<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 10, 1998
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
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>
DELAWARE 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)
RICHARD L. SHORTEN, JR., ESQ.
SENIOR VICE PRESIDENT AND GENERAL COUNSEL
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:
MICHAEL R. LITTENBERG, 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: / /
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED PER NOTE (1) OFFERING PRICE (1) REGISTRATION FEE
<S> <C> <C> <C> <C>
11% Senior Discount Notes due
2008.............................. $300,000,000 $565.00 $169,500,000 $50,002.50
</TABLE>
(1) Estimated solely for purposes of calculating the amount of the registration
fee.
------------------------------
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 MARCH 10, 1998
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 $300,000,000 OF NEW
11% SENIOR DISCOUNT NOTES DUE 2008
FOR $300,000,000 OF ANY AND ALL OUTSTANDING
11% SENIOR DISCOUNT NOTES DUE 2008
Econophone, Inc., a Delaware 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 $300,000,000 in aggregate
principal amount of its 11% Senior Discount Notes due 2008 (the "Exchange
Notes") for a like principal amount of its 11% Senior Discount Notes due 2008
(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, rate of accretion, 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."
The Notes will mature on February 15, 2008. The Original Notes were, and the
Exchange Notes will be, issued at a substantial discount from their principal
amount at maturity and there will not be any payment of interest on the Notes
prior to August 15, 2003. Each Original Note has a principal amount at maturity
of $1,000 and an initial Accreted Value (as defined) of $585.95. The Accreted
Value of the Exchange Notes initially will be equal to the Accreted Value of the
Original Notes at the time of the consummation of the Exchange Offer. The Notes
will fully accrete to face value on February 15, 2003. From and after February
15, 2003, the Notes will bear interest, which will be payable in cash at a rate
of 11.0% per annum on each February 15 and August 15 (the "Interest Payment
Dates"), commencing August 15, 2003.
The Notes will be redeemable at the option of the Company, in whole or in
part, at any time on or after February 15, 2003, 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 February 15, 2001, the Company
may, in its discretion, redeem up to 35% of the aggregate principal amount of
the Notes at a redemption price equal to 111% of their Accreted Value with the
net proceeds of one or more Public Equity Offerings (as defined); provided that
(1) at least 65% of the initially issued 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 Accreted Value thereof, plus accrued and unpaid interest, if any, thereon.
See "Description of the Exchange Notes" and "Capitalization."
The Original Notes were issued and sold on February 18, 1998, 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 requirements of the Securities Act
(COVER PAGE CONTINUED)
------------------------
SEE "RISK FACTORS," COMMENCING ON PAGE 15, 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 , 1998.
<PAGE>
(COVER PAGE CONTINUED)
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 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.
Morgan Stanley & Co. Incorporated ("Morgan Stanley" or the "Placement Agent")
has advised the Company that it currently intends to make a market in the
Exchange Notes; however, it is not obligated to do so and any market making
activity may be discontinued at any time without notice. Therefore, no assurance
can be given that an active trading market will develop or 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 , 1998, 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 currently subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). Whether or not
the Company is then required to file reports with the Commission, so long as any
of the Notes are outstanding, the Company is required by the terms of the
Indenture, dated as of February 18, 1998 (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, 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 has filed with the Commission pursuant to Sections 13(a) or
15(d) under the Exchange Act, or would be required to file by such sections of
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 files 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.
CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS
Certain of the statements contained in this Prospectus that are not
historical facts, including, without limitation, certain statements made in the
sections hereof entitled "Risk Factors," "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Business," are statements
of future expections and other forward-looking statements within the meaning of
Section 27A of the Securities Act that are based on management's current views
and assumptions and involve known and unknown risks and uncertainties that could
cause actual results, performance or events to differ materially from those
expressed or implied in such statements, including, without limitation, (i) the
rate of expansion of Econophone's network and/or customer base, (ii) competitive
factors, (iii) changes in law and regulations, (iv) general economic conditions
and (v) currency exchange rates, in each case on a global, regional and/or
national basis. See also "Risk Factors" for additional cautionary statements
identifying important factors with respect to such forward-looking statements
that could cause actual results to differ materially from results referred to in
the forward-looking statements.
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 February 18, 1998 the offering of $300.0 million
aggregate principal amount at maturity of 11% Senior Discount Notes due 2008 of
Econophone (the "Offering"). Econophone entered into a Notes Registration Rights
Agreement with Morgan Stanley 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 August 18, 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 August 18, 1998, interest (in addition to accretion of or interest
otherwise due on the Notes) will accrue at a rate per annum of .5% of the
Accreted Value of the Notes, from such date, payable in cash semiannually, in
arrears on each Interest Payment Date, commencing February 15, 1999. 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 rapidly growing switch-based provider of long distance
telecommunications services in selected major U.S. and western European markets.
Econophone's customer base consists primarily of residential customers, small-
and medium-sized businesses and other telecommunications carriers. 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. Since July 1997, Econophone has continued the
build-out of its domestic and international network, hired additional
experienced senior management, increased its sales and marketing activities and
consummated the acquisition of VoiceNet Corporation ("VoiceNet"), which
previously had been a reseller of Econophone's services. See "--Recent
Developments."
Through internal growth, Econophone's consolidated revenues have increased
from $3.5 million in 1993 to $83.0 million in 1997. During 1997, the United
States, continental Europe and the United Kingdom accounted for 59%, 22% and 19%
of Econophone's consolidated revenues, respectively.
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 1996. The European international long
distance market is the largest in the world, with approximately 28 billion
minutes or 40% of international calling volume originating in Europe in 1996.
The continental European
4
<PAGE>
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, until recently, 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. In most European Union ("EU") member
states, the ability to provide telecommunications services was liberalized on
January 1, 1998. Econophone believes that regulatory liberalization in
continental Europe and technological advancements will lead to market
developments similar to those that have occurred in the United States and the
United Kingdom, although certain European PTOs appear to be responding more
rapidly to competition than the former PTOs in the United States and the United
Kingdom.
Econophone's strategy is to (i) expand into additional geographic markets in
continental Europe, the United Kingdom, the United States and Canada, with a
focus on large markets that generate substantial long distance and international
calling traffic, (ii) add customers in its existing markets, (iii) migrate
additional switched traffic on to its expanding network and (iv) deliver an
expanded portfolio of features and services to its customers.
Econophone has substantially increased its network infrastructure in the
last year. Econophone currently has switches in New York, London, Brussels and
Paris, network nodes in Antwerp, Berlin, Hamburg, Marseilles, Nice and Zurich
and points of presence ("POPs") serving a number of major cities in the
northeastern United States.
Econophone is continuing to significantly expand its U.S. and European
network. In addition, Econophone intends to expand its network into Canada
during 1998. In 1998, Econophone intends to add switches and points of presence
in the markets indicated below. Thereafter, Econophone intends to further expand
its network to additional markets in western Europe, the United States and
Canada as market and regulatory conditions warrant.
<TABLE>
<CAPTION>
NETWORK COMMERCIAL
MARKET ELEMENT OPERATION DATE
- ------------------- ---------------- ---------------
Los Angeles Switch 1Q98
<S> <C> <C>
Berlin* Switch 2Q98
Geneva Node 2Q98
Miami Switch 2Q98
Montreal POP 2Q98
Toronto Switch 2Q98
Washington, D.C.* Switch 2Q98
Chicago Switch 3Q98
Dallas Switch 3Q98
Frankfurt Switch 3Q98
--------------------------------
* Upgrade of existing node or
POP.
</TABLE>
Econophone's network elements are connected by a combination of owned
indefeasible rights of use ("IRUs") and transmission lines between various
network cities that are leased on a fixed cost basis. Econophone's IRUs and
leased lines result in reduced transmission costs once certain utilization
levels are reached because there is no significant marginal cost to Econophone
for carrying a call over owned facilities or those leased on a fixed cost basis.
As part of its expansion strategy, Econophone intends to acquire additional IRUs
and leased lines.
Econophone markets its services through various channels, each of which is
designed to serve a particular geographic market, customer group and product.
Econophone sells to non-business customers primarily through independent sales
representatives retained directly by Econophone or by master distributors and to
business customers and other telecommunications carriers primarily through its
internal sales forces. Depending upon the service, sales are made either
directly to end-users (e.g., residential and business long distance) or to
retail establishments for resale (e.g., prepaid cards). Econophone believes
5
<PAGE>
that its multi-channel marketing strategy enhances its growth prospects and
reduces the risks associated with dependence on a smaller number of distribution
channels.
Econophone believes that its principal competitive strengths are its carrier
grade network and low cost structure, both of which enable it to offer
competitive prices, and the diversity of its revenue base and marketing
channels. In addition, in its continental European markets, 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.
RECENT DEVELOPMENTS
Since July 1997, Econophone has continued the build-out of its domestic and
international network, hired additional experienced senior management, increased
its sales and marketing activities and acquired VoiceNet.
NETWORK EXPANSION; NEW GEOGRAPHIC MARKETS. In anticipation of the January
1, 1998 deregulation of the provision of telecommunications services in many EU
markets, Econophone added nodes in Berlin, Marseilles and Nice during the fourth
quarter of 1997. During that quarter, a node also was added in Zurich. During
the second quarter of 1998, Econophone expects to upgrade its Berlin node to a
switch and add a node in Geneva and, during the third quarter of 1998,
Econophone intends to add a switch in Frankfurt. In addition, Econophone is in
the process of seeking more favorable interconnection arrangements in Belgium,
France and Germany that would enable it to offer network access through
abbreviated dialing, originate calls in a greater number of cities and terminate
calls in such countries more cheaply. Econophone expects interconnection
agreements to be entered into in Belgium, France and Germany by the end of 1998.
Due to the significant increase during 1997 in Econophone's U.S. traffic,
Econophone intends to upgrade its Washington D.C. point of presence to a switch
during the first half of 1998 and to add switches in Los Angeles and Miami.
Econophone also intends to add switches in Chicago and Dallas during the third
quarter of 1998. These new switches will enable Econophone to increase its
addressable market and migrate a larger portion of its U.S. calling card traffic
on to its network, which will reduce its transmission costs.
During the first half of 1998, Econophone also intends to install a switch
in Toronto and a point of presence in Montreal, which will enable Econophone to
provide cost competitive international service in these markets.
As part of its network expansion, since July 1997, Econophone has continued
to expand its transmission capacity through the acquisition of additional IRUs
and leased lines. Econophone recently acquired IRUs on the AC-1 transatlantic
cable, over which it will be able to transmit 1,890 non-compressed simultaneous
calls (or 7,560 calls that are compressed). These IRUs are expected to become
operational during the second quarter of 1998.
EXPANSION OF SENIOR MANAGEMENT TEAM. During January 1998, Kevin Alward was
hired as President-North America and Phillip Storin was hired as Chief Financial
Officer and Senior Vice President. Mr. Alward previously served as President of
TotalTel, Inc., a provider of international telecommunications services to
retail and wholesale customers. Most recently, Mr. Storin served as the Chief
Financial Officer at U.S. Long Distance, a provider of telecommunications
services to business customers in the United States that was recently acquired
by LCI International, Inc. During December 1997, Richard Shorten was hired as
Senior Vice President and General Counsel. Mr. Shorten was previously with the
New York law firm of Cravath, Swaine & Moore.
6
<PAGE>
INCREASE IN SALES AND MARKETING. Since July 1997, Econophone has opened
sales offices in Berlin, Marseilles and Zurich and established a corporate sales
group in the United Kingdom. Econophone intends to open additional sales offices
and significantly increase local advertising in each of its markets in
furtherance of its multi-channel marketing strategy.
VOICENET ACQUISITION. On February 12, 1998, Econophone acquired VoiceNet, a
major reseller of the Company's calling card products. The initial purchase
price for VoiceNet was $21.0 million, which was paid out of cash on hand. The
sellers of VoiceNet also are entitled to receive an earn-out based upon the
revenue growth of the VoiceNet business for a period of up to one year following
the closing of the acquisition.
VoiceNet provides travellers and other callers with calling card services,
which are advertised primarily in in-flight magazines. Econophone has provided
substantially all of VoiceNet's transmission, billing and customer service
functions since April 1996.
The acquisition of VoiceNet by Econophone ensures the continuity of
Econophone's sales through VoiceNet, provides Econophone with an established
U.S. calling card business and enables Econophone to cross-market many of its
other services to VoiceNet's customer base, which consisted of approximately
110,000 calling card holders during December 1997. The acquisition of VoiceNet
also will reduce Econophone's selling expenses in respect of services provided
to VoiceNet customers because, prior to the acquisition, Econophone paid
VoiceNet a commission on calling card usage by VoiceNet customers.
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 $30.1 million for the year ended
December 31, 1997 and, on a pro forma basis, assuming that the Offering and the
July 1, 1997 offering (the "1997 Unit Offering") of Units consisting of $155.0
million of senior notes (the "1997 Notes") and warrants (the "Warrants") to
purchase 1,265,885 shares of voting common stock ("Common Stock") of Econophone
had been consummated on January 1, 1997, a net loss of $61.4 million. Econophone
had a deficiency of earnings to fixed charges of $30.1 million ($61.4 million on
a pro forma basis) and negative EBITDA of $18.8 million for the year ended
December 31, 1997. Net cash used in operating activities for such period was
$12.2 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 2000. 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.
Econophone's principal executive offices are located at 45 Broadway, New
York, New York 10006. Its main telephone number is (212) 444-6991.
7
<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 $300.0 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.
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.
Expiration Date......... The Exchange Offer will expire at 5:00 p.m., New York City time,
on , 1998, unless the Company decides to extend the
Expiration Date.
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
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>
9
<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 , 1998.
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>
10
<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........ $300.0 million principal amount of 11% Senior Discount Notes due
2008 of Econophone.
Maturity................ February 15, 2008.
Yield and Interest...... The Original Notes were, and the Exchange Notes are being, issued
at a substantial discount from their principal amount, and there
will not be any payment of interest on the Notes prior to August
15, 2003. The Notes will fully accrete to face value on February
15, 2003. From and after February 15, 2003, the Notes will bear
interest, which will be payable in cash at a rate of 11.0% per
annum on each February 15 and August 15 (the "Interest Payment
Dates"), commencing August 15, 2003. In addition to stated
interest, for U.S. federal income tax purposes, holders 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."
Optional Redemption..... On or after February 15, 2003, 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 February 15, 2001, up to 35% of
the aggregate principal amount of the Notes may be redeemed with
the proceeds of Public Equity Offerings (as defined herein) at
111.0% of their Accreted Value; provided, that after any such
redemptions Notes representing at least 65% of the Notes
initially issued remain outstanding. 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 Accreted Value thereof, plus accrued
and unpaid interest, if any. There can 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 December 31, 1997,
Econophone had $157.9 million of indebtedness outstanding, all of
which was unsubordinated and $149.7 million of which was secured
by $59.0 million of restricted cash. Substantially all of the
remaining indebtedness is secured by telecommunications assets.
The Notes are effectively subordinated to the secured
indebtedness of Econophone to the extent of the security
interests relating thereto.
</TABLE>
11
<PAGE>
<TABLE>
<S> <C>
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 (as defined herein) 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 affiliates, 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. These covenants are subject to significant
exceptions. See "Description of the Exchange Notes--Covenants."
Original Issue
Discount.............. The Exchange Notes will 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 (the "Holders") are
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>
12
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
THE SUMMARY CONSOLIDATED FINANCIAL DATA (EXCEPT FOR OTHER DATA, REGIONAL
DATA AND 1993 FINANCIAL DATA) FOR THE YEARS PRESENTED BELOW WAS DERIVED FROM THE
AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF ECONOPHONE. THE AUDITED
CONSOLIDATED FINANCIAL STATEMENTS OF ECONOPHONE AS OF DECEMBER 31, 1996 AND 1997
AND FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997, TOGETHER
WITH THE NOTES THERETO AND THE RELATED REPORT OF ARTHUR ANDERSEN LLP,
INDEPENDENT PUBLIC ACCOUNTANTS, ARE INCLUDED ELSEWHERE IN THIS PROSPECTUS. THE
SELECTED CONSOLIDATED FINANCIAL DATA FOR THE YEAR ENDED DECEMBER 31, 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 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>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------
1993(1) 1994 1995 1996 1997
----------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT REVENUE PER MINUTE AND RATIOS)
STATEMENT OF OPERATIONS DATA:
Revenues.................................................. $ 3,528 $ 8,523 $ 27,490 $ 45,103 $ 83,003
Cost of services.......................................... 2,761 5,540 19,735 35,369 63,707
Selling, general and administrative expense............... 497 2,013 7,087 16,834 37,898
Depreciation and amortization............................. 51 168 389 1,049 3,615
----------- --------- --------- --------- ---------
Income (loss) from operations............................. 219 802 279 (8,149) (22,217)
Interest income........................................... 6 6 19 84 3,689
Interest expense.......................................... (25) (109) (167) (380) (11,437)(2)
Other income (expense).................................... 6 100 (10) 133 (163)
Provision (benefit) for taxes............................. -- 73 -- -- --
----------- --------- --------- --------- ---------
Net income (loss)......................................... $ 206 $ 726 $ 121 $ (8,312) $ (30,128)
----------- --------- --------- --------- ---------
----------- --------- --------- --------- ---------
OTHER DATA:
Capital expenditures(3)................................... $ 605 $ 906 $ 1,677 $ 4,670 $ 19,021
EBITDA(4)................................................. 276 1,070 658 (6,967) (18,765)
Dividends and distributions declared...................... -- -- 499 508 879
Net cash provided by (used in) operating activities....... (190) 474 2,037 (6,006) (12,219)
Revenue per minute........................................ .70 .57 .43 .25
Minutes................................................... 12,196 47,859 104,566 330,144
Ratio of earnings to fixed charges(5)..................... 8.6x 7.2x 1.5x -- --
Deficiency of earnings available to cover fixed
charges(5).............................................. -- -- -- $ (8,312) $ (30,128)(6)
REGIONAL DATA:
Revenues
United States........................................... $ 2,728 $ 8,292 $ 18,185 $ 48,899
United Kingdom.......................................... 3,143 14,173 15,477 18,363
Continental Europe...................................... 2,652 5,025 11,441 15,741
Minutes
United States........................................... 5,707 23,411 68,247 244,095
United Kingdom.......................................... 4,532 20,592 27,968 68,810
Continental Europe...................................... 1,957 3,856 8,351 17,239
</TABLE>
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<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
AT DECEMBER 31, -------------------------
------------------------------------------ PRO FORMA
1993 1994 1995 1996 ACTUAL AS ADJUSTED(7)
--------- --------- --------- --------- --------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................ $ 120 $ 86 $ 106 $ 6,272 $ 67,202 $ 215,534
Current assets................................... 852 2,588 7,616 14,729 96,329(8) 244,628(8)
Restricted cash.................................. -- -- -- -- 59,427(8) 59,427(8)
Total assets..................................... 1,541 4,034 10,508 22,755 178,005 352,975
Current portion of borrowings.................... 510 480 558 3,020 2,300 2,300
Long-term borrowings, less current portion....... 39 639 719 2,263 155,616 331,401
Redeemable convertible preferred stock........... -- -- -- 13,358 14,328 14,328
Total stockholders' equity (deficit)............. 708 1,088 710 (8,124) (33,726) (33,726)
</TABLE>
- ------------------------
(1) Regional revenue data and minute data for 1993 is not available.
(2) On a pro forma as adjusted basis, assuming the Offering closed on January 1,
1997, annual interest expense on the Notes for 1997 would have been $19.9
million.
(3) Capital expenditures include assets acquired through capital lease and other
financings.
(4) EBITDA represents net income (loss) plus net 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.
(5) 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.
(6) On an as adjusted basis, assuming that the Offering had been consummated on
January 1, 1997, the deficiency of earnings available to cover fixed charges
for the year ended December 31, 1997 would have been $50.9 million.
(7) The pro forma as adjusted balance sheet data gives effect to (i) the
Offering and (ii) the consummation of the acquisition of VoiceNet, as if
such events had occurred on December 31, 1997.
(8) Econophone used $57.4 million of the net proceeds from the 1997 Unit
Offering to purchase a portfolio 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 1997 Notes. Proceeds from the
Pledged Securities will be used by Econophone to make the first six semi-
annual scheduled interest payments on the 1997 Notes. Included in restricted
cash is $10.5 million, which is also included in current assets.
14
<PAGE>
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 most of such markets have been limited. In addition,
the liberalization of the European regulatory environment is substantially
changing the nature of European telecommunications markets. See
"Business--Services," "Business--Competition" and "Business--Regulation."
Econophone is in the process of significantly expanding its operations in
its current markets and intends 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. Any of these factors could have a
material adverse effect on Econophone's business, financial condition, results
of operations and its ability to pay principal of and interest on the Notes. See
"--Implementation of Expansion Plans," "--Competition," "--Dependence on Third
Party Sales Organizations," "--Risks Associated with Rapidly Changing Industry;
Significant Price Declines," "--Risks Associated with Rapid Growth," "--Need for
Local Connectivity," "--Dependence on Effective Information Systems,"
"--Dependence Upon Key Personnel; Integration of Management," "--Dependence on
Equipment Supplier" and "Business--Services."
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 continues to expand 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 presently uses its
network primarily to originate, but not terminate, calls. Therefore, the
economic benefits of Econophone's network are primarily 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 continue 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 Econophone to implement its
expansion plans would have a material
15
<PAGE>
adverse effect on Econophone's business, financial condition, results of
operations and on its ability to pay principal of and interest on the Notes.
HIGH LEVERAGE, FUTURE LOSSES, DEFICIENCY OF EARNINGS TO FIXED CHARGES AND
NEGATIVE CASH FLOW
At December 31, 1997, on a pro forma as adjusted basis after giving effect
to the Offering, Econophone would have had total consolidated indebtedness of
approximately $333.7 million and a stockholders' deficit of approximately $33.7
million. The 1997 Notes have a principal amount at maturity of $155.0 million
and mature prior to the Notes. As of December 31, 1997, the 1997 Notes were
secured by $59.0 million of restricted cash. Econophone anticipates that it will
incur substantial additional indebtedness. Econophone had a net loss of $30.1
million for the year ended December 31, 1997. On an as adjusted basis, assuming
that the Offering and the 1997 Unit Offering had been consummated on January 1,
1997, Econophone would have had a net loss of $61.4 million for 1997. Econophone
also had negative EBITDA of $18.8 million for the year ended December 31, 1997.
Furthermore, Econophone's net cash used in operating activities was $12.2
million for the year ended December 31, 1997. Econophone expects to have
operating losses and net losses for at least the next several years and negative
EBITDA and negative cash flow from operations until at least 2000. There can be
no assurance that Econophone will ever operate at profitable levels, have
positive EBITDA or be able to service its indebtedness. 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 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 and the Indenture pertaining to the 1997 Notes (the "1997
Indenture") contain certain restrictive covenants. Such restrictions will
affect, and in many respects will 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 Certain Indebtedness--The 1997 Unit Offering" and "Description
of the Exchange Notes--Covenants." The terms of Econophone's Series A Preferred
Stock (the "Series A Preferred Stock") and the Secured Amended and Restated
Equipment Loan and Security Agreement (as amended, the "NTFC Agreement") between
Econophone and NTFC Capital Corporation ("NTFC") 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" and "Description of the Capital Stock--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; (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
16
<PAGE>
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."
COMPETITION
The provision of telecommunications services is extremely competitive and
will become increasingly so due to the reduction or elimination of regulatory
barriers to entry into telecommunications markets. Econophone believes that its
non-U.S. 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. It appears that continental European telecommunications
markets will experience price competition more rapidly and more extensively than
was experienced when deregulation occured in the United States and the United
Kingdom. Econophone's success will depend upon its ability to compete with a
variety of other telecommunications providers in each of its markets.
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 has implemented a program offering $.10 per
minute rates on certain calls to the United Kingdom and free U.S. domestic long
distance calls on Friday and MCI has priced certain domestic off-peak calls at
$.05 per minute. In the United Kingdom, the Office of Telecommunications
("Oftel"), the U.K. telecommunications regulatory authority, is expected to
require British Telecom to reduce its retail prices by continuing to impose a
price cap on its residential retail prices, although, since October 1997, it has
allowed British Telecom far more freedom in respect of its pricing of its retail
business services. In continental Europe, France Telecom and Deutsche Telekom
have recently taken steps to substantially reduce prices in an effort to protect
their market share and deter competitors, such as Econophone. France Telecom has
obtained approval to reduce retail prices on domestic and international long
distance services by an average of 9% during each of 1997 and 1998 and 4.5%
during each of 1999 and 2000. Deutsche Telekom will reduce retail prices on
domestic and international long distance service by up to 40% beginning March 1,
1998. Neither France Telecom nor Deutsche Telekom have reduced wholesale prices
to the same extent as retail prices. Price reductions by France Telecom and
Deutsche Telekom may over time create substantial pressure on Econophone's gross
margins in those countries. In the United States, the Federal Communications
Commission (the "FCC"), the U.S. telecommunications regulatory authority, also
has adopted rules which are designed to bring downward pressure on international
telephone rates. The FCC is requiring U.S. international facilities-based
carriers to negotiate lower settlement rates with correspondent foreign carriers
that deliver calls in foreign jurisdictions. The FCC expects such lower
settlement rates to become effective on a transitional basis, commencing January
1, 1999 for major countries, with lower settlement rates in effect for
substantially all countries by January 1, 2003. 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, results
of operations and its ability to pay principal of and interest on the Notes.
Econophone has experienced, and expects to continue to experience, declining
revenue per billable minute in all of its markets, including France and Germany,
in part as a result of increasing worldwide competition
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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."
Competition is strong for all of Econophone's services. Competition for U.S.
calling card services is particularly intense. Larger service providers such as
AT&T, MCI and Sprint have substantial brand recognition and market penetration
for their calling cards, while a large number of smaller calling card providers
compete fiercely based almost entirely on price. In addition, the Regional Bell
Operating Companies ("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, and have
applied for FCC approval for "in region" market entry. To date, the FCC has
denied each of those applications. However, the FCC has been meeting with the
RBOCs to explain FCC requirements. This may lead to one or more successful RBOC
"in region" applications in the future. Recently, a lower court decision that is
currently being appealed invalidated the FCC's statutory authority for prior
approval of market entry by several RBOCs into certain "in region" long distance
markets.
Because all of Econophone's current and intended European markets (other
than the United Kingdom) have only recently liberalized or 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 European 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
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 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. For example, Deutsche Telekom recently proposed, subject to
regulatory approval, a fee of approximately 50 Deutsche Marks ("DM") for any
customer changing long distance service providers. In addition, in France, only
seven carriers will be able to provide long distance service using a single
digit prefix. Econophone does not expect to be one of these carriers. If the PTO
in any jurisdiction uses its competitive advantages to their fullest extent,
Econophone's operations in such jurisdiction would be adversely affected.
Further, if European PTOs persist in substantial retail price reductions, it
would have a material adverse effect on Econophone's ability to generate
positive gross margins in Europe, which will have a material adverse effect on
Econophone's ability to pay principal of and interest on the Notes.
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 creation of a new company
with the international facilities of the AT&T 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, the
pending acquisition of MCI by WorldCom, Inc. and the proposed acquisition of
Teleport Communications by AT&T may result in increased price competition for
retail services, but reduced competition for wholesale services used by
Econophone.
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, electric and other utilities, railways,
microwave carriers and large end users that have private networks. In addition,
existing telecommunications companies, including AT&T, are implementing plans to
offer voice telecommunications services over the Internet at substantially
reduced prices.
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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 business, financial condition, results of operations and its
ability to pay principal of and interest on the Notes. Many of Econophone's
larger competitors have lower incremental transmission costs than Econophone due
to, among other things, greater use of owned transmission capacity, more
favorable interconnection rates and volume discounts on transmission.
Furthermore, in certain European countries (including in France and Belgium),
telecommunications companies that make substantial investments in network
infrastructure will receive a substantial discount on interconnection rates.
Econophone does not expect to qualify for such a discount. In addition, certain
of Econophone's competitors offer customers an integrated full service
telecommunications package consisting of local and long distance voice, data and
Internet transmission. Econophone does not offer all of these types of service,
and presently does not intend to do so, which could have a material adverse
effect on Econophone's competitiveness and its 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 year
ended December 31, 1997, 52% of Econophone's revenues were attributable to
independent sales agents and 20% were attributable to resellers. 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, in late 1996, 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 exceptions. For 1996, Econophone's joint venture with EI and sales of
carrier services to EI contributed 32% of Econophone's consolidated revenues and
92% of its U.K. originated revenues. See "-- Dependence on Carrier 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. In addition, regulations pertaining to commercial
agents introduced by the European Union have given sales agents far greater
protection than before, resulting in the potential for increased termination
payments in the event of a dispute. 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 business, financial
condition, results of operations and its ability to pay principal of and
interest on the Notes.
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DEPENDENCE ON CARRIER CUSTOMERS
Revenues derived from carrier customers accounted for 20% of Econophone's
revenues during 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, financial
condition, results of operations and its ability to pay principal of and
interest on 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 the 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 exceptions. EI accounted for 12% 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 92% 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 13% of U.S. revenues and 8% of consolidated revenues in 1997.
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, 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's
business financial condition, results of operations 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, results of operations and its
ability to pay principal of and interest on the Notes.
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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, the
international settlement rate system is in the process of collapsing. In
addition, EC Directive 97\33\EC (the "Interconnection Directive"), which became
effective January 1, 1998, requires EU operators with significant market power
to have charges for call termination for cross border traffic that are
cost-based and non-discriminatory, which will have an effect on settlement rates
with countries and territories outside the EU and may also contribute to the
collapse of the accounting rate system. For the foregoing reasons, price
reductions have begun to be reflected in international rates, particularly the
rates charged for calls between countries where competition exists. For example,
Sprint has reduced its rates on certain calls between the United States and the
United 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
adopted 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 telephone charges will be less affected by the distance a
call is carried, particularly with the possible increased use of voice services
over the Internet. As a consequence, Econophone would experience a substantial
reduction in its gross 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
business, financial condition, results of operations and its ability to pay
principal of and interest on the Notes. In addition, France Telecom and Deutsche
Telekom have recently taken steps to substantially reduce retail prices, in
excess of reductions in wholesale prices, in an effort to protect their market
share and deter competitors, such as Econophone. See "--Competition."
RISKS ASSOCIATED WITH RAPID GROWTH
Econophone has experienced rapid growth. Econophone's revenues were $3.5
million for 1993, increasing to $83.0 million for 1997.
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 business, financial condition, results
of operations and its ability to pay principal of and interest on the Notes. See
"--Dependence on Effective Information Systems" and "--Dependence on Key
Personnel; Integration of Management."
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RISKS ASSOCIATED WITH IMPOSITION OF VAT
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 EU member states but typically is between 15% and 21% of the
cost of the goods or services. Prior to January 1, 1997, pursuant to the Sixth
VAT Directive adopted in 1977 (the "VAT Directive"), providers of
telecommunications services in the EU were liable for VAT in the EU member state
where the provider of the services was "established" or where the provider had a
"fixed establishment" from where the services were provided. The provider
charged 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 cannot offset VAT and, therefore,
bear the cost of the tax. With respect to the provision of services by
Econophone to EU customers, other than in the United Kingdom, where it had a
fixed establishment, Econophone until recently had a competitive price advantage
over its competitors, including the PTOs. Because services to these customers
were provided by a company based in the United States, Econophone was not
required to charge VAT to them.
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 from between January 1, 1997 and July 1, 1997, EU member
states 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 now required to charge. Any such reduction could have a
material adverse effect on Econophone's business, financial condition, results
of operations and its ability to pay principal of and interest on the Notes.
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 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 and the 1997 Notes, will
be denominated in dollars. Econophone from time to time uses foreign exchange
contracts relating to its trade accounts receivables to hedge foreign currency
exposure and to control risks relating to currency fluctuations. In addition, as
part of its efforts to mitigate the exposure to changes in foreign exchange
rates, to the extent practicable, Econophone varies the portion of its
transmission purchased in U.S. dollars and other currencies. 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.
Since the first quarter of 1997, the U.S. dollar has appreciated relative to the
principal European currencies in which Econophone bills its European customers.
A sustained increase in the value of the U.S. dollar relative to such currencies
would reduce Econophone's gross margins on European calls and could have a
material adverse effect on Econophone's ability to pay principal of and interest
on the Notes. 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's business, financial condition, results of operations and
its ability to pay principal of and interest on the Notes. See
"Business--Regulation."
A substantial portion of Econophone's strategy is based upon the regulatory
liberalization of certain EU markets that occurred on January 1, 1998. In
anticipation of such liberalization, Econophone established operations and made
capital expenditures in certain EU countries and intends to continue to do so.
Although liberalization is a legal obligation required by EC directives, a
substantial portion of the more detailed EU regulatory framework to apply in the
new liberalized environment is not yet in place. In addition, certain EU member
states have been granted a derogation from liberalizing their telecommunication
markets. Ireland and Portugal have been granted a derogation until January 1,
2000. Spain has been granted a derogation entitling it to delay liberalization
until November 30, 1998. Luxembourg and Greece have been granted a derogation
entitling them to delay full liberalization until July 1, 1998 and January 1,
2001, respectively. There can be no assurance that each EU member state will
proceed with the expected liberalization on schedule or to the extent required
(although failure to do so would be a breach of EU law) 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 either
does not subsequently occur or is delayed.
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 will also apply to 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, although EU members have signed the World Trade
Organization agreement which allows access to their markets by other
signatories. In addition, 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 regulations only after a significant delay. In November 1997, the
European Commission commenced proceedings against seven EU member states,
including Belgium, for failure to implement certain EU telecommunications
directives fully. Even if a national government 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 France, the
telecommunications union has stated its objection to the current move towards
liberalization. In Germany, competitors of Deutsche Telekom have had to resort
to court proceedings to attempt to obtain unbundled access to the local loop and
the interconnection prices set by the relevant ministry have been challenged.
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 business, financial condition, results of operations and
its ability to pay principal of and interest on the Notes.
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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 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's business, financial
condition, results of operations and its ability to pay principal of and
interest on the Notes. 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 (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.
Beginning January 1, 1998, Econophone, as well as its U.S. competitors,
became obligated to make FCC-mandated contributions to universal service funds.
These funds subsidize the provision of telecommunications services in high cost
areas and to low-income customers, as well as the provision of
telecommunications and certain other services to eligible schools, libraries and
rural health care providers. The contributions are billed monthly and are
assessed based on intrastate, interstate and international "end-user" gross
telecommunications revenues. However, revenues from international calls that
both originate and terminate in foreign points are excluded from assessment. On
December 16, 1997, the FCC approved the following contribution factors for
carriers' first quarter 1998 contributions: (i) 3.19% for the high cost and low
income funds (interstate and international revenues); and (ii) 0.72% for the
schools, libraries and rural health care funds (intrastate, interstate and
international revenues). Econophone currently is evaluating which categories of
its revenues are subject to assessment and, as a result, has not
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filed a universal service fund worksheet. Because the contribution factors are
likely to vary quarterly, the annualized impact on Econophone cannot be
estimated at this time.
Additionally, effective January 1, 1998, Econophone is required to pay to
LECs specified presubscribed inter-exchange carrier charges ("PICCs") in order
to compensate such LECs for their investment in the telephone lines Econophone
uses to access its customers. The costs of these charges vary in amount
depending upon the type of presubscribed lines that are serviced by Econophone
and the individual LEC's revenue requirements. While Econophone currently
intends to pass through the costs of both the PICC and its universal service
fund contributions to its customers, there can be no assurance that Econophone
will be able to fully pass on such costs or that doing so will not result in a
loss of customers. In addition, the FCC orders implementing the universal
service contribution obligation and the PICC are both subject to petitions
seeking reconsideration by the FCC and to certain appeals. Until such petitions
or appeals are decided, there can be no assurance as to how the orders will be
implemented or enforced or what effect the orders generally will have on
competition within the telecommunications industry or specifically on the
competitive position of Econophone.
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 $0.35 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 and remanded to the FCC by the court for further
consideration. The FCC subsequently adopted a rate of $0.284 per call in lieu of
the $0.35 rate, effective October 7, 1997, and issued further clarifications of
its initial order. This decision is also before an appellate court and some
aspects of its implementation remain unclear. 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 $0.284 access
charge. Econophone recently began charging the $0.284 access charge. There can
be no assurance that, over time, Econophone will be able to fully pass the cost
of this charge 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 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, results of operations and its ability to pay principal of
and interest on the Notes would be materially and adversely affected. See
"Business--Regulation."
NEED FOR LOCAL CONNECTIVITY
To originate and terminate calls, Econophone requires "local connectivity,"
which is connection to the PSTN. Local connectivity can be obtained through
third parties or through interconnection agreements negotiated directly with
PTOs. Interconnection agreements may provide for more favorable carrier rates
based on volume and other benefits such as the ability to offer customers
abbreviated dialing. 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,
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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. Furthermore, where local connectivity is obtained
through third parties, there can be no assurance that Econophone will be able to
enter into interconnection agreements with PTOs on acceptable terms.
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 or on a timely basis.
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's business, financial condition, results of operations 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, 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. In several European countries, including France and Germany,
this currently is the case. Such rates may be too high to allow Econophone to
generate gross profit. In addition, PTOs will not necessarily be required by law
to allow Econophone to lease transmission lines. Even where applicable law
requires PTOs to lease transmission lines to other carriers, delays are
nevertheless being encountered with respect to the commencement of operations
and extensive delays are occurring with respect to the negotiation of leases and
interconnection agreements. In addition, disputes are occurring 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, results of operations and its ability to pay principal of
and interest on the Notes.
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DEPENDENCE ON EFFECTIVE INFORMATION SYSTEMS
To complete its billing, Econophone must record and process large amounts of
data quickly and accurately. Econophone's public financial reporting
requirements also require it to process large amounts of information. While
Econophone believes its management information systems currently are adequate,
substantial investment will continue to be required to satisfy anticipated
billing and public financial reporting needs. Econophone believes that the
successful implementation and integration of enhanced and new information
systems will be important to its continued growth and its ability to bill
customers, monitor costs and other financial data 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. If Econophone's information systems prove to be
inadequate, it could have a material adverse effect on Econophone's business,
financial condition, results of operations and its ability to pay principal of
and interst on the Notes. 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
and Chief Operating Officer and a Director of Econophone, could have a material
adverse effect on Econophone, its ability to successfully implement its business
plan (including, without limitation, the continued roll-out of its network
infrastructure, its sales and marketing initiatives and the continued expansion
of its back-office capabilities) and its ability to pay principal of and
interest 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, although it intends to do so
with certain new senior employees. 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.
Pursuant to the NTFC Agreement, Econophone may not cease to employ Mr. West
(other than by reason of his death or disability) or suffer to exist any
material 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. See "Description of Certain
Indebtedness--NTFC Vendor Financing."
Econophone has significantly increased the size of its management team since
the second half of 1997. 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. In addition, the labor market for software engineers has been extremely
competitive recently and Econophone may lose key employees or be forced to
increase their compensation as a result. The loss of the services of key
personnel, or the inability to attract additional qualified personnel, could
have a
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material adverse effect on Econophone's business, financial condition, results
of operations and its ability to pay principal of and interest on the Notes.
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 and Mr. Alward,
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."
INTEGRATION OF VOICENET AND OTHER ACQUISITIONS
Although Econophone and VoiceNet have had an extensive business relationship
since VoiceNet's inception, VoiceNet will need to be integrated with
Econophone's existing operations. In particular, Econophone must maintain and
develop the numerous distributor relationships that have been critical to
VoiceNet's operations to date. The integration of VoiceNet also will entail,
among other things, the integration of management and other personnel and of
accounting and other record-keeping systems. Econophone has had limited
experience with the integration of acquired businesses and there can be no
assurance that it will be able to successfully integrate VoiceNet's operations.
Other acquisitions, if any, would pose even greater integration challenges.
DEPENDENCE ON EQUIPMENT SUPPLIER
Econophone purchases a significant portion of its switching equipment from
Northern Telecom. There can be no assurance that Econophone will be able to
acquire the switches that it will require as it continues to expand its network
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, results of operations and its ability to pay
principal of and interest on the Notes. See "Business--Network Infrastructure."
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, beneficially own, in the aggregate, approximately 85.5%
of the outstanding shares of Common Stock (assuming conversion of the Series A
Preferred Stock, but not giving effect to the issuance or exercise of any
warrants or options issued by Econophone). To the extent such stockholders
exercise their voting rights in concert, such stockholders will have the ability
to control the election of all members of Econophone's Board of Directors, 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. In addition, the
affirmative vote of such stockholders will be required to effect a change of
control of Econophone. The exercise of these powers may present conflicts of
interest between these individuals and the holders of the Notes. See "Principal
Stockholders."
POTENTIAL INABILITY TO REPAY NOTES AND OTHER INDEBTEDNESS UPON A CHANGE OF
CONTROL
The Indenture and the 1997 Indenture provide that, upon the occurrence of a
Change of Control thereunder, Econophone must make an offer to purchase all of
the Notes and 1997 Notes issued and then outstanding at a purchase price equal
to 101% of the then Accreted Value or principal amount thereof plus accrued
interest (if any) thereon to the payment date. Under the NTFC Agreement, a
change of control
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(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 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, the Certificate of
Incorporation and/or the 1997 Indenture, 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, NTFC would be
entitled to receive payment of all outstanding obligations under the NTFC
Agreement and the holders of the Series A Preferred Stock and the 1997 Notes
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, the 1997
Notes and the Notes. Such a failure would constitute an Event of Default under
the 1997 Indenture and the Indenture and the NTFC Agreement. See "Certain
Transactions--Investment by Princes Gate" and "Description of Certain
Indebtedness--NTFC Vendor Financing."
ORIGINAL ISSUE DISCOUNT CONSEQUENCES
The Exchange Notes will 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. A holder of a Note
will be required to include in such holder's income for federal income tax
purposes original issue discount with respect to the Note as it accrues although
no cash payments of interest on the Notes are scheduled to be made until 2003.
See "Certain Federal Income Tax Considerations--Original Issue Discount."
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.
In addition, the Notes constitute "applicable high yield discount
obligations" ("AHYDOs") for federal income tax purposes. As a result, Econophone
will not be permitted to deduct original issue discount in respect of the Notes
until amounts corresponding to such discount are paid in cash. See "Certain
Federal Income Tax Considerations--United States Holders; Applicable High Yield
Discount Obligations."
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.
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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. Morgan Stanley has advised the
Company that it currently intends to make a market in the Exchange Notes;
however, it is not obligated to do so and any market making activity may be
discontinued at any time without notice. Therefore, 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 February
18, 1998 (the "Closing Date") to Morgan Stanley, the Placement Agent thereof,
pursuant to a Placement Agreement, dated February 12, 1998 (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 February 18, 1998 (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 August 18, 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."
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 ,
1998 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.
Holders of Original Notes that are accepted for exchange will not receive
accrued interest thereon at the time of the consummation of the Exchange Offer.
The Accreted Value of the Exchange Notes initially will be equal to the Accreted
Value of the Original Notes at the time of the the consummation of the Exchange
Offer. Cash interest on the Exchange Notes will not accrue prior to February 15,
2003. Commencing August 15, 2003, cash interest on the Exchange Notes will be
payable on February 15 and August 15 of each year at a rate of 11.0% per annum.
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As of the date of this Prospectus, $300.0 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.
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
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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 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.
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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 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
34
<PAGE>
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 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
35
<PAGE>
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 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.
36
<PAGE>
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 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:
or
BY FACSIMILE:
The Bank of New York
Attention:
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
37
<PAGE>
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, 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."
38
<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 sale of the Notes was approximately
$169.1 million. The net proceeds of the Offering will be used primarily for the
purchase of telecommunications equipment and IRUs. Net proceeds from the
Offering not immediately required for the foregoing purposes are invested in
short term, interest-bearing, investment grade securities, subject to
restrictions in the Indenture.
39
<PAGE>
CAPITALIZATION
The following table sets forth the cash and capitalization of Econophone (i)
at December 31, 1997 and (ii) on a pro forma as adjusted basis giving effect to
the Offering and the acquisition of VoiceNet (not including any payment for the
sellers' earn-out). This information should be read in conjunction with the
Financial Statements and the notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
----------------------------
PRO FORMA
ACTUAL AS ADJUSTED
--------------- -----------
<S> <C> <C>
(IN THOUSANDS)
Cash, cash equivalents and restricted cash.......................................... $ 126,629 $ 274,961
--------------- -----------
--------------- -----------
Current portion of long-term debt and capital lease obligations(1).................. 2,300 2,300
Long-term debt and capital lease obligations:
Capital leases.................................................................... 279 279
1997 Notes(2)..................................................................... 149,680 149,680
Notes offered hereby.............................................................. -- 175,785
Other long-term debt(1)........................................................... 5,657 5,657
--------------- -----------
Total long-term debt and capital lease obligations............................ 155,616 331,401
Redeemable convertible preferred stock.............................................. 14,328 14,328
Stockholders' equity (deficit):
Common Stock-voting, $.0001 par value, 29,250,000 shares authorized, 20,000,000
shares issued and outstanding(3)................................................ 2 2
Non-voting common stock, $.0001 par value, 500,000 shares authorized, no shares
issued and outstanding.......................................................... -- --
Additional paid-in capital(4)..................................................... 6,082 6,082
Cumulative translation adjustment................................................. (104) (104)
Accumulated deficit............................................................... (39,706) (39,706)
--------------- -----------
Total stockholders' equity (deficit).......................................... (33,726) (33,726)
--------------- -----------
Total capitalization...................................................... $ 138,518 $ 314,303
--------------- -----------
--------------- -----------
</TABLE>
- ------------------------------
(1) Through December 31, 2002, other long-term debt of Econophone matures as
follows:
<TABLE>
<CAPTION>
Year of Maturity Amount
- -------------------------------------------------------------------------------------- ---------
<S> <C>
1998.................................................................................. $2,144,000
1999.................................................................................. 1,689,000
2000.................................................................................. 1,689,000
2001.................................................................................. 1,500,000
2002.................................................................................. 779,000
</TABLE>
(2) The annual interest to be paid on the 1997 Notes is $20,925,000.
(3) Based on the number of shares outstanding on December 31, 1997. Does not
include (i) 2,901,445 shares of Common Stock issuable upon the exercise of
options to employees granted pursuant to the 1996 Flexible Incentive Plan
(the "Incentive Plan") at a weighted average exercise price of $2.74, (ii)
3,420,701 shares of Common Stock issuable upon conversion of the Series A
Preferred Stock at December 31, 1997 or (iii) 1,265,885 shares of Common
Stock issuable upon exercise of the Warrants issued in connection with the
1997 Unit Offering. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources,"
"Management--Executive Compensaiton--1996 Flexible Incentive Plan" and
"Certain Transactions--Investment by Princes Gate."
(4) Includes $5.6 million attributable to the Warrants, which 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 1997
Notes and will be amortized over the term of the 1997 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
between Econophone and the Placement Agent in connection with the 1997 Unit
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 1997 Unit
Offering and the prices of similar securities of generally comparable
companies. The Warrants expire on June 30, 2007.
40
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data (except for Other Data, Regional
Data and 1993 financial data) for the years presented below was derived from the
audited consolidated financial statements of Econophone. The audited
consolidated financial statements of Econophone as of December 31, 1996 and 1997
and for each of the three years in the period ended December 31, 1997, together
with the notes thereto and the related report of Arthur Andersen LLP,
independent public accountants, are included elsewhere in this Prospectus. The
selected consolidated financial data for the year ended December 31, 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 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>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------
1993(1) 1994 1995 1996 1997
----------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT REVENUE PER MINUTE AND RATIOS)
STATEMENT OF OPERATIONS DATA:
Revenues............................................................. $ 3,528 $ 8,523 $ 27,490 $ 45,103 $ 83,003
Cost of services..................................................... 2,761 5,540 19,735 35,369 63,707
Selling, general and administrative expense.......................... 497 2,013 7,087 16,834 37,898
Depreciation and amortization........................................ 51 168 389 1,049 3,615
----------- --------- --------- --------- ---------
Income (loss) from operations........................................ 219 802 279 (8,149) (22,217)
Interest income...................................................... 6 6 19 84 3,689
Interest expense..................................................... (25) (109) (167) (380) (11,437)(2)
Other income (expense)............................................... 6 100 (10) 133 (163)
Provision (benefit) for taxes........................................ -- 73 -- -- --
----------- --------- --------- --------- ---------
Net income (loss).................................................... $ 206 $ 726 $ 121 $ (8,312) $ (30,128)
----------- --------- --------- --------- ---------
----------- --------- --------- --------- ---------
OTHER DATA:
Capital expenditures(3).............................................. $ 605 $ 906 $ 1,677 $ 4,670 $ 19,021
EBITDA(4)............................................................ 276 1,070 658 (6,967) (18,765)
Dividends and distributions declared................................. -- -- 499 508 879
Net cash provided by (used in) operating activities.................. (190) 474 2,037 (6,006) (12,219)
Revenue per minute................................................... .70 .57 .43 .25
Minutes.............................................................. 12,196 47,859 104,566 330,144
Ratio of earnings to fixed charges(5)................................ 8.6x 7.2x 1.5x -- --
Deficiency of earnings available to cover fixed charges(5)........... -- -- -- $ (8,312) $ (30,128)(6)
REGIONAL DATA:
Revenues
United States...................................................... $ 2,728 $ 8,292 $ 18,185 $ 48,899
United Kingdom..................................................... 3,143 14,173 15,477 18,363
Continental Europe................................................. 2,652 5,025 11,441 15,741
Minutes
United States...................................................... 5,707 23,411 68,247 244,095
United Kingdom..................................................... 4,532 20,592 27,968 68,810
Continental Europe................................................. 1,957 3,856 8,351 17,239
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
AT DECEMBER 31, -------------------------
------------------------------------------ PRO FORMA
1993 1994 1995 1996 ACTUAL AS ADJUSTED(7)
--------- --------- --------- --------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents................................ $ 120 $ 86 $ 106 $ 6,272 67,202 215,534
Current assets........................................... 852 2,588 7,616 14,729 96,329(8) 244,628(8)
Restricted cash.......................................... -- -- -- -- 59,427(8) 59,427(8)
Total assets............................................. 1,541 4,034 10,508 22,755 178,005 352,975
Current portion of borrowings............................ 510 480 558 3,020 2,300 2,300
Long-term borrowings, less current portion............... 39 639 719 2,263 155,616 331,401
Redeemable convertible preferred stock................... -- -- -- 13,358 14,328 14,328
Total stockholders' equity (deficit)..................... 708 1,088 710 (8,124) (33,726) (33,726)
</TABLE>
- ------------------------
(1) Regional revenue data and minute data for 1993 is not available.
(2) On a pro forma as adjusted basis, assuming the Offering closed on January 1,
1997, annual interest expense on the Notes for 1997 would have been $19.9
million.
(3) Capital expenditures include assets acquired through capital lease financing
and other debt.
(4) EBITDA represents net income (loss) plus net 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.
(5) 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.
(6) On an as adjusted basis, assuming that the Offering had been consummated on
January 1, 1997, the deficiency of earnings available to cover fixed charges
for the year ended December 31, 1997 would have been $50.9 million.
(7) The pro forma as adjusted balance sheet data gives effect to (i) the
Offering and (ii) the consummation of the acquisition of VoiceNet, as if
such events had occurred on December 31, 1997.
(8) Econophone used $57.4 million of the net proceeds from the 1997 Unit
Offering to purchase the Pledged Securities. Proceeds from the Pledged
Securities will be used by Econophone to make the first six scheduled
interest payments on the 1997 Notes. Included in restricted cash is $10.5
million, included in current assets.
42
<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.S., U.K. and continental European operations for
the years ended December 31, 1995, 1996 and 1997. Over time, Econophone expects
its European markets to contribute an increasingly larger percentage of its
revenues.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
<S> <C> <C> <C>
1995 1996 1997
--------- --------- ----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
REVENUE
United States............................................... $ 8,292 $ 18,185 $ 48,899
United Kingdom.............................................. 14,173 15,477 18,363
Continental Europe.......................................... 5,025 11,441 15,741
BILLABLE MINUTES OF USE
United States............................................... 23,411 68,247 244,095
United Kingdom.............................................. 20,592 27,968 68,810
Continental Europe.......................................... 3,856 8,351 17,239
</TABLE>
Econophone generally prices its services at a discount to the primary
carrier (or carriers) in each of its 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 business, financial condition, results
of operations and its 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."
43
<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 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 (excluding carrier services) now are sold in the United
Kingdom primarily through Telco Global Communications ("Telco"), a
majority-owned subsidiary of Econophone. Telco began marketing efforts during
the first quarter of 1997. During 1997, Econophone's U.K. revenues were $18.4
million, $10.6 million of which was generated by Telco. See "Business--Sales and
Marketing."
Until recently, Econophone was not required to charge VAT to its customers
based in the European Union, other than in the United Kingdom, where it was
required to charge VAT. This resulted in a competitive price advantage for
Econophone over competitors, including the PTOs, who were required to charge VAT
to such customers. 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 now required to charge. See
"Risk Factors--Risks Associated With Imposition of VAT."
In continental Europe, France Telecom and Deutsche Telekom have recently
taken steps to substantially reduce prices in an effort to protect their market
share and deter competitors, such as Econophone. France Telecom has obtained
approval to reduce retail prices on domestic and international long distance
services by an average of 9% during each of 1997 and 1998 and 4.5% during each
of 1999 and 2000. Deutsche Telekom will reduce retail prices on domestic and
international long distance service by up to 40% beginning March 1, 1998.
Neither France Telecom nor Deutsche Telekom have reduced or proposed reducing
wholesale prices to the same extent as retail prices. Price reductions by France
Telecom and Deutsche Telekom, may over time, create substantial pressure on
Econophone's gross margins in France and Germany. See "Risk
Factors--Competition."
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.
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 consist of IRU costs. IRU costs are included in depreciation and
amortization, involve only fixed costs and no per minute charges and are,
therefore, a more cost-effective means of transmitting traffic once certain
volume levels
44
<PAGE>
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 recently completed the purchase of five
half-circuits on PTAT-1 and one on Cantat-3, which were previously leased.
Econophone also recently purchased IRUs on the AC-1 transatlantic cable, which
are expected to become operational during the second quarter of 1998. See
"Business--Network Infrastructure--Transmission Capacity."
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.
The FCC adopted, effective October 7, 1997, a $0.284 access charge for each
call made using toll free access from a payphone in the United States. The FCC's
decision is before an appellate court. Econophone recently began to charge the
$0.284 access charge to its customers. If this charge is upheld, there can be no
assurance that Econophone will over time 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. Had such access charge been in
effect during all of 1997, the aggregate payphone access charge paid by
Econophone would have been approximately $3.3 million.
Beginning January 1, 1998, Econophone, as well as its U.S. competitors,
became obligated to make FCC-mandated contributions to universal service funds.
These funds subsidize the provision of telecommunications services in high cost
areas and to low-income customers, as well as the provisions of
telecommunications and certain other services to eligible schools, libraries and
rural health care providers. The contributions are billed monthly and are
assessed based on intrastate, interstate and international "end-user" gross
telecommunications revenues. However, revenues from international calls that
both originate and terminate in foreign points are excluded from assessment. On
December 16, 1997, the FCC approved the following contribution factors for
carriers' first quarter 1998 contributions: (i) 3.19% for the high cost and low
income funds (interstate and international revenues); and (ii) 0.72% for the
schools, libraries and rural health care funds (intrastate, interstate and
international revenues). Econophone currently is evaluating which categories of
its revenues are subject to assessment and, as a result, has not filed a
universal service fund worksheet. Because the contribution factors are likely to
vary quarterly, the annualized impact on Econophone cannot be estimated at this
time.
Additionally, effective January 1, 1998, Econophone is required to pay to
LECs specified PICCs in order to compensate such LECs for their investment in
the telephone lines Econophone uses to access its customers. The costs of these
charges vary in amount depending upon the type of presubscribed lines that are
serviced by Econophone and the individual LEC's revenue requirements. While
Econophone currently intends to pass through the costs of both the PICC and its
universal service fund contributions to its customers, there can be no assurance
that Econophone will be able to fully pass on such costs or that doing so will
not result in a loss of customers. In addition, the FCC orders implementing the
universal service contribution obligation and the PICC are both subject to
petitions seeking reconsideration by the FCC and to certain appeals. Until such
petitions or appeals are decided, there can be no assurance as to how the orders
will be implemented or enforced or what effect the orders generally will have on
competition within the telecommunications industry or specifically on the
competitive position of Econophone. See "Risk Factors -- Regulatory
Restrictions."
45
<PAGE>
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 resellers. 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.
For the year ended December 31, 1997, commissions earned by VoiceNet
accounted for $5.7 million, or 43%, of selling expenses. Commissions were based
on calling card usage by VoiceNet customers and consisted of two components: (i)
commissions received by VoiceNet that it retained; and (ii) commissions received
by VoiceNet that it subsequently paid to its independent sales agents. As of the
date of consummation of the acquisition of VoiceNet, that portion of commissions
paid to and retained by VoiceNet has been eliminated. For the year ended
December 31, 1997, $2.3 million of the commissions paid to VoiceNet were
retained by VoiceNet.
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 has and will
continue to increase significantly its selling expenses due to costs associated
with operating and staffing sales offices. Econophone expects these costs 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."
Deutsche Telekom recently proposed, subject to regulatory approval, a fee of
approximately DM50 for a customer to change long distance service providers. If
Econophone were required to bear this cost in order to remain competitive, its
selling expenses in Germany would be increased. See "Risk Factors--
Competition."
GENERAL AND ADMINISTRATIVE EXPENSES
Since the fourth quarter of 1996, Econophone has significantly increased the
size of its management team and established new sales offices in London, Paris,
Berlin, Brussels, Hamburg, Marseilles and Zurich, all of which resulted in an
increase in general and administrative expenses. Since the fourth quarter of
1996, general and administrative expenses have primarily consisted of expanding
Econophone's customer service, billing, financial reporting and other management
information systems and network management systems and organizational expenses
related to entering additional markets. Such expenses have been and will
continue to be incurred in advance of anticipated related revenues and are
expected to decline as a percentage of revenues over time. Econophone intends to
establish sales offices in additional network cities, which will further
increase general and administrative expenses.
INTEREST EXPENSE
Prior to July 1, 1997, interest expense principally consisted of interest
payable in connection with equipment financing loans and short-term
indebtedness. The 1997 Notes were issued on July 1, 1997 and currently
constitute most of Econophone's interest expense. Annual interest expense on the
1997 Notes is $20.9 million. Econophone used $57.4 million of the net proceeds
from the 1997 Unit Offering to purchase the Pledged Securities. Proceeds from
the Pledged Securities will be used by Econphone to make the first six scheduled
interest payments on the 1997 Notes. Thereafter, interest on the 1997 Notes will
be paid out of other cash sources. Interest expense will increase substantially
as a result of the Offering.
46
<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. For the years ended 1995, 1996 and 1997,
approximately 60%, 40% and 40%, 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 year ended December 31, 1997 was a reduction of
$2.7 million or 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, 1997,
Econophone had $0.3 million in 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. As part of its
efforts to mitigate exposure to changes in foreign exchange rates, to the extent
practicable, Econophone also varies the portion of its transmission capacity
purchased in U.S. dollars and other currencies. Since the first quarter of 1997,
the U.S. dollar has appreciated relative to the principal European currencies in
which Econophone bills its European customers. A sustained increase in the value
of the U.S. dollar relative to such currencies would reduce Econophone's gross
margins on European calls and could have a material adverse effect on
Econophone's ability to pay principal of and interest on the Notes. See "Risk
Factors-- Devaluation and Currency Risks."
THE VOICENET ACQUISITION
On February 12, 1998, Econophone acquired VoiceNet, a major reseller of
Econophone's calling card products. The initial purchase price for VoiceNet was
$21.0 million. which was paid out of cash on hand. The sellers of VoiceNet also
are entitled to receive an earn-out based upon the revenue growth of the
VoiceNet business for a period of up to one year following the closing of the
acquisition if certain performance criteria are met. See "Risk
Factors--Integration of VoiceNet."
VoiceNet provides travellers and other callers with calling card services,
which are advertised primarily in in-flight magazines. Econophone has provided
substantially all of VoiceNet's transmission, billing and customer service
functions since April 1996. The acquisition of VoiceNet by Econophone ensures
the continuity of Econophone's sales to VoiceNet, provides Econophone with an
established U.S. calling card business and enables Econophone to cross-market
its other services to VoiceNet's customer base, which during December 1997
consisted of approximately 110,000 calling card holders. The acquisition of
VoiceNet also will reduce Econophone's selling expenses in respect of services
provided to VoiceNet customers. See "--Selling Expenses."
The acquisition of VoiceNet will be accounted for under the purchase method
of accounting. Goodwill is recorded to the extent the purchase price exceeds the
fair value of the net assets purchased. Based on Econophone's preliminary
analysis, approximately $1.0 million of the initial purchase price will reflect
the underlying value of the assets acquired and $20.0 million will reflect
goodwill. Goodwill will be amortized over 15 years.
ACQUISITION OF TELCO MINORITY INTEREST
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
through its wholly-owned subsidiary, ATL. On January 29, 1998, Econophone
received notice from Goldvalley Limited ("Goldvalley"), the minority partner in
Telco, that pursuant to existing arrangements between Econophone and Goldvalley,
Goldvalley has elected to exercise an option to cause Econophone to acquire
Goldvalley's interest in Telco. The parties recently commenced
47
<PAGE>
negotiations with respect to the terms of such acquisition, including the form
and amount of the consideration. There can be no assurance whether such
acquisition ultimately will be consummated, and if consummated, whether it will
be on terms favorable to Econophone.
NEW ACCOUNTING PRONOUNCEMENTS
During 1997, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 128, "Earnings Per Share." This statement established 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. Econophone has adopted the provisions of SFAS No. 128 as of
December 31, 1997.
In June 1997, Statement of Financial Accounting Standards (SFAS) No.
130--"Reporting Comprehensive Income" and SFAS No. 131--"Disclosures about
Segments of an Enterprise and Related Information" were issued and are effective
for periods beginning after December 15, 1997. SFAS No. 130 establishes
standards for reporting comprehensive income and its components. SFAS No. 131
establishes standards for reporting financial and descriptive information
regarding an enterprise's operating segments. These standards increase
disclosure only and will have no impact on the Company's financial position or
results of operations.
RESULTS OF OPERATIONS
The following table presents certain data concerning Econophone's results of
operations for the years ended December 31, 1995, 1996 and 1997.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1995 1996 1997
--------- --------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues..................................................................... $ 27,490 $ 45,103 $ 83,003
Cost of services............................................................. 19,735 35,369 63,707
Selling expenses............................................................. 3,934 7,821 13,357
General and administrative expenses.......................................... 3,153 9,013 24,541
Depreciation and amortization................................................ 389 1,049 3,615
Net income (loss)............................................................ 121 (8,312) (30,128)
</TABLE>
1997 COMPARED TO 1996
REVENUES. Total revenues for 1997 increased by 84% to $83.0 million on
330.1 million billable minutes of use from $45.1 million on 104.6 million
billable minutes of use for 1996. Billable minutes of use increased by 216% for
1997 from 1996. Growth in revenues during 1997 primarily was attributable to
additional minutes of use, particularly in the United States, offset in part by
a substantial decline in prices, as a result of increased competition. This
competition was a primary factor for the average revenue per minute decrease
from $.43 during 1996 to $.25 during 1997. An additional factor in the decrease
in revenues per minute was a larger portion of national, as opposed to
international, minutes of use. The increase in revenues was primarily
attributable to sales by VoiceNet of $23.6 million for 1997, compared to $1.9
million for 1996.
In the United Kingdom, revenues increased to $18.4 million from $15.5
million, primarily due to sales by Telco which increased to $10.6 million in
1997 from $1.3 million in 1996. Increases in U.K. revenue were
48
<PAGE>
partially offset by the termination of Econophone's business relationship with
EI, which accounted for $14.2 million in revenues in 1996. During the fourth
quarter of 1996, Econophone began marketing efforts in the U.K. through Telco,
its majority owned subsidiary. During 1997, U.K. revenues consisted principally
of $10.6 million from international and domestic long distance and prepaid card
services attributable to Telco, as well as $7.2 million from carrier services
sold through American Telemedia Limited ("ATL"), a wholly-owned subsidiary of
Econophone. Average U.K. revenue per minute decreased from $.55 per minute
during 1996 to $.27 per minute during 1997. This reduction was due principally
to sales of a larger percentage of domestic long distance minutes, which are
sold at lower rates than international minutes, and to increased price
competition.
In continental Europe, revenues increased by 38% to $15.7 million from $11.4
million. This increase was attributable to an increase in prepaid card services,
primarily in France and Germany. Average continental European revenue per minute
decreased from $1.37 per minute during 1996 to $.91 per minute during 1997. This
decrease was due to lower rates in France and Germany.
In the United States, revenues grew by 169% to $48.9 million from $18.2
million. This increase was due principally to calling card revenues attributable
to sales by VoiceNet, which were $23.6 million during 1997, compared to $1.9
million during 1996. VoiceNet began reselling Econophone's calling card services
to end users during the second quarter of 1996. The remainder of the increase
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 $.20 per minute during 1997 from $.27 per minute
during 1996. This reduction was due principally to sales of a larger percentage
of domestic long distance minutes, which are sold at lower rates than
international minutes, and to increased price competition.
During 1997, Econophone experienced an average customer turnover or "churn"
rate of approximately 5% relating to U.S., U.K. and continental European "1+",
"1xxx" and calling card services. To date, Econophone's revenues and margins
have not been materially impacted by its "churn" rate. Econophone's "churn" rate
with respect to any given period consists of the average number of customers
that ceased using Econophone's services during any month during the period
divided by the average monthly number of customers for the period. Customers
that have ceased using Econophone's services during any given month are those
customers who used Econophone's services during the prior month but not during
any subsequent month during the applicable period.
COST OF SERVICES. Cost of services increased to $63.7 million for 1997 from
$35.4 million for 1996. As a percentage of revenues, cost of services decreased
slightly to approximately 77% for 1997 from approximately 78% for 1996. Average
cost per minute for 1997 decreased to $.19 from $.34 for 1996. This was a result
of increased use of owned and leased line transmission capacity acquired by
Econophone during the period, as well as obtaining better prices on switched
transmission capacity because of the growth of Econophone's minutes of traffic
and more available capacity.
SELLING EXPENSES. Selling expenses increased to $13.4 million for 1997 from
$7.8 million for 1996, and, as a percentage of revenues, were 16% for 1997 and
17% for 1996. The increase in selling expenses primarily consisted of
commissions paid to resellers (principally VoiceNet) and independent agents,
expenses associated with Econophone's sales offices in London, Brussels, Hamburg
and Paris and expenses attributable to Econophone's customer service department,
which has been substantially enlarged since June of 1996. For 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 $24.5 million for 1997 from $9.0 million for 1996, and, as a
percentage of revenues, increased to 30% for 1997 from 20% for 1996. The
increase in general and administrative expenses was primarily attributable to an
increase in payroll costs related to additional management and staff in the
areas of finance, network management and
49
<PAGE>
information systems at Econophone's Manhattan, New York, Brooklyn, New York and
College Station, Texas facilities, as well as the London, Brussels, Hamburg and
Paris offices.
In connection with the termination of Econophone's joint venture with EI
during June 1996, EI granted Econophone the right to compete with EI in the
United Kingdom in exchange for forgiveness of a net receivable due to Econophone
of $2.0 million. The forgiveness of the receivable has been reclassified as an
expense of the joint venture and has been charged to operations. Econophone
previously had capitalized the U.K. territorial rights granted to it by EI on
its consolidated balance sheet and was amortizing the rights over a 15 year
life. Econophone subsequently decided to write off this asset, resulting in an
additional $1.9 million charge in 1996.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
increased to $3.6 million for 1997 from $1.0 million for 1996. This increase was
substantially due to the depreciation associated with upgrades in Econophone's
switch in New York and installation of multiplexing equipment in New York and
London, as well as amortization of costs associated with the 1997 Unit Offering.
BAD DEBT EXPENSE. Econophone had bad debt expense of $3.9 million for 1997,
compared to bad debt expense of $2.0 million for 1996, which was due to the $2.0
million charge relating to EI during 1996.
INTEREST EXPENSE. Econophone had $11.4 million of interest expense during
1997, as compared to interest expense of $0.4 million during 1996. Interest
expense has increased substantially as a result of the 1997 Unit Offering, with
$10.5 million of 1997 expense attributable to the 1997 Unit Offering. Interest
expense will increase substantially as a result of the Offering.
NET LOSS. Econophone had a net loss of $30.1 million during 1997, compared
to a net loss of $8.3 million during 1996. The increase is primarily due to
costs associated with increasing the internal infrastructure, building the
network, marketing, commissions paid to resellers and interest expense related
to the 1997 Notes. Net loss is expected to increase substantially over the near
term, primarily due to interest expense incurred on the Notes and the 1997
Notes.
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 from 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 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
50
<PAGE>
certain permitted exceptions. See "Risk Factors--Dependence on Carrier
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 $7.8 million for 1996 from
$3.9 million for 1995, and, as a percentage of revenues, increased to 17% 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 $1.0 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 EXPENSE. Econophone had bad debt expense of $2.0 million during
1996, compared to bad debt expense of $.2 million during 1995. For bad debt
expense in 1996, $2.0 million was attributable to the charge relating to EI
during 1996.
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LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, Econophone had approximately $67.2 million in cash and
cash equivalents, excluding the Pledged Securities, but including other unused
net proceeds of the 1997 Unit Offering, which are invested in short term,
interest-bearing, investment grade securities, as compared to cash and cash
equivalents of $6.3 million at December 31, 1996. Econophone's net cash used by
operating activities was $12.2 million for 1997, primarily due to a net loss of
$30.1 million, an increase in accounts receivable of $10.7 million, and an
increase in other assets of $1.7 million, offset by an increase in accounts
payable of $15.9 million, an increase in accrued interest on the 1997 Notes of
$10.5 million and depreciation and amortization of $2.6 million. Cash used for
investing in property and equipment of $13.3 million for 1997 was primarily
attributable to the implementation and expansion of Econophone's network in
Europe. Cash provided by financing activities of $145.8 million was primarily
related to cash received from the sale of the 1997 Notes and Warrants of $155.0
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 for 1995.
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 and $1.2 million for 1996 and 1995,
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 Investors II, L.P. ("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.
Capital expenditures during 1997 were $19.0 million. Capital expenditures
for 1997 related 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 Antwerp, Berlin, Brussels, Hamburg,
London, Los Angeles, Marseilles, 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. Capital
expenditures for 1998 are budgeted at $58.0 million and are expected to consist
of the purchase of telecommunications equipment and IRUs, network management
systems and management information systems.
Econophone expects to continue to make further significant capital
expenditures as it continues to expand the geographic scope of its services in
Europe, the United Kingdom, the United States and Canada, and as it continues 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 1997 Indenture and the NTFC
Agreement.
The initial purchase price for VoiceNet was $21.0 million, which was paid
out of cash on hand. The sellers of VoiceNet also are entitled to an earn-out
based upon the revenue growth of the VoiceNet business for a period of up to one
year following the closing of the acquisition if certain performance criteria
are met.
The net proceeds from the Offering, which were approximately $169.1 million,
together with the remaining proceeds from the 1997 Unit Offering, and, to the
extent available on favorable terms, vendor financing, will be used to fund
Econophone's continued 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 2000,
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
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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."
PRIOR FINANCINGS. 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 four primary sources of funding:
(i) Princes Gate; (ii) NTFC; (iii) the sale of Bridge Notes to Morgan Stanley
Group, an affiliate of the Placement Agent and Princes Gate, and (iv) the 1997
Unit Offering.
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. 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."
On May 28, 1996, Econophone entered into a credit facility with NTFC, which
has been amended and increased as to amount on several occasions. On January 28,
1998, the NTFC credit facility was amended and restated in its entirety in order
to effect various amendments and increase the amount of NTFC's commitment
thereunder (as amended and restated, the "NTFC Facility"). The NTFC Facility
provides for borrowings by Econophone and its subsidiaries to fund certain
equipment acquisition costs and related expenses. The NTFC Facility provides for
an aggregate commitment of NTFC of $24.0 million pursuant to three tranches of
$2.0 million, $3.0 million and $19.0 million. Loans borrowed under each tranche
of the NTFC Facility amortize in equal monthly installments over a five year
period ending on July 1, 2001, April 1, 2002 and January 1, 2003, respectively.
As of December 31, 1997, the aggregate amount outstanding under all tranches of
the NTFC Facility was $7.1 million. Loans under the NTFC Facility accrue
interest at an interest rate equal to the 90-day commercial paper rate plus 395
basis points (an interest rate of 9.55% as of January 1, 1998), subject to
certain quarterly adjustments depending upon financial performance. All of the
equipment purchased with the proceeds of the NTFC Facility has been pledged to
NTFC. See "Description of Certain Indebtedness--NTFC Vendor Financing."
On April 24, 1997, Econophone entered into a Note Purchase Agreement (the
"Note Purchase Agreement") with Morgan Stanley Group, pursuant to which Morgan
Stanley Group agreed to purchase from Econophone up to $15.0 million 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 2.0% 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 sold by Econophone
were $6.6 million and were used to fund equipment and other capital expenditures
and operations. Immediately following the consummation of the 1997 Unit
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 1997 Unit Offering. In
connection with the 1997 Unit Offering, Econophone issued $155.0 million in
aggregate principal amount of 1997 Notes and Warrants to purchase 1,265,885
shares of Common Stock. The net proceeds of the 1997 Unit Offering were
approximately $148.1 million. Of this amount, approximately $57.4 million was
used to purchase the Pledged Securities, the proceeds of which will be used to
make the first six scheduled interest payments on the 1997 Notes. See
"Description of Certain Indebtedness -- The 1997 Unit Offering."
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BUSINESS
Econophone is a rapidly growing switch-based provider of long distance
telecommunications services in selected major U.S. and western European markets.
Econophone's customer base consists primarily of residential customers, small-
and medium-sized businesses and other telecommunications carriers. 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 was incorporated in the State of New York under the name
"Switchtel Communications Corp." on July 10, 1992. During 1996, the name of the
Company was changed to "Econophone, Inc." A wholly-owned subsidiary named
"Econophone, Inc." was subsequently incorporated in the State of Delaware for
the sole purpose of changing the state of incorporation of the Company, and the
New York parent corporation was merged into the Delaware subsidiary on February
11, 1998, with the Delaware corporation being the surviving entity. Econophone's
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 1996. 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 13% per annum through the year 2000. Based on this
estimate, worldwide international long distance traffic is projected to increase
from approximately 70 billion minutes in 1996 to over 114 billion minutes by the
year 2000. The market for these services is highly concentrated in more
developed countries, with approximately 40% and 27% of 1996 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 and multicurrency 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 24 billion minutes of outgoing calls or
34% of international calling volume in 1996. In most EU member states, the
ability to provide telecommunications services was liberalized on January 1,
1998. Until such time, most continental European PTOs 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 until recently 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
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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.
Econophone believes that regulatory liberalization in many countries in
continental Europe will 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,
although certain European PTOs appear to be responding more rapidly to
competition than the former PTOs in the United States and the United Kingdom.
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 200 public telecommunications operators
licensed to operate in the U.K. market.
According to Oftel, during the period April 1996 to March 1997, the amount
of international calls originating from the United Kingdom was approximately 4.5
billion minutes, of which 47% were from residential users and 53% from business
users. Over the same period, there were 39.7 billion minutes of U.K. domestic
long distance calls, of which 55% were from residential users and 45% were from
business users.
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. Since October 1997, British Telecom has set
its own prices for services that are competitive, with an overall price cap on
the basket of non-competitive services. Oftel does, however, have 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 December 1996, the U.K. government issued the first licenses for the
provision of international facilities-based services, which until then only
British Telecom and Mercury had been authorized to provide. ATL, a wholly-owned
subsidiary of 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 has been able to acquire international
circuits originating in the United Kingdom. See "--Network Infrastructure--
Transmission Capacity."
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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 19 billion minutes or 27% of global international calling
volume originated in the United States in 1996. 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 7 billion minutes in 1989 to approximately 19 billion minutes in
1996, a compound annual growth rate of approximately 16%. 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.
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 1996, per minute settlement
payments by U.S. based carriers to foreign PTOs fell 39%, from $.70 per minute
to $.43 per minute. However, over this same period, per minute international
billed revenues fell only 27%, from $1.02 in 1989 to $.74 in 1996. As a result,
gross profit margin for outbound international calls (before local access
charges) grew from 31% in 1989 to 42% in 1996. The FCC has recently issued
benchmark levels for settlement rates, of between $.15 and $.23 per minute, in
an effort to reduce the settlement rates charged and paid by U.S. based
carriers. Such benchmark rates are substantially lower than the current
settlement rates. The FCC has encouraged carriers to use alternative measures to
terminate international traffic other than through operating agreements and the
international settlement process. 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."
Econophone also provides domestic long distance services to a substantial
portion of its U.S. customers and, as part of its strategy, is increasing its
U.S. domestic long distance business, including through its acquisition of
VoiceNet. According to the FCC, the U.S. domestic long distance market grew in
total minutes at an annual compound rate of approximately 7.8% from 1989 to
1996. 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 (i) expand into additional geographic markets in
continental Europe, the United Kingdom, the United States and Canada, with a
focus on large markets that generate substantial long distance and international
calling traffic, (ii) add customers in its existing markets, (iii) migrate
additional switched traffic on to its expanding network and (iv) 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. During 1997, Econophone installed switches in
Brussels, London and Paris, nodes in Antwerp, Berlin, Marseilles, Nice and
Zurich and points of presence serving a
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number of major cities in the northeastern United States. During 1998,
Econophone's network expansion will be focused on North America and
continental Europe. During 1998, Econophone intends to install switches in
Chicago, Dallas, Frankfurt, Los Angeles and Miami and a node in Geneva.
This expansion is largely driven by existing customer calling patterns.
Econophone also intends to expand its network into Canada, with the
installation of a switch in Toronto and a point of presence in Montreal.
In addition, Econophone intends to upgrade its node in Berlin and point of
presence in Washington, D.C. to switches. Econophone's network expansion
will enable it to route calls from each of its new network cities,
providing for more cost-efficient transmission from these cities. The
switches in Chicago, Dallas, Los Angeles and Miami and the point of
presence in Montreal also will enable Econophone to provide international
and domestic long distance service originating in those cities through
"1+" access. Econophone intends to enter additional markets in western
Europe, the United States and Canada as market and regulatory conditions
warrant. See "--The Econophone Network--European Expansion," "--The
Econophone Network--U.S. Expansion" and "--Regulation."
Econophone also is in the process of seeking to enter into interconnection
agreements in Belgium, France and Germany. Interconnection agreements would
provide Econophone with a direct connection to the PSTN in such countries,
which would enable it to provide network access through abbreviated
dialing, originate calls in a greater number of cities and terminate calls
in such countries more cheaply. In particular, in Germany, interconnection
to the PSTN would enable Econophone to offer domestic long distance service
through "1+" access in its German network cities. Econophone expects the
foregoing interconnection agreements to be obtained by the end of 1998.
- ADD CUSTOMERS IN EXISTING MARKETS. By adding customers in its existing
markets, Econophone is able to increase network utilization, which reduces
transmission costs per minute. Econophone markets its services through
various channels, each of which is designed to serve a particular
geographic market, customer group and product. Econophone sells to
non-business customers primarily through independent sales representatives
retained directly by Econophone or by master distributors and to business
customers and other telecommunications carriers primarily through its
internal sales forces. Depending upon the service, sales are made either
directly to end-users (e.g., residential and business long distance) or to
retail establishments for resale (e.g., prepaid cards). Econophone
believes that its multi-channel marketing strategy enhances its growth
prospects and reduces the risks associated with dependence on a smaller
number of distribution channels. See "-- Sales and Marketing."
As of December 31, 1997, Econophone had (i) 122, (ii) 28,180 and (iii) 305
independent sales representatives, and 23, 19 and 9 internal sales
representatives, in continental Europe, the United Kingdom and the United
States, respectively.
Econophone intends to continue to advertise VoiceNet's calling card
services primarily through in-flight magazines and through advertisements
placed in high traffic locations such as restaurants. Econophone also
intends to cross-market many of its other services to VoiceNet's customer
base, which consisted of approximately 110,000 calling card holders for
December 1997, and to use VoiceNet's expertise to market its calling card
services in Europe.
- MIGRATE ADDITIONAL TRAFFIC ON TO ECONOPHONE NETWORK. By transmitting a
greater portion of its calls over its network, Econophone reduces its
transmission costs. Transmission costs are reduced because, once certain
volume levels are met, it is cheaper to transmit calls over lines that are
owned or leased on a fixed cost basis than lines leased on a per-minute
basis. In addition, local access (which can be used in Econophone's
network cities), is less expensive for Econophone than national or
international toll-free access. Econophone is increasing the percentage of
traffic carried on its network by installing additional switches, nodes
and points of presence, which increases
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Econophone's addressable market, and by increasing the transmission
capacity that it owns or obtains on a fixed-cost lease basis. See "--The
Econophone Network."
- CONTINUE TO DEVELOP AND INTRODUCE INNOVATIVE SERVICES AND FEATURES.
Econophone strives to differentiate itself from its competitors by
designing value-added features and integrating these features into its
services and network. Features under development include voice mail and
conference calling, both of which Econophone plans to introduce during the
first half of 1998. 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,
Switzerland 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. International and long distance
service accounted for $17.7 million or 21% of total revenues during 1997, and
$8.0 million (44%) and $9.6 million (20%) of U.K., and U.S. revenues,
respectively. See "--Network Infrastructure--Access Methods."
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 provided this service throughout England. For the year
ended December 31, 1997, approximately 70% of Econophone's U.K. revenues from
international and domestic long distance service were derived from the London
area, with the remainder derived principally from Manchester and Leeds.
Econophone's services are at present principally used by its U.K. customers to
make domestic long distance calls. See "--The Econophone Network--European
Expansion" and "--Network Infrastructure."
CONTINENTAL EUROPE. Econophone has offered international long distance
service to customers in Hamburg since February 1997, to customers in Antwerp,
Brussels and Paris since March 1997 and to customers in Berlin, Marseilles, Nice
and Zurich since the fourth quarter of 1997. During the second quarter of 1998,
Econophone intends to add a node in Geneva and, during the third quarter of
1998, Econophone intends to add a switch in Frankfurt, both of which will enable
Econophone to offer international long distance service to customers in those
cities. At present, Econophone cannot offer intra-European international long
distance service other than from its network cities on a cost-efficient basis.
Econophone is in the process of seeking to enter into interconnection
agreements in Belgium, France and Germany, which would provide it with a direct
connection to the PSTN in such countries, enabling it to provide international
long distance service through abbreviated dialing and originate calls in a
greater
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number of cities. In Germany, interconnection to the PSTN would enable
Econophone to provide domestic long distance service through "1+" access in its
German network cities. Econophone expects the foregoing interconnection
agreements to be obtained by the end of 1998. See "--Strategy."
UNITED STATES. Econophone has offered international and domestic long
distance service in the New York metropolitan area since March 1994 and in
Baltimore, Connecticut, northern New Jersey, Philadelphia and Washington, D.C.
since the first quarter of 1997. During 1998, Econophone intends to install
switches in Chicago, Dallas, Los Angeles and Miami, which will enable it to
offer international and domestic long distance in those markets. See "--The
Econophone Network--U.S. Expansion."
CANADA. During the first half of 1998, Econophone intends to expand its
network into Canada by installing a switch in Toronto and a point of presence in
Montreal. This will enable Econophone to offer international and domestic long
distance service in both cities.
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, including those that
are marketed through VoiceNet, are sold to customers who use its calling card
service primarily 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 and domestic 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 does not presently offer
competitive rates on intra-European calls made by calling card customers. See
"--The Econophone Network."
In 1997, calling card service in the United Kingdom, continental Europe and
the United States accounted for $0.5 million, $4.2 million and $23.6 million, or
1%, 5% and 28%, of Econophone's revenues, respectively. Substantially all of
Econophone's U.S. calling card sales are attributable to VoiceNet. A definitive
agreement to acquire VoiceNet was entered into on January 28, 1998. On February
12, 1998, Econophone acquired VoiceNet, which ensures the continuity of
Econophone's sales to VoiceNet and provides Econophone with an established U.S.
calling card business.
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 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 is an early
entrant into the market for prepaid services in
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continental Europe. In 1997, prepaid card services in the United Kingdom,
continental Europe and the United States accounted for $2.6 million, $11.5
million and $6.0 million, or 3%, 14% and 7%, of Econophone's revenues,
respectively.
Econophone's software development group has developed a new prepaid service
called "Debit Phone." Debit Phone was introduced in the United Kingdom during
the first quarter of 1998 and is expected to be introduced in the United States
by the end of the second quarter of 1998. Debit Phone allows customers 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 recognizes the customer's telephone
number and deducts the cost of the call from the customer's prepaid account
balance. Debit Phone customers are able to replenish their balances on line by
credit card or by purchasing vouchers. Customers also can 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. U.S. carrier customers buy transmission from
Econophone in bulk almost exclusively based on price. In the United Kingdom,
Econophone believes that many of its carrier customers instead choose Econophone
for access to its software platform, which, among other things, allows them to
utilize Econophone's software technology to sell calling cards and prepaid cards
and perform specialized billing functions. However, Econophone's U.K. carrier
customers are also price sensitive.
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, especially those in the United States, 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. In 1997,
sales of transmission capacity to carrier customers in the United Kingdom and
the United States accounted for $7.2 million and $9.7 million respectively, or
20% of Econophone's total revenues. See "Risk Factors--Dependence on Carrier
Customers" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
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
the United Kingdom.
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Econophone intends to introduce dedicated access service in its continental
European network cities during 1998.
During 1997, sales of toll free and dedicated access service accounted for
an insignificant amount of Econophone's revenues. Econophone expects that
revenues from these services will continue to represent a relatively small
portion of its revenues.
VALUE-ADDED FEATURES
Econophone strives to differentiate itself from its competitors by designing
value-added features and integrating these features into its services and
network and believes that its emphasis on technological innovation and quality
is one of its competitive strengths. 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. 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 the first quarter of 1998, Econophone intends to introduce
voicemail and conference calling capability. Econophone believes that its
emphasis on technological innovation and quality is one of its principal
competitive strengths.
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, Berlin, Hamburg,
Marseilles, Nice and Zurich, (iii) points of presence in Baltimore, Connecticut,
northern 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 and the introduction of
its network in Canada. 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
During 1997, Econophone significantly expanded its network in continental
Europe. 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 lines. Econophone also installed nodes in Antwerp and Hamburg that are
connected to the Brussels and London switches by leased lines. In addition,
during the first quarter of
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1997, Econophone installed its own switch in London. Prior to that time,
Econophone had leased a portion of Colt's London switch. Nodes in Berlin,
Marseilles, Nice and Zurich were installed during the fourth quarter of 1997.
The Berlin, Marseilles, Nice and Zurich nodes are connected to Econophone's
Hamburg, Paris and London node and switches, respectively, by leased line. The
Geneva node will be connected to the Zurich node by leased line.
During the second and third quarters of 1998, Econophone intends to install
a switch in Frankfurt and a node in Geneva and to upgrade its node in Berlin to
a switch. These switches will enable Econophone to route calls from these
cities, rather than transmitting them to another network city with a switch for
routing, which will result in more cost-efficient transmission.
Econophone also is in the process of seeking to enter into interconnection
agreements in Belgium, France and Germany, which would provide it with a direct
connection to the PSTN in such countries, enabling it to provide network access
through abbreviated dialing, originate calls in a greater number of cities and
terminate calls in such countries more cheaply. In Germany, interconnection to
the PSTN would enable Econophone to offer domestic long distance service through
"1+" access in its German network cities. Econophone expects the foregoing
interconnection agreements to be obtained by the end of 1998. See "--Strategy."
In addition to increasing its addressable market, the expansion of
Econophone's network in continental Europe enables it to provide intra-European
international long distance service from more continental European cities 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 can use less expensive local dial-up access
instead of international toll free access.
U.S. AND CANADIAN EXPANSION
During 1998, Econophone intends to substantially expand its network in North
America, particularly in the United States. This expansion is largely driven by
existing customer calling patterns. During the first half of 1998, Econophone
intends to install switches in Los Angeles and Miami. During the third quarter
of 1998, Econophone also intends to install switches in Chicago and Dallas.
These switches will enable Econophone to offer international and domestic long
distance service through "1+" access and carrier services from those cities. In
those cities in which Econophone has a switch, it is able to route traffic,
which provides for more cost-efficient transmission.
Econophone also intends to upgrade its point of presence in Washington, D.C.
to a switch during the second quarter of 1998. This upgrade will allow for more
cost-efficient transmission by enabling Econophone to route calls from
Washington D.C.
Econophone intends to establish additional switches in other selected U.S.
markets that generate substantial long distance calling traffic.
During the second quarter of 1998, Econophone also intends to install a
switch in Toronto and a point of presence in Montreal. In both cities,
Econophone intends to target customers with significant international calling
needs.
OPERATING AGREEMENTS
Econophone has entered into operating agreements with OTE, the Greek PTO,
Golden Lines International Telecommunications Services, an Israeli carrier, and
Utel in the Ukraine. Econophone's operating agreements provide it with a direct
interconnection to the foregoing carriers. By entering into operating
agreements, Econophone is able to obtain more favorable termination rates.
Operating
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agreements also enable Econophone to better control the quality of the
terminating segment of a call and can provide for favorable transit rates to
third countries (such as between Greece and Turkey). In addition, pursuant to
its operating agreements, Econophone's correspondent carriers are required to
send to Econophone a specified portion of their traffic. The revenues for
terminating this traffic are substantially in excess of Econophone's actual
termination costs, which increases Econophone's overall gross margins or enables
it to price its services more competitively. As part of its strategy, as market
and regulatory conditions warrant, Econophone intends to enter into additional
operating agreements with foreign carriers.
NETWORK INFRASTRUCTURE
NETWORK HARDWARE
Econophone's network employs Northern Telecom carrier grade switches.
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.
CARRIER GRADE SWITCHES. Carrier grade switches enable Econophone's network
to interconnect directly with the networks of PTOs and LECs, subject to
applicable regulatory requirements and an inter-connection agreement having been
entered into.
In Europe, carrier grade switches enable Econophone to provide international
and domestic long distance service utilizing abbreviated dialing. Carrier grade
switches also enable Econophone to originate calls in a greater number of cities
in countries in which it is connected to the PTO's network and terminate calls
in such countries more cheaply. In addition, Econophone is able to provide
domestic long distance service to the extent permitted by law. Many of
Econophone's competitors in continental Europe do not utilize carrier grade
switches and, therefore, cannot provide service on the same basis as Econophone,
which Econophone believes provides it with a competitive advantage over those
competitors. See "-- Strategy," "--Services--International and Domestic Long
Distance Service--United Kingdom," "-- Services--International and Domestic Long
Distance Service--Continental Europe" and "--The Econophone Network--European
Expansion."
In the United States, Econophone's carrier grade switches enable it to
interconnect with LECs. This interconnection reduces Econophone's transmission
costs.
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) and leased lines
between Brussels and New York, Econophone's network utilizes "fast signaling"
(also known as "SS7", "CCS7" or "EUROISDN"). 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.
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 and conference calling. 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."
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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 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 owns five IRUs on the PTAT-1 transatlantic cable, one IRU on the
Cantat-3 transatlantic cable and one IRU on the TAT 12/13 transatlantic cable.
Econophone also recently acquired 63 IRUs on the AC-1 transatlantic cable, which
will enable it to transmit 1,890 non-compressed simultaneous calls (or 7,560
calls that are compressed). Econophone's IRUs on the AC-1 transatlantic cable
are expected to become operational during the second quarter of 1998. As part of
its expansion strategy, Econophone intends to acquire additional IRUs, including
half-circuits originating in the United Kingdom running between the United
Kingdom and selected continental European cities.
In addition to utilizing IRUs to carry traffic, Econophone utilizes leased
lines. Econophone's aggregate cost for its leased lines for the month ended
December 31, 1997 was approximately $.3 million. Leased line costs will
substantially increase as Econophone expands its network to the extent that
Econophone leases additional lines instead of purchasing them.
Listed below are Econophone's currently operational IRUs and principal
leased lines and the maximum number of calls that can be carried at one time
over each circuit. Other than Econophone's circuits from New York to London,
which are owned, all of the lines listed below are leased lines.
<TABLE>
<CAPTION>
SIMULTANEOUS
TRANSMISSION LINES CALLS(1)
- -------------------------------------------------------------------------------- -----------------
<S> <C>
Los Angeles -- New York......................................................... 696
London -- New York.............................................................. 680
New Brunswick, New Jersey -- New York........................................... 336
Paris -- London................................................................. 240
Newark -- New York.............................................................. 192
Washington, D.C. -- New York.................................................... 168
Brussels -- Antwerp............................................................. 120
Brussels -- London.............................................................. 120
Brussels -- New York............................................................ 120
Hamburg -- Berlin............................................................... 120
Philadelphia -- New York........................................................ 96
Baltimore -- New York........................................................... 72
New Haven, Connecticut -- New York.............................................. 72
Brussels -- Paris............................................................... 60
Hamburg -- London............................................................... 60
Paris -- Nice................................................................... 60
Paris -- Marseilles............................................................. 60
London -- Zurich................................................................ 60
</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.
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.
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In addition, during November, 1997, Econophone entered into a Service
Agreement with Intelsat. Pursuant to this Agreement, Econophone has a direct
link to Intelsat's satellite, which reduces Econophone's transmission costs on
certain calls. Econophone's Intelsat link also enables it to more efficiently
carry traffic to certain countries that do not have direct fiber links to the
country in which Econophone's originating switch is located.
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 devoted
approximately $2.0 million to enhancing and developing its network management
systems during 1997 and has budgeted $7.0 million in 1998 to further enhancing
and developing its network management systems.
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 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 U.S. switch or point of presence and is
expected to be available in Germany in the future.
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. See "--The Econophone Network."
Econophone is in the process of seeking to enter into interconnection
agreements in Belgium, France and Germany that would enable it to provide
network access in those countries through abbreviated dialing (the equivalent of
"1xxx" or "1+"). Econophone expects these interconnection agreements to be
obtained by the end of 1998.
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,
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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. During
1997, Econophone introduced dedicated access service in the United Kingdom. In
continental Europe, Econophone intends to introduce dedicated access during
1998. 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 for
Econophone 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.
SALES AND MARKETING
Econophone's services are marketed primarily to residential customers and
small- and medium-sized businesses, with a focus on customers with significant
long distance calling needs. Econophone also sells transmission capacity to
carriers in the United States and the United Kingdom. As of December 31, 1997,
Econophone had 37,751, 3,769 and 125,705 customer accounts in the United
Kingdom, continental Europe and the United States, respectively, generating
approximately 69 million, 17 million and 244 million minutes of calling traffic,
respectively, for the year then ended. Econophone markets its services through
various channels, each of which is tailored to the particular geographic market,
customer group and product. Econophone believes that its multi-channel marketing
strategy enhances its growth prospects and reduces the risks associated with
dependence on a smaller number of distribution channels. See "--Strategy."
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
through its wholly-owned subsidiary, ATL. On January 29, 1998, Econophone
received notice from Goldvalley, the minority partner in Telco, that pursuant to
existing arrangements between Econophone and Goldvalley, Goldvalley has elected
to exercise an option to cause Econophone to acquire Goldvalley's interest in
Telco. The parties recently commenced negotiations with respect to the terms of
such acquisition, including the form and amount of the consideration. There can
be no assurance whether such acquisition ultimately will be consummated, and if
consummated, on terms favorable to Econophone.
As of December 31, 1997, Telco had retained 28,180 independent sales
representatives in the United Kingdom, primarily through master agents. A
substantial number of these sales representatives also sell products and
services other than long distance telephone service of other companies. As of
December 31, 1997, Telco also had 8 internal sales representatives, which sell
Econophone's services primarily to business users. Prior to April 1997,
Econophone's services were marketed only in the London area. Since that time,
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Econophone has been able to provide services on a U.K.-wide basis and its
services have been marketed by Telco and ATL in additional U.K. markets,
consisting principally of Manchester and Leeds. Prior to the establishment of
Telco, Econophone's services in the United Kingdom primarily were marketed under
a joint venture between Econophone and EI. See "Risk Factors--Dependence on
Third Party Sales Organizations," "Risk Factors--Dependence on Carrier
Customers" and "Management's Discussion of Financial Condition and Results of
Operations."
As of December 31, 1997, Econophone had 23 internal sales representatives
and 122 independent sales representatives in continental Europe. Econophone's
internal sales representatives are based in Antwerp, Berlin, Brussels, Hamburg
and Paris. In all five of these cities, Econophone is expanding its internal
sales forces and recruiting additional independent sales representatives. In
addition to the foregoing cities, Econophone also has independent sales
representatives in Amsterdam and Zurich. 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.
Econophone also typically 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.
During December 1997, Econophone, through Telco, implemented a sales and
marketing strategy in Germany similar to that utilized in the United Kingdom,
retaining master agents who then retain individual independent sales
representatives. As of December 31, 1997, Telco had approximately 150 direct and
indirect independent sales representatives in Germany and intends to
significantly expand this distribution channel. Telco's German sales force will
concentrate on sales to residential customers. Econophone's internal sales force
in Hamburg will continue to concentrate on prepaid card sales and sales to
business customers.
In the United States, Econophone's services have been sold primarily in the
New York metropolitan area. Econophone has begun to focus its marketing efforts
on its other U.S. network cities and, as of December 31, 1997, Econophone had 9
internal sales representatives and 305 independent sales representatives in the
United States.
VoiceNet's calling card services are marketed primarily through in-flight
magazines and through advertising materials placed in high traffic locations,
such as restaurants. Econophone intends to cross-market many of its other
services to VoiceNet's customer base, which for December 1997, consisted of
approximately 110,000 calling card holders, and to use VoiceNet's marketing
expertise to market its calling card services in Europe.
In Canada, Econophone intends to market its services primarily through
independent sales representatives. Initially, Econophone intends to market its
services in Canada primarily to ethnic communities that generate substantial
international calling volume.
Econophone's internal sales forces concentrate primarily on sales to
small-and medium-sized businesses and to other carriers, while independent sales
representatives concentrate primarily on residential sales. Econophone believes
that local internal sales forces 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.
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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.
INFORMATION TECHNOLOGY
Econophone believes that advanced, effective and flexible billing, public
financial reporting and customer service information systems are vital for its
operations and continued growth. Econophone engages in design and integration of
billing, public financial reporting and customer service information systems at
its College Station, Texas and Brooklyn, New York facilities, where it employs
26 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 information systems are
adequate, substantial investment will be required to maintain the adequacy of
these systems as Econophone expands its operations. Econophone currently is in
the process of upgrading its billing systems to a format that will provide for
greater expandability and that will accommodate greater customer volumes.
Econophone expended approximately $1.4 million during 1997 to enhance current
and develop new customer service, billing, financial reporting and other
management information systems and has budgeted $3.4 million for such
expenditures during 1998. See "Risk Factors--Dependence on Effective Information
Systems" and "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 "AT&T Unisource," and the
corresponding alliance with WorldPartners, 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 has 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
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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.
See "Risk Factors--Competition."
In the United States, Econophone's competitors include AT&T, MCI, Sprint and
numerous other carriers and providers, including calling card providers, for
domestic and international long distance calls. Competition is strong for all of
Econophone's services. Competition for U.S. calling card services is
particularly intense. Larger service providers such as AT&T, MCI and Sprint have
substantial brand recognition and market penetration for their calling cards,
while a large number of smaller calling card providers compete fiercely based
almost entirely on price.
As a result of the Communications Act of 1996 (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, and have applied for FCC approval for
"in region" market entry. To date, the FCC has denied each of these
applications. However, the FCC has been meeting with the RBOCs to explain FCC
requirements. This may lead to one or more successful RBOC "in region"
applications in the future. Recently, a lower court decision, which is currently
being appealed, invalidated the FCC's statutory authority for prior approval of
market entry by several RBOCs into certain "in region" long distance markets. 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 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.
The World Trade Organization (the "WTO") recently concluded an agreement,
known as the WTO Basic Telecommunications Service Agreement (the "WTO
Agreement"), which will open the telecommunications markets of the 70 signatory
countries to foreign carriers on varying dates. The WTO Agreement became
effective February 5, 1998. 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 on a
reasonable and non-discriminatory basis. The WTO Agreement affords no private
right of action, however, so a company would have to pursue any complaint at the
national government level. 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, 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 merger between
Bell Atlantic and NYNEX, the pending acquisition of MCI by Worldcom, Inc., the
proposed acquisition of Teleport Communications by AT&T and the creation of a
new company with the national and/or 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 providing national
and/or international long distance voice transmission (including AT&T), 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
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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, business, financial
condition, results of operations and its ability to pay principal of and
interest on the Notes. Many of Econophone's larger competitors have lower
incremental transmission costs than Econophone due to, among other things,
greater use of owned transmission capacity, more favorable interconnection rates
and volume discounts on transmission. Furthermore, in certain European countries
(including in France and Belgium), telecommunications companies that make
substantial investments in network infrastructure will receive a substantial
discount on interconnection rates. Econophone does not expect to qualify for
such a discount. In addition, certain of Econophone's competitors offer
customers an integrated full service telecommunications package consisting of
local and long distance voice, data and Internet transmission. Econophone does
not offer all of these types of service, and presently does not intend to do so,
which could have a material adverse effect on Econophone's competitiveness and
its ability to make payments of 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
Over the last decade, the telecommunications market in the EU has been
subject to gradual liberalization. Some EU member states (including the United
Kingdom, Sweden and Finland) have opened up their markets on their own
initiative and are already substantially liberalized. In other member states,
liberalization has come about through the implementation of EU legislation and
in most of these member states the liberalization process and the establishment
of a liberalized regulatory framework are still in their initial stages.
National governments must pass legislation within their countries to give effect
to EC directives. Each EU member state in which Econophone currently conducts
its business will continue to, in part, have a different regulatory regime. The
requirements for Econophone to obtain necessary approvals vary considerably from
country to country and are expected to continue to so vary. See "Risk
Factors--Regulatory Restrictions."
As a first step towards removing PTOs' monopolies in each member state and
enabling competition both within each member state and between them, in 1990,
the European Commission issued a Directive on Competition in the Markets for
Telecommunications Services (the "Services Directive"). The effect of the
Services Directive was 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.
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The Service Directive was amended by later directives concerned with
liberalizing various sections of the telecommunications market. Finally, 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, to fully liberalize the
supply of all telecommunications services and the provision of
telecommunications infrastructure by January 1, 1998. 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 been granted a
derogation entitling it to delay compliance with the Services Directive, as
amended, until November 30, 1998 and Luxembourg and Greece have been granted a
derogation entitling them to delay compliance until June 30, 1998 and January 1,
2001, respectively.
The Full Competition Directive abolished, as of January 1, 1998 (subject to
permitted derogations by EU member states described above), 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
the provision of 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) provided 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 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 were not considered to be
competitive. From January 1997, these remaining restrictions on international
simple resale have been removed, although the United Kingdom has reserved the
right to reimpose proportionate return conditions in the event that market
distortions occur. However, the ability of EU member states to in the future
enact restrictions on the provision of telecommunications services is limited
due to the WTO Agreement. See "--World Trade Organization Initiatives."
In addition to the abolition of special and exclusive rights, the Council of
the European Communities has adopted regulatory measures in order to harmonize
the rules applying in the liberalized EU telecommunications environment. In this
respect, an Open Network Provision ("ONP") Framework Directive was adopted in
1990. Further more specific directives, which include the ONP Leased Lines
Directive, the ONP Voice Telephony Directive, the ONP (Adaptation of the
Framework and Leased Lines to a Competitive Environment) Directive and the
Interconnection Directive, as well as directives concerned with licensing and
satellite PCS services have been adopted. In addition an amendment to the
Interconnection Directive, which would provide for equal access and number
portability has been proposed. Equal access would enable a customer to access
Econophone's network over another operator's network, without dialing an access
code, by notifying the network operator that it wishes all long distance calls
to be carried by Econophone. Oftel has already indicated that it will seek to
defer the implementation of equal access in the United Kingdom. Number
portability would enable customers to retain their existing telephone numbers
when switching to alternative carriers and is already available (although not
universally) in the United Kingdom. Additional directives, in addition to those
described above, remain to be adopted by the Council of the European
Communities, although their final content and timing of implementation cannot be
predicted at this time.
UNITED KINGDOM
The telecommunications services provided by Econophone in the United Kingdom
are subject to and affected by legislation and the terms of its licenses.
Licenses are granted by the Secretary of State for Trade
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and Industry but enforced by Oftel under powers granted by the
Telecommunications Act 1984. 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 operate under individual
licenses granted by the Secretary of State for Trade and Industry pursuant to
the Telecommunications Act 1984. International simple resellers operate under
registrable class licenses. 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). The statutory instrument implementing the
Interconnection Directive extends this requirement to operators with "relevant
connectable system status." Oftel has stated that the categories of companies
that qualify for relevant connectable system status are 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 its subsidiary ATL, held an
International Simple Resale ("ISR") license in the United Kingdom, which
entitled it to resell international message, telephone and private line
services. All ISRs were revoked on December 31, 1997 and all holders were
required to reapply to the Secretary of State for Trade and Industry to be
registered under the new International Simple Voice Resale Class License (the
"ISVR"), which authorizes the same activities as the old ISR. ATL, a subsidiary
of Econophone, has registered itself under the ISVR. The ISVR license enables
ATL 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 facilities vested with British Telecom and Mercury. All other
operators were required to buy leased capacity from British Telecom or Mercury,
rather than installing their own facilities or 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. ATL was awarded an
IFL during the second quarter of 1997.
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. The WTO Agreement becomes effective on February 5,
1998. 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 on a reasonable
and non-discriminatory basis. The WTO Agreement affords no private right of
action, however, so a company would have to pursue any complaint at the national
government level. 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.
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BELGIUM
Until January 1, 1998, the provision of "telephone services" was reserved
for the Belgian PTO. "Telephone services" consist of real-time voice telephony
involving switching in Belgium. Services that did not constitute "telephone
services" could be provided by private service providers that are duly licensed.
Prior to January 1, 1998, a subsidiary of Econophone was 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. Econophone
currently has pending an application for a license to provide "telephone
services" in Belgium.
FRANCE
Beginning on January 1, 1998, licensed private service providers were able
to offer domestic and international long distance voice telephony services to
the general public in France. These services are 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 intends to file an application for a license to provide
international and long distance voice telephony services to the general public
utilizing local dial-up access.
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. The provision by Econophone of domestic long distance
service in Germany under the presently planned technical setup would involve
switching and would, therefore, require a license. Econophone currently has
pending an application for a license to be able to provide such service.
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.
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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, New
Zealand and Australia. 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 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, New Zealand and Australia, 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, to pay each
payphone operator $0.35 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 and was remanded to the FCC by the court for further
consideration. The FCC subsequently adopted a rate of $0.284, in lieu of the
$0.35 rate, effective October 7, 1997 and made further clarifications of its
initial order. This decision is also before an appellate court and some aspects
of its implementation remain unclear. There can be no assurance that Econophone
will be able to fully pass the cost of this charge, if applied to Econophone, 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.
Beginning January 1, 1998, Econophone, as well as its U.S. competitors,
became obligated to make FCC-mandated contributions to universal service funds.
These funds subsidize the provision of
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telecommunications services in high cost areas and to low-income customers, as
well as the provisions of telecommunications and certain other services to
eligible schools, libraries and rural health care providers. The contributions
are billed monthly and are assessed based on intrastate, interstate and
international "end-user" gross telecommunications revenues. However, revenues
from international calls that both originate and terminate in foreign points are
excluded from assessment. On December 16, 1997, the FCC approved the following
contribution factors for carriers' first quarter 1998 contributions: (i) 3.19%
for the high cost and low income funds (interstate and international revenues);
and (ii) 0.72% for the schools, libraries and rural health care funds
(intrastate, interstate and international revenues). Because the contribution
factors are likely to vary quarterly, the annualized impact on Econophone cannot
be estimated at this time. Econophone currently is evaluating which categories
of its revenues are subject to assessment and, as a result, has not filed a
universal service fund worksheet.
Additionally, effective January 1, 1998, Econophone is required to pay to
LECs specified PICCs in order to compensate such LECs for their investment in
the telephone lines Econophone uses to access its customers. The costs of these
charges vary in amount depending upon the type of presubscribed lines that are
serviced by Econophone and the individual LEC's revenue requirements. While
Econophone currently intends to pass through the costs of both the PICC and its
universal service fund contributions to its customers, there can be no assurance
that Econophone will be able to fully pass on such costs or that doing so will
not result in a loss of customers. In addition, the FCC orders implementing the
universal service contribution obligation and the PICC are both subject to
petitions seeking reconsideration by the FCC and to certain appeals. Until such
petitions or appeals are decided, there can be no assurance as to how the orders
will be implemented or enforced or what effect the orders generally will have on
competition within the telecommunications industry or specifically on the
competitive position of Econophone. See "Risk Factors--Regulatory Restrictions."
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, Inc., a New York corporation, the predecessor to Econophone
("Econophone NY"), has received authority, pursuant to state regulation,
certification, tariffs, notifications, or on an unregulated basis, to provide
intrastate long distance service in 49 states. Econophone and Econophone NY are
in the process of transferring such authorities from Econophone NY to
Econophone, or notifying or obtaining the approval of the state regulatory
authorities of the merger of Econophone NY into Econophone, where required.
Econophone anticipates that it will obtain all required state regulatory
approvals.
EMPLOYEES
As of December 31, 1997, Econophone had 408 employees worldwide. Of this
total, 248 were based in the United States and 160 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, Marseilles, London, Paris and Zurich.
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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.
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 Antwerp, Athens, Berlin, Hamburg, Marseilles and
Zurich.
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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 and Director
Kevin A. Alward...................................... 30 President-North America
Phillip J. Storin.................................... 47 Senior Vice President and Chief Financial Officer
Richard L. Shorten, Jr............................... 30 Senior Vice President and General Counsel
Abe Grohman.......................................... 37 Vice President, Chief Information Officer
Jeremy S. Kagan...................................... 32 Vice President of Service Systems
Patrick Attallah..................................... 32 Vice President of European Sales and Marketing
Charles D. Briggs.................................... 41 Vice President of Network Operations
Ira M. Riesenberg.................................... 36 Corporate Controller
Gary S. Bondi........................................ 46 Director and Treasurer
Steven West.......................................... 47 Director
Stephen Munger....................................... 40 Director
</TABLE>
Directors of Econophone each serve for a term of one year or until their
successors are elected. 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. The holders of the
Series A Preferred Stock have, since the issuance thereof, had the right to vote
as a separate class to elect one director. Stephen Munger currently serves in
such capacity.
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 AND DIRECTOR. Mr. Levy has
served as Econophone's Chief Operating Officer since August 1996, as a Director
since January 1997 and as President since August 1997. Mr. Levy also served as
Chief Financial Officer from August 1996 to January 1998. 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
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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.
KEVIN A. ALWARD, PRESIDENT-NORTH AMERICA. Mr. Alward has served as
Econophone's President-North America since February 1998. From October 1996 to
January 1998, Mr. Alward served as Director, President and Chief Operating
Officer of TotalTel USA Communications. From 1994 to October 1996, Mr. Alward
served as President of TotalTel, Inc., the principal operating subisidary of
TotalTel USA Communications. From 1992 to 1994, Mr. Alward served as Senior Vice
President at TotalTel USA Communications and assumed the additional
responsibilities of Chief Operating Officer in 1993, a position he held until
1994. Mr. Alward also served from 1991 to 1992 as Vice President of Marketing at
TotalTel USA Communications, and from 1990 to 1991 as Manager of Sales. Mr.
Alward served as a sales account executive at TotalTel USA Communications from
1988 to 1990.
PHILLIP J. STORIN, SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER. Mr.
Storin has served as a Senior Vice President and the Chief Financial Officer of
Econophone since February 1998. From May 1996 to January 1998, Mr. Storin served
as Chief Financial Officer of U.S. Long Distance, and from October 1994 to May
1996 served as Corporate Controller. From July 1992 to October 1994, Mr. Storin
served as Vice President, Accounting at U.S. Long Distance. Before joining U.S.
Long Distance, Mr. Storin served for five years as Director of Accounting for
Dell Computer Corporation. Prior to such time, Mr. Storin served in various
financial management positions at Datapoint Computer Corporation and Westvaco
Corporation. Mr. Storin is a Certified Public Accountant and a Certified
Management Accountant.
RICHARD L. SHORTEN, JR., SENIOR VICE PRESIDENT AND GENERAL COUNSEL. Mr.
Shorten has served as a Senior Vice President and the General Counsel of
Econophone since December 1997. From September 1992 to December 1997, Mr.
Shorten was an associate at the New York law firm Cravath, Swaine & Moore, where
he specialized in a variety of areas of corporate representation, including
securities, finance and mergers and acquistions.
ABE GROHMAN, VICE PRESIDENT, CHIEF INFORMATION OFFICER. Mr. Grohman has
served as Chief Information Officer since October 1997. From September 1994 to
September 1997, Mr. Grohman was the Director of Management Information Systems
for LDM Systems Inc., a switchless reseller. From May 1986 to September 1994,
Mr. Grohman was President of DBA Consulting, an independent data processing
consulting company.
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.
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 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.
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
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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 served as the Assistant Controller at
Computron, and from April 1990 to March 1994 served as Accounting Manager. Mr.
Riesenberg served as Accounting Manager for Transnet Corporation from November
1988 to April 1990. Before Transnet, Mr. Riesenberg was at Stanley Marks &
Company, an accounting firm. Mr. Riesenberg is a Certified Public Accountant and
a member of the American Institute of Certified Public Accountants.
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.
STEPHEN MUNGER, DIRECTOR. Mr. Munger has served as a Director of Econophone
since November 1997. Mr. Munger is a Managing Director in the Mergers,
Acquisitions and Restructuring Department of Morgan Stanley & Co. Incorporated
and Head of the Private Investment Department. He joined Morgan Stanley in 1988
as a Vice President in the Corporate Finance Department. He became a Principal
in 1990 and a Managing Director in 1993. In 1993 and 1994, Mr. Munger was
Investment Banking Division Operations Officer and Administrative Director of
the Corporate Finance Department, respectively.
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.
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.
Alfred West, Alan L. Levy, Gary S. Bondi, Stephen West and Hartley R.
Rogers, a former director of Econophone, participated in deliberations
concerning executive officer compensation during 1997. Alfred West and Alan L.
Levy receive compensation as officers of Econophone. Hartley R. Rogers, who,
effective as of October 21, 1997, terminated his employment as a Managing
Director of Morgan Stanley and as the President of the General Partner of
Princes Gate, was a member of the Board of Directors until such time. Princes
Gate, which is an affiliate of Morgan Stanley, owns 140,000 shares of Series A
Preferred Stock. Effective November 1997, the holders of the Series A Preferred
Stock designated Stephen Munger as a Director. 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 1997 Unit Offering and is the
Placement Agent in connection with the Offering. See "--Executive Compensation"
and "Certain Transactions."
EXECUTIVE COMPENSATION
At December 31, 1997, the chief executive officer and other four most highly
compensated executive officers of Econophone were Mr. Alfred West and Messrs.
Levy, Shorten, Grohman and Kagan. The following table summarizes all 1997 plan
and non-plan compensation awarded to, earned by or paid to Mr. West and Messrs.
Levy, Shorten, Grohman and Kagan. Messrs. Alward and Storin commenced employment
with the Company during February 1998 (Messrs. West, Levy, Alward, Storin,
Shorten, Grohman and Kagan are referred to herein as the "Named Executive
Officers").
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1997 SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
-------------------
SHARES OF
ANNUAL COMPENSATION COMMON STOCK
------------------------ UNDERLYING OPTIONS ALL OTHER
NAME AND PRINCIPAL POSITION SALARY (1) BONUS GRANTED COMPENSATION(1)
- ------------------------------------------------ ------------ ---------- ------------------- -----------------
<S> <C> <C> <C> <C>
Alfred West (2)................................. $ 323,784 $ 422,992(3) -- $ 4,725(4)
Chief Executive Officer
Alan L. Levy (5)................................ 210,000 116,250(6) -- --
President and Chief Operating Officer
Kevin A. Alward (7)............................. -- -- -- --
President--North America
Phillip J. Storin (8)........................... -- -- -- --
Senior Vice President--Chief Financial Officer
Richard L. Shorten, Jr. (9)..................... 6,875 -- 50,000 --
Senior Vice President--General Counsel
Abe Grohman (10)................................ 29,167 -- 50,000 --
Chief Information Officer
Jeremy S. Kagan................................. 125,000 -- -- --
Vice President of Service Systems
</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 1997.
(2) See "--Employment Agreements and Arrangements" for a description of Mr.
West's Employment Agreement.
(3) Consists of $127,686 of 1996 bonus paid in 1997 and $295,306 of 1997 bonus
paid in 1997.
(4) Consists of compensation in respect of life insurance, of which Mr. West's
designee is the beneficiary, paid by Econophone.
(5) See "--Employment Agreements and Arrangements" for a description of Mr.
Levy's Employment Agreement.
(6) Consists of $37,500 of 1996 bonus paid in 1997 and $78,750 of 1997 bonus
paid in 1997.
(7) Mr. Alward commenced employment with Econophone during February 1998.
(8) Mr. Storin commenced employment with Econophone during February 1998.
(9) Mr. Shorten joined Econophone on December 15, 1997.
(10) Mr. Grohman joined Econophone on October 20, 1997.
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<PAGE>
1996 FLEXIBLE INCENTIVE PLAN
Econophone has adopted 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 4,000,000 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), if 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 December 31, 1997, Econophone had issued options to purchase 2,901,445
shares of Common Stock under the Incentive Plan, 1,109,445 of which were
exercisable as of such date.
The following table sets forth grants of options to purchase shares of
Common Stock of Econophone made during 1997 to each Named Executive Officer.
OPTION GRANTS IN 1997
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------------- POTENTIAL REALIZABLE
% OF TOTAL VALUE AT ASSUMED
OPTIONS ANNUAL RATES OF STOCK
GRANTED TO PRICE APPRECIATION FOR
NUMBER OF EMPLOYEES EXERCISE OPTION TERM
SECURITIES IN FISCAL PRICE PER EXPIRATION ----------------------
NAME UNDERLYING OPTIONS YEAR 1997 SHARE($) DATE 5% ($) 10%($)
- --------------------------- ------------------ ----------- ----------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Alfred West................ -- -- -- -- -- --
Alan L. Levy............... -- -- -- -- -- --
Kevin A. Alward (1)........ -- -- -- -- -- --
Phillip J. Storin (2)...... -- -- -- -- -- --
Richard L. Shorten, Jr..... 50,000 16.7% $ 5.00 11/1/2007 $ 157,223 $ 398,435
Abe Grohman................ 50,000 16.7% $ 5.00 11/1/2007 $ 157,223 $ 398,435
Jeremy S. Kagan............ -- -- -- -- -- --
</TABLE>
- ------------------------
(1) Mr. Alward commenced employment with Econophone during February 1998.
(2) Mr. Storin commenced employment with Econophone during February 1998.
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<PAGE>
The following table sets forth options exercised during 1997 and the fiscal
year-end value of unexercised options for each Named Executive Officer.
OPTION EXERCISES IN 1997 AND 1997 YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1997 DECEMBER 31, 1997
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............... -- -- 944,446 1,055,554 $ 2,361,115 $ 2,638,885
Kevin A. Alward (2)........ -- -- -- -- -- --
Phillip J. Storin (3)...... -- -- -- -- -- --
Richard L. Shorten, Jr..... -- -- 0 50,000 0 0
Abe Grohman................ -- -- 0 50,000 0 0
Jeremy S. Kagan............ -- -- 10,000 20,000 25,000 50,000
</TABLE>
- ------------------------
(1) No options were exercised during 1997.
(2) Mr. Alward commenced employment with Econophone during February 1998.
(3) Mr. Storin commenced employment with Econophone during February 1998.
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 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 President and Chief Operating Officer of Econophone. 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
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<PAGE>
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. Shorten, Grohman and Kagan do not have employment agreements with
Econophone. As of January 1, 1998, the annual salary (exclusive of any bonus)
for Messrs. Shorten, Grohman and Kagan was $165,000, $140,000 and $125,000,
respectively. The Company expects to enter into employment agreements with
Messrs. Alward and Storin providing for annual base salary of $216,000 and
$180,000, respectively. Messrs. Alward and Storin also will be granted options
under the Incentive Plan during 1998.
LIMITATIONS ON OFFICERS' AND DIRECTORS' LIABILITY
Econophone's Certificate of Incorporation indemnifies its officers and
directors to the fullest extent permitted by the Delaware General Corporation
Law (the "GCL"). Under Section 145 of the GCL, a corporation may indemnify its
directors, officers, employees and agents and its former directors, officers,
employees and agents and those who serve, at the corporation's request, in such
capacities with another enterprise, against expenses (including attorneys'
fees), as well as judgments, fines and settlements in nonderivative lawsuits,
actually and reasonably incurred in connection with the defense of any action,
suit or proceeding in which they or any of them were or are made parties or are
threatened to be made parties by reason of their serving or having served in
such capacity. The GCL provides, however, that such person must have acted in
good faith and in a manner such person reasonably believed to be in (or not
opposed to) the best interests of the corporation and, in the case of a criminal
action, such person must have had no reasonable cause to be believe his or her
conduct was unlawful. In addition, the GCL does not permit indemnification in an
action or suit by or in the right of the corporation, where such person has been
adjudged liable to the corporation, unless, and only to the extent that, a court
determines that such person fairly and reasonably is entitled to indemnity for
costs the court deems proper in light of liability adjudication. Indemnity is
mandatory to the extent a claim, issue or matter has been successfully defended.
The Certificate of Incorporation and the GCL 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
foregoing 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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<PAGE>
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.
The Series A Preferred Stock is convertible into 3,420,701 shares of Common
Stock.
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 1997 Unit Offering,
Econophone was 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 became no more restrictive than
the analogous covenants contained in the Indenture dated as of July 1, 1997,
between the Company and The Bank of New York, as trustee.
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 Delaware 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 1997 Unit 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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<PAGE>
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 December 31,
1997, the shares of Series A Preferred Stock outstanding were convertible into
3,420,701 shares of Common 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, dated April 24, 1997, between the Company and Morgan
Stnaley & Co. Incorporated, as placement agent, 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 occurring
prior to March 1, 1998, which is underwritten or placed by an investment bank of
national standing; (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 connection with the disposition of any
business, assets or subsidiary of Econophone, subject to certain exceptions.
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<PAGE>
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 (references below to "Series A Preferred Stock" apply equally to
the Common Stock issuable upon the conversion thereof).
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 (as hereinafter defined) (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 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
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<PAGE>
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 the Placement Agent and
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. Bridge Notes totalling $7.0 million were issued under the Note
Purchase Agreement on the following dates: $3.0 million on April 24, 1997; $2.0
million on May 20, 1997; and $1.0 million on each of May 23, 1997 and May 30,
1997. The net proceeds from the Bridge Notes sold by Econophone were $6.6
million and were used to fund equipment and other capital expenditures and
operations.
Immediately following the consummation of the 1997 Unit Offering, all of the
outstanding Bridge Notes ($7.0 million) were redeemed and all accrued interest
thereon ($143,750) 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 1997 Unit Offering and to
act as lead underwriter in the event of Econophone's initial public offering.
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<PAGE>
PRIVATE PLACEMENT OF UNITS AND NOTES BY MORGAN STANLEY
The Placement Agent acted as placement agent in respect of the 1997 Unit
Offering and the Offering. In connection with the 1997 Unit Offering and the
Offering, Econophone entered into Placement Agreements with the Placement Agent
pursuant to which it purchased the Units or Notes for resale. The Placement
Agreements provide, among other things, that the Company and the Placement Agent
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
Agreements, Econophone has certain obligations to register 1997 Notes, Warrants,
shares of Common Stock and Notes on a shelf registration statement at the
request, and for the benefit of, the Placement Agent 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 matured on December 8, 1997 and, on such date, was
converted into a demand obligation. 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 $214,022 from
Econophone pursuant to unsecured, non-interest bearing notes, repayable upon
demand.
E-GRAM
Alfred West, the 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. 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.
MINORITY INTEREST IN ECONOPHONE SERVICES GMBH
The brother-in-law of Alfred West owns a 28% interest in Econophone's Swiss
subsidiary, Econophone Services GmbH. Econophone Services GmbH is in the initial
stages of commencing marketing efforts in Zurich and is expected to, over time,
market Econophone's services in additional Swiss markets.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
THE 1997 UNIT OFFERING
In connection with the 1997 Unit Offering, Econophone issued $155.0 million
of 13 1/2% Senior Notes due 2007 pursuant to the 1997 Indenture among the
Company and The Bank of New York, as trustee. On December 5, 1997, the Company
consummated an offer to exchange the notes issued in the 1997 Unit Offering (the
"1997 Original Notes") for $155.0 million principal amount at maturity of notes
that had been registered under the Securities Act (the "1997 Exchange Notes").
As used below and elsewhere herein, the term "1997 Notes" includes the 1997
Original Notes and the 1997 Exchange Notes. As indicated herein, the terms of
the 1997 Notes are substantially similar to those of the Notes. See "Description
of the Exchange Notes."
PRINCIPAL, MATURITY AND INTEREST
The 1997 Notes are unsecured unsubordinated obligations of Econophone,
limited to $155.0 million aggregate principal amount at maturity, and mature on
July 15, 2007. Interest on the 1997 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, 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. At
the closing of the 1997 Unit Offering, Econophone used $57.6 of the net proceeds
of the 1997 Unit Offering to purchase the Pledged Securities, which were pledged
as security for the payment of interest on the principal of the 1997 Notes.
Proceeds from the Pledged Securities are being used by Econophone to make
interest payments on the 1997 Notes through July 15, 2000. The Pledged
Securities are being held by a trustee pending disbursement.
OPTIONAL REDEMPTION
The 1997 Notes will be redeemable, at Econophone'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, at the following redemption prices (expressed in percentages of
principal amount at maturity), plus accrued and unpaid interest, if any, to the
redemption 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, Econophone may redeem up to
35% of the aggregate principal amount of the 1997 Notes with the net proceeds of
one or more sales of common equity at a redemption price of 113.50%, plus
accrued and unpaid interest, if any, to the redemption date; PROVIDED that (1)
at least $100.0 million aggregate principal amount at maturity of 1997 Notes
remains outstanding after each such redemption and (2) each such redemption
occurs within 180 days of the related sale of common equity.
RANKING
The indebtedness evidenced by the 1997 Notes ranks PARI PASSU in right of
payment with all existing and future unsubordinated indebtedness of Econophone
and senior in right of payment to all existing and future subordinated
indebtedness of Econophone.
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COVENANTS
The 1997 Indenture restricts, on substantially the same terms as the
Indenture, among other things, Econophone's ability to incur additional
indebtedness, pay dividends or make certain other restricted payments, incur
certain liens to secure pari passu or subordinated indebtedness, engage in any
sale and lease-back transaction, sell, assign, transfer, lease, convey or
otherwise dispose of substantially all of the assets of Econophone, enter into
certain transactions with affiliates, or incur indebtedness that is subordinated
in right of payment to any senior indebtedness and senior in right of payment to
the 1997 Notes. The 1997 Indenture permits, under the same circumstances as the
Indenture, Econophone's subsidiaries to be deemed unrestricted subsidiaries and
thus not subject to the restrictions of the 1997 Indenture.
REPURCHASE OF 1997 NOTES UPON A CHANGE OF CONTROL
Econophone must commence, within 30 days of the occurrence of a Change of
Control (as defined in the 1997 Indenture), and consummate an offer to purchase
for cash all 1997 Notes then outstanding at a purchase price equal to 101% of
the outstanding principal amount, plus accrued interest (if any) at such time.
The foregoing covenant requiring Econophone to repurchase the 1997 Notes will,
unless consents are obtained, require Econophone to repay all indebtedness then
outstanding which by its terms would prohibit such 1997 Note repurchase, either
prior to or concurrently with such 1997 Note repurchase.
EVENTS OF DEFAULT
The 1997 Indenture contains standard events of default, including, but not
limited to, (i) defaults in the payment of principal, premium or interest, (ii)
defaults in the compliance with covenants contained in the 1997 Indenture, (iii)
cross defaults on more than $5.0 million of other indebtedness, (iv) failure to
pay more than $5.0 million of judgments that have not been stayed by appeal or
otherwise and (v) the bankruptcy of Econophone or certain of its subsidiaries.
The events of default contained in the 1997 Indenture are the same as those
contained in the Indenture.
NTFC VENDOR FINANCING
On May 28, 1996, Econophone entered into a credit facility with NTFC, which
has been amended and increased as to amount on several occasions. On January 28,
1998, the NTFC credit facility was amended and restated in its entirety in order
to effect various amendments and increase the amount of NTFC's commitment
thereunder (such credit facility, as amended and restated, is referred to herein
as the "NTFC Facility"). The NTFC Facility provides for borrowings by Econophone
and its subsidiaries to fund certain equipment acquisition costs and related
expenses. The NTFC Facility provides for an aggregate commitment of NTFC of
$24.0 million pursuant to three tranches of $2.0 million, $3.0 million and $19.0
million. Loans borrowed under each tranche of the NTFC Facility amortize in
equal monthly installments over a five year period ending on July 1, 2001, April
1, 2002 and January 1, 2003, respectively. As of December 31, 1997, the
aggregate amount outstanding under all tranches of the NTFC Facility was $7.1
million. Loans under the NTFC Facility accrue interest at an interest rate equal
to the 90-day commercial paper rate plus 395 basis points (an interest rate of
9.55% as of January 1, 1998), subject to certain quarterly adjustments depending
upon financial performance. All of the equipment purchased with the proceeds of
the NTFC Facility has been pledged to NTFC.
The NTFC Facility permits the incurrence of indebtedness (including
contingent obligations), the creation of liens and transactions with affiliates
on substantially the same terms as the Indenture.
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
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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 (other than by reason of his death or disability) or suffer to exist any
material competition by any of Alfred West, Steven West or Gary Bondi, with the
business now or hereafter conducted by Econophone.
The NTFC Facility 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 specified minimum cash
balances (certain related business investments and acquisitions qualify as cash
for the foregoing purposes). Econophone also must have EBITDA (as defined in the
NTFC Facility) of not less than: negative $5,500,000 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.
Borrowings from NTFC are secured by the equipment purchased therewith and
general intangibles and intangible property that is associated with such
equipment.
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 January 1, 1998 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 Named 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(3) 47.0%
Steven West............................................................... 4,500,000(4) 19.2%
Gary Bondi................................................................ 4,500,000(5) 19.2%
Princes Gate Investors II, L.P............................................ 3,420,701(6) 14.6%
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, NY 10036
Kevin A. Alward........................................................... -- (7) --
Abe Grohman............................................................... -- (8) *
Jeremy S. Kagan........................................................... 10,000(9) *
Alan L. Levy.............................................................. 1,055,557(10) 4.3%
Stephen Munger............................................................ -- --
Richard L. Shorten, Jr.................................................... -- (11) --
Phillip J. Storin......................................................... -- (12) --
All Directors and Executive Officers as a Group (10 persons).............. 21,065,557 85.4%
</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 January 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
January 1, 1998, 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 860,000 shares held by AT Econ Ltd. Partnership.
(4) Includes 860,000 shares held by SS Econ Ltd. Partnership and 85,000 shares
held by SS Econ Ltd. Partnership No. 2.
(5) Includes 860,000 shares held by GS Econ Ltd. Partnership.
(6) Includes 31,704 shares of Series A Preferred Stock, which were convertible
into 774,528 shares of Common Stock on January 1,1998, owned by affiliates
of Princes Gate over which Princes Gate has sole voting power.
(7) Mr. Alward commenced employment with Econophone during February 1998 and
will be granted options under the Incentive Plan during 1998.
(8) Does not include options to purchase 50,000 shares of Common Stock under the
Incentive Plan which are not exercisable within 60 days after January 1,
1998.
(9) Does not include options to purchase 20,000 shares of Common Stock under the
Incentive Plan which are not exercisable within 60 days after January 1,
1998.
(10) All of such shares are issuable upon the exercise of options. Does not
include options to purchase 944,443 shares of Common Stock under the
Incentive Plan which are not exercisable within 60 days after January 1,
1998.
(11) Does not include options to purchase 50,000 shares of Common Stock under
the Incentive Plan which are not exercisable within 60 days after January 1,
1998.
(12) Mr. Storin commenced employment with Econophone during February 1998 and
will be granted options under the Incentive Plan during 1998.
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DESCRIPTION OF THE EXCHANGE NOTES
The Exchange Notes are to be issued under an Indenture, dated as of February
18, 1998, 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 $300.0 million aggregate principal amount at maturity, and will mature on
February 15, 2008. Although for federal income tax purposes a significant amount
of original issue discount, taxable as ordinary income, will be recognized by a
Holder as such discount accrues, no interest will be payable on the Notes prior
to August 15, 2003. From and after February 15, 2003, interest on the Notes will
accrue at the rate of 11.0% from February 15, 2003 or from the most recent
Interest Payment Date to which interest has been paid or provided for, payable
semiannually (to Holders of record at the close of business on the February 1 or
August 1 immediately preceding the Interest Payment Date) on February 15 and
August 15 of each year, commencing August 15 , 2003. Interest will be computed
on the basis of a 360-day year of twelve 30-day months.
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.
The 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 February 15, 2003 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 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 February 15 of the years set forth below:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
- --------------------------------------------- ----------------
<S> <C>
2003 105.500%
2004 103.667%
2005 101.833%
2006 and thereafter 100.000%
</TABLE>
In addition, at any time prior to February 15, 2001, the Company may redeem
up to 35% of the initial aggregate principal amount of the Notes originally
issued 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
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Redemption Price (expressed as a percentage of Accreted Value on the Redemption
Date) of 111.0%; PROVIDED that (1) at least 65% of the initially issued Notes
remain outstanding and (2) each such redemption occurs within 180 days of the
related Public Equity Offering.
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.
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 December 31, 1997, Econophone had $157.9 million of
indebtedness outstanding, all of which was unsubordinated and $149.7 million of
which was secured by $59.0 million of restricted cash. Substantially all of the
remaining indebtedness is secured by telecommunications assets. The Notes are
effectively subordinated to the secured indebtedness to the extent of the
security interest related thereto.
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 the purposes of these
definitions, the terms "Note" or "Notes" shall mean the Original Notes and the
Exchange Notes.
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"Accreted Value" means, for any Specified Date, the amount provided below
for each $1,000 principal amount at maturity of Notes:
(i) if the Specified Date occurs on one of the following dates (each a
"Semi-Annual Accrual Date"), the Accreted Value will equal the amount set
forth below for such Semi-Annual Accrual Date:
<TABLE>
<CAPTION>
ACCRETED
SEMI-ANNUAL ACCRUAL DATE VALUE
- ------------------------------------------------------------------------------- -------------
<S> <C>
August 15, 1998................................................................ $ 617.62
February 15, 1999.............................................................. $ 651.59
August 15, 1999................................................................ $ 687.43
February 15, 2000.............................................................. $ 725.24
August 15, 2000................................................................ $ 765.13
February 15, 2001.............................................................. $ 807.21
August 15, 2001................................................................ $ 851.61
February 15, 2002.............................................................. $ 898.45
August 15, 2002................................................................ $ 947.86
February 15, 2003.............................................................. $ 1,000.00
</TABLE>
(ii) if the Specified Date occurs before the first Semi-Annual Accrual
Date, the Accreted Value will equal the sum of (a) $585.95 and (b) an amount
equal to the product of (1) the Accreted Value for the First Semi-Annual
Accrual Date less $585.95 MULTIPLIED by (2) a fraction, the numerator of
which is the number of days from the Closing Date to the Specified Date,
using a 360-day year of twelve 30-day months, and the denominator of which
is the number of days from the Closing Date to the first Semi-Annual Accrual
Date, using a 360-day year of twelve 30-day months;
(iii) if the Specified Date occurs between two Semi-Annual Accrual
Dates, the Accreted Value will equal the sum of (a) the Accreted Value for
the Semi-Annual Accrual Date immediately preceding such Specified Date and
(b) an amount equal to the product of (1) the Accreted Value for the
immediately following Semi-Annual Accrual Date less the Accreted Value for
the immediately preceding Semi-Annual Accrual Date MULTIPLIED by (2) a
fraction, the numerator of which is the number of days from the immediately
preceding Semi-Annual Accrual Date to the Specified Date, using a 360-day
year of twelve 30-day months, and the denominator of which is 180; or
(iv) if the Specified Date occurs after the last Semi-Annual Accrual
Date, the Accreted Value will equal $1,000.
"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 that is not a Restricted Subsidiary,
except (x) with respect to net income, to the extent of the amount of dividends
or other distributions actually paid to the Company or any of its Restricted
Subsidiaries by such Person during such period and (y) with respect to net
losses, to the extent of the amount of Investments made by the Company or any
Restricted Subsidiary in such Person 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
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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 (on an after tax basis)
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; (vi) all extraordinary gains and extraordinary losses
and (vii) any compensation expense paid or payable solely with Capital Stock
(other than Disqualified Stock) of the Company or any options, warrants or other
rights to acquire Capital Stock (other than Disqualified Stock) of the Company.
"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 or provided to the Trustee 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 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 constitutes 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 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
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and assets (other than the Capital Stock of, or other Investment in, an
Unrestricted Subsidiary) 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
constitute property or assets of the kind described in clause (B) of the
"Limitation on Asset Sales" covenant, including consideration that consists of
technology, licenses or expertise useful in the business of the Company 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 connnection 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.
"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 outstanding on the
Closing Date or issued thereafter, 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.
"Capitalized Lease Obligations" means the discounted present value of the
rental obligations under a Capitalized 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) of 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
of 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
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any new directors whose election to 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
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 on the Closing Date or issued thereafter,
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 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
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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
(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
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"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; PROVIDED that for purposes of clause (viii) of
the second paragraph of the "Limitation on Indebtedness" covenant, (x) the fair
market value of any security registered under the Exchange Act shall be the
average of the closing prices, regular way, of such security for the 20
consecutive trading days immediately preceding the applicable capital
contribution or sale of Capital Stock and (y) in the event the aggregate fair
market value of any other property (other than cash or cash equivalents)
received by the Company exceeds $10 million, the fair market value of such
property shall be determined by a nationally recognized investment banking firm
and set forth in their written opinion which shall be delivered to the Trustee.
"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 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.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness 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 of
such other Person (whether arising by virtue of partnership arrangements, or by
agreements to keep-well, to purchase assets, goods, securities or services
(unless such purchase arrangements are on arm's-length terms and are entered
into in the ordinary course of business), 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 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 Acquired Indebtedness; PROVIDED that neither
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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 Capitalized
Lease Obligations of such Person, (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.
"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;
PROVIDED that the fair market value of the Investment remaining in any Person
that has ceased to be a Restricted Subsidiary shall not exceed the aggregate
amount of Investments previously made in such Person valued at the time such
Investments were made less the net reduction in such Investments. 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 Restricted Subsidiaries)) of any Restricted Subsidiary at
the time that such Restricted Subsidiary is designated an Unrestricted
Subsidiary, (ii) the fair market value of the
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assets (net of liabilities (other than liabilities to the Company or any of its
Restricted 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 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) 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
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each new Note issued shall be in a principal amount at maturity of $1,000 or an
integral multiple 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 an integral
multiple 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, 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 $10.0 million at any one time outstanding; (ix)
Investments in Permitted Joint Ventures not to exceed $10.0 million at any one
time outstanding; (x) Investments in prepaid expenses, negotiable instruments
held for collection and lease, utility and worker's compensation, performance
and other similar deposits; and (xi) Interest Rate Agreements and Currency
Agreements designed solely to protect the Company or its Restricted Subsidiaries
against fluctuations in interest rates or foreign currency exchange rates.
"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'
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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, acquisition, construction, installation, transportation 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 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; (xix) Liens existing on the Closing Date and (xx)
Liens that secure Indebtedness in an aggregate principal amount not in excess of
$5.0 million at any time outstanding.
"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
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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 Group, a division of McGraw Hill,
Inc., and its successors.
"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 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 are
entitled or otherwise reasonably expected to obtain rights to such products or
services as a result of such Investment.
"Strategic Subordinated Indebtedness" means Indebtedness of the Company
Incurred to finance the acquisition of a Person engaged in a business that is
related, ancillary or complementary to the business conducted by the Company or
any of its Restricted Subsidiaries, which Indebtedness by its terms, or by the
terms of any agreement or instrument pursuant to which such Indebtedness is
Incurred, (i) is expressly made subordinate in right of payment to the Notes and
(ii) provides that no payment of principal, premium or interest on, or any other
payment with respect to, such Indebtedness may be made prior to the payment in
full of all of the Company's obligations under the Notes; PROVIDED that such
Indebtedness may provide for and be repaid at any time from the proceeds of a
capital contribution or the sale of Capital Stock (other than Disqualified
Stock) of the Company after the Incurrence of such Indebtedness.
"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 one year 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 $50.0 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
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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
one year 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
$10.0 million.
"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
(and shall be deemed to have been 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.
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"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 will contain, 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 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.
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 $100.0 million, less any amount of such Indebtedness permanently repaid
as provided under the "Limitation on Asset Sales" covenant described below; (ii)
Indebtedness owed (A) to the Company evidenced by a promissory note or (B) to
any Restricted Subsidiary; 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 (xii) 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 Restricted
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
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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 (other than Guarantees of Indebtedness
Incurred by any Person acquiring all or any portion of such business, assets or
Restricted Subsidiary 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 (including Guarantees) Incurred to finance the cost
(including the cost of design, development, improvement, acquisition,
construction, installation, transportation or integration) to acquire equipment,
inventory or other tangible assets used or useful in the telecommunications
business of the Company and its Restricted Subsidiaries acquired (including
acquisitions by way of Capitalized Lease and acquisitions of the Capital Stock
of a Person that becomes a Restricted Subsidiary to the extent of the fair
market value of the equipment, inventory or other assets so 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 sum of
(A) the Net Cash Proceeds received by the Company after the Closing Date as a
capital contribution or 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 (I) such capital contribution or Net Cash Proceeds have not been used
pursuant to clause (C)(2) of the first paragraph of, or clause (iii), (iv) or
(viii) of the second paragraph of, the "Limitation on Restricted Payments"
covenant described below to make a Restricted Payment and (II) if such capital
contribution or Net Cash Proceeds are used to consummate a transaction pursuant
to which the Company Incurs Acquired Indebtedness, the amount of such Net Cash
Proceeds exceeds one-half of the amount of Acquired Indebtedness so Incurred and
(B) 80% of the fair market value of property (other than cash and cash
equivalents) received by the Company after the Closing Date as a capital
contribution or 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 (I) such capital contribution or sale of Capital Stock has not been used
pursuant to clause (iii), (iv) or (viii) of the second paragraph of the
"Limitation on Restricted Payments" covenant described below to make a
Restricted Payment and (II) if such capital contribution or Capital Stock is
used to consummate a transaction pursuant to which the Company Incurs Acquired
Indebtedness, 80% of the fair market value of the property received exceeds
one-half of the amount of Acquired Indebtedness so Incurred; PROVIDED that such
Indebtedness does not mature prior to the Stated Maturity of the Notes and has
an Average Life longer than the Notes; (ix) Acquired Indebtedness; (x) Strategic
Subordinated Indebtedness; (xi) subordinated Indebtedness of the Company (in
addition to Indebtedness permitted under clauses (i) through (x) above and
clause (xii) below) in an aggregate principal amount outstanding at any time not
to exceed $100.0 million, less any amount of such Indebtedness permanently
repaid as provided under the "Limitation on Asset Sales" covenant described
below; and (xii) Indebtedness of the Company and any Restricted Subsidiary;
PROVIDED that at the time of the Incurrence of any Indebtedness under this
clause (xii) the amount of Indebtedness under this clause (xii) 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.
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(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, and from time to
time may reclassify, 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) 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 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) above 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 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 with the Commission 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 as a
capital contribution or 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
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pursuant to clause (viii) of the second paragraph under 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
an Unrestricted Subsidiary (or options, warrants or other rights to acquire such
Capital Stock) in exchange for, or out of the proceeds of a capital contribution
to the Company or a substantially concurrent offering of, shares of Capital
Stock (other than Disqualified Stock) of the Company (or options, warrants or
other rights to acquire such Capital 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
capital contribution to the Company or a substantially concurrent offering of,
shares of the Capital Stock (other than Disqualified Stock) of the Company (or
options, warrants or other rights to acquire such Capital 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 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 from 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) Investments in any Person the primary business
of which is related, ancillary or complementary to the business of the Company
and its Restricted Subsidiaries on the date of such Investments; PROVIDED that
the aggregate amount of Investments made pursuant to this clause (viii) does not
exceed the sum of (a) $20.0 million and (b) the amount of Net Cash Proceeds
received by the Company after the Closing Date as a capital contribution or from
the sale of its Capital Stock (other than Disqualified Stock) to a Person who is
not a Subsidiary of the Company, except to the extent such Net Cash Proceeds are
used to Incur Indebtedness pursuant to clause (viii) of the second paragraph
under the "Limitation on Indebtedness" covenant or to make Restricted Payments
pursuant to clause (C)(2) of the first paragraph, or clause (iii) or (iv) of
this paragraph, of this "Limitation on Restricted Payments" covenant, and (c)
the net reduction in Investments made pursuant to this clause (viii) resulting
from distributions on or repayments of such Investments 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 is included in the calculation of Adjusted
Consolidated Net Income) or from such Person becoming a Restricted Subsidiary
(valued in each case as provided in the definition of "Investments"), PROVIDED
that the net reduction in any Investment shall not exceed the amount of such
Investment; (ix) the purchase, redemption, retirement or other acquisition for
value of shares of Capital Stock of the Company, or options to purchase such
shares,
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held by directors, officers or employees or former directors, officers 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 $5.0 million in the
aggregate after the Closing Date; (x) any Investment, to the extent the
consideration therefor paid by the Company and its Restricted Subsidiaries
consists solely of Capital Stock (other than Disqualified Stock) of the Company;
(xi) repurchases of Warrants pursuant to a Repurchase Offer; or (xii) other
Restricted Payments in an aggregate amount not to exceed $2.0 million; 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 and the Restricted Payment referred to in clause (x) thereof) and
the Net Cash Proceeds from any issuance of Capital Stock referred to in clauses
(iii), (iv) and (viii) 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.
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 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,
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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) $10.0 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) $5.0 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 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 of a Restricted Subsidiary, provided that the Company or such Restricted
Subsidiary applies the Net Cash Proceeds, if any, of any such sale in accordance
with 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
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("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 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 $3.0 million in value, must be approved or
determined to be fair in the manner provided for in clause (i)(A) or (B) above.
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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 (including, without limitation, licenses), 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; (vi) Liens on the
Capital Stock of, or any property or assets of, a Restricted Subsidiary securing
Indebtedness of such Restricted Subsidiary permitted under the "Limitation on
Indebtedness" covenant; or (vii) 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 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 75% 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
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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), PROVIDED, HOWEVER, that this clause (ii)
shall not apply to any long-term assignments in capacity in a telecommunications
network. 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
with the Commission 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 (as determined
in good faith by the Board of Directors, whose determination shall be conclusive
and evidenced by a Board Resolution) 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 $5.0 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 Accreted Value of Notes on the relevant Payment Date equal to the
Excess Proceeds on such date, at a purchase price equal to 101% of the Accreted
Value of the Notes on the relevant Payment Date, plus, in each case, 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.
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 Accreted Value 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.
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COMMISSION REPORTS AND REPORTS TO HOLDERS
The Company shall file with the Commission the annual, quarterly and other
reports and other information required by Section 13(a) or 15(d) of the Exchange
Act, regardless of whether such sections of the Exchange Act are applicable to
the Company, and shall mail or cause to be mailed copies of such reports to
Holders and the Trustee within 15 days after the date it would have been
required to file such reports with the Commission had it been subject to such
sections; PROVIDED, HOWEVER, that the copies of such reports mailed to Holders
may omit exhibits, which the Company will supply to any Holder at such Holder's
request.
EVENTS OF DEFAULT
The following events will be defined as "Events of Default" in the
Indenture: (a) default in the payment of principal or Accreted Value 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; (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 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;
or (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.
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
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at least 25% in aggregate principal amount at maturity of the Notes then
outstanding, 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 Accreted Value of, premium, if any, and accrued interest, if
any, on the Notes to be immediately due and payable. Upon a declaration of
acceleration, such Accreted Value, 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 Accreted Value 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 Accreted Value 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 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 with respect to complying with
the request; (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 Accreted Value 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 will require 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
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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,
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 (x) a consolidation, merger or sale of all (but
not less than all) of the assets of the Company if all Liens and Indebtedness of
the Company or any Person becoming the successor obligor on the Notes, as the
case may be, and its Restricted Subsidiaries outstanding immediately after such
transaction would, if Incurred at such time, have been permitted to be Incurred
(and all such Liens and Indebtedness, other than Liens and Indebtedness of the
Company and its Restricted Subsidiaries outstanding immediately prior to the
transaction, shall be deemed to have been Incurred) for all purposes of the
Indenture or (y) a consolidation, merger or sale of all or substantially all of
the assets of the Company if 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 Leverage Ratio equal to or less than the
Consolidated Leverage Ratio of the Company immediately prior to such
transaction; and (v) the Company delivers to the Trustee an Officers'
Certificate (attaching the arithmetic computations to demonstrate compliance
with clauses (iii) and (iv) above) 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 that
such transaction shall not have as one of its purposes the evasion of the
foregoing limitations.
DEFEASANCE
DEFEASANCE AND DISCHARGE. The Indenture will provide 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,
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(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 will provide 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," and that clause (c) under "Events of Default" with respect to such
clauses (iii) and (iv) under "Consolidation, Merger and Sale of Assets," clause
(d) under "Events of Default" with respect to such other 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 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 Accreted Value 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.
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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 of the rights and powers vested in it under the Indenture 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
THE GLOBAL NOTES. 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).
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.
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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 SUMMARY OF FEDERAL INCOME TAX CONSEQUENCES SET FORTH BELOW IS FOR
GENERAL INFORMATION ONLY. PROSPECTIVE PURCHASERS OF THE NOTES ARE URGED TO
CONSULT THEIR OWN TAX ADVISORS AS TO THE FEDERAL, STATE, LOCAL AND OTHER TAX
CONSEQUENCES OF ACQUIRING, OWNING AND DISPOSING OF THE NOTES.
The following discussion summarizes certain material United States federal
income tax consequences of the exchange of the Original Notes for the Exchange
Notes and the ownership and disposition of the Exchange Notes. The discussion is
based on the United States Internal Revenue Code of 1986, as amended (the
"Code"), currently applicable Treasury regulations promulgated thereunder, and
judicial and administrative interpretations thereof, all as in effect on the
date hereof. 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. There can be no assurance that the Internal
Revenue Service ("IRS") will not take a contrary view, and no ruling from the
IRS has been or will be sought. The following discussion is intended as a
descriptive summary only. It is not a complete analysis and does not address tax
consequences of holding the Exchange Notes that may be relevant to investors in
special tax situations, such as insurance companies, banks, investors subject to
the alternative minimum tax, tax-exempt organizations, dealers in securities or
other investors holding the Exchange Notes as other than capital assets, and
investors holding the Exchange Notes as a hedge or as part of a hedging,
straddle or conversion transaction. Finally, the discussion does not address the
effect of any United States state or local tax law or foreign tax law. The
summary of U.S. federal income taxes below is based upon the advice of Schulte
Roth & Zabel LLP, counsel to Econophone.
For purposes of this summary, the term "U.S. Holder" means a beneficial
owner of an Exchange Note that is (a) an individual who is a United States
citizen or resident, (b) a corporation, partnership or other entity created or
organized under the laws of the United States or any political subdivision
thereof, (c) an estate the income of which is subject to federal income tax
regardless of source, or (d) a trust if a court within the United States is able
to exercise primary supervision over the administration of the trust and one or
more U.S. persons have the authority to control all substantial decisions of the
trust. The term "Non-U.S. Holder" means a beneficial owner of an Exchange Note
that is not a U.S. Holder.
UNITED STATES HOLDERS
EXCHANGE
The exchange of Original Notes for Exchange Notes pursuant to the Exchange
Offer will not be a taxable event for U.S. 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 Exchange Notes pursuant to the Exchange
Offer.
Because each Exchange Note will be treated as a continuation of the
corresponding Original Note, the remainder of this discussion of federal income
tax considerations generally refers to "Notes."
ORIGINAL ISSUE DISCOUNT
GENERAL. A debt obligation that has an issue price that is less than its
stated redemption price at maturity ("SRPM") by more than a DE MINIMIS amount is
treated as issued with OID for federal income tax purposes. As explained below,
the issue price of the Notes was substantially less than their SRPM, so the
Notes were issued with original issue discount ("OID").
Generally, the issue price of a Note was the first price at which a
substantial amount of the Notes was sold to the public (ignoring sales to bond
houses, brokers, or similar persons or organizations acting in the capacity of
underwriters, placement agents, or wholesalers). The SRPM of a Note is the sum
of all
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payments provided by the Note that are not payments of "qualified stated
interest". "Qualified stated interest" generally means stated interest that is
unconditionally payable in cash or property other than debt instruments of the
Company at least annually at a single fixed rate (or at certain qualifying
variable rates) applied to the outstanding principal amount of the Note. The
Notes were issued at a discount from their stated principal amount. In addition,
stated interest on the Notes is not payable until August 15, 2003. As a result,
the stated interest on the Notes will not be "qualified stated interest" and all
payments of stated interest will be included in the SRPM of the Notes.
Accordingly, the Notes were issued with OID.
U.S. Holders must generally include OID in gross income for federal income
tax purposes on an annual basis under a constant yield method without regard to
the holder's method of accounting for tax purposes. As a result, U.S. Holders
will generally be required to include OID in income in advance of the receipt of
cash attributable to the stated interest. OID accrues based on a compounded,
constant yield to maturity. Accordingly, U.S. Holders of Notes will be required
to include in income increasingly greater amounts of OID in successive accrual
periods. However, U.S. Holders generally will not be required to include
separately in income cash payments received on the Notes, even if denominated as
interest. The aggregate amount of OID on each Note equals the excess of such
Note's SRPM over such Note's issue price.
The amount of OID includible in income by a U.S. Holder of a Note is the sum
of the "daily portions" of OID with respect to the Note for each day during the
taxable year (or portion of the taxable year) in which such U.S. Holder held
such Note. The daily portion is determined by allocating to each day in any
"accrual period" a pro rata portion of the OID allocable to that accrual period.
The "accrual period" for a Note may be of any length and may vary in length over
the term of the Note, provided that each accrual period is no longer than one
year and each scheduled payment of principal or interest occurs on the first day
or the final day of an accrual period.
In general, the amount of OID allocable to an accrual period is an amount
equal to the product of the Note's adjusted issue price at the beginning of such
accrual period and its yield to maturity (determined on the basis of compounding
at the close of each accrual period and properly adjusted for the length of the
accrual period). The Notes' yield to maturity is the rate that, when used to
determine the present value of all payments due under the Notes, produces an
amount equal to the issue price of the Notes. The yield must be constant over
the term and must be calculated to at least two decimal places (e.g., 10.50%).
OID allocable to a final accrual period is the difference between the amount
payable at maturity and the adjusted issue price at the beginning of the final
accrual period. The "adjusted issue price" of a Note at the beginning of any
accrual period is equal to its issue price increased by the accrued OID for each
prior accrual period (determined without regard to the amortization of any
acquisition premium, as described below) and reduced by any payments made on
such Note on or before the first day of the accrual period.
The Treasury regulations contain special rules that allow any reasonable
method to be used in determining the amount of OID allocable to a short initial
accrual period, provided all other accrual periods are of equal length, and
require that the amount of OID allocable to the final accrual period equals the
excess of the amount payable at the maturity of the Note (other than any payment
of qualified stated interest) over the Note's adjusted issue price as of the
beginning of such final accrual period. In addition, if an interval between
payments of qualified stated interest contains more than one accrual period,
then the amount of qualified stated interest payable at the end of such interval
is allocated pro rata (on the basis of their relative lengths) between the
accrual periods contained in the interval.
The Company does not intend to treat the possibility of an optional
redemption or of the repurchase of the Notes upon a Change of Control as giving
rise to any additional accrual of OID or recognition of ordinary income upon
redemption, sale or exchange of a Note.
APPLICABLE HIGH YIELD DISCOUNT OBLIGATIONS. The Notes are considered
"applicable high yield discount obligations" ("AHYDOs") under Section 163(i) of
the Code. As a result, the Company will not be
123
<PAGE>
permitted to deduct any OID in respect to the Notes until amounts corresponding
to such OID are paid in cash.
MARKET DISCOUNT. A U.S. Holder that purchases a Note at a market discount
(as described below) generally will be required to treat any principal payments
on, or any gain on the disposition (including by way of a gift) or maturity of,
such Note as ordinary income to the extent of the accrued market discount (not
previously included in income) at the time of such payment or disposition. In
general, market discount is the amount by which a Note's adjusted issue price
exceeds the U.S. Holder's basis in the Note immediately after the Note is
acquired. If such difference is less than a specified DE MINIMIS amount, the
market discount will be disregarded. Market discount on a Note will accrue
ratably during the period from the date of acquisition to the maturity of a
Note, unless the U.S. Holder elects to accrue such market discount on the
constant yield method. This election is irrevocable and applies only to the Note
for which it is made.
The U.S. Holder may also elect to include market discount in income
currently as it accrues. This election, once made, applies to all market
discount obligations acquired 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. Generally, if a Note with market discount is transferred in certain
non-taxable transactions, the market discount will be transferred to the
property received in exchange for the Note; however, under certain limited
circumstances, the market discount will be includible as ordinary income as if
such Note had been sold at its fair market value. A U.S. Holder that does not
elect to include market discount in income currently may be required to defer
deductions for interest on borrowings incurred or continued to purchase or carry
such Note in an amount not exceeding the accrued market discount on such Note,
until the maturity of the Note or, in certain circumstances, the earlier
disposition of such Note.
ACQUISITION PREMIUM. A U.S. Holder that purchases a Note for an amount that
is greater than the adjusted issue price of such Note, but that is less than or
equal to the sum of the amounts payable on the 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 Treasury regulations
thereunder, the amount of OID that such U.S. Holder must include in its gross
income with respect to such Note will be reduced (but not below zero) for each
accrual period by the portion of acquisition premium properly allocable to the
period.
SALE, RETIREMENT AND OTHER DISPOSITION OF THE NOTES. In general, a U.S.
Holder's adjusted tax basis in a Note will equal the cost of such Note to the
U.S. Holder, increased by the amount of any OID or market discount previously
included in the U.S. Holder's income with respect to the Note, and reduced by
the amount of (i) any payments made on the Note and (ii) any amortizable bond
premium previously deducted from the U.S. Holder's income.
A U.S. Holder will generally recognize gain or loss on the sale, retirement
or other disposition (including redemption) of a Note in an amount equal to the
difference between (i) the amount of cash and the fair market value of property
received by such U.S. Holder on such disposition (less any amounts attributable
to, and taxable as, accrued but unpaid interest) and (ii) the U.S. Holder's
adjusted tax basis in the Note (as described above). Gain or loss upon the sale,
retirement or other disposition (including redemption) of a Note will be capital
gain or loss (except that any portion of such gain attributable to market
discount will be ordinary income). Under recently enacted legislation, the
maximum individual U.S. federal income tax rate on net capital gains is 20% for
capital assets held for more than 18 months and 28% for capital assets held for
more than 12 months but not more than 18 months. Gains on the sale of capital
assets held for one year or less are subject to U.S. federal income tax at
ordinary income tax rates. Certain limitations exist on the deductibility of
capital losses by both corporations and individual taxpayers.
124
<PAGE>
NON-U.S. HOLDERS
Subject to the discussion of backup withholding below, a Non-U.S. Holder
will generally not be subject to U.S. federal income or withholding tax on
payments of principal, premium, if any, and interest (including OID) on the
Notes under the portfolio interest exemption of the Code, provided that (in the
case of interest, including OID): (i) the Non-U.S. Holder does not actually or
constructively own 10% or more of the total combined voting power of all classes
of stock of the Company entitled to vote; (ii) the Non-U.S. Holder is not a
controlled foreign corporation that is related to the Company through stock
ownership; (iii) such interest or OID is not effectively connected with a United
States trade or business of the Non-U.S. Holder; (iv) the Non-U.S. Holder is not
a bank receiving interest described under Section 881(c)(3)(A) of the Code; and
(v) generally either (a) the beneficial owner of the Notes certifies to the
Company or its agent, under penalties of perjury, that it is a Non-U.S. Holder
and provides a completed IRS Form W-8 ("Certificate of Foreign Status") or (b) a
securities clearing organization, bank or other financial institution which
holds customers' securities in the ordinary course of its trade or business (a
"financial institution") and which holds the Notes, certifies to the Company or
its agent, under penalties of perjury, that it has received Form W-8 from the
beneficial owner or that it has received from another financial institution a
Form W-8 and furnishes the payor with a copy thereof. If any of the situations
described in proviso (i), (ii) or (v) of the preceding sentence do not exist,
interest on the Notes when received is subject to United States withholding tax
at the rate of 30% unless an income tax treaty between the United States and the
country of which the Non-U.S. Holder is a tax resident provides for the
elimination or reduction in the rate of U.S. federal withholding tax.
If a Non-U.S. Holder of a Note is engaged in a trade or business in the
United States and interest (including OID) on the Note is effectively connected
with the conduct of such trade or business, such Non-U.S. Holder, although
exempt from U.S. federal withholding tax by reason of the delivery of a properly
completed Form 4224 (or, after December 31, 1998, a Form W-8), will be subject
to U.S. federal income tax on such interest (including OID) and on any gain
realized on the sale, exchange or other disposition of a Note in the same manner
as if it were a U.S. Holder. In addition, if such Non-U.S. Holder is a foreign
corporation, it may be subject to a branch profits tax equal to 30% of its
effectively connected earnings and profits for that taxable year, unless the
branch profits tax is reduced or eliminated under an applicable income tax
treaty.
SALE, RETIREMENT AND OTHER DISPOSITION OF NOTES. A Non-U.S. Holder
generally will not be subject to U.S. federal income tax on any gain realized in
connection with the sale, exchange, retirement or other disposition of Notes
(other than gain attributable to accrued interest or OID, which is addressed in
the preceding paragraph), unless: (i) the gain is effectively connected with a
trade or business carried on by the Non-U.S. Holder within the United States;
(ii) if a tax treaty applies, the gain is attributable to an office or other
fixed place of business maintained in the United Stated by the Non-U.S. Holder;
or (iii) in the case of an individual holder, (a) such holder is present in the
United States for 183 days or more in the taxable year of disposition and
certain other conditions are satisfied, or (b) the Non-U.S. Holder is subject to
tax pursuant to provisions of the Code applicable to United States expatriates.
UNITED STATES INFORMATION REPORTING AND BACKUP WITHHOLDING
In general, payments to certain non-corporate U.S. Holders of principal,
premium (if any) and interest (including OID) on a Note, and the proceeds of
sale or other disposition of a Note before maturity will be subject to U.S.
information reporting requirements and "backup" withholding tax at a rate of 31%
backup withholding will apply only if such U.S. Holder fails to supply a correct
taxpayer identification number ("TIN") which, in the case of an individual,
would be his or her Social Security Number, furnishes an incorrect TIN, is
notified by the Internal Revenue Service ("IRS") that it has failed to properly
report payments of interest and dividends or under certain circumstances, fails
to certify, under penalty of perjury, that it has furnished a correct TIN and
has not been notified by the IRS that it is subject to backup
125
<PAGE>
withholding. U.S. Holders should consult their own tax advisors regarding their
qualification for exemption from backup withholding and the procedure for
obtaining such an exemption if applicable.
In general, there is no U.S. information reporting requirement or backup
withholding tax on payments to Non-U.S. Holders who provide the appropriate
certification described above regarding qualification for the portfolio interest
exemption from U.S. federal income tax for payments of principal or interest
(including OID) on the Notes, provided in each case that the Company or its
paying agent, as the case may be, does not have actual knowledge that the payee
is a United States person.
Payment by the Company of principal on the Notes or payment by a United
States office of a broker of the proceeds of a sale of Notes is subject to both
backup withholding and information reporting unless the beneficial owner
provides a completed IRS Form W-8 which certifies under penalties of perjury
that such owner is a Non-U.S. Holder who meets all the requirements for
exemption from U.S. federal income tax on any gain from the sale, exchange or
retirement of the Notes.
In general, backup withholding and information reporting will not apply to a
payment of the gross proceeds of a sale of Notes effected at a foreign office of
a broker. If, however, such broker is, for U.S. federal income tax purposes, a
U.S. person, a controlled foreign corporation or a foreign person 50% or more of
whose gross income for certain periods is derived from activities that are
effectively connected with the conduct of a trade or business in the United
States, or in the case of payments made after December 31, 1998, a foreign
partnership with certain connections to the United States, such payments will
not be subject to backup withholding, but will be subject to information
reporting unless such broker has documentary evidence in its records that the
beneficial owner is a Non-U.S. Holder and certain other conditions are met, or
the beneficial owner otherwise establishes an exemption, provided such broker
does not have actual knowledge that the payee is a United States person.
Non-U.S. Holders should consult their tax advisors regarding the application of
these rules to their particular situations, the availability of an exemption
therefrom and the procedure for obtaining such an exemption, if available.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules will be allowed as a refund or a credit against such
holder's U.S. federal income tax liability, provided the required information is
furnished to the IRS.
126
<PAGE>
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 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 the 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 underwriter 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.
Morgan Stanley has advised the Company that it intends to make a market in
the Exchange Notes; however, it is not obligated to do so and any such
market-making may be discontinued at any time without notice, in the sole
discretion of Morgan Stanley. To the extent Morgan Stanley is considered an
affiliate, within the meaning of Rule 405 under the Securities Act, of the
Company, the Company has advised Morgan Stanley that it must comply with the
registration and prospectus delivery requirements of the Securities Act
applicable to affiliates in connection with such secondary resale transactions.
See "Risk Factors--Lack of Public Market." To the extent that Morgan Stanley is
an "affiliate" of the Company, the Company is required to file a shelf
registration statement and keep such shelf registration statement effective in
order to provide Morgan Stanley with the ability to resell Exchange Notes that
it acquires from time to time in connection with any market-making activities.
The Company has agreed in the Notes 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.
127
<PAGE>
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.
POP: 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.
G-1
<PAGE>
ECONOPHONE, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS................................................................... F-2
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1996 AND 1997............................................... F-3
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997................. F-4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND
1997..................................................................................................... F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997................. F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS................................................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Econophone, Inc.:
We have audited the accompanying consolidated balance sheets of Econophone,
Inc. (a Delaware corporation) and subsidiaries as of December 31, 1996 and 1997,
and the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for each of the three years ended December 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Econophone,
Inc. and subsidiaries as of December 31, 1996 and 1997, and the results of their
operations and their cash flows for each of the three years ended December 31,
1997, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
New York, New York
February 12, 1998
F-2
<PAGE>
ECONOPHONE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1997
---------- -----------
<S> <C> <C>
<CAPTION>
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............................................................. $6,271,641 $67,201,901
Accounts receivable, net of allowance for doubtful accounts of $761,372 and
$1,593,531, respectively............................................................ 7,946,042 16,796,253
Prepaid expenses and other current assets............................................. 863,735 1,867,941
Restricted cash and securities........................................................ -- 10,462,500
---------- -----------
Total current assets.............................................................. 15,081,418 96,328,595
PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS net of accumulated depreciation and
amortization of $1,643,151 and $3,689,550, respectively (Note 4)...................... 6,242,472 23,216,765
Debt issuance costs..................................................................... -- 6,355,491
Other assets (Note 6)................................................................... 1,431,446 3,139,117
Restricted cash and securities.......................................................... -- 48,964,970
---------- -----------
Total assets...................................................................... $22,755,336 $178,004,938
---------- -----------
---------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable...................................................................... $5,190,086 $21,100,675
Accrued expenses and other current liabilities........................................ 6,188,847 5,355,975
Interest accrued on Senior Notes...................................................... -- 10,462,500
Short-term borrowings (Note 8)........................................................ 2,127,726 --
Current maturities of long-term debt (Note 8)......................................... 753,881 1,828,962
Current maturities of obligations under capital lease (Note 14)....................... 130,867 156,067
Current maturities of notes payable--related party (Note 12).......................... 7,884 315,493
Deferred revenue...................................................................... 859,803 2,567,606
---------- -----------
Total current liabilities......................................................... 15,259,094 41,787,278
LONG-TERM DEBT (Note 8)................................................................. 1,707,941 5,657,042
OBLIGATIONS UNDER CAPITAL LEASE (Note 14)............................................... 235,074 278,667
NOTES PAYABLE--RELATED PARTY (Note 12).................................................. 319,531 --
SENIOR NOTES............................................................................ -- 149,680,000
SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK (Note 11)............................... 13,357,940 14,327,588
COMMITMENTS AND CONTINGENCIES (Note 14)
STOCKHOLDERS' EQUITY (DEFICIT) (Note 10):
Common stock--voting, par value $.0001; authorized 29,250,000 shares; 20,000,000
shares issued and outstanding in 1996 and 1997...................................... 2,000 2,000
Non-Voting Common stock, par value $.0001; authorized 500,000 shares; no shares issued
and outstanding..................................................................... -- --
Additional paid-in capital............................................................ 481,870 6,081,870
Cumulative translation adjustment..................................................... -- (103,880)
Retained earnings (deficit)........................................................... (8,608,114) (39,705,627)
---------- -----------
Total stockholders' equity (deficit).............................................. (8,124,244) (33,725,637)
---------- -----------
Total liabilities and stockholders' equity (deficit).............................. $22,755,336 $178,004,938
---------- -----------
---------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE>
ECONOPHONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------
1995 1996 1997
---------- ---------- -----------
<S> <C> <C> <C>
REVENUES...................................................................... $27,490,490 $45,102,882 $83,002,625
COST OF SERVICES.............................................................. 19,735,530 35,368,603 63,707,453
---------- ---------- -----------
Gross profit............................................................ 7,754,960 9,734,279 19,295,172
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.................................. 7,087,735 16,833,779 37,897,940
DEPRECIATION AND AMORTIZATION................................................. 388,508 1,049,651 3,615,283
---------- ---------- -----------
Income (loss) from operations........................................... 278,717 (8,149,151) (22,218,051)
OTHER INCOME.................................................................. 31,425 106,580 101,926
FOREIGN CURRENCY EXCHANGE GAIN (LOSS), net.................................... (41,097) 26,649 (264,521)
INTEREST EXPENSE, net......................................................... (147,826) (295,677) (7,747,219)
---------- ---------- -----------
Net income (loss)....................................................... $ 121,219 $(8,311,599) $(30,127,865)
---------- ---------- -----------
---------- ---------- -----------
BASIC EARNINGS (LOSS) PER SHARE (Note 2)...................................... $ .01 $ (0.43) $ (1.55)
---------- ---------- -----------
---------- ---------- -----------
PRO FORMA INFORMATION (Note 2):
Income before pro forma provision for income taxes.......................... $ 121,219
Pro forma provision for income taxes........................................ 41,214
----------
Pro forma net income.................................................... $ 80,005
----------
----------
PRO FORMA NET INCOME PER SHARE................................................ $ .00
----------
----------
WEIGHTED AVERAGE NUMBER OF BASIC COMMON SHARES OUTSTANDING (Note 2)........... 20,000,000 20,000,000 20,000,000
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE>
ECONOPHONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 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
Distribution of S Corporation Earnings....... -- -- -- (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..................................... -- -- -- (8,311,599) -- (8,311,599)
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 (8,608,114) -- (8,124,244)
Net loss..................................... -- -- -- (30,127,865) -- (30,127,865)
Warrants..................................... -- -- 5,600,000 -- -- 5,600,000
Accretion of preferred stock................. -- -- -- (91,054) -- (91,054)
Dividends on preferred stock................. -- -- -- (878,594) -- (878,594)
Cumulative translation adjustment............ -- -- -- -- (103,880) (103,880)
---------- ----------- ---------- ------------ ----------- ------------
BALANCE, December 31, 1997................... 20,000,000 $ 2,000 $6,081,870 ($39,705,627) $(103,880) ($33,725,637)
---------- ----------- ---------- ------------ ----------- ------------
---------- ----------- ---------- ------------ ----------- ------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
ECONOPHONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------------------
1995 1996 1997
---------- ---------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................................... $ 121,219 $(8,311,599) $(30,127,865)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization............................................. 388,508 1,049,651 3,615,283
Provision for doubtful accounts........................................... 721,215 290,762 832,159
Accreted interest expense................................................. -- -- 280,000
Changes in assets and liabilities:
Increase in accounts receivable........................................... (5,694,774) (887,670) (9,682,370)
Increase in prepaid expenses and other current assets..................... (189,879) (350,500) (1,004,206)
Increase in other assets.................................................. -- (1,514,284) (3,276,550)
Increase in accounts payable, accrued expenses and other current
liabilities............................................................. 6,196,439 3,351,953 14,973,832
Increase in interest accrued on senior notes.............................. -- -- 10,462,500
Increase in deferred revenue.............................................. 494,409 365,394 1,707,803
---------- ---------- -----------
Net cash provided by (used in) operating activities..................... 2,037,137 (6,006,293) (12,219,414)
---------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment......................................... (1,206,077) (4,246,997) (13,266,837)
---------- ---------- -----------
Net cash used in investing activities................................... (1,206,077) (4,246,997) (13,266,837)
---------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of preferred stock................................... -- 13,061,425 --
Proceeds from line of credit................................................ 1,760,000 800,000 --
Repayment of line of credit................................................. (1,860,000) (1,000,000) --
Proceeds from short term borrowing.......................................... -- 5,436,582 --
Repayments of short-term borrowings......................................... -- (3,308,855) (2,127,726)
Proceeds from long-term debt................................................ -- 2,232,195 --
Repayments of long-term debt................................................ (116,400) (447,910) (428,268)
Repayments of notes payable--related party.................................. (9,383) (10,636) (11,922)
Repayments of capital leases................................................ (85,379) (117,844) (232,612)
Dividends paid.............................................................. (499,301) (226,148) --
Proceeds from senior notes.................................................. -- -- 149,400,000
Proceeds from warrants...................................................... -- -- 5,600,000
Payment of debt issuance cost............................................... -- -- (6,355,491)
Proceeds from bridge loan................................................... -- -- 7,000,000
Repayments of bridge loan................................................... -- -- (7,000,000)
---------- ---------- -----------
Net cash provided by (used in) financing activities..................... (810,463) 16,418,809 145,843,981
---------- ---------- -----------
Increase in cash and cash equivalents, (including restricted cash and
securities)............................................................... 20,597 6,165,519 120,357,730
Cash and cash equivalents, beginning of period.............................. 85,525 106,122 6,271,641
---------- ---------- -----------
Cash and cash equivalents, end of period (including restricted cash and
securities)............................................................... $ 106,122 $6,271,641 $126,629,371
---------- ---------- -----------
---------- ---------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest.................................................................. $ 193,455 $ 210,280 $ 504,981
Income Taxes.............................................................. 193,554 -- --
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:
Accretion of preferred stock................................................ $ -- $ 15,115 $ 91,054
Accrued dividends on preferred stock........................................ -- 281,400 878,594
Capital leases entered into................................................. 471,000 423,000 5,753,855
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
ECONOPHONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
1. NATURE OF BUSINESS
Econophone, Inc. ("Econophone") is a rapidly growing switch-based provider
of long-distance telecommunications services in selected major U.S. and western
European markets. Econophone's customer base consists primarily of residential
customers, small- and medium-sized businesses and other telecommunications
carriers. 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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Econophone and
its wholly owned subsidiaries, its 70% owned subsidiary, Telco Global
Communications Ltd. (England) and its 72% owned subsidiary, Econophone Services
GmbH (Switzerland) (collectively, the "Company"). The full amount of the net
loss for the year ended December 31, 1997 for Telco Global Communications Ltd.
and Econophone Services GmbH have been recorded in the consolidated financial
statements of the Company. All significant intercompany balances and
transactions have been eliminated in consolidation.
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.
CASH AND CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments with a maturity of
less than three months when purchased.
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 fifteen 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, 1997, the Company incurred approximately
$897,000 of such costs and has included them in Other Assets. The capitalized
software development costs are reported at the lower of unamortized cost or
F-7
<PAGE>
ECONOPHONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
net realizable value. These costs are amortized on a straight-line basis over
the estimated useful life, generally two years. Such costs were immaterial,
prior to 1997.
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 recoverable. 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 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 year ended December 31, 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. Deferred income taxes are
not provided on undistributed earnings of foreign subsidiaries since such
earnings are currently expected to be permanently reinvested outside the United
States.
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 fair value of the Company's
stock at the date of grant over the amount an employee or director must pay to
acquire the stock.
The Company accounts for stock-based compensation awards to outside
consultants and affiliates based on the fair value of such awards. 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).
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, Statement of Financial Accounting Standards (SFAS) No.
130--"Reporting Comprehensive Income" and SFAS No. 131--"Disclosures about
Segments of an Enterprise and Related Information" were issued and are effective
for periods beginning after December 15, 1997. SFAS No. 130
F-8
<PAGE>
ECONOPHONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
establishes standards for reporting comprehensive income and its components.
SFAS No. 131 establishes standards for reporting financial and descriptive
information regarding an enterprise's operating segments. These standards
increase disclosure only and will have no impact on the Company's financial
position or results of operations, upon adoption.
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. Foreign currency transaction adjustments are reflected in the Statements
of Operations.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
current year's presentation.
PER SHARE DATA
During 1997, SFAS No. 128 "Earnings per Share" was issued and became
effective for the Company's December 31, 1997 financial statements. SFAS No. 128
establishes new standards for computing and presenting earnings per share (EPS).
The new standard requires the presentation of basic EPS and diluted EPS. Basic
EPS is calculated by dividing income available to common shareholders by the
weighted average number of shares of common stock outstanding during the period.
Diluted EPS is calculated by dividing income available to common shareholders by
the weighted average number of common shares outstanding adjusted to reflect
potentially dilutive securities. Diluted EPS has not been presented since the
inclusion of outstanding options would be antidilutive.
The following is the reconciliation of net income (loss) per share as of
December 31,
<TABLE>
<CAPTION>
1995 1996 1997
---------- ------------- --------------
<S> <C> <C> <C>
Net income (loss)................................. $ 121,219 ($ 8,311,599) ($ 30,127,865)
Less Dividends on Preferred Stock................. 0 (281,400) (878,594)
---------- ------------- --------------
Income (loss) available to common shareholders.... $ 121,219 $ (8,592,999) $ (31,006,459)
---------- ------------- --------------
---------- ------------- --------------
</TABLE>
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 market prices for similar debt instruments or
on the current rates offered to the Company for debt with similar maturities.
F-9
<PAGE>
ECONOPHONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997
3. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
As of December 31, 1997, the fair value based upon quotes from securities
dealers and carrying value of the Company's Senior Notes were $168,175,000 and
$149,680,000 respectively.
FOREIGN EXCHANGE CONTRACTS
The Company 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 in British Pounds, Belgian Francs and French Francs.
The Company does not use derivative financial instruments for speculative
purposes and, at December 31, 1996, the Company had no open foreign currency
hedging positions. At December 31, 1997, the Company had $300,000 of open
foreign currency hedging positions.
4. PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------
1996 1997
------------ -------------
<S> <C> <C>
Equipment........................................................ $ 7,189,102 $ 23,403,236
Computer software................................................ 182,963 1,365,820
Furniture and fixture............................................ 136,399 634,269
Leasehold improvements........................................... 377,159 1,502,990
------------ -------------
7,885,623 26,906,315
Less-Accumulated depreciation and amortization................... (1,643,151) (3,689,550)
------------ -------------
Property, equipment and leasehold improvements, net........ $ 6,242,472 $ 23,216,765
------------ -------------
------------ -------------
</TABLE>
Depreciation expense for the years ended December 31, 1996 and 1997, was
$1,008,402 and $2,296,855, 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 which
occured in June 1996, 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 charged this to operations in 1996 as an expense of the joint
venture.
6. OTHER ASSETS
Other assets consist primarily of security deposits and software development
costs.
7. FOREIGN OPERATIONS AND CONCENTRATIONS
FOREIGN OPERATIONS
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, operating income
F-10
<PAGE>
ECONOPHONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997
7. FOREIGN OPERATIONS AND CONCENTRATIONS (CONTINUED)
(before interest, foreign currency exchange and other income) and identifiable
assets by geographical area for the years ended and as of December 31, 1995,
1996 and 1997 are as follows:
<TABLE>
<CAPTION>
UNITED OTHER
ENGLAND STATES BELGIUM EUROPE CONSOLIDATED
------------- -------------- ------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
1995
Revenues............................ $ 14,172,747 $ 8,292,415 $ 4,235,155 $ 790,173 $ 27,490,490
------------- -------------- ------------- ------------ --------------
------------- -------------- ------------- ------------ --------------
Operating income.................... $ 143,693 $ 84,074 $ 42,939 $ 8,011 $ 278,717
Corporate expenses.................. (157,498)
--------------
$ 121,219
--------------
--------------
Account receivable.................. $ 4,343,590 $ 900,883 $ 1,331,276 $ 773,385 $ 7,349,134
Other identifiable assets........... -- 2,183,642 397,675 -- 2,581,317
Corporate assets.................... 577,770
--------------
$ 10,508,221
--------------
--------------
1996
Revenues............................ $ 15,477,308 $ 18,185,110 $ 9,037,967 $ 2,402,497 $ 45,102,882
------------- -------------- ------------- ------------ --------------
------------- -------------- ------------- ------------ --------------
Operating loss...................... ($ 2,472,933) ($3,855,148) ($1,472,157) ($348,913) ($8,149,151)
Corporate expenses.................. (162,448)
--------------
($8,311,599)
--------------
--------------
Accounts receivable................. $ 2,282,951 $ 3,718,158 $ 1,487,965 $ 456,968 $ 7,946,042
Other identifiable assets........... 1,423,097 4,001,405 847,181 200,789 6,472,472
Corporate assets.................... 8,336,822
--------------
$ 22,755,336
--------------
--------------
1997
Revenues............................ $ 18,362,999 $ 48,898,882 $ 7,980,848 $ 7,759,896 $ 83,002,625
------------- -------------- ------------- ------------ --------------
------------- -------------- ------------- ------------ --------------
Operating loss...................... ($ 2,966,508) ($ 17,213,062) ($374,446) ($664,033) ($ 21,218,049)
Corporate expenses.................. (7,909,816)
--------------
($ 29,127,865)
--------------
--------------
Accounts receivable................. $ 5,252,202 $ 9,034,226 $ 1,250,317 $ 1,259,508 $ 16,796,253
Other identifiable assets........... 6,731,185 16,514,567 462,682 405,331 24,113,765
Corporate assets.................... 137,094,920
--------------
$ 178,004,938
--------------
--------------
</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 accounted for $13.2 million or 48%
in 1995 and $14.2 million or 32% in 1996. The relationship was terminated in
December 1996.
F-11
<PAGE>
ECONOPHONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997
7. FOREIGN OPERATIONS AND CONCENTRATIONS (CONTINUED)
SUPPLIERS
Sprint Communication, Inc. ("Sprint"), one of the Company's principal
suppliers 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, 1996 and 1997, Sprint
supplied approximately $9.4 million and $6.0 million respectively, of telephone
line usage to the Company. In addition, Switch Services, Inc. ("SSI") supplied
approximately $6.9 million of telephone line usage to the Company in 1997. These
amounts have been included in cost of services.
8. BORROWINGS
At December 31, 1997, the Company was obligated under the following debt
agreements:
<TABLE>
<CAPTION>
CURRENT LONG-TERM TOTAL
------------ -------------- --------------
<S> <C> <C> <C>
Long-term debt:
NTFC note (a)................................ $ 1,633,136 $ 5,521,792 $ 7,154,928
Cable lines (b).............................. 195,826 135,250 331,076
Senior notes (c)............................. 149,680,000 149,680,000
------------ -------------- --------------
$ 1,828,962 $ 155,337,042 $ 157,166,004
------------ -------------- --------------
------------ -------------- --------------
</TABLE>
- ------------------------
(a) On May 28, 1996, Econophone entered into a credit facility with NTFC, which
has been amended and increased as to amount on several occasions. On January
28, 1998, the NTFC credit facility was amended and restated in its entirety
in order to effect various amendments and increase the amount of NTFC's
commitment thereunder (such credit facility, as amended and restated, is
referred to herein as the "NTFC Facility"). The NTFC Facility provides for
borrowings by Econophone and its subsidiaries to fund certain equipment
acquisition costs and related expenses. The NTFC Facility provides for an
aggregate commitment of NTFC of $24.0 million pursuant to three tranches of
$2.0 million, $3.0 million and $19.0 million. Loans borrowed under each
tranche of the NTFC Facility amortize in equal monthly installments over a
five year period ending on July 1, 2001, April 1, 2002 and January 1, 2003,
respectively. As of December 31, 1997, the aggregate amount outstanding
under all tranches of the NTFC Facility was $7,154,928. Loans under the NTFC
Facility accrue interest at an interest rate equal to the 90-day commercial
paper rate plus 395 basis points, subject to certain quarterly adjustments
depending upon financial performance. All of the equipment purchased with
the proceeds of the NTFC Facility has been pledged to NTFC.
The NTFC Facility requires Econophone to maintain a Debt Service Coverage
Ratio 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 specified minimum cash balances
(certain related business investments and acquisitions qualify as cash for
the foregoing purposes). Econophone also must have EBITDA (as defined in the
NTFC Facility) of not less than: negative $5,500,000 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
F-12
<PAGE>
ECONOPHONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997
8. BORROWINGS (CONTINUED)
fiscal year ending December 31, 2001. Econophone was in compliance with
these covenants at December 31, 1997.
(b) 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 $5,849 to $30,291.
(c) The 1997 Unit Offering
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. On December 5, 1997, the Company
consummated an offer to exchange the notes issued in the 1997 Unit Offering
for $155.0 million of notes that had been registered under the Securities
Act.
The 1997 Notes are unsecured unsubordinated obligations of Econophone,
limited to $155.0 million aggregate principal amount at maturity, and mature
on July 15, 2007. Interest on the 1997 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, 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. At the closing of the 1997 Unit Offering, Econophone used
$57.4 of the net proceeds of the 1997 Unit Offering to purchase the Pledged
Securities, which were pledged as security for the payment of interest on
the principal of the 1997 Notes. Proceeds from the Pledged Securities are
being used by Econophone to make interest payments on the 1997 Notes through
July 15, 2000. The Pledged Securities are being held by a trustee pending
disbursement.
Maturities of other long-term debt over the next five years are as follows:
<TABLE>
<S> <C>
1998............................................................ $2,144,455
1999............................................................ 1,689,280
2000............................................................ 1,688,848
2001............................................................ 1,499,620
2002............................................................ 779,294
---------
Total........................................................... $7,801,497
---------
---------
</TABLE>
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 other state and local sales taxes. All of these taxes are included in
general and administrative expenses.
F-13
<PAGE>
ECONOPHONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997
9. TAXES (CONTINUED)
As of December 31, 1997, the Company had a net operating loss carryforward
of approximately $36,000,000 which is available to reduce its future taxable
income and expires at various dates through 2012. A valuation allowance of
approximately $14,000,000 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 country 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.
Econophone's foreign subsidiaries file separate tax returns and provide for
taxes accordingly.
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.
All information contained in the accompanying financial statements and
footnotes has been retroactively restated to give effect to these transactions.
Included within additional paid in capital, is $5.6 million attributable to
the Warrants, which 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 1997 Notes and will be amortized over the term of the 1997
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 between Econophone and the Placement Agent in connection with the 1997
Unit Offering. Among the factors considered in making such determinations 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 1997 Unit Offering and the prices
of similar securities of generally comparable companies. The Warrants expire on
June 30, 2007.
F-14
<PAGE>
ECONOPHONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997
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 accrued monthly cumulative dividends on each
outstanding share at a rate of $1.00 per month. The accrued and unpaid dividends
compound monthly at a rate of 12% per year. The dividends began to accrue and
compound interest from the issuance date of the preferred stock and ceased to
accrue on July 1, 1997, when the Senior Notes were issued.
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 December 31, 1997, the shares of Series A
Preferred Stock outstanding were convertible into 3,420,701 shares of Common
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, 1996 and 1997 due to various
related parties. These notes are unsecured, and accrue interest at annual rates
ranging from 9% to 18%. One note is a demand obligation while the others have
maturities which range through November 15, 1998.
The Company has a non-interest bearing note receivable at December 31, 1997
for approximately $215,000 from a related party.
The brother-in-law of Alfred West owns a 28% interest in Econophone's Swiss
subsidiary, Econo-
phone Services GmbH.
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 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
F-15
<PAGE>
ECONOPHONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997
13. STOCK-BASED COMPENSATION PLANS (CONTINUED)
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 1997
------------- ---------------
<S> <C> <C>
Net Loss:
Available to $ (8,592,999) $ (31,006,459)
Common
Shareholders
Pro Forma (9,088,001) (31,797,731)
Basic EPS:
As Reported $ (.43) $ (1.55)
Pro Forma (.45) (1.59)
</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
and 1997, 0 and 1,667 of the options granted to the consultants were
exercisable, respectively, and the expense recognized in 1996 and 1997 relating
to these options was $496 and $2,976, respectively.
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 and 1997, 226,527 and 1,109,250 options respectively, were exercisable
under the Company's 1996 Plan.
F-16
<PAGE>
ECONOPHONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997
13. STOCK-BASED COMPENSATION PLANS (CONTINUED)
Option activity during 1996 and 1997 is as follows:
<TABLE>
<CAPTION>
1996 1997
--------------------------- ---------------------------
<S> <C> <C> <C> <C>
WEIGHTED WEIGHTED
AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
---------- --------------- ---------- ---------------
Outstanding at beginning of year...... -- -- 2,606,500 $ 2.50
Granted............................... 2,606,500 $ 2.50 294,945 5.00
Outstanding at end of year............ 2,606,500 2.50 2,901,445 2.74
---------- ---------- -----
---------- ---------- -----
Exercisable at end of year............ 226,527 2.50 1,109,250 2.50
Weighted average fair value of options
granted............................. .89 1.91
</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 and 1997: risk-free interest rate of 6.23%
for 1996 and 1997; expected life of three years for 1996 and 1997; expected
volatility of 43% for 1996 and 47% for 1997 and expected dividend yield of zero
percent for 1996 and 1997.
The following table summarizes information with respect to stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------ --------------------------------
NUMBER WEIGHTED AVERAGE NUMBER
EXERCISE OUTSTANDING AT REMAINING WEIGHTED AVERAGE EXERCISABLE WEIGHTED AVERAGE
PRICE 12/31/97 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/97 EXERCISE PRICE
- ------------- -------------- ------------------- ----------------- ------------- -----------------
<S> <C> <C> <C> <C> <C>
$2.50-$5.00 2,901,445 8.97 $ 2.74 1,109,250 $ 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, 1997 are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASE
------------ ----------
<S> <C> <C>
1998................................................................ $ 1,500,451 $ 156,067
1999................................................................ 1,535,221 159,311
2000................................................................ 1,593,025 97,105
2001................................................................ 1,629,640 21,481
2002................................................................ 1,450,602 770
------------ ----------
Total minimum lease payments........................................ $ 7,708,939 $ 434,734
------------ ----------
------------ ----------
</TABLE>
The rent expense for the year ended December 31, 1996 and 1997 was
approximately $394,000 and 1,378,000, respectively.
F-17
<PAGE>
ECONOPHONE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997
14. COMMITMENTS AND CONTINGENCIES (CONTINUED)
In January, 1998, the Company obtained a line of credit from European
American Bank ("EAB") in the amount of $2,000,000 and a foreign exchange line in
the amount of $5,000,000, which are collateralized by $2,300,000 in time
deposits. Interest is charged at the prime rate in effect, and is payable
monthly from the date of advance of the line.
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 $990,000. These officers
are also eligible for annual bonuses based on performance.
On January 29, 1998, the Company received notice from the minority partner
in Telco, that pursuant to existing arrangements between them, it has elected to
exercise an option to cause the Company to acquire its interest in Telco. The
parties recently commenced negotiations with respect to the terms of such
acquisition, including the form and amount of the consideration. There can be no
assurance whether such acquisition ultimately will be consummated, and if
consummated, on terms favorable to the Company.
15. SUBSEQUENT EVENTS
VOICENET ACQUISITION. A definitive agreement to acquire VoiceNet was
entered into on January 28, 1998. The closing of the VoiceNet Acquisition
occurred on February 12, 1998. The initial purchase price for VoiceNet was $21.0
million and was paid out of cash on hand. The sellers of VoiceNet also are
entitled to receive an earn-out based upon the revenue growth of the VoiceNet
business for a period of up to one year following the closing of the
acquisition.
VoiceNet provides travellers and other callers with calling card services,
which are advertised primarily in in-flight magazines. Econophone has provided
substantially all of VoiceNet's transmission, billing and customer service
functions since April 1996.
SENIOR DISCOUNT NOTES. During February 1998, the Company authorized the
issue and sale of Senior Discount Notes. The Notes will be unsecured
unsubordinated obligations of the Company, initially limited to $300 million
aggregate principal amount at maturity, and will mature on February 15, 2008.
Although for federal income tax purposes a significant amount of original issue
discount, taxable as ordinary income, will be recognized by the Holder as such
discount accrues from the Closing Date, no interest will be payable on the Notes
prior to February 15, 2003. From and after February 15, 2003, interest on the
Notes will accrue at 11.0% from February 15, 2003 or from the most recent
Interest Payment Date to which interest has been paid or provided for, payable
semiannually (to Holders of record at the close of business on the February 1 or
August 1 immediately preceding the Interest Payment Date) on February 15 and
August 15 of each year, commencing August 15, 2003. Interest will be computed on
the basis of a 360-day year of twelve 30-day months.
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
Cautionary Statement on Forward-Looking
Statements.................................... 3
Prospectus Summary.............................. 4
Risk Factors.................................... 15
The Exchange Offer.............................. 31
Use of Proceeds................................. 39
Capitalization.................................. 40
Selected Consolidated Financial Data............ 41
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 43
Business........................................ 54
Management...................................... 77
Certain Transactions............................ 84
Description of Certain Indebtedness............. 89
Principal Stockholders.......................... 92
Description of the Exchange Notes............... 93
Certain Federal Income Tax Considerations....... 122
Plan of Distribution............................ 127
Legal Matters................................... 127
Experts......................................... 127
Glossary........................................ G-1
Index to Financial Statements................... F-1
</TABLE>
--------------------------
UNTIL , 1998, 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
$300,000,000
OF NEW
11% SENIOR DISCOUNT NOTES DUE 2008
FOR
$300,000,000
OF ANY AND ALL OUTSTANDING
11% SENIOR DISCOUNT NOTES DUE 2008
---------------------
PROSPECTUS
---------------------
THE BANK OF NEW YORK
REORGANIZATION SECTION
101 BARCLAY STREET, FLOOR 7 EAST
NEW YORK, NEW YORK 10286
ATTN:
TELEPHONE:(212) 815-5789
FACSIMILE:(212) 815-6339
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Econophone's Certificate of Incorporation indemnifies its officers and
directors to the fullest extent permitted by the Delaware General Corporation
Law (the "GCL"). Under Section 145 of the GCL, a corporation may indemnify its
directors, officers, employees and agents and its former directors, officers,
employees and agents and those who serve, at the corporation's request, in such
capacities with another enterprise, against expenses (including attorneys'
fees), as well as judgments, fines and settlements in nonderivative lawsuits,
actually and reasonably incurred in connection with the defense of any action,
suit or proceeding in which they or any of them were or are made parties or are
threatened to be made parties by reason of their serving or having served in
such capacity. The GCL provides, however, that such person must have acted in
good faith and in a manner such person reasonably believed to be in (or not
opposed to) the best interests of the corporation and, in the case of a criminal
action, such person must have had no reasonable cause to be believe his or her
conduct was unlawful. In addition, the GCL does not permit indemnification in an
action or suit by or in the right of the corporation, where such person has been
adjudged liable to the corporation, unless, and only to the extent that, a court
determines that such person fairly and reasonably is entitled to indemnity for
costs the court deems proper in light of liability adjudication. Indemnity is
mandatory to the extent a claim, issue or matter has been successfully defended.
The Certificate of Incorporation and the GCL 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. These provisions
will not limit the liability of directors or officer under the federal
securities laws of the United States. The foregoing summary of Econophone's
Certificate of Incorporation, as amended, is qualified in its entirety by
reference to the relevant provisions thereof (filed as Exhibit 3.1).
See Item 22 for a statement of the Company's undertaking as to the
Commission's position respecting indemnification arising under the Securities
Act.
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 Bylaws of Econophone, Inc.
4.1 Specimen of Econophone, Inc.'s 11% Senior Discount Note due 2008.
4.2 Indenture, dated as of February 18, 1998, between Econophone, Inc. and The Bank of New York, as
Trustee.
4.3 Notes Registration Rights Agreement, dated February 18, 1998, between Econophone, Inc. and Morgan
Stanley & Co., Incorporated.
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* Securityholders Agreement, dated as of November 1, 1996, between Alfred West, Econophone, Inc. and
Princes Gate Investors II, L.P.
10.2* Securities Purchase Agreement, dated as of November 1, 1996, between Econophone, Inc. and Princes Gate
Investors II, L.P.
10.3* Note Purchase Agreement, dated as of April 24, 1997, between Econophone, Inc. and Morgan Stanley Group
Inc.
10.4* Form of Note under Note Purchase Agreement.
10.5* Placement Agreement, dated June 26 1997, between Econophone, Inc. and Morgan Stanley & Co.
Incorporated, as Placement Agent.
10.6* Specimen of Econophone, Inc.'s 13 1/2% Senior Note due 2007.
10.7* Indenture, dated as of July 1, 1997, between Econophone, Inc. and The Bank of New York, as Trustee.
10.8* Notes Registration Rights Agreement, dated July 1, 1997, between Econophone, Inc. and Morgan Stanley &
Co., Incorporated.
10.9* 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.
10.10* Warrant Registration Rights Agreement, dated as of July 1, 1997, between Econophone, Inc. and Morgan
Stanley & Co. Incorporated.
10.11* Collateral Pledge and Security Agreement, dated July 1, 1997, between Econophone, Inc. and The Bank of
New York, as Trustee and Custodian.
10.12 Placement Agreement, dated February 12, 1998, between Econophone, Inc. and Morgan Stanley Co.
Incorporated, as Placement Agent.
10.13 Second Amended and Restated Equipment Loan and Security Agreement, dated as of January 28, 1998,
between Econophone, Inc. and NTFC Capital Corporation ("NTFC").
10.14* Promissory Note, dated May 28, 1996, from Econophone, Inc. to NTFC.
10.15* Promissory Note, dated March 27, 1997, from Econophone, Inc. to NTFC.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- -------------------------------------------------------------------------------------------------------
<S> <C>
10.16 Promissory Note, dated December 31, 1997, from Econophone, Inc. to NTFC.
10.17 Stock Purchase Agreement, dated January 28, 1998, between Econophone, Inc. and the shareholders of
Voicenet Corporation.
10.18* Employment Agreement, dated August 1, 1996, between Econophone, Inc. and Alan Levy, as amended October
31, 1996.
10.19* Employment Agreement, dated January 1, 1997, between Econophone, Inc. and Alfred West.
10.20* Amended and Restated Econophone, Inc. 1996 Flexible Incentive Plan.
10.21* 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 as exhibits to Registration Statement on Form S-4,
Commission file number 333-33117, and hereby incorporated herein by
reference.
(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 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.
II-3
<PAGE>
(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 10th day of March, 1998.
<TABLE>
<S> <C> <C>
ECONOPHONE, INC.
By: /s/ ALAN L. LEVY
-----------------------------------------
Alan L. Levy
President and Chief Operating
Officer
</TABLE>
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
Richard L. Shorten, Alfred West and Alan L. Levy, or any one or more of them,
his true and lawful attorney-in-fact, for him and in his name, place and stead,
to sign any and all amendments (including post-effective amendments) to this
registration statement or amendment and to cause the same to be filed with the
Securities and Exchange Commission, hereby granting to said attorneys-in-fact
full power and authority to do and perform all and every act and thing
whatsoever requisite or desirable to be done in and about the premises as fully
to all intents and purposes as the undersigned might or could do in person,
hereby ratifying and confirming all acts and things that said attorneys-in-fact
may do or cause to be done by virtue of these presents.
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 March 10, 1998
Alfred West (Principal Executive
Officer)
President, Chief Operating
/s/ ALAN L. LEVY Officer and Director
- ------------------------------ (Principal Financial and March 10, 1998
Alan L. Levy Accounting Officer)
- ------------------------------ Director and Treasurer
Gary S. Bondi
- ------------------------------ Director
Steven West
/s/ STEPHEN MUNGER
- ------------------------------ Director March 10, 1998
Stephen Munger
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,
1997.............................................. $ 761,372 $ 3,890,525 $(3,058,366) $ 1,593,531
1996.............................................. 470,610 290,762 -- 761,372
1995.............................................. 268,730 721,215 (519,335) 470,610
</TABLE>
- ------------------------
(a) Represents writeoffs, recoveries and other deductions.
S-1
<PAGE>
Exhibit 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
ECONOPHONE, INC.
Under Sections 242 and 245 of the
Delaware General Corporation Law
Econophone, Inc. (the "Corporation"), a corporation organized and
existing under the General Corporation Law of the State of Delaware, does
hereby certify that:
1. The name of the corporation is Econophone, Inc.
2. The original certificate of incorporation of the Corporation was filed
by the Secretary of State of the State of Delaware on the 29th day of
October, 1996 (the "Certificate of Incorporation").
3. This Amended and Restated Certificate of Incorporation restates,
integrates and further amends the Corporation's existing Certificate of
Incorporation as follows:
(1) Paragraph FOUR has been amended to provide for the
recapitalization of the Corporation and to set forth the relative rights,
preferences and limitations of each class of shares so authorized.
(2) The paragraphs following paragraph FOUR have been renumbered.
4. The Certificate of Incorporation of Econophone, Inc. is amended
hereby, and is hereby restated to read in its entirety, as hereinafter set
forth:
<PAGE>
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
ECONOPHONE, INC.
1. The name of the corporation is Econophone, Inc. (the "Corporation").
2. The address of the Corporation's registered office in the State of
Delaware is 9 East Loockerman Street, Dover, Delaware 19901, County of Kent,
Delaware. National Corporate Research, Ltd. is the Corporation's registered
agent at that address.
3. The Corporation is being formed for the purpose of engaging in any
lawful act or activity for which corporations may be organized under the
General Corporation Law of the State of Delaware (the "General Corporation
Law").
4. 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 $.01 per share, 500,000 shares
of which shall be designated as Non-Voting Common Stock, par value $.01 per
share, and 250,000 shares of which shall be designated as Preferred Stock,
par value $.01 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
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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 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.
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
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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 offering
completed in July 1997 of $155 million in aggregate principal amounts of 13
1/2% Senior Notes due 2007.
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 and Gary Bondi) of the Corporation or any of its
Subsidiaries for consideration not to exceed, in the aggregate, $1,000,000,
(iv) [intentional left blank] (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
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<PAGE>
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 Preferred in accordance with
the Amended and Restated 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, as the same may be amended from
time to time (the "NTFC Lender" and, as amended, 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 Amended and Restated 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 Delaware 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 Amended and Restated 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 Amended and Restated 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.
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<PAGE>
(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 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 Amended and Restated
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 Delaware corporate law, the holders of the Series A Preferred shall not
be entitled to any voting rights.
SECTION 7. Redemption. (a) Special Optional Redemption.
[Intentionally left blank.]
(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 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
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<PAGE>
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 canceled.
(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 agreement
reasonably satisfactory to the Corporation to indemnify the Corporation from
any loss incurred by it in connection with such certificates.
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(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).
(e) Redemption Subject to Applicable Law. Any redemption pursuant to
this Section 7 shall be subject to Section 160 of the General Corporation Law.
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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).
(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
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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."
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.
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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 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
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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.
(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
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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 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
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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 BT Alex. Brown,
Inc.; Bear, Stearns & Co., Inc.; SBC Warburg Dillon & Read; DLJ (Donaldson,
Lufkin & Jenrette); Goldman, Sachs & Co.; Lazard Freres & Co. LLC; Merrill
Lynch & Co. Inc.; PaineWebber; Prudential Securities Inc.; Salomon Brothers;
Oppenheimer; Furman Selz LLC; or Lehman Brothers Incorporated; 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.
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
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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 or
in an offering of debt securities to bonafide third parties having a maturity
of no less than seven years occurring prior to March 1, 1998 which is
underwritten of placed by and investment bank of national standing; (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 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.
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(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 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
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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 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.
(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.
(b) Definitions. As used in this Amended and Restated Certificate of
Incorporation, 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.
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"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 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 Amended or Restated Certificate of Incorporation.
"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
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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 Amended and
Restated Certificate of Incorporation shall be computed in conformity with
GAAP, except that calculations made for 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
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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 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
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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 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; and (viii) Investments,
not to exceed $5 million at any one time outstanding, if the Board has
determined that such Investments constitute strategic investments, provided
that such incurrences and issuances are permitted by the terms of this
Amended and Restated Certificate of Incorporation.
"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
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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 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.
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"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 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
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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 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
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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 date of the filing of the Amended and Restated Certificate of
Incorporation, without any action or approval by any holder of Series A
Preferred, amend this Amended and Restated Certificate of Incorporation 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 more favorable to the Corporation of the analogous
covenants contained in any indenture with respect to Indebtedness
contemplated by Section 12(a)(4).
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
e(ither generally or in a particular instance and either retroactively or
prospectively) with 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 all holders of the
Series A Preferred.
5. The personal liability of the directors of the Corporation is hereby
eliminated to the fullest extent permitted by the General Corporation Law
(including, without limitation, paragraph (7) of subsection (b) of Section
102 thereof), as the same may be amended and supplemented from time to time.
6. The Board of Directors shall have the power to adopt, amend or
repeal By-laws of the Corporation, subject to the right of the stockholders
of the Corporation to adopt, amend or repeal any By-law.
7. The Corporation shall, to the fullest extent permitted by the
General Corporation Law (including, without limitation, Section 145 thereof),
as the same may be amended and supplemented from time to time, indemnify any
and all persons whom it shall have power to indemnify under the General
Corporation Law. The indemnification provided for herein shall not be deemed
exclusive of any other rights to which those seeking indemnification may be
entitled whether as a matter of law, under any By-law of the Corporation, by
agreement, by vote of stockholders or disinterested directors of the
Corporation or otherwise.
8. The election of directors of the Corporation need not be by written
ballot, unless the By-laws of the Corporation otherwise provide.
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9. This Amended and Restated Certificate of Incorporation was duly
adopted by the Board of Directors of the Corporation in accordance with
Section 245 of the General Corporation Law and by the unanimous written
consent of the Stockholders entitled to vote, in accordance with Sections 228
and 242 of the General Corporation Law.
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IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
signed by M. David Lacher, its Secretary, this 11th day of February, 1998.
ECONOPHONE, INC.
By: /s/ M. DAVID LACHER
--------------------------
Name: M. David Lacher
Title: Secretary of the Corporation
Date: February 11, 1998
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Exhibit 3.2
BY-LAWS
OF
ECONOPHONE, INC.
ARTICLE I
Offices
Section 1. The registered office of the Corporation shall be in the
City of Dover, County of Kent, State of Delaware. The Corporation also may
have offices at such other places, within or without the State of Delaware, as
the Board of Directors determines from time to time or the business of the
Corporation requires. Until such time as the Board of Directors otherwise
determines, the Corporation shall also have an office in the City of New York,
State of New York.
ARTICLE II
Meetings of Stockholders
Section 1. Place of Meetings. Except as otherwise provided in
these By-laws, all meetings of the stockholders shall be held on such dates
and at such times and places, within or without the State of Delaware, as
shall be determined by the Board of Directors or the Chairman of the Board of
Directors and as shall be stated in the notice of the meeting or in waivers of
notice thereof. If the place of any meeting is not so fixed, it shall be held
at the registered office of the Corporation in the State of Delaware.
Section 2. Annual Meeting. The annual meeting of stockholders for
the election of directors and the transaction of such other proper business as
may be brought before the
<PAGE>
meeting shall be held on such date after the close of the Corporation's fiscal
year, and at such time, as the Board of Directors may from time to time
determine.
Section 3. Special Meetings. Special meetings of the stockholders,
for any purpose or purposes, may be called by the Chairman of the Board of
Directors and shall be called by the President or the Secretary upon the
written request of a majority of the directors. The request shall state the
date, time, place and purpose or purposes of the proposed meeting.
Section 4. Notice of Meetings. Except as otherwise required or
permitted by law, whenever the stockholders are required or permitted to take
any action at a meeting, written notice thereof shall be given, stating the
place, date and hour of the meeting and, unless it is the annual meeting, by
or at whose direction it is being issued. The notice also shall designate the
place where the stockholders list is available for examination, unless the
list is kept at the place where the meeting is to be held. Notice of a
special meeting also shall state the purpose or purposes for which the meeting
is called. A copy of the notice of any meeting shall be delivered personally
or shall be mailed, not less than 10 and not more than 60 days before the date
of the meeting, to each stockholder entitled to vote at the meeting. If
mailed, the notice shall be deemed given when deposited in the United States
mail, postage prepaid, directed to each stockholder at such stockholder's
address as it appears on the records of the Corporation, unless such
stockholder shall have filed with the Secretary of the Corporation a written
request that such notices be mailed to some other address, in which case it
shall be directed to such other address. Notice of any meeting of stockholders
need not be given to any stockholder who shall attend the meeting, other than
for the express purpose of objecting at the beginning thereof to the
transaction of any business because the meeting is not lawfully called or
convened, or who shall submit, either before or after the time stated therein,
a signed waiver of notice. Unless the Board
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of Directors, after an adjournment is taken, shall fix a new record date for
an adjourned meeting or unless the adjournment is for more than 30 days,
notice of an adjourned meeting need not be given if the place, date and time
to which the meeting shall be adjourned are announced at the meeting at which
the adjournment is taken.
Section 5. Quorum. Except as otherwise provided by law or by the
Certificate of Incorporation of the Corporation, at all meetings of
stockholders the holders of a majority of the shares of the Corporation
entitled to vote, present in person or represented by proxy, shall constitute
a quorum for the transaction of business.
Section 6. Voting. Except as otherwise provided by law or by the
Certificate of Incorporation of the Corporation, at any meeting of the
stockholders every stockholder of record having the right to vote thereat
shall be entitled to one vote for every share of stock standing in his name as
of the record date and entitling him to so vote. A stockholder may vote in
person or by proxy. Except as otherwise provided by law or by the Certificate
of Incorporation, any corporate action to be taken by a vote of the
stockholders, other than the election of directors, shall be authorized by the
affirmative vote of a majority of the shares present or represented by proxy
at the meeting and entitled to vote on the subject matter. Directors shall be
elected as provided in Section 2 of Article III of these By-laws. Written
ballots shall not be required for voting on any matter unless ordered by the
chairman of the meeting, except that, unless otherwise provided in the
Certificate of Incorporation of the Corporation, all elections of directors
shall be by written ballot.
Section 7. Proxies. Every proxy shall be executed in writing by
the stockholder or by his authorized representative, or otherwise as provided
in the General Corporation Law of the State of Delaware (the "General
Corporation Law").
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Section 8. List of Stockholders. At least 10 days before every
meeting of stockholders, a complete list of the stockholders entitled to vote
at the meeting, arranged in alphabetical order, and showing their addresses
and the number of shares registered in their names as of the record date shall
be open to the examination of any stockholder, for any purpose germane to the
meeting, during ordinary business hours, for a period of at least 10 days
prior to the meeting, either at a place within the city where the meeting is
to be held, which place shall be specified in the notice of the meeting, or,
if not so specified, at the place 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 stockholder who is
present.
Section 9. Conduct of Meetings. At each meeting of the
stockholders, the Chairman of the Board of Directors or, in his absence, the
President shall act as chairman of the meeting. The Secretary or, in his
absence, any person appointed by the chairman of the meeting shall act as
secretary of the meeting and shall keep the minutes thereof. The order of
business at all meetings of the stockholders shall be as determined by the
chairman of the meeting.
Section 10. Consent of Stockholders in Lieu of Meeting. Unless
otherwise provided in the Certificate of Incorporation of the Corporation, any
action required to be taken or which may be taken at any annual or special
meeting of stockholders may be taken without a meeting, without prior notice
and without a vote, if a consent or consents in writing, setting forth the
action so taken, shall be signed, in person or by proxy, by the holders of
outstanding stock having not less than the minimum number of votes that would
be necessary to authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and voted in person or by proxy and
shall be delivered to the Corporation as required by law. Prompt notice
4
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of the taking of the corporate action without a meeting by less than unanimous
written consent shall be given to those stockholders who have not consented in
writing.
ARTICLE III
Board of Directors
Section 1. Number of Directors. Except as otherwise provided by
the Certificate of Incorporation of the Corporation, until such time as the
Board of Directors determines otherwise, the number of directors shall be at
least one. The number of directors may be reduced or increased from time to
time by action of a majority of the whole Board, but no decrease may shorten
the term of an incumbent director. When used in these By-laws, the term
"whole Board" means the total number of directors which the Corporation would
have if there were no vacancies.
Section 2. Election and Term. Except as otherwise provided by law,
by the Certificate of Incorporation of the Corporation or by these By-laws,
the directors shall be elected at the annual meeting of the stockholders and
the persons receiving a plurality of the votes cast shall be so elected.
Subject to his earlier death, resignation or removal as provided in Section 3
of this Article III, each director shall hold office until his successor shall
have been elected and shall have qualified.
Section 3. Removal. A director may be removed at any time, with or
without cause, by the holders of a majority of the shares then entitled to
vote at an election of directors.
Section 4. Resignations. Any director may resign at any time by
giving written notice of his resignation to the Corporation. A resignation
shall take effect at the time specified therein or, if the time when it shall
become effective shall not be specified therein, immediately
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<PAGE>
upon its receipt, and, unless otherwise specified therein, the acceptance of a
resignation shall not be necessary to make it effective.
Section 5. Vacancies. Except as otherwise provided by the
Certificate of Incorporation of the Corporation, any vacancy in the Board of
Directors arising from an increase in the number of directors or otherwise may
be filled by the vote of a majority of the directors then in office, although
less than a quorum, or by a sole remaining director.
Section 6. Place of Meetings. Except as otherwise provided in
these By-laws, all meetings of the Board of Directors shall be held at such
places, within or without the State of Delaware, as the Board determines from
time to time.
Section 7. Annual Meeting. The annual meeting of the Board of
Directors shall be held either without notice immediately after the annual
meeting of stockholders and in the same place, or as soon as practicable after
the annual meeting of stockholders on such date and at such time and place as
the Board determines from time to time.
Section 8. Regular Meetings. Regular meetings of the Board of
Directors shall be held on such dates and at such times and places as the
Board determines from time to time. Notice of regular meetings need not be
given, except as otherwise required by law.
Section 9. Special Meetings. Special meetings of the Board of
Directors, for any purpose or purposes, may be called by the Chairman of the
Board of Directors or the President and shall be called by the President or
the Secretary upon the written request of a majority of the directors. The
request shall state the date, time, place and purpose or purposes of the
proposed meeting.
Section 10. Notice of Meetings. Notice of each special meeting of
the Board (and of each annual meeting which is not held immediately after, and
in the same place as, the
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annual meeting of stockholders) shall be given, not later than 24 hours before
the meeting is scheduled to commence, by the Chairman of the Board of
Directors, the President or the Secretary and shall state the place, date and
time, and the purpose or purposes of the meeting. Notice of each meeting may
be delivered to a director by hand or given to a director orally (either by
telephone or in person) or mailed, telegraphed or sent by facsimile
transmission to a director at his residence or usual place of business,
provided, however, that if notice of less than 72 hours is given it may not be
mailed. If mailed, the notice shall be deemed given when deposited in the
United States mail, postage prepaid; if telegraphed, the notice shall be
deemed given when the contents of the telegram are transmitted to the
telegraph service with instructions that the telegram immediately be
dispatched; and if sent by facsimile transmission, the notice shall be deemed
given when transmitted with transmission confirmed. Notice of any meeting
need not be given to any director who shall submit, either before or after the
time stated therein, a signed waiver of notice or who shall attend the
meeting, other than for the express purpose of objecting at the beginning
thereof to the transaction of any business because the meeting is not lawfully
called or convened. Notice of an adjourned meeting, including the place, date
and time of the new meeting, shall be given to all directors not present at
the time of the adjournment, and also to the other directors unless the place,
date and time of the new meeting are announced at the meeting at the time at
which the adjournment is taken.
Section 11. Quorum. Except as otherwise provided by law or in
these By-laws, at all meetings of the Board of Directors a majority of the
whole Board shall constitute a quorum for the transaction of business, and the
vote of a majority of the directors present at a meeting at which a quorum is
present shall be the act of the Board. A majority of the directors present,
whether or not a quorum is present, may adjourn any meeting to another place,
date and time.
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Section 12. Conduct of Meetings. At each meeting of the Board of
Directors, the Chairman of the Board of Directors or, in his absence, the
President or, in his absence, a director chosen by a majority of the directors
present shall act as chairman of the meeting. The Secretary or, in his
absence, any person appointed by the chairman of the meeting shall act as
secretary of the meeting and keep the minutes thereof. The order of business
at all meetings of the Board shall be as determined by the chairman of the
meeting.
Section 13. Committees of the Board. The Board of Directors, by
resolution adopted by a majority of the whole Board, may designate an
executive committee and other committees, each consisting of one or more
directors. Each committee (including the members thereof) shall serve at the
pleasure of the Board of Directors and shall keep minutes of its meetings and
report the same to the Board. The Board of Directors may designate one or more
directors as alternate members of any committee, who may replace any absent or
disqualified member or members at any meeting of the committee. In addition,
in the absence or disqualification of a member of a committee, if no alternate
member has been designated by the Board of Directors, the member or members
present at any meeting and not disqualified from voting, whether or not they
constitute a quorum, may unanimously appoint another member of the Board of
Directors to act at the meeting in the place of the absent or disqualified
member. Except as limited by law, each committee, to the extent provided in
the resolution of the Board of Directors establishing it, shall have and may
exercise all the powers and authority of the Board in the management of the
business and affairs of the Corporation.
Section 14. Operation of Committees. A majority of all the members
of a committee shall constitute a quorum for the transaction of business, and
the vote of a majority of all the members of a committee present at a meeting
at which a quorum is present shall be the act
8
<PAGE>
of the committee. Each committee shall adopt whatever other rules of
procedure it determines for the conduct of its activities.
Section 15. Consent to Action. 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 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 or committee.
Section 16. Attendance Other Than in Person. Members of the Board
of Directors or any committee thereof may participate in a meeting of the
Board or committee, as the case may be, by means of conference telephone or
similar communications equipment by means of which all persons participating
in the meeting can hear each other, and such participation shall constitute
presence in person at the meeting.
ARTICLE IV
Officers
Section 1. Executive and Other Officers. The executive officers of
the Corporation shall be a Chairman of the Board of Directors, a President, a
Secretary and a Treasurer. The Board of Directors also may elect or appoint
one or more Vice Presidents (any of whom may be designated as Executive Vice
Presidents or otherwise), and any other officers it deems necessary or
desirable for the conduct of the business of the Corporation, each of whom
shall have such powers and duties as the Board determines. Any officer may
devote less than all of his working time to his activities as such if the
Board so approves.
Section 2. Duties.
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(a) The Chairman of the Board of Directors. The Chairman of
the Board of Directors, who shall be a member of the Board of Directors, shall
be the chief executive officer of the Corporation. The Chairman of the Board
of Directors shall preside at all meetings of the stockholders and the Board.
(b) The President. The President shall be the chief operating
officer of the Corporation. The President shall be responsible for the
general management of the business and affairs of the Corporation, subject to
the control of the Chairman of the Board of Directors and the Board of
Directors, and he shall have such other powers and duties as the Chairman of
the Board of Directors and the Board assign to him.
(c) The Vice President. The Vice President or, if there shall
be more than one, the Vice Presidents, if any, in the order of their seniority
or in any other order determined by the Board of Directors, shall perform, in
the absence or disability of the President, the duties and exercise the powers
of the President, and shall have such other powers and duties as the Board,
the Chairman of the Board of Directors or the President assigns to him or them.
(d) The Secretary. Except as otherwise provided in these
By-laws or as directed by the Board of Directors, the Secretary shall attend
all meetings of the stockholders and the Board; he shall record the minutes of
all proceedings in books to be kept for that purpose; he shall give notice of
all meetings of the stockholders and special meetings of the Board; and he
shall keep in safe custody the seal of the Corporation and, when authorized by
the Board, he shall affix the same to any corporate instrument. The Secretary
shall have such other powers and duties as the Board, the Chairman of the
Board of Directors or the President assigns to him.
(e) The Treasurer. Subject to the control of the Board, the
Treasurer shall have the care and custody of the corporate funds and the books
relating thereto; and he shall
10
<PAGE>
perform all other duties incident to the office of Treasurer. The Treasurer
shall have such other powers and duties as the Board, the Chairman of the
Board of Directors or the President assigns to him.
Section 3. Term; Removal. Subject to his earlier death,
resignation or removal, each officer shall hold his office until his successor
shall have been elected or appointed and shall have qualified, or until his
earlier death, resignation or removal. Any officer may be removed at any
time, with or without cause, by the Board of Directors.
Section 4. Resignations. Any officer may resign at any time by
giving written notice of his resignation to the Corporation. A resignation
shall take effect at the time specified therein or, if the time when it shall
become effective shall not be specified therein, immediately upon its receipt,
and, unless otherwise specified therein, the acceptance of a resignation shall
not be necessary to make it effective.
Section 5. Vacancies. If an office becomes vacant for any reason,
the Board of Directors may fill the vacancy, and each officer so elected or
appointed shall serve for the remainder of his predecessor's term and until
his successor shall have been elected or appointed and shall have qualified.
ARTICLE V
Provisions Relating to Stock
Certificates and Stockholders
Section 1. Certificates. Certificates for the Corporation's
capital stock shall be in such form as required by law and as approved by the
Board of Directors. Each certificate shall be signed in the name of the
Corporation by the Chairman of the Board of Directors, the President or any
Vice President and by the Secretary, the Treasurer, any Assistant Secretary or
11
<PAGE>
any Assistant Treasurer. Any or all of the signatures on a certificate may be
a facsimile. If any certificate is countersigned by a transfer agent or
registered by a registrar, other than the Corporation or its employee, the
signature of any officer of the Corporation may be a facsimile signature. In
case any officer, transfer agent or registrar who shall have signed or whose
facsimile signature shall have been placed on any certificate shall have
ceased to be such officer, transfer agent or registrar before the certificate
shall be issued, the certificate may be issued by the Corporation with the
same effect as if he were such officer, transfer agent or registrar at the
date of issue.
Section 2. Replacement Certificates. The Corporation may issue a
new certificate of stock in place of any certificate theretofore issued by it,
alleged to have been lost, stolen or destroyed, and the Board of Directors may
require the owner of the lost, stolen or destroyed certificate, or such
person's legal representative, to make an affidavit of that fact and to give
the Corporation a bond sufficient to indemnify the Corporation against any
claim that may be made against it on account of the alleged loss, theft or
destruction of the certificate or the issuance of such new certificate.
Section 3. Transfers of Shares. Transfers of shares shall be
registered on the books of the Corporation maintained for that purpose after
due presentation of the stock certificates therefor, appropriately endorsed or
accompanied by proper evidence of succession, assignment or authority to
transfer.
Section 4. Record Date. For the purpose of determining the
stockholders entitled to notice of or to vote at any meeting of stockholders
or any adjournment thereof, or to express consent to corporate action in
writing without a meeting, or for the purpose of determining stockholders
entitled to receive payment of any dividend or other distribution or the
allotment of
12
<PAGE>
any rights, or for the purpose of any other action, the Board of Directors may
fix a record date, which record date shall not precede the date upon which the
resolution fixing the record date is adopted by the Board, and which record
date shall not be more than 60 or less than 10 days before the date of any
such meeting, shall not be more than 10 days after the date on which the Board
fixes a record date for any such consent in writing, and shall not be more
than 60 days prior to any other action.
ARTICLE VI
Indemnification
Section 1. Indemnification. Unless otherwise determined by the
Board of Directors, the Corporation shall, to the fullest extent permitted by
the General Corporation Law (including, without limitation, Section 145
thereof) or other provisions of the laws of Delaware relating to
indemnification of directors, officers, employees and agents, as the same may
be amended and supplemented from time to time, indemnify any and all such
persons whom it shall have power to indemnify under the General Corporation
Law or such other provisions of law.
Section 2. Statutory Indemnification. Without limiting the
generality of Section 1 of this Article VI, to the fullest extent permitted,
and subject to the conditions imposed, by law, and pursuant to Section 145 of
the General Corporation Law, unless otherwise determined by the Board of
Directors:
(i) the Corporation shall indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding whether civil, criminal,
administrative or investigative (other than an action by or in the right
of the Corporation) by reason of the fact that such person is or was a
13
<PAGE>
director, officer, employee or agent of the Corporation, or is or was
serving at the request of the Corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture,
trust or other enterprise against reasonable expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action,
suit or proceeding if such person acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had
no reasonable cause to believe his conduct was unlawful; and
(ii) the Corporation shall indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the Corporation to procure
a judgment in its favor by reason of the fact that such person is or was
a director, officer, employee or agent of the Corporation, or is or was
serving at the request of the Corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture,
trust or other enterprise against reasonable expenses (including
attorneys' fees) actually and reasonably incurred by him in connection
with the defense or settlement of such action or suit if such person
acted in good faith and in a manner he reasonably believed to be in or
not opposed to the best interests of the Corporation, except as otherwise
provided by law.
Section 3. Indemnification by Resolution of Stockholders or
Directors or Agreement. Without limiting the generality of Section 1 or
Section 2 of this Article VI, to the fullest extent permitted by law,
indemnification may be granted, and expenses may be advanced, to the persons
described in Section 145 of the General Corporation Law or other provisions of
the laws of Delaware relating to indemnification and advancement of expenses,
as from time to
14
<PAGE>
time may be in effect, by (i) a resolution of stockholders, (ii) a resolution
of the Board of Directors, or (iii) an agreement providing for such
indemnification and advancement of expenses.
Section 4. General. It is the intent of this Article VI to require
the Corporation, unless otherwise determined by the Board of Directors, to
indemnify the persons referred to herein for judgments, fines, penalties,
amounts paid in settlement and reasonable expenses (including attorneys'
fees), and to advance expenses to such persons, in each and every circumstance
in which such indemnification and such advancement of expenses could lawfully
be permitted by express provision of by-laws, and the indemnification and
expense advancement provided by this Article VI shall not be limited by the
absence of an express recital of such circumstances. The indemnification and
advancement of expenses provided by, or granted pursuant to, these By-laws
shall not be deemed exclusive of any other rights to which a person seeking
indemnification or advancement of expenses may be entitled, whether as a
matter of law, under any provision of the Certification of Incorporation of
the Corporation or these By-laws, by agreement, by vote of stockholders or
disinterested directors of the Corporation or otherwise, both as to action in
his official capacity and as to action in another capacity while holding such
office.
Section 5. Indemnification Benefits. Indemnification pursuant to
these By-laws shall inure to the benefit of the heirs, executors,
administrators and personal representatives of those entitled to
indemnification.
15
<PAGE>
ARTICLE VII
General Provisions
Section 1. Dividends. To the extent permitted by law, the Board of
Directors shall have full power and discretion, subject to the provisions of
the Certificate of Incorporation of the Corporation and the terms of any other
corporate document or instrument binding upon the Corporation, to determine
what, if any, dividends or distributions shall be declared and paid or made.
Section 2. Seal. The Corporation's seal shall be in such form as
is required by law and as shall be approved by the Board of Directors.
Section 3. Fiscal Year. The fiscal year of the Corporation shall
be determined by the Board of Directors.
Section 4. Voting Shares in Other Corporations. Unless otherwise
directed by the Board of Directors, shares in other corporations which are
held by the Corporation shall be represented and voted only by the Chairman of
the Board of Directors, the President or a proxy or proxies appointed by him.
ARTICLE VIII
Amendments
Section 1. By-Laws may be adopted, amended or repealed by the Board
of Directors, provided the conferral of such power on the Board shall not
divest the stockholders of the power, or limit their power, to adopt, amend or
repeal By-laws.
16
<PAGE>
EXHIBIT 4.1
[FACE OF NOTE]
[THE FOLLOWING LEGEND TO BE INCLUDED ON THE U.S. GLOBAL NOTES, TEMPORARY
OFFSHORE GLOBAL NOTE AND U.S. PHYSICAL NOTES:
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, SOLD,
PLEDGED OR OTHERWISE TRANSFERRED 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 REGULATIONED 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 WITH RESPECT TO SUCH TRANSFER,
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 AT MATURITY 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
<PAGE>
APPROPRIATE BOX SET FORTH ON THE REVERSE HEREOF RELATING TO THE MANNER OF
SUCH TRANSFER AND SUBMIT THIS CERTIFICATE TO THE 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.]
[THE FOLLOWING LEGEND TO BE INCLUDED ON ALL GLOBAL NOTES, WHETHER OR NOT
EXCHANGE NOTES:
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.]
ECONOPHONE, INC.
11% Senior Discount Note Due 2008
<PAGE>
[CUSIP] [CINS] [__________]
No. $_________
The following information is supplied for purposes of Sections 1273
and 1275 of the Internal Revenue Code:
Issue Date: February 18, 1998
Yield to maturity for period from Issue Date to February 15, 2008: 11%,
compounded semi-annually on February 15 and August 15, commencing February
18, 1998 (computed without giving effect to the additional payments of
interest in the event the issuer fails to commence the exchange offer or
cause the registration statement to be declared effective, each as described
on the reverse hereof)
Original issue discount under Section 1273 of the Internal Revenue Code (for
each $1,000 principal amount): $964.05
Issue Price (for each $1,000 principal amount): $585.95
ECONOPHONE, INC., a Delaware corporation (the "Company", which term
includes any successor under the Indenture hereinafter referred to), for
value received, promises to pay to _____________, or its registered assigns,
the principal sum of ____________ ($____) on February 15, 2008.
Interest Payment Dates: February 15 and August 15, commencing August 15,
2003.
Regular Record Dates: February 1 and August 1.
Reference is hereby made to the further provisions of this Note set forth
on the reverse hereof, which further provisions shall for all purposes have
the same effect as if set forth at this place.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Note to be signed
manually or by facsimile by its duly authorized officers.
ECONOPHONE, INC.
By:________________________________
Name:
Title:
By: ________________________________
Name:
Title:
(Trustee's Certificate of Authentication)
This is one of the 11% Senior Discount Notes due 2008 described in the
within-mentioned Indenture.
Date: February 18, 1998 THE BANK OF NEW YORK,
as Trustee
By: ________________________________
Authorized Signatory
<PAGE>
[REVERSE SIDE OF NOTE]
ECONOPHONE, INC.
11% Senior Discount Note Due 2008
1. Principal and Interest.
The Company will pay the principal of this Note on February 15, 2008.
The Company promises to pay interest on the principal amount at
maturity of this Note on each Interest Payment Date, as set forth below, at the
rate per annum shown above.
Interest will be payable semiannually (to the holders of record of the
Notes at the close of business on February 1 or August 1, immediately
preceding the Interest Payment Date) on each Interest Payment Date,
commencing August 15, 2003; provided that no interest shall accrue on the
principal amount of this Note prior to February 15, 2003 and no interest
shall be paid on this Note prior to August 15, 2003, except as provided in
the next paragraph.
If an exchange offer registered under the Securities Act is not
consummated and a shelf registration statement under the Securities Act with
respect to resales of the Notes is not declared effective by the Commission,
on or before August 18, 1998 in accordance with the terms of the Registration
Rights Agreement dated as of February 18, 1998 between the Company and Morgan
Stanley & Co. Incorporated, interest (in addition to the amount of original
issue discount accreting during the period ending February 15, 2003 and in
addition to interest otherwise due on the Notes after such date) will accrue
at a rate of .5% per annum of the Accreted Value on the preceding Semi-Annual
Accrual Date on the Notes, from August 18, 1998 and payable in cash
semi-annually on February 15 and August 15 of each year, commencing February
15, 1999, until the consummation of an exchange offer or the effectiveness of
a shelf registration statement. The Holder of this Note is entitled to the
benefits of such Registration Rights Agreement.
From and after February 15, 2003, interest on the Notes will accrue from
the most recent date to which interest has been paid or, if no interest has
been paid, from February 15, 2003; provided that, if there is no existing
default in the payment of interest and this Note is authenticated between a
Regular Record Date referred to on the face hereof and the next succeeding
Interest Payment Date, interest shall accrue from such Interest Payment Date.
Interest will be computed on the basis of a 360-day year of twelve 30-day
months.
The Company shall pay interest on overdue principal and premium, if any,
and interest on overdue installments of interest, to the extent lawful, at a
rate born by the Notes.
2. Method of Payment.
<PAGE>
The Company will pay interest (except defaulted interest) on the
principal amount at maturity of the Notes as provided above on each February
15 and August 15 to the persons who are Holders (as reflected in the Note
Register at the close of business on February 1 and August 1 immediately
preceding the Interest Payment Date), commencing August 15, 2003, in each
case, even if the Note is cancelled on registration of transfer, registration
of exchange, redemption or repurchase after such record date; provided that,
with respect to the payment of principal, the Company will make payment to
the Holder that surrenders this Note to a Paying Agent on or after February
15, 2008.
The Company will pay principal, premium, if any, and as provided above,
interest in money of the United States that at the time of payment is legal
tender for payment of public and private debts. However, the 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). If a payment date is a date
other than a Business Day at a place of payment, payment may be made at that
place on the next succeeding day that is a Business Day and no interest shall
accrue for the intervening period.
3. Paying Agent and Registrar.
Initially, the Trustee will act as authenticating agent, Paying Agent and
Registrar. The Company may change any authenticating agent, Paying Agent or
Registrar without notice. The Company, any Subsidiary or any Affiliate of
any of them may act as Paying Agent, Registrar or co-Registrar.
4. Indenture; Limitations.
The Company issued the Notes under an Indenture dated as of February 18,
1998 (the "Indenture"), between the Company and The Bank of New York, as
trustee (the "Trustee"). Capitalized terms herein are used as defined in the
Indenture unless otherwise indicated. The terms of the Notes include those
stated in the Indenture and those made part of the Indenture by reference to
the Trust Indenture Act. The Notes are subject to all such terms, and
Holders are referred to the Indenture and the Trust Indenture Act for a
statement of all such terms. To the extent permitted by applicable law, in
the event of any inconsistency between the terms of this Note and the terms
of the Indenture, the terms of the Indenture shall control.
The Notes are unsecured senior obligations of the Company. The Company
may, subject to Article Four of the Indenture, issue additional Notes under
the Indenture.
5. 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 February 15, 2003 and
prior to maturity, upon not less than 30 nor
<PAGE>
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 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 prior
to the Redemption Date to receive interest due on an Interest Payment Date),
if redeemed during the 12-month period commencing February 15 of the years
set forth below:
<TABLE>
<CAPTION>
Redemption
Year Price
---- ----------
<S> <C>
2003 105.500%
2004 103.667%
2005 101.833%
2006 and thereafter 100.000%
</TABLE>
In addition, at any time prior to February 15, 2001, the Company may
redeem up to 35% of the principal amount of the Notes originally issued 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 Accreted Value on the
Redemption Date) of 111.00%; provided that at least 65% of the initially
issued Notes remains outstanding and each such redemption occurs within 180
days of the related Public Equity Offering.
Notice of any optional redemption will be mailed at least 30 days but not
more than 60 days before the Redemption Date to each Holder of Notes to be
redeemed at his last address as it appears in the Note Register. Notes in
original denominations larger than $1,000 may be redeemed in part. On and
after the Redemption Date, interest ceases to accrue and the original issue
discount ceases to accrete on Notes or portions of Notes called for
redemption, unless the Company defaults in the payment of the Redemption
Price.
6. Repurchase upon Change of Control.
Upon the occurrence of any Change of Control, each Holder shall have the
right to require the repurchase of its Notes by the Company in cash pursuant
to the offer described in the Indenture at a purchase price equal to 101% of
the Accreted Value thereof plus accrued and unpaid interest, if any, to the
date of purchase (the "Change of Control Payment").
A notice of such Change of Control will be mailed within 30 days after
any Change of Control occurs to each Holder at his last address as it appears
in the Note Register. Notes in original denominations larger than $1,000 may
be sold to the Company in part. On and after the Payment Date, interest
ceases to accrue and the original issue discount ceases to accrete on Notes
or portions of Notes surrendered for purchase by the Company, unless the
Company defaults in the payment of the Change of Control Payment.
<PAGE>
7. Denominations; Transfer; Exchange.
The Notes are in registered form without coupons in denominations of
$1,000 of principal amount at maturity and multiples of $1,000 in excess
thereof. A Holder may register the transfer or exchange of Notes in
accordance with the Indenture. The Registrar may require a Holder, among
other things, to furnish appropriate endorsements and transfer documents and
to pay any taxes and fees required by law or permitted by the Indenture. The
Registrar need not register the transfer or exchange of any Notes selected
for redemption. Also, it need not register the transfer or exchange of any
Notes for a period of 15 days before the day of the mailing of a notice of
redemption of Notes selected for redemption.
8. Persons Deemed Owners.
A Holder shall be treated as the owner of a Note for all purposes.
9. Unclaimed Money.
If money for the payment of principal, premium, if any, or interest
remains unclaimed for two years, the Trustee and the Paying Agent will pay
the money back to the Company at its written request. After that, Holders
entitled to the money must look to the Company for payment, unless an
abandoned property law designates another Person, and all liability of the
Trustee and such Paying Agent with respect to such money shall cease.
10. Discharge Prior to Redemption or Maturity.
If the Company deposits with the Trustee money or U.S. Government
Obligations sufficient to pay the then outstanding principal of, premium, if
any, and accrued interest on the Notes (a) to redemption or maturity, the
Company will be discharged from the Indenture and the Notes, except in
certain circumstances for certain sections thereof, and (b) to the Stated
Maturity, the Company will be discharged from certain covenants set forth in
the Indenture.
11. Amendment; Supplement; Waiver.
Subject to certain exceptions, the Indenture or the Notes may be amended
or supplemented with the consent of the Holders of at least a majority in
principal amount at maturity of the Notes then outstanding, and any existing
default or compliance with any provision may be waived with the consent of
the Holders of at least a majority in principal amount at maturity of the
Notes then outstanding. Without notice to or the consent of any Holder, the
parties thereto may amend or supplement the Indenture or the Notes to, among
other things, cure any ambiguity,
<PAGE>
defect or inconsistency and make any change that does not adversely affect
the rights of any Holder.
12. Restrictive Covenants.
The Indenture imposes certain limitations on the ability of the Company
and its Restricted Subsidiaries, among other things, to Incur additional
Indebtedness, make Restricted Payments, use the proceeds from Asset Sales,
suffer to exist restrictions on the ability of Restricted Subsidiaries to
make certain payments to the Company, issue Capital Stock of Restricted
Subsidiaries, engage in transactions with Affiliates, suffer to exist or
incur Liens, Guarantee Indebtedness of the Company or merge, consolidate or
transfer substantially all of its assets. Within 90 days after the end of
each fiscal year, the Company shall deliver to the Trustee an Officers'
Certificate stating whether or not the signers know of any Default or Event
of Default under such restrictive covenants.
13. Successor Persons.
When a successor person or other entity assumes all the obligations of
its predecessor under the Notes and the Indenture, the predecessor person
will be released from those obligations.
14. Defaults and Remedies.
The following events constitute "Event of Default" with respect to the
Notes under the Indenture: (a) default in the payment of the principal or
Accreted Value 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; (c) default in
the performance of or breach of the provisions of Article Five or the failure
to make or consummate an Offer to Purchase in accordance with the provisions
of Section 4.11 or Section 4.12 of the Indenture; (d) default in the
performance of or breach of 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
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 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
<PAGE>
money in excess of $5 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; or (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 appoin-TM-ent 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.
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, the Trustee or the Holders of at least 25% in aggregate
principal amount at maturity of the Notes may declare all the Notes to be due
and payable. If a bankruptcy or insolvency default with respect to the
Company occurs and is continuing, the Notes automatically become due and
payable. Holders may not enforce the Indenture or the Notes except as
provided in the Indenture. The Trustee may require indemnity satisfactory to
it before it enforces the Indenture or the Notes. Subject to certain
limitations, Holders of at least a majority in principal amount at maturity
of the Notes then outstanding may direct the Trustee in its exercise of any
trust or power.
15. Trustee Dealings with the Company.
The Trustee under the Indenture, in its individual or any other capacity,
may make loans to, accept deposits from and perform services for the Company
or its Affiliates and may otherwise deal with the Company or its Affiliates
as if it were not the Trustee.
16. No Recourse Against Others.
No incorporator or any past, present or future partner, shareholder,
other equity holder, officer, director, employee or controlling person as
such, of the Company or of any successor Person shall have any liability for
any obligations of the Company under the Notes or the
<PAGE>
Indenture or for any claim based on, in respect of or by reason of, such
obligations or their creation. Each Holder by accepting a Note expressly
waives and releases all such liability. The waiver and release are a
condition of, and part of the consideration for the issuance of the Notes.
17. Authentication.
This Note shall not be valid until the Trustee or authenticating agent
signs the certificate of authentication on the other side of this Note.
18. Abbreviations.
Customary abbreviations may be used in the name of a Holder or an
assignee, such as: TEN COM (=tenants in common), TEN ENT (=tenants by the
entireties), JT TEN (=joint tenants with right of survivorship and not as
tenants in common), CUST (=Custodian) and U/G/M/A (=Uniform Gifts to Minors
Act).
The Company will furnish to any Holder upon written request and without
charge a copy of the Indenture. Requests may be made to Econophone, Inc., 45
Broadway, New York, New York 10006, Attention: Chief Financial Officer.
<PAGE>
[FORM OF TRANSFER NOTICE]
FOR VALUE RECEIVED the undersigned registered holder hereby sell(s),
assign(s) and transfer(s) unto
Insert Taxpayer Identification No.
Please print or typewrite name and address including zip code of assignee
the within Note and all rights thereunder, hereby irrevocably constituting
and appointing attorney to transfer said Note on the
books of the Company with full power of substitution in the premises.
[THE FOLLOWING PROVISION TO BE INCLUDED
ON ALL NOTES OTHER THAN EXCHANGE NOTES,
PERMANENT OFFSHORE GLOBAL NOTE AND
OFFSHORE PHYSICAL NOTES]
In connection with any transfer of this Note occurring prior to the date
which is the earlier of (i) the date the shelf registration statement is
declared effective or (ii) the end of the period referred to in Rule 144(k)
under the Securities Act, the undersigned confirms that without utilizing any
general solicitation or general advertising that:
[Check One]
[ ] (a) this Note is being transferred in compliance with the exemption from
registration under the Securities Act of 1933, as amended, provided by
Rule 144A thereunder.
or
[ ] (b) this Note is being transferred other than in accordance with (a) above
and documents are being furnished which comply with the conditions of
transfer set forth in this Note and the Indenture.
<PAGE>
If none of the foregoing boxes is checked, the Trustee or other Registrar
shall not be obligated to register this Note in the name of any Person other
than the Holder hereof unless and until the conditions to any such transfer
of registration set forth herein and in Section 2.08 of the Indenture shall
have been satisfied.
Date:_______________ ___________________________________________
NOTICE: The signature to this assignment must
correspond with the name as written upon the
face of the within-mentioned instrument in
every particular, without alteration or any
change whatsoever.
SIGNATURE GUARANTEE:____________________________
Signatures must be guaranteed by an "eligible guarantor institution" meeting
the requirements of the Registrar, which requirements include membership or
participation in the Security Transfer Agent Medallion Program ("STAMP") or
such other "signature guarantee program" as may be determined by the
Registrar in addition to, or in substitution for, STAMP, all in accordance
with the Securities Exchange Act of 1934, as amended.
TO BE COMPLETED BY PURCHASER IF (a) ABOVE IS CHECKED.
The undersigned represents and warrants that it is purchasing this 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 "qualified
institutional buyer" within the meaning of Rule 144A under the Securities Act
of 1933, as amended, and is aware that the sale to it is being made in
reliance on Rule 144A and acknowledges that it has received such information
regarding the Company as the undersigned has requested pursuant to Rule 144A
or has determined not to request such information and that it is aware that
the transferor is relying upon the undersigned's foregoing representations in
order to claim the exemption from registration provided by Rule 144A.
Dated:____________
NOTICE: To be executed by an executive officer
<PAGE>
OPTION OF HOLDER TO ELECT PURCHASE
If you wish to have this Note purchased by the Company pursuant to
Section 4.11 or Section 4.12 of the Indenture, check the Box: _
If you wish to have a portion of this Note purchased by the Company
pursuant to Section 4.11 or Section 4.12 of the Indenture, state the amount
(in principal amount at maturity): $___________________.
Date:_____________________________
Your Signature:____________
(Sign exactly as your name appears on the other side of
this Note)
Signature Guarantee:(1)_____________________________
______________________________
(1) The Holder's signature must be guaranteed by a member firm of a
registered national securities exchange or of the National Association of
Securities Dealers, Inc., a commercial bank or trust company having an office
or correspondent in the United States or an "eligible guarantor institution"
as defined by Rule 17Ad-15 under the Exchange Act.
<PAGE>
EXHIBIT 4.2
EXECUTION COPY
ECONOPHONE, INC.,
Issuer
and
THE BANK OF NEW YORK,
Trustee
Indenture
Dated as of February 18, 1998
11% Senior Discount Notes Due 2008
<PAGE>
CROSS-REFERENCE TABLE
<TABLE>
<CAPTION>
TIA Sections Indenture Sections
- ------------ ------------------
<S> <C>
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
</TABLE>
Note: The Cross-Reference Table shall not for any purpose be deemed to
be a part of the Indenture.
<PAGE>
Page
----
TABLE OF CONTENTS(2)
- ---------------------
(2)Note: The Table of Contents shall not for any purposes be deemed to be a
part of the Indenture
<PAGE>
RECITALS OF THE COMPANY
ARTICLE ONE
DEFINITIONS AND INCORPORATION BY REFERENCE
<TABLE>
<CAPTION>
Page
----
<S> <C>
SECTION 1.01. Definitions.......................................... 1
SECTION 1.02. Incorporation by Reference of Trust Indenture Act.... 24
SECTION 1.03. Rules of Construction................................ 24
ARTICLE TWO
THE NOTES
SECTION 2.01. Form and Dating....................................... 25
SECTION 2.02. Restrictive Legends................................... 26
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................... 30
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....................................... 37
SECTION 2.12. Cancellation.......................................... 38
SECTION 2.13. CUSIP Numbers......................................... 38
SECTION 2.14. Defaulted Interest.................................... 38
SECTION 2.15. Issuance of Additional Notes.......................... 39
ARTICLE THREE
REDEMPTION
SECTION 3.01. Right of Redemption................................... 39
SECTION 3.02. Notices to Trustee.................................... 39
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........................... 41
SECTION 3.07. Payment of Notes Called for Redemption................ 42
SECTION 3.08. Notes Redeemed in Part................................ 42
</TABLE>
<PAGE>
ARTICLE FOUR
COVENANTS
<TABLE>
<CAPTION>
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<S> <C>
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.................... 50
SECTION 4.06. Limitation on the Issuance and Sale of Capital Stock
of Restricted Subsidiaries........................... 52
SECTION 4.07. Limitation on Issuances of Guarantees by Restricted
Subsidiaries......................................... 53
SECTION 4.08. Limitation on Transactions with Shareholders and
Affiliates........................................... 53
SECTION 4.09. Limitation on Liens.................................. 54
SECTION 4.10. Limitation on Sale-Leaseback Transactions............ 55
SECTION 4.11. Limitation on Asset Sales............................ 56
SECTION 4.12. Repurchase of Notes upon a Change of Control......... 57
SECTION 4.13. Existence............................................ 57
SECTION 4.14. Payment of Taxes and Other Claims.................... 58
SECTION 4.15. Maintenance of Properties and Insurance.............. 58
SECTION 4.16. Compliance Certificates.............................. 58
SECTION 4.17. Commission Reports and Reports to Holders............ 59
SECTION 4.18. Waiver of Stay, Extension or Usury Laws.............. 59
SECTION 4.19. Calculation of Original Issue Discount............... 59
ARTICLE FIVE
SUCCESSOR CORPORATION
SECTION 5.01. When Company May Merge, Etc. ........................ 60
SECTION 5.02. Successor Substituted................................ 61
ARTICLE SIX
DEFAULT AND REMEDIES
SECTION 6.01. Events of Default.................................... 61
SECTION 6.02. Acceleration......................................... 63
SECTION 6.03. Other Remedies....................................... 63
SECTION 6.04. Waiver of Past Defaults.............................. 64
SECTION 6.05. Control by Majority.................................. 64
SECTION 6.06. Limitation on Suits.................................. 64
SECTION 6.07. Rights of Holders to Receive Payment................. 65
SECTION 6.08. Collection Suit by Trustee........................... 65
SECTION 6.09. Trustee May File Proofs of Claim..................... 65
SECTION 6.10. Priorities........................................... 66
SECTION 6.11. Undertaking for Costs................................ 66
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Page
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<S> <C>
SECTION 6.12. Restoration of Rights and Remedies................... 66
SECTION 6.13. Rights and Remedies Cumulative....................... 67
SECTION 6.14. Delay or Omission Not Waiver......................... 67
ARTICLE SEVEN
TRUSTEE
SECTION 7.01. General.............................................. 67
SECTION 7.02. Certain Rights of Trustee............................ 67
SECTION 7.03. Individual Rights of Trustee......................... 69
SECTION 7.04. Trustee's Disclaimer................................. 69
SECTION 7.05. Notice of Default.................................... 69
SECTION 7.06. Reports by Trustee to Holders........................ 69
SECTION 7.07. Compensation and Indemnity........................... 69
SECTION 7.08. Replacement of Trustee............................... 70
SECTION 7.09. Successor Trustee by Merger, Etc. ................... 71
SECTION 7.10. Eligibility.......................................... 71
SECTION 7.11. Money Held in Trust.................................. 72
SECTION 7.12. Withholding Taxes.................................... 72
ARTICLE EIGHT
DISCHARGE OF INDENTURE
SECTION 8.01. Termination of Company's Obligations................. 72
SECTION 8.02. Defeasance and Discharge of Indenture................ 73
SECTION 8.03. Defeasance of Certain Obligations.................... 75
SECTION 8.04. Application of Trust Money........................... 77
SECTION 8.05. Repayment to Company................................. 77
SECTION 8.06. Reinstatement........................................ 77
ARTICLE NINE
AMENDMENTS, SUPPLEMENTS AND WAIVERS
SECTION 9.01. Without Consent of Holders........................... 78
SECTION 9.02. With Consent of Holders.............................. 78
SECTION 9.03. Revocation and Effect of Consent..................... 80
SECTION 9.04. Notation on or Exchange of Notes..................... 80
SECTION 9.05. Trustee to Sign Amendments, Etc. .................... 80
SECTION 9.06. Conformity with Trust Indenture Act.................. 81
ARTICLE TEN
[INTENTIONALLY OMITTED]
ARTICLE ELEVEN
MISCELLANEOUS
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Page
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<S> <C>
SECTION 11.01. Trust Indenture Act of 1939......................... 81
SECTION 11.02. Notices............................................. 81
SECTION 11.03. Certificate and Opinion As to Conditions Precedent.. 83
SECTION 11.04. Statements Required in Certificate or Opinion....... 83
SECTION 11.05. Acts of Holders..................................... 83
SECTION 11.06. Rules by Trustee, Paying Agent or Registrar......... 84
SECTION 11.07. Payment Date Other Than a Business Day.............. 84
SECTION 11.08. Governing Law....................................... 85
SECTION 11.09. No Adverse Interpretation of Other Agreements....... 85
SECTION 11.10. No Recourse Against Others.......................... 85
SECTION 11.11. Successors.......................................... 85
SECTION 11.12. Duplicate Originals................................. 85
SECTION 11.13. Separability........................................ 85
SECTION 11.14. Table of Contents, Headings, Etc. .................. 85
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
</TABLE>
<PAGE>
INDENTURE, dated as of February 18, 1998, between ECONOPHONE, INC.,
a Delaware 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 $300,000,000
aggregate principal amount at maturity of the Company's 11% Senior Discount
Notes Due 2008 (the "Notes") issuable as provided in this Indenture.
Pursuant to the terms of a Placement Agreement, dated February 12, 1998,
between the Company and Morgan Stanley & Co. Incorporated, as placement agent
(the "Placement Agreement"), the Company has agreed to issue and sell the
Notes. 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:
ARTICLE ONE
DEFINITIONS AND INCORPORATION BY REFERENCE
SECTION 1.01. Definitions.
"Accreted Value" means, for any Specified Date, the amount provided
below for each $1,000 principal amount at maturity of Notes:
(i) if the Specified Date occurs on one of the following dates
(each a "Semi-Annual Accrual Date"), the Accreted Value will equal the
amount set forth below for such Semi-Annual Accrual Date:
<PAGE>
<TABLE>
<CAPTION>
Semi-Annual Accrual Date Accreted Value
------------------------ ----------------
<S> <C>
August 15, 1998 $ 617.62
February 15, 1999 $ 651.59
August 15, 1999 $ 687.43
February 15, 2000 $ 725.24
August 15, 2000 $ 765.13
February 15, 2001 $ 807.21
August 15, 2001 $ 851.61
February 15, 2002 $ 898.45
August 15, 2002 $ 947.86
February 15, 2003 $1,000.00
</TABLE>
(ii) if the Specified Date occurs before the first Semi-Annual
Accrual Date, the Accreted Value will equal the sum of (a) $585.95 and
(b) an amount equal to the product of (1) the Accreted Value for the
First Semi-Annual Accrual Date less $585.95 multiplied by (2) a
fraction, the numerator of which is the number of days from the Closing
Date to the Specified Date, using a 360-day year of twelve 30-day
months, and the denominator of which is the number of days from the
Closing Date to the first Semi-Annual Accrual Date, using a 360-day year
of twelve 30-day months;
(iii) if the Specified Date occurs between two Semi-Annual Accrual
Dates, the Accreted Value will equal the sum of (a) the Accreted Value
for the Semi-Annual Accrual Date immediately preceding such Specified
Date and (b) an amount equal to the product of (1) the Accreted Value
for the immediately following Semi-Annual Accrual Date less the Accreted
Value for the immediately preceding Semi-Annual Accrual Date multiplied
by (2) a fraction, the numerator of which is the number of days from the
immediately preceding Semi-Annual Accrual Date to the Specified Date,
using a 360-day year of twelve 30-day months, and the denominator of
which is 180; or
(iv) if the Specified Date occurs after the last Semi-Annual
Accrual Date, the Accreted Value will equal $1,000.
<PAGE>
"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
that is not a Restricted Subsidiary, except (x) with respect to net income,
to the extent of the amount of dividends or other distributions actually paid
to the Company or any of its Restricted Subsidiaries by such Person during
such period and (y) with respect to net losses, to the extent of the amount
of Investments made by the Company or any Restricted Subsidiary in such
Person 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 (on an after tax basis)
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; (vi) all
extraordinary gains and extraordinary losses; and (vii) any compensation
expense paid or payable solely with Capital Stock (other than Disqualified
Stock) of the Company or any options, warrants or other rights to acquire
Capital Stock (other than Disqualified Stock) of the Company.
"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
<PAGE>
Subsidiaries, prepared in conformity with GAAP and filed with the Commission
or provided to the Trustee 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 constitutes
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 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 (other than
the Capital Stock of, or other Investment in, an Unrestricted Subsidiary) 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
<PAGE>
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 constitute
property or assets of the kind described in clause (B) of Section 4.11,
including consideration that consists of technology, licenses or expertise
useful in the business of the Company 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.
"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 outstanding
on the Closing Date or issued thereafter, 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
<PAGE>
of such Person as lessee, in conformity with GAAP, is required to be
capitalized on the balance sheet of such Person.
"Capitalized Lease Obligations" means the discounted present value
of the rental obligations under a Capitalized 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) of 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) of 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 to 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.
"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 on the Closing Date or issued
thereafter, 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
<PAGE>
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' 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
<PAGE>
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 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
<PAGE>
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
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.
"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 Registration Rights Agreement and this Indenture.
<PAGE>
"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
Investors II, L.P.
"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;
provided that for purposes of clause (viii) of the second paragraph of
Section 4.03(a), (x) the fair market value of any security registered under
the Exchange Act shall be the average of the closing prices, regular way, of
such security for the 20 consecutive trading days immediately preceding the
applicable capital contribution or sale of Capital Stock and (y) in the event
the aggregate fair market value of any other property (other than cash or
cash equivalents) received by the Company exceeds $10 million, the fair
market value of such property shall be determined by a nationally recognized
investment banking firm and set forth in their written opinion which shall be
delivered to the Trustee.
"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 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.
"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 of such other Person (whether
arising by virtue of partnership arrangements, or by agreements to keep-well,
to purchase assets, goods, securities or services (unless such purchase
arrangements are on arm's-length terms and are entered into in the ordinary
course of business), 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 of
<PAGE>
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 Acquired Indebtedness; 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 Capitalized Lease Obligations of such Person, (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.
<PAGE>
"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 February 15 and August 15 of each year, commencing August 15, 2003.
"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 Section 4.06; provided that the fair market
value of the Investment remaining in any Person that has ceased to be a
Restricted Subsidiary shall not exceed the aggregate amount of Investments
previously made in such Person valued at the time such Investments were made
less the net reduction in such Investments. 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 Restricted 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 Restricted 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.
<PAGE>
"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 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) 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 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.
"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
<PAGE>
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 an
integral multiple 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 an integral multiple 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.
<PAGE>
"Offshore Physical Notes" has the meaning provided in Section 2.01.
"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.
"Payment Date" has the meaning specified in the definition of
"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,
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; (ix) Investments in Permitted Joint Ventures not to exceed $10
million at any one time outstanding; (x) Investments in prepaid expenses,
negotiable instruments held for collection and lease, utility and worker's
compensation, performance and other similar deposits; and (xi) Interest Rate
Agreements and Currency Agreements designed solely to protect the Company or
its Restricted Subsidiaries against fluctuations in interest rates or foreign
currency exchange rates.
"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
<PAGE>
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 Section 4.03, (1) to finance the
cost (including the cost of design, development, improvement, acquisition,
construction, installation, transportation 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
<PAGE>
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; (xix) Liens existing on the Closing Date; and (xx) Liens that
secure Indebtedness in an aggregate principal amount not exceeding $5 million
at any time outstanding.
"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.
"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.
"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.
<PAGE>
"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 Rights Agreement" means the Registration Rights
Agreement, dated as of the date hereof, between the Company and Morgan
Stanley & Co. Incorporated, and certain permitted assigns specified therein.
"Registration Statement" means the Registration Statement as
defined and described in the Registration Rights Agreement.
"Regular Record Date" for the interest payable on any Interest
Payment Date means February 1 or August 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.
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"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 Group, a division of McGraw
Hill, Inc., and its successors.
"Securities Act" means the Securities Act of 1933, as amended.
"Semi-Annual Accrual Date" has the meaning specified in the definition
of "Accreted Value."
"Shelf Registration Statement" has the meaning provided in the
Registration Rights Agreement.
"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
<PAGE>
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.
"Strategic Subordinated Indebtedness" means Indebtedness of the
Company Incurred to finance the acquisition of a Person engaged in a business
that is related, ancillary or complementary to the business conducted by the
Company or any of its Restricted Subsidiaries, which Indebtedness by its terms,
or by the terms of any agreement or instrument pursuant to which such
Indebtedness is Incurred, (i) is expressly made subordinate in right of payment
to the Notes and (ii) provides that no payment of principal, premium or interest
on, or any other payment with respect to, such Indebtedness may be made prior to
the payment in full of all of the Company's obligations under the Notes;
provided that such Indebtedness may provide for and be repaid at any time from
the proceeds of a capital contribution or the sale of Capital Stock (other than
Disqualified Stock) of the Company after the Incurrence of such Indebtedness.
"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 one year 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 one year 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
<PAGE>
"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.
"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.
"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.
"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
<PAGE>
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
(and shall be deemed to have been 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 Notes" 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 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 July 1,
1997 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 the
Company's Voting Common Stock, par value $0.0001 per share, at $.01 per share,
subject to adjustment.
<PAGE>
"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.
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
<PAGE>
(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.
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 (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 at maturity 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 permanent
global Notes in registered form, substantially in the form set forth in Exhibit
A (the "Offshore Global Notes"), duly executed by the Company and authenticated
by the Trustee as hereinafter provided, and 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 at maturity of the
Offshore Global Notes in an amount equal to the principal amount at maturity of
the beneficial interest in the Offshore Global Notes transferred.
Notes offered and sold in reliance on Regulation D under the
Securities Act or issued pursuant to Section 2.07 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 Notes 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").
<PAGE>
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 Registration Rights Agreement, (i) each U.S. Global
Note and each U.S. Physical Note shall bear the legend, set forth below on the
face thereof and (ii) each Offshore Global Note and each Offshore Physical Note
shall bear the legend set forth below, on the face thereof, until at least the
41st day after the Closing Date and receipt by the Company and the Trustee of a
certificate substantially in the form of Exhibit B:
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, SOLD,
PLEDGED OR OTHERWISE TRANSFERRED 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 WITH RESPECT TO SUCH TRANSFER,
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 AT MATURITY OF NOTES OF LESS THAN $250,000, AN
OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY
<PAGE>
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 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.
<PAGE>
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.
SECTION 2.03. Execution, Authentication and Denominations. Subject
to Article Four, the aggregate principal amount at maturity 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 at maturity 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 at maturity 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.
The Notes shall be issuable only in registered form without coupons
and only in denominations of $1,000 in principal amount at maturity 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
<PAGE>
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 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
<PAGE>
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. 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 at maturity 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 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.
<PAGE>
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 Notes or the Offshore Global
Notes, respectively, if (i) the Depositary notifies the Company that it is
unwilling or unable to continue as Depositary for the U.S. Global Notes or the
Offshore Global Notes, 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 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 the
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 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 at maturity of
the U.S. Global Notes or Offshore Global Notes in an amount equal to the
principal amount at maturity of the beneficial interest in the U.S. Global Notes
or Offshore Global Notes 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
<PAGE>
amount at maturity 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 a
U.S. Global Note pursuant to paragraph (b), (d) or (e) of this Section shall,
except as otherwise provided by paragraph (e) 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 an Offshore Global Note pursuant to paragraph (b), (d) or (e) of this Section
shall, except as otherwise provided by paragraph (e) 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.
(i) Beneficial owners of interests in a 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 at maturity of the relevant U.S. Global Note equal to the
principal amount at maturity 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 at maturity.
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 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 as in effect with respect to such
transfer 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 at maturity of the Notes being
transferred is less than $250,000 at the time of such transfer, an
opinion of counsel acceptable to the Company that such transfer is in
compliance with the Securities Act.
<PAGE>
(ii) If the proposed transferor is an Agent Member holding a
beneficial interest in a 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 at maturity of
the U.S. Global Note in an amount at maturity equal to the principal
amount at maturity 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, an interest in a U.S. Global Note or an interest in an Offshore
Global Note prior to the removal of the Private Placement Legend to a QIB
(excluding Non-U.S. Persons):
(i) If the Note to be transferred consists of (x) either (A) an
interest in an Offshore Global Note prior to the removal of the
Private Placement Legend or (B) 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 a 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 or an interest in an
Offshore Global Note prior to the removal of the Private Placement
Legend, 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 at
maturity of the U.S. Global Note in an amount equal to the principal
amount at maturity of the U.S. Physical Notes or the Offshore Global
Notes to be transferred, and the Trustee shall cancel the U.S.
Physical Notes so transferred or decrease the amount of the Offshore
Global Note so transferred in such an amount, as the case may be.
<PAGE>
(c) Transfers of Interests in the Offshore Global Notes or Offshore
Physical Notes. The following provisions shall apply with respect to any
transfer of interests in the Offshore Global Notes or Offshore Physical
Notes:
(i) prior to the removal of the Private Placement Legend from an
Offshore Global Note or Offshore Physical Notes pursuant to Section
2.02, the Registrar shall refuse to register such transfer unless such
transfer complies with Section 2.08(b) or Section 2.08(d), as the case
may be; and
(ii) after such removal, the Registrar shall register the
transfer of any such Note without requiring any additional
certification.
(d) 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) 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 a U.S. Global Note only upon receipt of a
certificate substantially in the form of Exhibit D from the proposed
transferor.
(ii) (a) If the proposed transferor is an Agent Member holding a
beneficial interest in a U.S. Global Note, upon receipt by the
Registrar of (x) the documents required by paragraph (i) 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 such U.S.
Global Note in an amount equal to the principal amount at maturity 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 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 Offshore Global Note in an amount equal to the
principal amount at maturity 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 at maturity of the U.S. Global Note.
(e) 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 paragraphs (a)(i)(x) or (c)(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
<PAGE>
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.
(f) 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 at maturity; provided that the requirements of this Section
2.09 are 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
<PAGE>
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 at maturity 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 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 at maturity 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.
<PAGE>
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.
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 February 15, 2003 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 at maturity),
plus accrued and unpaid interest to the Redemption Date (subject to the right of
Holders of record on the relevant
<PAGE>
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
February 15 of the years set forth below:
<TABLE>
<CAPTION>
Redemption
Year Price
<S> <C>
2003.................... 105.500%
2004.................... 103.667%
2005.................... 101.833%
2006 and thereafter..... 100.000%
</TABLE>
(b) In addition, at any time prior to February 15, 2001, the Company
may redeem up to 35% of the principal amount of the Notes originally issued 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 Accreted Value on the Redemption
Date) of 111.00%; provided that (1) at least 65% of the initially issued Notes
remains outstanding 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 shall 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 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.
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 at maturity may only be redeemed in whole. The Trustee may
select for redemption portions (equal to $1,000 in principal amount at maturity
or any integral multiple thereof) of Notes that have
<PAGE>
denominations larger than $1,000 in principal amount at maturity. 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.
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 at maturity (equal to $1,000 in principal amount at
maturity 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 at maturity 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 at maturity 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
<PAGE>
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 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 at maturity to the unredeemed portion of such
surrendered Note.
ARTICLE FOUR
COVENANTS
<PAGE>
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 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 and any Restricted Subsidiary 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.
<PAGE>
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 such Indebtedness
permanently repaid as provided under Section 4.11;
(ii) Indebtedness owed (A) to the Company evidenced by a promissory
note or (B) to any Restricted Subsidiary; 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 (xii) 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 Restricted
Subsidiaries against fluctuations in foreign currency exchange rates or
interest rates and (b) do not increase the Indebtedness of the obligor
outstanding
<PAGE>
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 (other than Guarantees of Indebtedness Incurred by
any Person acquiring all or any portion of such business, assets or
Restricted Subsidiary 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 (including Guarantees) Incurred to finance the cost
(including the cost of design, development, improvement, acquisition,
construction, installation, transportation or integration) to acquire
equipment, inventory or other tangible assets used or useful in the
telecommunications business of the Company and its Restricted
Subsidiaries acquired (including acquisitions by way of Capitalized
Lease and acquisitions of the Capital Stock of a Person that becomes a
Restricted Subsidiary to the extent of the fair market value of the
equipment, inventory or other assets so 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 sum of (A) the Net Cash Proceeds received by
the Company after the Closing Date as a capital contribution or 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 (I)
such capital contribution or Net Cash Proceeds have not been used
pursuant to clause (C)(2) of the first paragraph of, or clause (iii),
(iv) or (viii) of the second paragraph of, Section 4.04 to make a
Restricted Payment and (II) if such capital contribution or Net Cash
Proceeds are used to consummate a transaction pursuant to which the
Company Incurs Acquired Indebtedness, the amount of such Net Cash
Proceeds exceeds one-half of the amount of Acquired Indebtedness so
Incurred and (B) 80% of the fair market value of property (other than
cash and cash equivalents) received by the Company after the Closing
Date as a capital contribution or 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 (I) such capital contribution
or sale of Capital Stock has not been used pursuant to clause (iii),
(iv) or (viii) of the second
<PAGE>
paragraph of Section 4.04 to make a Restricted Payment and (II) if such
capital contribution or Capital Stock is used to consummate a
transaction pursuant to which the Company Incurs Acquired Indebtedness,
80% of the fair market value of property received exceeds one-half of
the amount of Acquired Indebtedness so Incurred; provided that such
Indebtedness does not mature prior to the Stated Maturity of the Notes
and has an Average Life longer than the Notes;
(ix) Acquired Indebtedness;
(x) Strategic Subordinated Indebtedness;
(xi) Subordinated Indebtedness of the Company (in addition to
Indebtedness permitted under clauses (i) through (x) above and clause
(xii) below) in an aggregate principal amount outstanding at any time
not to exceed $100 million, less any amount of such Indebtedness
permanently repaid as provided under Section 4.11; and
(xii) Indebtedness of the Company and any Restricted
Subsidiary; provided that at the time of the Incurrence of any
Indebtedness under this clause (xii) the amount of Indebtedness under
this clause (xii) 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 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, and from time to time may reclassify, 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
<PAGE>
minority stockholders) 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 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) above
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 with the Commission pursuant to Section 4.17 plus (2) (A) the aggregate
Net Cash Proceeds received by the Company after the Closing Date as a capital
contribution or 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 part (a) 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,
<PAGE>
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
Section 4.03;
(iii) the repurchase, redemption or other acquisition of Capital
Stock of the Company or an Unrestricted Subsidiary (or options, warrants
or other rights to acquire such Capital Stock) in exchange for, or out
of the proceeds of a capital contribution to the Company or a
substantially concurrent offering of, shares of Capital Stock (other
than Disqualified Stock) of the Company (or options, warrants or other
rights to acquire such Capital 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 capital
contribution to the Company or a substantially concurrent offering of,
shares of the Capital Stock (other than Disqualified Stock) of the
Company (or options, warrants or other rights to acquire such Capital
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 from any governmental agency;
<PAGE>
(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) Investments in any Person the primary business of which is
related, ancillary or complementary to the business of the Company and
its Restricted Subsidiaries on the date of such Investments; provided
that the aggregate amount of Investments made pursuant to this clause
(viii) does not exceed the sum of (a) $20 million and (b) the amount of
Net Cash Proceeds received by the Company after the Closing Date as a
capital contribution or from the sale of its Capital Stock (other than
Disqualified Stock) to a Person who is not a Subsidiary of the Company,
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(a) or to make Restricted Payments pursuant to clause (C)(2)
of the first paragraph, or clause (iii) or (iv) of this paragraph, of
this Section 4.04, and (c) the net reduction in Investments made
pursuant to this clause (viii) resulting from distributions on or
repayments of such Investments 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 is included in the calculation of Adjusted
Consolidated Net Income) or from such Person becoming a Restricted
Subsidiary (valued in each case as provided in the definition of
"Investments"), provided that the net reduction in any Investment shall
not exceed the amount of such Investment;
(ix) the purchase, redemption, retirement or other acquisition for
value of shares of Capital Stock of the Company, or options to purchase
such shares, held by directors, officers or employees or former
directors, officers 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 $5.0 million in the
aggregate after the Closing Date;
(x) any Investment, to the extent the consideration therefor paid
by the Company and its Restricted Subsidiaries consists solely of
Capital Stock (other than Disqualified Stock) of the Company;
(xi) repurchases of Warrants pursuant to a Repurchase Offer; and
(xii) other Restricted Payments in an aggregate amount not to
exceed $2.0 million;
<PAGE>
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 and the Restricted Payment
referred to in clause (x) thereof) and the Net Cash Proceeds from any
issuance of Capital Stock referred to in clauses (iii), (iv) and (viii)
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.
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 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
<PAGE>
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;
(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
<PAGE>
(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 of a Restricted Subsidiary, provided that
the Company or such Restricted Subsidiary applies the Net Cash Proceeds, if
any, of any such sale in accordance with clause (A) or (B) of Section 4.11;
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.
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
<PAGE>
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.
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
<PAGE>
(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
(including, without limitation, licenses), 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 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;
(vi) Liens on the Capital Stock of, or any property or assets of, a
Restricted Subsidiary securing Indebtedness of such Restricted
Subsidiary permitted under Section 4.03; or
<PAGE>
(vii) 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.
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 75% 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), provided, however, that this clause
(ii) shall not apply to any long-term assignments in capacity in a
telecommunications network. 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 with the Commission pursuant to Section 4.17),
<PAGE>
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 (as determined in good faith by the Board of Directors, whose
determination shall be conclusive and evidenced by a Board Resolution) 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 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 Accreted
Value of Notes on the relevant Payment Date equal to the Excess Proceeds on
such date, at a purchase price equal to 101% of the Accreted Value of the
Notes on the relevant Payment Date, in each case, 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 Accreted Value 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
<PAGE>
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, 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.
<PAGE>
(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 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. The
Company shall file with the Commission the annual, quarterly and other
reports and other information required by Section 13(a) or 15(d) of the
Exchange Act, regardless of whether such sections of the Exchange Act are
applicable to the Company, and shall mail or cause to be mailed copies of
such reports to Holders and the Trustee within 15 days after the date it
would have been required to file such reports with the Commission had it been
subject to such sections; provided, however, that the copies of such reports
mailed to Holders may omit exhibits, which the Company will supply to any
Holder at such Holder's request.
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.
SECTION 4.19. Calculation of Original Issue Discount. The Company
shall file with the Trustee promptly at the end of each calendar year (i) a
written notice specifying the amount of original issue discount (including
daily rates and accrual periods) accrued on outstanding Notes as of the end
of such year and (ii) such other specific information relating to
<PAGE>
such original issue discount as may then be relevant under the Internal
Revenue Code of 1986, as amended from time to time and requested by the
Trustee.
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 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, 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 (x) a consolidation,
merger or sale of all (but not less than all) of the assets of the
Company if all Liens and Indebtedness of the Company or any Person
becoming the successor obligor on the Notes, as the case may be, and its
Restricted Subsidiaries outstanding immediately after such transaction
would, if Incurred at such time, have been permitted to be Incurred (and
all such Liens and Indebtedness, other than Liens and Indebtedness of
the Company and its Restricted Subsidiaries outstanding immediately
prior to the transaction, shall be deemed to have been Incurred) for all
purposes of the Indenture or (y) a consolidation, merger or sale of all
or substantially all of the assets of the Company if 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 Leverage Ratio equal to or less than the Consolidated
Leverage Ratio of the Company immediately prior to such transaction; and
<PAGE>
(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 that such transaction shall not have as one of its purposes the evasion
of the foregoing limitations.
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 or Accreted
Value 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;
(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 at maturity of the Notes;
<PAGE>
(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 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 $5.0 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; or
(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.
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 at
maturity of the Notes then outstanding, by written notice to the
<PAGE>
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 Accreted Value of,
premium, if any, and accrued interest, if any, on the Notes to be immediately
due and payable. Upon a declaration of acceleration, such Accreted Value,
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 Accreted Value 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 at
maturity 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 Accreted Value of, premium,
if any, and accrued interest, if any, 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 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
at maturity 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 no such waiver shall extend to
any subsequent or other Default or Event of Default or impair any right
consequent thereto.
<PAGE>
SECTION 6.05. Control by Majority. 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 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 gives the Trustee written notice of a 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
reasonably satisfactory to the Trustee against any costs, liability or
expense with respect to complying with the request;
(iv) the Trustee does not comply with the request within 60 days after
its receipt of the request and 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.
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 at maturity 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.
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 Accreted Value 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.
<PAGE>
SECTION 6.08. Collection Suit by Trustee. If an Event of Default in
payment of Accreted Value, 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 Accreted Value, 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:
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 or
Accreted Value, 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, Accreted Value,
premium, if any, and interest, respectively; and
<PAGE>
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 at maturity 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 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
<PAGE>
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 11.04. 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;
(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 at
maturity 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
<PAGE>
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.
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
<PAGE>
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 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 to pay Accreted Value 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 7.07 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 at maturity 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;
<PAGE>
(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 at maturity 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 principal amount at maturity 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
<PAGE>
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 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
<PAGE>
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 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 has 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
<PAGE>
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 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.
<PAGE>
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
Section 4.19, and that clause (c) under Section 6.01 with respect to such
clauses (iii) and (iv) under Section 5.01, clause (d) under Section 6.01 with
respect to 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 Section 4.19, 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
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;
<PAGE>
(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 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.
<PAGE>
SECTION 8.05. Repayment to Company. Subject to Sections 7.07, 8.01,
8.02 and 8.03, 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.
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;
<PAGE>
(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 with the written consent of the
Holders of not less than a majority in aggregate principal amount at maturity of
the Notes then outstanding, and the Holders of not less than a majority in
aggregate principal amount at maturity of the Notes then outstanding by written
notice to the Trustee may waive future compliance by the Company with any
provision of this Indenture or the Notes.
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;
(ii) reduce the Accreted Value of, or premium, if any, or interest on,
any Note;
(iii) change the place or currency of payment of Accreted Value
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 Accreted Value of, premium, if
any, or interest on the Notes;
<PAGE>
(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 this Indenture or for waiver
of certain defaults; or
(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.
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 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 at maturity 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 (viii) of Section 9.02. In case of an amendment or waiver of the type
described in clauses (i) through (viii) of Section 9.02, the amendment or waiver
shall bind each Holder who has consented to it and every
<PAGE>
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.
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
[INTENTIONALLY OMITTED]
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.
<PAGE>
45 Broadway
New York, New York 10006
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
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.
<PAGE>
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
(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
<PAGE>
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.
(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
<PAGE>
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.
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. 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 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>
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: /s/ ALAN L. LEVY
-------------------------------
Name: Alan L. Levy
Title: President and Chief
Operating Officer
THE BANK OF NEW YORK,
as Trustee
By: /s/ VIVIAN GEORGES
-------------------------------
Name: Vivian Georges
Title: Assistant Vice President
<PAGE>
EXHIBIT 4.3
EXECUTION COPY
------------------------------------------------------------
REGISTRATION RIGHTS AGREEMENT
Dated February 18, 1998
between
ECONOPHONE, INC.
and
MORGAN STANLEY & CO. INCORPORATED
--------------------------------------------------------
<PAGE>
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made and
entered into February 18, 1998, between ECONOPHONE, INC., a Delaware
corporation (the "Company"), and MORGAN STANLEY & CO. INCORPORATED (the
"Placement Agent").
This Agreement is made pursuant to the Placement Agreement, dated
February 12, 1998, between the Company and the Placement Agent (the
"Placement Agreement"), which provides for the sale by the Company to the
Placement Agent of an aggregate principal amount at maturity of $300,000,000
of the Company's 11% Senior Discount Notes due 2008 (collectively, the
"Notes"). In order to induce the Placement Agent to enter into the Placement
Agreement, the Company has agreed to provide to the Placement Agent and its
direct and indirect transferees the registration rights set forth in this
Agreement. The execution of this Agreement is a condition to the closing
under the Placement Agreement.
In consideration of the foregoing, the parties hereto agree as
follows:
1. Definitions.
As used in this Agreement, the following capitalized defined terms
shall have the following meanings:
"Accreted Value" shall have the meaning specified in the Indenture.
"Business Day" shall have the meaning specified in the Indenture.
"Closing Date" shall mean the Closing Date as defined in the
Placement Agreement.
"Company" shall have the meaning set forth in the preamble and
shall also include the Company's successors.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended from time to time.
"Exchange Offer" shall mean the exchange offer by the Company of
Exchange Securities for Registrable Securities pursuant to Section 2(a)
hereof.
"Exchange Offer Registration" shall mean a registration under the
1933 Act effected pursuant to Section 2(a) hereof.
"Exchange Offer Registration Statement" shall mean an exchange
offer registration statement on Form S-4 (or, if applicable, on another
appropriate form) and all amendments and supplements to such registration
statement, in each case including the Prospectus contained therein, all
exhibits thereto and all material incorporated by reference therein.
"Exchange Securities" shall mean securities issued by the Company
under the Indenture containing terms identical to the Notes (except that (i)
interest thereon shall accrue from the last date on which interest was paid
on the Notes or, if no such interest has been paid, from February 15, 2003,
and (ii) the Exchange Securities will not provide for an increase in the rate
of interest payable semiannually in cash and will not contain restrictions on
transfer) and to be offered to Holders of Notes in exchange for Notes
pursuant to the Exchange Offer.
<PAGE>
"Holder" shall mean the Placement Agent, for so long as it owns any
Registrable Securities, and each of its successors, assigns and direct and
indirect transferees who become registered owners of Registrable Securities
under the Indenture; provided that for purposes of Sections 4 and 5 of this
Agreement, the term "Holder" shall include Participating Broker-Dealers (as
defined in Section 4(a)).
"Indenture" shall mean the Indenture relating to the Notes dated as
of February 18, 1998 between the Company and The Bank of New York, as
trustee, and as the same may be amended from time to time in accordance with
the terms thereof.
"Majority Holders" shall mean the Holders of a majority of the
aggregate principal amount at maturity of outstanding Registrable Securities;
provided that whenever the consent or approval of Holders of a specified
percentage of Registrable Securities is required hereunder, Registrable
Securities held by the Company or any of its affiliates (as such term is
defined in Rule 405 under the Securities Act) (other than the Placement Agent
or subsequent holders of Registrable Securities if such subsequent holders
are deemed to be such affiliates solely by reason of their holding of such
Registrable Securities) shall not be counted in determining whether such
consent or approval was given by the Holders of such required percentage or
amount.
"Person" shall mean an individual, partnership, corporation,
limited liability company, trust or unincorporated organization, or a
government or agency or political subdivision thereof.
"Placement Agent" shall have the meaning set forth in the preamble.
"Placement Agreement" shall have the meaning set forth in the
preamble.
"Prospectus" shall mean the prospectus included in a Registration
Statement, including any preliminary prospectus, and any such prospectus as
amended or supplemented by any prospectus supplement, including a prospectus
supplement with respect to the terms of the offering of any portion of the
Registrable Securities covered by a Shelf Registration Statement, and by all
other amendments and supplements to such prospectus, and in each case
including all material incorporated by reference therein.
<PAGE>
"Registrable Securities" shall mean the Notes; provided, however,
that the Notes shall cease to be Registrable Securities (i) when a
Registration Statement with respect to such Notes shall have been declared
effective under the Securities Act and such Notes shall have been disposed of
or exchanged pursuant to such Registration Statement, (ii) when such Notes
have been sold to the public pursuant to Rule 144(k) (or any similar
provision then in force, but not Rule 144A) under the Securities Act or (iii)
when such Notes shall have ceased to be outstanding.
"Registration Expenses" shall mean any and all expenses incident to
performance of or compliance by the Company with this Agreement, including
without limitation: (i) all SEC, stock exchange or National Association of
Securities Dealers, Inc. registration and filing fees, (ii) all fees and
expenses incurred in connection with compliance with state securities or blue
sky laws (including reasonable fees and disbursements of one counsel for any
underwriters or Holders in connection with blue sky qualification of any of
the Exchange Securities or Registrable Securities), (iii) all expenses of any
Persons in preparing or assisting in preparing, word processing, printing and
distributing any Registration Statement, any Prospectus, any amendments or
supplements thereto, any underwriting agreements, securities sales agreements
and other documents relating to the performance of and compliance with this
Agreement, in each case to the extent not paid or payable by any other
person, (iv) all rating agency fees, (v) all fees and disbursements relating
to the qualification of the Indenture under applicable securities laws, (vi)
the fees and disbursements of the Trustee and its counsel, (vii) the fees and
disbursements of counsel for the Company and, in the case of a Shelf
Registration Statement, the reasonable fees and disbursements of one counsel
for the Holders (which counsel shall be selected by the Majority Holders and
which counsel may also be counsel for the Placement Agent) and (viii) the
fees and disbursements of the independent public accountants of the Company,
including the expenses of any special audits or "cold comfort" letters
required by or incident to such performance and compliance, but excluding
fees and expenses of counsel to the underwriters (other than fees and
expenses set forth in clause (ii) above) or the Holders (other than fees and
expenses set forth in clause (vii) above) or accountants to the Holders and
underwriting discounts and commissions and transfer taxes, if any, relating
to the sale, disposition or exchange of Registrable Securities by a Holder.
"Registration Statement" shall mean any registration statement of
the Company that covers any of the Exchange Securities or Registrable
Securities pursuant to the provisions of this Agreement and all amendments
and supplements to any such Registration Statement, including post-effective
amendments, in each case including the Prospectus contained therein, all
exhibits thereto and all material incorporated by reference therein.
"SEC" shall mean the Securities and Exchange Commission.
"Securities Act" shall mean the Securities Act of 1933, as amended
from time to time.
<PAGE>
"Semi-Annual Accrual Date" shall have the meaning specified in the
Indenture.
"Shelf Registration" shall mean a registration effected pursuant to
Section 2(b) hereof.
"Shelf Registration Statement" shall mean a "shelf" registration
statement of the Company pursuant to the provisions of Section 2(b) of this
Agreement which covers all of the Registrable Securities (but no other
securities unless approved by the Majority Holders whose Registrable
Securities are covered by such Shelf Registration Statement) on an
appropriate form under Rule 415 under the Securities Act, or any similar rule
that may be adopted by the SEC, and all amendments and supplements to such
registration statement, including post-effective amendments, in each case
including the Prospectus contained therein, all exhibits thereto and all
material incorporated by reference therein.
"Trustee" shall mean the trustee with respect to the Notes under
the Indenture.
"Underwritten Registration" or "Underwritten Offering" shall mean a
registration in which Registrable Securities are sold to an Underwriter (as
defined in Section 3 hereof) for reoffering to the public.
2. Registration Under the Securities Act.
(a) To the extent not prohibited by any applicable law or
applicable interpretation of the Staff of the SEC, the Company shall use its
best efforts to cause to be filed an Exchange Offer Registration Statement
covering the offer by the Company to the Holders to exchange all of the
Registrable Securities for Exchange Securities and to have such Registration
Statement remain effective until the closing of the Exchange Offer. The
Company shall commence the Exchange Offer promptly after the Exchange Offer
Registration Statement has been declared effective by the SEC and use its
best efforts to have the Exchange Offer consummated not later than 60 days
after such effective date. The Company shall commence the Exchange Offer by
mailing the related exchange offer Prospectus and accompanying documents to
each Holder stating, in addition to such other disclosures as are required by
applicable law:
(i) that the Exchange Offer is being made pursuant to this
Registration Rights Agreement and that all Registrable Securities
validly tendered will be accepted for exchange;
(ii) the dates of acceptance for exchange (which shall be a period
of at least 20 Business Days from the date such notice is mailed) (the
"Exchange Dates");
(iii) that any Registrable Security not tendered will remain
outstanding and continue to accrue interest, but will not retain any
rights under this Registration Rights Agreement;
<PAGE>
(iv) that Holders electing to have a Registrable Security exchanged
pursuant to the Exchange Offer will be required to surrender such
Registrable Security, together with the enclosed letters of transmittal,
to the institution and at the address (located in the Borough of
Manhattan, The City of New York) specified in the notice prior to the
close of business on the last Exchange Date; and
(v) that Holders will be entitled to withdraw their election, not
later than the close of business on the last Exchange Date, by sending
to the institution and at the address (located in the Borough of
Manhattan, The City of New York) specified in the notice a telegram,
telex, facsimile transmission or letter setting forth the name of such
Holder, the principal amount at maturity of Registrable Securities
delivered for exchange and a statement that such Holder is withdrawing
his election to have such Notes exchanged.
As soon as practicable after the last Exchange Date, the Company
shall:
(i) accept for exchange Registrable Securities or portions thereof
tendered and not validly withdrawn pursuant to the Exchange Offer; and
(ii) deliver, or cause to be delivered, to the Trustee for
cancellation all Registrable Securities or portions thereof so accepted
for exchange by the Company and issue, and cause the Trustee to promptly
authenticate and mail to each Holder, an Exchange Security equal in
principal amount at maturity to the principal amount at maturity of the
Registrable Securities surrendered by such Holder.
The Company shall use its best efforts to complete the Exchange Offer as
provided above and shall comply with the applicable requirements of the
Securities Act, the Exchange Act and other applicable laws and regulations in
connection with the Exchange Offer. The Exchange Offer shall not be subject
to any conditions, other than that the Exchange Offer does not violate
applicable law or any applicable interpretation of the Staff of the SEC. The
Company shall inform the Placement Agent of the names and addresses of the
Holders to whom the Exchange Offer is made, and the Placement Agent shall
have the right, subject to applicable law, to contact such Holders and
otherwise facilitate the tender of Registrable Securities in the Exchange
Offer.
(b) In the event that (i) the Company determines that the Exchange
Offer Registration provided for in Section 2(a) above is not available or may
not be consummated as soon as practicable after the last Exchange Date
because it would violate applicable law or the applicable interpretations of
the Staff of the SEC, (ii) the Exchange Offer is not for any other reason
consummated by the date that is six months after the Closing Date or (iii)
the Exchange Offer has been completed and in the written opinion of counsel
for the Placement Agent a Registration Statement must be filed and a
Prospectus must be delivered by the Placement Agent in connection with any
offering or sale of Registrable Securities (other than in situations covered
by Section 2(f) below), the Company shall use its best efforts to cause to be
filed as soon as practicable after such determination, date or notice of such
opinion of counsel is given to the Company, as the case may be, a Shelf
Registration Statement providing for the sale by the
<PAGE>
Holders of all of the Registrable Securities, in the case of clause (i) or
(ii) above, or by the Placement Agent, in the case of clause (iii) above, and
to have such Shelf Registration Statement declared effective by the SEC.
Subject to the penultimate paragraph of Section 3 hereof, the Company agrees
to use its best efforts to keep the Shelf Registration Statement continuously
effective until the second anniversary of the Closing Date or such shorter
period that will terminate when all of the Registrable Securities covered by
the Shelf Registration Statement have been sold pursuant to the Shelf
Registration Statement or all of the Notes cease to be Registrable
Securities. The Company further agrees to supplement or amend the Shelf
Registration Statement if required by the rules, regulations or instructions
applicable to the registration form used by the Company for such Shelf
Registration Statement or by the Securities Act or by any other rules and
regulations thereunder for shelf registration or if reasonably requested by a
Holder with respect to information relating to such Holder, and, subject to
the penultimate paragraph of Section 3 hereof, to use its best efforts to
cause any such amendment to become effective and such Shelf Registration
Statement to become usable as soon as thereafter practicable. The Company
agrees to furnish to the Holders of Registrable Securities copies of any such
supplement or amendment promptly after its being used or filed with the SEC.
(c) The Company shall pay all Registration Expenses in connection
with the registration pursuant to Section 2(a) or Section 2(b). Each Holder
shall pay all underwriting discounts and commissions and transfer taxes, if
any, relating to the sale or disposition of such Holder's Registrable
Securities pursuant to the Shelf Registration Statement.
(d) An Exchange Offer Registration Statement pursuant to Section
2(a) hereof or a Shelf Registration Statement pursuant to Section 2(b) hereof
will not be deemed to have become effective unless it has been declared
effective by the SEC; provided, however, that, if, after it has been declared
effective, the offering of Registrable Securities pursuant to a Shelf
Registration Statement is interfered with by any stop order, injunction or
other order or requirement of the SEC or any other governmental agency or
court, such Registration Statement will be deemed not to have become
effective during the period of such interference until the offering of
Registrable Securities pursuant to such Registration Statement may legally
resume. If by the date that is six months after the Closing Date the Company
has not consummated the Exchange Offer or caused the Shelf Registration
Statement to be declared effective, interest (in addition to the amount of
original issue discount accruing during the period ending February 15, 2003
and in addition to interest otherwise due on the Notes after such date) will
accrue from August 18, 1998, at a rate of .5% per annum of the Accreted Value
on the preceding Semi-Annual Accrual Date, on the Notes and be payable in
cash semi-annually on February 15 and August 15 of each year, commencing
February 15, 1999, until the consummation of an Exchange Offer or the
effectiveness of the Shelf Registration Statement.
(e) Without limiting the remedies available to the Placement Agent
and the Holders, the Company acknowledges that any failure by the Company to
comply with its obligations under Section 2(a) and Section 2(b) hereof may
result in material irreparable injury to the Placement Agent or the Holders
for which there is no adequate remedy at law, that it will not be possible to
measure damages for such injuries precisely and that, in the event of any
such
<PAGE>
failure, the Placement Agent or any Holder may obtain such relief as may be
required to specifically enforce the Company's obligations under Section 2(a)
and Section 2(b) hereof.
(f) In the event that, at any time after consummation of the
Exchange Offer or the effectiveness of the Shelf Registration Statement, the
Placement Agent, or any successor thereto, in its opinion, becomes an
Affiliate (as such term is defined in Rule 144 under the Securities Act) of
the Company, or any successor thereto, the Company (or its successor) shall
use its best efforts to cause to be filed as soon as practicable after
receiving notice thereof from the Placement Agent (or its successor) a shelf
registration statement (the "Resales Registration Statement") under the
Securities Act providing for the sale by the Placement Agent (or its
successor) of all Notes or Exchange Securities it acquires from time to time
in connection with market-making activities and to have such shelf
registration statement declared effective by the SEC. The provisions of this
Agreement concerning the Shelf Registration Statement shall apply to any
Resales Registration Statement as if such Resales Registration Statement were
the Shelf Registration Statement filed pursuant to Section 2(b) hereof
(except that the Company (or its successor) will use its best efforts to keep
the Resales Registration Statement effective until the earlier of (i) the
date on which no Notes or Exchange Securities remain outstanding and (ii)
such time as the Placement Agent shall, in its opinion, have ceased to be an
Affiliate of the Company, as evidenced by written notice, which shall be sent
promptly upon such event). Notwithstanding the foregoing, the Company shall
not be required to maintain the effectiveness of any Resales Registration
Statement if the Placement Agent shall have ceased to make a market in the
Notes or the Exchange Securities.
3. Registration Procedures.
In connection with the obligations of the Company with respect to
the Registration Statements pursuant to Section 2(a) and Section 2(b) hereof,
the Company shall as expeditiously as is practicable:
(a) prepare and file with the SEC a Registration Statement on the
appropriate form under the Securities Act, which form (x) shall be
selected by the Company and (y) shall, in the case of a Shelf
Registration, be available for the sale of the Registrable Securities by
the selling Holders thereof and (z) shall comply as to form in all
material respects with the requirements of the applicable form and
include all financial statements required by the SEC to be filed
therewith, and use its best efforts to cause such Registration Statement
to become effective and remain effective in accordance with Section 2
hereof;
(b) prepare and file with the SEC such amendments and
post-effective amendments to each Registration Statement as may be
necessary to keep such Registration Statement effective for the
applicable period and cause each Prospectus to be supplemented by any
required prospectus supplement and, as so supplemented, to be filed
pursuant to Rule 424 under the Securities Act; to keep each Prospectus
current during the period described under Section 4(3) and Rule 174
under the Securities Act that is
<PAGE>
applicable to transactions by brokers or dealers with respect to the
Registrable Notes or Exchange Notes;
(c) in the case of a Shelf Registration, furnish to each Holder of
Registrable Securities, to counsel for the Placement Agent, to counsel
for the Holders and to each Underwriter of an Underwritten Offering of
Registrable Securities, if any, without charge, as many copies of each
Prospectus, including each preliminary Prospectus, and any amendment or
supplement thereto and such other documents as such Holder or
Underwriter may reasonably request, in order to facilitate the public
sale or other disposition of the Registrable Securities; and the Company
consents to the use of such Prospectus and any amendment or supplement
thereto in accordance with applicable law by each of the selling holders
of Registrable Securities and any such Underwriters in connection with
the offering and sale of the Registrable Securities covered by and in
the manner described in such Prospectus or any amendment or supplement
thereto in accordance with applicable law;
(d) use its best efforts to register or qualify the Registrable
Securities under all applicable state securities or "blue sky" laws of
such jurisdictions as any Holder of Registrable Securities covered by a
Registration Statement shall reasonably request in writing by the time
the applicable Registration Statement is declared effective by the SEC,
to cooperate with such Holders in connection with any filings required
to be made with the National Association of Securities Dealers, Inc. and
do any and all other acts and things which may be reasonably necessary
or advisable to enable such Holder to consummate the disposition in each
such jurisdiction of such Registrable Securities owned by such Holder;
provided, however, that the Company shall not be required to (i) qualify
as a foreign corporation or as a dealer in securities in any
jurisdiction where it would not otherwise be required to qualify but for
this Section 3(d), (ii) file any general consent to service of process
or (iii) subject itself to taxation in any such jurisdiction if it is
not so subject;
(e) in the case of a Shelf Registration, notify each Holder of
Registrable Securities, counsel for the Holders and counsel for the
Placement Agent promptly and, if requested by any such Holder or
counsel, confirm such advice in writing (i) when a Shelf Registration
Statement has become effective and when any post-effective amendment
thereto has been filed and becomes effective, (ii) of any request by the
SEC or any state securities authority for amendments and supplements to
a Shelf Registration Statement and Prospectus or for additional
information after the Shelf Registration Statement has become effective,
(iii) of the issuance by the SEC or any state securities authority of
any stop order suspending the effectiveness of a Shelf Registration
Statement or the initiation of any proceedings for that purpose, (iv)
if, between the effective date of a Shelf Registration Statement and the
closing of any sale of Registrable Securities covered thereby, the
representations and warranties of the Company contained in any
underwriting agreement, securities sales agreement or other similar
agreement, if any, relating to the offering cease to be true and correct
in all material respects or if the Company receives any notification
with respect to the suspension of the qualification of
<PAGE>
the Registrable Securities for sale in any jurisdiction or the
initiation of any proceeding for such purpose, (v) of the happening of
any event during the period a Shelf Registration Statement is effective
which makes any statement made in such Registration Statement or the
related Prospectus untrue in any material respect or which requires the
making of any changes in such Registration Statement or Prospectus in
order to make the statements therein not misleading and (vi) of any
determination by the Company that a post-effective amendment to a
Registration Statement would be appropriate;
(f) make every reasonable effort to obtain the withdrawal of any
order suspending the effectiveness of a Registration Statement at the
earliest possible moment and provide notice as promptly as practicable
to each Holder of the withdrawal of any such order;
(g) in the case of a Shelf Registration, furnish to each Holder of
Registrable Securities, without charge, at least one conformed copy of
each Registration Statement and any post-effective amendment thereto
(without documents incorporated therein by reference or exhibits
thereto, unless requested);
(h) in the case of a Shelf Registration, cooperate with the selling
Holders of Registrable Securities to facilitate the timely preparation
and delivery of certificates representing Registrable Securities to be
sold and not bearing any restrictive legends and enable such Registrable
Securities to be in such denominations (consistent with the provisions
of the Indenture) and registered in such names as the selling Holders
may reasonably request at least two business days prior to the closing
of any sale of Registrable Securities;
(i) in the case of a Shelf Registration, upon the occurrence of any
event contemplated by Section 3(e)(v) hereof, use its best efforts to
prepare and file with the SEC a supplement or post-effective amendment
to a Registration Statement or the related Prospectus or any document
incorporated therein by reference or file any other required document so
that, as thereafter delivered to the purchasers of the Registrable
Securities, such Prospectus will not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading. The Company agrees to notify the Holders to
suspend use of the Prospectus as promptly as practicable after the
occurrence of such an event, and the Holders hereby agree to suspend use
of the Prospectus until the Company has amended or supplemented the
Prospectus to correct such misstatement or omission;
(j) a reasonable time prior to the filing of any Registration
Statement, any Prospectus, any amendment to a Registration Statement or
amendment or supplement to a Prospectus or any document which is to be
incorporated by reference into a Registration Statement or a Prospectus
after initial filing of a Registration Statement, provide copies of such
document to the Placement Agent and its counsel (and, in the case of a
Shelf Registration Statement, the Holders and their joint counsel) and
make such of the representatives of the Company as shall be reasonably
requested by the Placement Agent
<PAGE>
or its counsel (and, in the case of a Shelf Registration Statement, the
Holders or their joint counsel) available for discussion of such
document, and shall not at any time file or make any amendment to the
Registration Statement, any Prospectus or any amendment of or supplement
to a Registration Statement or a Prospectus or file any document which
is to be incorporated by reference into a Registration Statement or a
Prospectus, of which the Placement Agent and its counsel (and, in the
case of a Shelf Registration Statement, the Holders and their counsel)
shall not have previously been advised and furnished a copy or to which
the Placement Agent or its counsel (and, in the case of a Shelf
Registration Statement, the Holders or their counsel) shall reasonably
object without unreasonable delay;
(k) obtain a CUSIP number for all Exchange Securities or
Registrable Securities, as the case may be, not later than the effective
date of a Registration Statement;
(l) cause the Indenture to be qualified under the Trust Indenture
Act of 1939, as amended (the "TIA"), in connection with the registration
of the Exchange Securities or Registrable Securities, as the case may
be, cooperate with the Trustee and the Holders to effect such changes to
the Indenture as may be required for the Indenture to be so qualified in
accordance with the terms of the TIA and execute, and use its best
efforts to cause the Trustee to execute, all documents as may be
required to effect such changes and all other forms and documents
required to be filed with the SEC to enable the Indenture to be so
qualified in a timely manner;
(m) in the case of a Shelf Registration, make available for
inspection by a representative of the Holders of the Registrable
Securities, any Underwriter participating in any disposition pursuant to
such Shelf Registration Statement, and one firm of attorneys and
accountants designated by the Holders, at reasonable times and in a
reasonable manner, all financial and other records, pertinent documents
and properties of the Company as shall reasonably be requested, and
cause the respective officers, directors and employees of the Company to
supply all information reasonably requested by any such representative,
Underwriter, attorney or accountant in connection with a Shelf
Registration Statement; provided, however, that any such representative,
Underwriter, attorney or accountant agrees to keep confidential any
records, documents or other information (collectively, "Information")
received from the Company and designated by the Company as confidential
and to use such Information obtained pursuant to this provision only in
connection with the transaction for which such Information was obtained,
and not for any other purpose; provided further, however, that the
foregoing confidentiality obligation shall not apply to the extent that
(i) such Information (x) is available to the public, (y) subject to
clause (z) below, is already in such representative's, Underwriters',
attorney's or accountant's possession prior to receipt from the Company
and such person does not otherwise have any obligation to keep such
Information confidential or (z) is obtained by such representative,
Underwriter, attorney or accountant from a third person who, insofar as
is known to such representative, Underwriter, attorney or accountant
after due inquiry, is not required to keep such Information confidential
or
<PAGE>
(ii) disclosure of such Information is required by court or
administrative order after the exhaustion of all appeals therefrom;
(n) in the case of a Shelf Registration, use its best efforts to
cause all Registrable Securities to be listed on any securities exchange
or any automated quotation system on which similar securities issued by
the Company are then listed if requested by the Majority Holders, to the
extent such Registrable Securities satisfy applicable listing
requirements;
(o) if reasonably requested by any Holder of Registrable Securities
covered by a Registration Statement, (i) promptly incorporate in a
Prospectus supplement or post-effective amendment such information with
respect to such Holder as such Holder reasonably requests to be included
therein and (ii) make all required filings of such Prospectus supplement
or such post-effective amendment as soon as practicable after the
Company has received notification of the matters to be incorporated in
such filing; and
(p) in the case of a Shelf Registration, enter into such customary
agreements and take all such other customary actions in connection
therewith (including those requested by the Holders of a majority of the
Registrable Securities being sold) in order to expedite or facilitate
the disposition of such Registrable Securities including, but not
limited to, an Underwritten Offering and in such connection, (i) to the
extent possible, make such representations and warranties to the Holders
and any Underwriters of such Registrable Securities with respect to the
business of the Company and its subsidiaries, the Registration
Statement, Prospectus and documents incorporated by reference or deemed
incorporated by reference, if any, in each case, in form, substance and
scope as are customarily made by issuers to underwriters in underwritten
offerings and confirm the same if and when requested, (ii) obtain
opinions of counsel to the Company (which counsel and opinions, in form,
scope and substance, shall be reasonably satisfactory to the Holders of
a majority in principal amount at maturity of the Registrable Securities
to be sold in such Underwritten Offering and any Underwriters and their
respective counsel) addressed to each selling Holder and Underwriter of
Registrable Securities, covering the matters customarily covered in
opinions requested in underwritten offerings, (iii) obtain "cold
comfort" letters from the independent certified public accountants of
the Company (and, if necessary, any other certified public accountant of
any subsidiary of the Company, or of any business acquired by the
Company for which financial statements and financial data are or are
required to be included in the Registration Statement) addressed to each
selling Holder and Underwriter of Registrable Securities, such letters
to be in customary form and covering matters of the type customarily
covered in "cold comfort" letters in connection with underwritten
offerings, and (iv) deliver such documents and certificates as may be
reasonably requested by the Holders of a majority in principal amount at
maturity of the Registrable Securities being sold or the Underwriters,
and which are customarily delivered in underwritten offerings, to
evidence the continued validity of the representations and warranties of
the Company made pursuant to clause (i) above and to evidence compliance
with any customary conditions contained in an underwriting agreement;
provided that the Company shall be required to
<PAGE>
use its best efforts to make an Underwritten Offering only upon the
request of Holders of at least (1) 25% of the aggregate principal amount
at maturity of the Registrable Securities outstanding at the time such
request is delivered to the Company and (2) 10% of the aggregate
principal amount at maturity of the Notes outstanding on the date
hereof. In the case of any Underwritten Offering, the Company shall
provide written notice to the Holders of all Registrable Securities of
such Underwritten Offering at least 30 days prior to the filing of a
prospectus supplement for such Underwritten Offering, (y) specifying a
date, which shall be no earlier than 10 days following the date of such
notice, by which each such Holder must inform the Company of its intent
to participate in such Underwritten Offering and (z) including the
instructions such Holder must follow in order to participate in such
Underwritten Offering.
In the case of a Shelf Registration Statement, the Company may
require each Holder of Registrable Securities to furnish to the Company such
information regarding the Holder and the proposed distribution by such Holder
of such Registrable Securities as the Company may from time to time
reasonably request in writing.
In the case of a Shelf Registration Statement, each Holder agrees
that, upon receipt of any notice from the Company of the happening of any
event of the kind described in Section 3(e)(v) hereof, such Holder will
forthwith discontinue disposition of Registrable Securities pursuant to a
Shelf Registration Statement until such Holder's receipt of the copies of the
supplemented or amended Prospectus contemplated by Section 3(i) hereof, and,
if so directed by the Company, such Holder will deliver to the Company (at
its expense) all copies in its possession, other than permanent file copies
then in such Holder's possession, of the Prospectus covering such Registrable
Securities current at the time of receipt of such notice. If the Company
shall give any such notice to suspend the disposition of Registrable
Securities pursuant to a Shelf Registration Statement, the Company shall
extend the period during which the Shelf Registration Statement shall be
maintained effective pursuant to this Agreement by the number of days during
the period from and including the date of the giving of such notice to and
including the date when the Holders shall have received copies of the
supplemented or amended Prospectus necessary to resume such dispositions. In
addition, the Company may, for a good-faith business purpose, provide the
Holders with notice of the suspension of the disposition of Registrable
Securities pursuant to a Shelf Registration Statement. The Company may give
any such notice pursuant to the preceding sentence only twice during any 365
day period and any such suspensions may not exceed 30 days for each
suspension and there may not be more than two suspensions in effect during
any 365 day period (which may be cumulative).
The Holders of Registrable Securities covered by a Shelf
Registration Statement who desire to do so may sell such Registrable
Securities in an Underwritten Offering, subject to such terms and conditions
as shall be established by the Underwriters thereof. In any such
Underwritten Offering, the investment banker or investment bankers and
manager or managers (the "Underwriters") that will administer the offering
will be selected by the Majority Holders of the Registrable Securities
included in such offering, subject to the approval of the Company, which
approval shall not be unreasonably withheld.
<PAGE>
4. Participation of Broker-Dealers in Exchange Offer.
(a) The Staff of the SEC has taken the position that any
broker-dealer that receives Exchange Securities for its own account in the
Exchange Offer in exchange for Notes that were acquired by such broker-dealer
as a result of market-making or other trading activities (a "Participating
Broker-Dealer"), may be deemed to be an "underwriter" within the meaning of
the Securities Act and must deliver a prospectus meeting the requirements of
the Securities Act in connection with any resale of such Exchange Securities.
The Company understands that it is the position of the Staff of the
SEC that if the Prospectus contained in the Exchange Offer Registration
Statement includes a plan of distribution containing a statement to the above
effect and the means by which Participating Broker-Dealers may resell the
Exchange Securities, without naming the Participating Broker-Dealers or
specifying the amount of Exchange Securities owned by them, such Prospectus
may be delivered by Participating Broker-Dealers to satisfy their prospectus
delivery obligation under the Securities Act in connection with resales of
Exchange Securities for their own accounts, so long as the Prospectus
otherwise meets the requirements of the Securities Act.
(b) In light of the above, notwithstanding the other provisions of
this Agreement, the Company agrees that the provisions of this Agreement as
they relate to a Shelf Registration shall also apply to an Exchange Offer
Registration to the extent, and with such reasonable modifications thereto as
may be, reasonably requested by the Placement Agent or by one or more
Participating Broker-Dealers, in each case as provided in clause (ii) below,
in order to expedite or facilitate the disposition of any Exchange Securities
by Participating Broker-Dealers consistent with the positions of the Staff
recited in Section 4(a) above; provided that:
(i) the Company shall not be required to amend or supplement the
Prospectus contained in the Exchange Offer Registration Statement, as
would otherwise be contemplated by Section 3(i), for a period exceeding
180 days after the last Exchange Date (as such period may be extended
pursuant to the penultimate paragraph of Section 3 of this Agreement)
and Participating Broker-Dealers shall not be authorized by the Company
to deliver and shall not deliver such Prospectus after such period in
connection with the resales contemplated by this Section 4; and
(ii) the application of the Shelf Registration procedures set forth
in Section 3 of this Agreement to an Exchange Offer Registration, to the
extent not required by the positions of the Staff of the SEC or the
Securities Act and the rules and regulations thereunder, will be in
conformity with the reasonable request to the Company by the Placement
Agent or with the reasonable request in writing to the Company by one or
more broker-dealers who certify to the Placement Agent and the Company
in writing that they anticipate that they will be Participating
Broker-Dealers; and provided further that, in connection with such
application of the Shelf Registration procedures set forth in Section 3
to an Exchange Offer Registration, the Company shall be obligated (x) to
deal only with one entity representing the Participating Broker-Dealers
as a whole, which shall be the Placement Agent unless it elects not to
act as such representative, (y) to pay the
<PAGE>
fees and expenses of only one counsel representing the Participating
Broker-Dealers, which shall be counsel to the Placement Agent unless
such counsel elects not to so act and (z) to cause to be delivered only
one, if any, "cold comfort" letter with respect to the Prospectus in the
form existing on the last Exchange Date and with respect to each
subsequent amendment or supplement, if any, effected during the period
specified in clause (i) above.
(c) The Placement Agent shall have no liability to the Company or
any Holder with respect to any request that it may make pursuant to Section
4(b) above.
5. Indemnification and Contribution.
(a) The Company agrees to indemnify and hold harmless the
Placement Agent, each Holder and each person, if any, who controls the
Placement Agent or any Holder 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 or any Holder, from and
against all losses, claims, damages and liabilities (including, without
limitation, any legal or other expenses reasonably incurred by the Placement
Agent, any Holder or any such controlling or 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
any Registration Statement (or any amendment thereto) pursuant to which
Exchange Securities or Registrable Securities were registered under the
Securities Act, including all documents incorporated therein by reference, 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 not
misleading, or caused by any untrue statement or alleged untrue statement of
a material fact contained in any Prospectus (as amended or supplemented if
the 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 or any Holder furnished to the Company in writing by the
Placement Agent or any selling Holder expressly for use therein. In
connection with any Underwritten Offering permitted by Section 3, the Company
will also indemnify the Underwriters, if any, selling brokers, dealers and
similar securities industry professionals participating in the distribution,
their officers and directors and each Person who controls such Persons
(within the meaning of the Securities Act and the Exchange Act) to the same
extent as provided above with respect to the indemnification of the Holders,
if requested in connection with any Registration Statement.
(b) Each Holder agrees, severally and not jointly, to indemnify
and hold harmless the Company, the Placement Agent and the other selling
Holders, and each of their respective directors, officers who sign the
Registration Statement and each Person, if any, who controls the Company, the
Placement Agent and any other selling Holder 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 and the Holders, but only
<PAGE>
with reference to information relating to such Holder furnished to the
Company in writing by such Holder expressly for use in any Registration
Statement (or any amendment thereto) or any Prospectus (or any amendment or
supplement 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 paragraph (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 (a) the reasonable fees and expenses of
more than one separate firm (in addition to any one firm of local counsel in
each applicable jurisdiction) for the Placement Agent and all persons, if
any, who control the Placement Agent within the meaning of either Section 15
of the Securities Act or Section 20 of the Exchange Act, (b) the reasonable
fees and expenses of more than one separate firm (in addition to one firm of
local counsel in each applicable jurisdiction) for the Company, its
directors, its officers who sign the Registration Statement and each person,
if any, who controls the Company within the meaning of either such Section
and (c) the reasonable fees and expenses of more than one separate firm (in
addition to one firm of local counsel in each applicable jurisdiction) for
all Holders and all persons, if any, who control any Holders within the
meaning of either such Section, and that all such fees and expenses shall be
reimbursed as they are incurred, to the extent not being contested by the
indemnifying party in good faith. In such case involving the Placement Agent
and persons who control the Placement Agent, such firm shall be designated in
writing by the Placement Agent. In such case involving the Holders and such
persons who control Holders, such firm shall be designated in writing by the
Majority Holders. In all other cases, such firm shall be designated by the
Company. 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 party for reasonable 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 45 days after receipt by such
indemnifying party of the aforesaid request and (ii) such indemnifying party
shall not have reimbursed the indemnified party for such fees and expenses of
counsel in
<PAGE>
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 such 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) If the indemnification provided for in paragraph (a) or
paragraph (b) of this Section 5 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 in such proportion as is appropriate to reflect the relative
fault of the indemnifying party or parties on the one hand and of the
indemnified party or parties 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 fault of the Company and the Holders shall be determined by
reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by the Company or by the
Holders and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission. The
Holders' respective obligations to contribute pursuant to this Section 5(d)
are several in proportion to the respective principal amount at maturity of
Registrable Securities of such Holder that were registered pursuant to a
Registration Statement.
(e) The Company and each Holder agree that it would not be just or
equitable if contribution pursuant to this Section 5 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 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 5, no Holder shall be required to indemnify or
contribute any amount in excess of the amount by which the total price at
which Registrable Securities were sold by such Holder exceeds the amount of
any damages that such 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. The remedies
provided for in this Section 5 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.
The indemnity and contribution provisions contained in this Section
5 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, any Holder or any person
<PAGE>
controlling the Placement Agent or any Holder, or by or on behalf of the
Company, its officers or directors or any person controlling the Company,
(iii) acceptance of any of the Exchange Securities and (iv) any sale of
Registrable Securities pursuant to a Shelf Registration Statement.
6. Miscellaneous.
(a) No Inconsistent Agreements. The Company has not entered into,
and on or after the date of this Agreement will not enter into, any agreement
which is inconsistent with the rights granted to the Holders of Registrable
Securities in this Agreement or otherwise conflicts with the provisions
hereof. The rights granted to the Holders hereunder do not in any way
conflict with and are not inconsistent with the rights granted to the holders
of the Company's other issued and outstanding securities under any such
agreements.
(b) Amendments and Waivers. The provisions of this Agreement,
including the provisions of this sentence, may not be amended, modified or
supplemented, and waivers or consents to departures from the provisions
hereof may not be given unless the Company has obtained the written consent
of Holders of at least a majority in aggregate principal amount at maturity
of the outstanding Registrable Securities affected by such amendment,
modification, supplement, waiver or consent; provided, however, that no
amendment, modification, supplement, waiver or consents to any departure from
the provisions of Section 5 hereof shall be effective as against any Holder
of Registrable Securities unless consented to in writing by such Holder.
(c) Notices. All notices and other communications provided for or
permitted hereunder shall be made in writing by hand-delivery, registered
first-class mail, telex, telecopier, or any courier guaranteeing overnight
delivery (i) if to a Holder, at the most current address given by such Holder
to the Company by means of a notice given in accordance with the provisions
of this Section 6(c), which address initially is, with respect to the
Placement Agent, the address set forth in the Placement Agreement; and (ii)
if to the Company, initially at the Company's address set forth in the
Placement Agreement and thereafter at such other address, notice of which is
given in accordance with the provisions of this Section 6(c).
All such notices and communications shall be deemed to have been
duly given: at the time delivered by hand, if personally delivered; five
business days after being deposited in the mail, postage prepaid, if mailed;
when answered back, if telexed; when receipt is acknowledged, if telecopied;
and on the next business day if timely delivered to an air courier
guaranteeing overnight delivery.
Copies of all such notices, demands, or other communications shall
be concurrently delivered by the person giving the same to the Trustee, at
the address specified in the Indenture.
(d) Successors and Assigns. This Agreement shall inure to the
benefit of and be binding upon the successors, assigns and transferees of
each of the parties, including, without limitation and without the need for
an express assignment, subsequent Holders; provided that
<PAGE>
nothing herein shall be deemed to permit any assignment, transfer or other
disposition of Registrable Securities in violation of the terms of the
Placement Agreement. If any transferee of any Holder shall acquire
Registrable Securities, in any manner, whether by operation of law or
otherwise, such Registrable Securities shall be held subject to all of the
terms of this Agreement, and by taking and holding such Registrable
Securities such person shall be conclusively deemed to have agreed to be
bound by and to perform all of the terms and provisions of this Agreement and
such person shall be entitled to receive the benefits hereof. The Placement
Agent (in its capacity as Placement Agent) shall have no liability or
obligation to the Company with respect to any failure by any other Holder to
comply with, or any breach by any other Holder of, any of the obligations of
such Holder under this Agreement.
(e) Purchases and Sales of Notes. The Company shall not, and
shall use its best efforts to cause its affiliates (as defined in Rule 405
under the Securities Act) not to, purchase and then resell or otherwise
transfer any Notes.
(f) Third Party Beneficiary. The Holders shall be third party
beneficiaries to the agreements made hereunder between the Company, on the
one hand, and the Placement Agent, on the other hand, and shall have the
right to enforce such agreements directly to the extent it deems such
enforcement necessary or advisable to protect its rights or the rights of
Holders hereunder.
(g) Counterparts. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of
which when so executed shall be deemed to be an original and all of which
taken together shall constitute one and the same agreement.
(h) Headings. The headings in this Agreement are for convenience
of reference only and shall not limit or otherwise affect the meaning hereof.
(i) Governing Law. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of New York.
(j) Severability. In the event that any one or more of the
provisions contained herein, or the application thereof in any circumstance,
is held invalid, illegal or unenforceable, the validity, legality and
enforceability of any such provision in every other respect and of the
remaining provisions contained herein shall not be affected or impaired
thereby.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the date first written above.
ECONOPHONE, INC.
By /s/ ALAN L. LEVY
---------------------------
Name: Alan L. Levy
Title: President and Chief Operating Officer
Confirmed and accepted as of
the date first above written:
MORGAN STANLEY & CO. INCORPORATED
By /s/ JAMES B. AVERY
-------------------------------
Name: James B. Avery
Title: Principal
<PAGE>
Exhibit 5.1
March 10, 1998
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 (the "Registration
Statement"), relating to the 11% Senior Discount Notes due 2008 of the
Company in the aggregate principal amount of $300,000,000 (the "Exchange
Notes"). The Exchange Notes are to be offered by the Company in exchange for
$300,000,000 in aggregate principal amount of its outstanding 11% Senior
Discount Notes due 2008 (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 February 18, 1998 (the "Indenture"),
between the
<PAGE>
Econophone, Inc.
March 10, 1998
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>
EXECUTION COPY
Exhibit 10.12
ECONOPHONE, INC.
$300,000,000
11% Senior Discount Notes Due 2008
PLACEMENT AGREEMENT
February 12, 1998
<PAGE>
February 12, 1998
Morgan Stanley & Co.
Incorporated
1585 Broadway
New York, New York 10036-8293
Dear Sirs and Mesdames:
ECONOPHONE, INC., a Delaware corporation (the "Company"), proposes
to issue and sell to you (the "Placement Agent") $300,000,000 principal
amount at maturity of its 11% Senior Discount Notes due 2008 (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").
The Notes 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 a registration rights agreement (the
"Registration Rights Agreement"), to be dated the Closing Date and to be
substantially in the form attached hereto as Exhibit A.
In connection with the sale of the Notes, the Company has prepared
a preliminary offering memorandum (the "Preliminary Offering Memorandum") and
will prepare a final offering 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 Notes, the terms
of the offering and a description of the Company and its business.
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.
<PAGE>
(b) The Company has been duly incorporated, is validly subsisting
under the laws of the State of Delaware, 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 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 Registration Rights Agreement.
(f) Each of the Indenture and the 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 under the Registration Rights Agreement may be limited by
public policy.
<PAGE>
(g) The execution and delivery by the Company of, and the performance
by the Company of its obligations under, this Agreement, the Indenture, the
Registration Rights Agreement and the Notes (collectively, the "Transaction
Documents"), the issuance and sale and delivery in the manner contemplated
by the Offering Memorandum of the Notes 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
Notes 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 Registration Rights Agreement.
(h) 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.
(i) 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.
(j) 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 Notes, 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 Notes in a
<PAGE>
manner that would require the registration under the Securities Act of the
Notes or (ii) engaged in any form of general solicitation or general
advertising in connection with the offering of the Notes (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.
(k) 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").
(l) It is not necessary in connection with the offer, sale and
delivery of the Notes to the Placement Agent in the manner contemplated by
this Agreement to register the Notes under the Securities Act or to qualify
the Indenture under the Trust Indenture Act of 1939, as amended.
(m) The Notes satisfy the requirements set forth in Rule 144A(d)(3)
under the Securities Act.
(n) 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.
(o) 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 Notes 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 Notes.
(p) 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
<PAGE>
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.
(q) 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.
(r) 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.
(s) 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 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.
(t) 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,
<PAGE>
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.
(u) 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.
(v) 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 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.
(w) The terms of the Notes, the Indenture and the Registration Rights
Agreement conform in all material respects to the description thereof
contained in the Final Offering Memorandum under the heading "Description
of the Notes."
(x) 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.
(y) (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 and data services, 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>
2. Terms of Offering. You have advised the Company that the
Placement Agent will make an offering of the Notes 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. Agreement to Sell and Purchase. 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 the Notes at a purchase
price of $565.44 per Note, for an aggregate purchase price of $169,632,525.
The Company hereby agrees that, without your prior written consent,
it will not, during the period beginning on the date hereof and continuing to
and including the Closing Date, offer, sell, contract to sell or otherwise
dispose of any debt of the Company or warrants to purchase debt of the
Company substantially similar to the Notes (other than the sale of the Notes
under this Agreement).
4. Payment and Delivery. Payment for the Notes shall be made
against delivery of the Notes 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 February 18, 1998, or at such other time on the
same or such other date, not later than March 3, 1998, 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 Notes 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 shall be in definitive form or global
form, as specified by you, and registered in such names and in such
denominations as you shall request in writing not later than one full
business day prior to the Closing Date. The certificates evidencing the
Notes 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 Notes to the Placement Agent duly paid, against payment of
the purchase price therefor.
5. Conditions to the Placement Agent's Obligations. The
obligation of the Placement Agent under this Agreement to purchase and pay
for the Notes on the Closing Date is subject to the following conditions:
(a) Subsequent to the date of this Agreement and prior to the
Closing Date,
(i) there shall not have occurred any downgrading, nor shall any
notice have been given of any intended or potential downgrading or of
any review for a possible change that does not indicate the direction
of the possible change, in the rating accorded any of the Company's
securities by any "nationally recognized statistical rating
organization," as such term is defined for purposes of Rule 436(g)(2)
under the Securities Act; and
<PAGE>
(ii) 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
Final Offering Memorandum (exclusive of any amendments or supplements
thereto subsequent to the date of this Agreement) that, in your
judgment, is material and adverse and that makes it, in your judgment,
impracticable to market the Notes 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 set forth in clause (a)(i) above and 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 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) Simmons & Simmons, special U.K. and European Union
regulatory counsel to the Company, (iv) Arthur Flieger, special Belgian
regulatory counsel to the Company, (vi) Dser Amereller Noack, special
German regulatory counsel to the Company, and (vii) Simmons & Simmons,
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
<PAGE>
Offering Memorandum; provided that the letter delivered on the Closing Date
shall use a "cut-off date" not earlier than the date hereof.
(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) You shall have received such other documents as you and your
counsel shall reasonably request.
6. Covenants of the Company. In further consideration of the
agreements of the Placement Agent contained in this Agreement, the Company
covenants with the Placement Agent as follows:
(a) To furnish to you, without charge, prior to 10:00 a.m. New York
City time on the business day next succeeding the date of this Agreement
and 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.
(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 Notes 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 Notes 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 Notes,
in any jurisdiction where it is not now so subject.
<PAGE>
(e) Whether or not the transactions contemplated in this Agreement
are consummated or this Agreement is terminated, to pay or cause to be paid
all expenses incident to the performance of its obligations under this
Agreement, including: (i) all the fees or expenses in connection with the
preparation of each Offering Memorandum and all amendments and supplements
thereto, (ii) all costs and expenses related to the preparation, issuance,
transfer and delivery of the Notes, including any transfer or other taxes
payable thereon, (iii) the fees, disbursements and expenses of the
Company's counsel and accountants and the Trustee, (iv) the cost of
printing or producing any Blue Sky or legal investment memorandum in
connection with the offer and sale of the Notes under state securities laws
and all expenses in connection with the qualification of the Notes for
offer and sale under state securities laws as provided in Section 6(d)
hereof, including filing fees and the reasonable fees and disbursements of
counsel for the Placement Agent in connection with such qualification and
in connection with the Blue Sky or legal investment memorandum, (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) the fees and expenses, if any, incurred in
connection with the admission of the Notes for trading on the Private
Offerings, Resale and Trading through Automated Linkages ("PORTAL") and any
other appropriate market system agreed upon by the Company and the
Placement Agent, (vii) any fees charged by rating agencies for the rating
of the Notes, (viii) the costs and expenses of the Company relating to
investor presentations on any "road show" undertaken in connection with the
marketing of the Notes, 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. It is understood, however, that except as provided
in this Section, Section 8, and the last paragraph of Section 10, the
Placement Agent will pay all of its costs and expenses, including fees and
disbursements of its counsel, transfer taxes payable on resale of any of
the Notes by it and any advertising expenses connected with any offers it
may make.
(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 Notes in a manner which would require the registration under the
Securities Act of the Notes.
(g) Not to solicit any offer to buy or offer or sell the Notes 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.
<PAGE>
(h) While any of the Notes remain outstanding, to make available,
upon request, to any seller of such Notes, 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 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 in any directed selling
efforts (as that term is defined in Regulation S) with respect to the Notes
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 Notes 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 and to list the Notes on any other appropriate market
system agreed upon by the Company and the Placement Agent.
(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) During the period of two years after the Closing Date, the
Company will not, and will not permit any of its affiliates (as defined in
Rule 144A under the Securities Act) (other than the Placement Agent or any
of its affiliates (other than the Company) to the extent the Placement
Agent is deemed to be an affiliate of the Company) to resell any of the
Notes which constitute "restricted securities" under Rule 144A that have
been reacquired by any of them.
(m) To use the proceeds from the sale of the Notes in the manner set
forth in the Final Offering Memorandum.
(n) To use its best efforts to transfer all the authorizations
granted in relation to the conduct of its business to Econophone, Inc., a
New York corporation, that is the predecessor of the Company, by state
regulatory authorities or otherwise obtain all approvals necessary to
conduct its business from such state regulatory authorities as promptly as
possible.
7. Offering of Notes; 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, the Notes 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 the Notes only from, and will offer and
sell the Notes only to, persons that it
<PAGE>
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 the Notes, 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
Notes are deemed to have represented and agreed as provided in the Final
Offering Memorandum under the caption "Transfer Restrictions."
(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
Notes or possession or distribution of either Offering Memorandum or any
other offering or publicity material relating to the Notes 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 the Notes or has in its possession or distributes either Offering
Memorandum or any such other material, in all cases at its own expense;
(iii) the Notes 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 Rule 144A or Regulation S or pursuant to another exemption from the
registration requirements of the Securities Act;
(iv) it has offered the Notes and will offer and sell the Notes (A)
as part of its distribution at any time and (B) otherwise until 40 days
after the Closing Date, only in accordance with Rule 903 of Regulation S
or as otherwise permitted in Section 7(a); 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 Notes 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 Notes 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
<PAGE>
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 Notes
in, from or otherwise involving the United Kingdom; and (C) only issued or
passed on and will only issue or pass on in the United Kingdom any document
received by it in connection with the issue of the Notes 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 Notes 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 Notes directly or indirectly in Japan or for the account of any
resident of Japan except (A) pursuant to any exemption from the
registration requirements of the Securities and Exchange Law of Japan and
(B) otherwise in compliance with applicable provisions of Japanese law; and
(vii) the Placement Agent agrees that, at or prior to confirmation
of sales of the Notes, it will have sent to each distributor, dealer or
person receiving a selling concession, fee or other remuneration that
purchases such Notes from it during the restricted period a confirmation or
notice to substantially the following effect:
"The Notes 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, 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 7(b) and not otherwise defined in this Agreement have
the meanings given to them by Regulation S.
8. 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, from and against any and all
losses, claims, damages and liabilities (including, without limitation, any
legal or other expenses reasonably incurred 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 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 the 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
<PAGE>
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 Section 8(a) or 8(b), 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 respect of the legal expenses of any indemnified party 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 Section 8(a) and by the Company in the case
of parties indemnified pursuant to Section 8(b). 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 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
<PAGE>
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 Section 8(a)
or 8(b) 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 the Notes or (ii) if the allocation provided
by clause 8(d)(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 8(d)(i) above but also the relative fault of the
Company on the one hand and of 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 the Notes shall be deemed to be in the same respective
proportions as the net proceeds from the offering of the Notes (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 the Notes. 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 8 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 Section 8(d).
The amount paid or payable by an indemnified party as a result of the losses,
claims, damages and liabilities referred to in Section 8(d) 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 8, the Placement Agent shall not be required to
contribute any amount in excess of the amount by which the total price at
which the Notes resold by it in the initial placement of such Notes 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 remedies provided for in
this Section 8 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.
<PAGE>
(f) The indemnity and contribution provisions contained in this
Section 8 and the representations, warranties and other statements 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 Notes.
9. 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 9(a)(i) through 9(a)(iii), such event singly or together
with any other such event makes it, in your judgment, impracticable to market
the Notes on the terms and in the manner contemplated in the Final Offering
Memorandum.
10. Effectiveness. This Agreement shall become effective upon the
execution and delivery hereof by the parties hereto.
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 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.
11. Counterparts. 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.
12. Applicable Law. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of New York.
13. Headings. 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>
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 /s/ ALAN L. LEVY
--------------------------
Name: Alan L. Levy
Title: President and Chief
Operating Officer
Accepted as of the date hereof
MORGAN STANLEY & CO.
INCORPORATED
By /s/ GREGORY ATTORRI
---------------------------
Name: Gregory Attorri
Title: Principal
- --------------------------------------------------------------
<PAGE>
Exhibit 10.13
SECOND AMENDED AND RESTATED
EQUIPMENT LOAN AND SECURITY AGREEMENT
This SECOND AMENDED AND RESTATED EQUIPMENT LOAN AND SECURITY AGREEMENT
("Agreement"), dated as of January 28, 1998, is 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")
ECONOPHONE/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 Agreement amends and restates that certain Equipment Loan and Security
Agreement dated as of May 28, 1996, between Econophone and Lender, as first
amended by that certain letter agreement dated November 18, 1996, and as
subsequently amended and restated and joined in by American Telemedia, Ltd.
("ATL") as of March 27, 1997, and further amended by that First Amendment to
Amended and Restated Equipment Loan and Security Agreement dated as of April
24, 1997, by that Second Amendment to Amended and Restated Equipment Loan and
Security Agreement dated as of June 26, 1997, by that Third Amendment to
Amended and Restated Equipment Loan and Security Agreement, dated as of August
7, 1997, and by that Fourth Amendment to Amended and Restated Loan and
Security Agreement, dated as of December 31, 1997, 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 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 Agreement by their duly
authorized representatives:
LENDER: BORROWER:
- ------ ---------
NTFC CAPITAL CORPORATION ECONOPHONE, INC.
BY: /s/ Lawrence Middleton BY: /s/ RICHARD L. SHORTEN, JR.
TITLE:__________________ TITLE: Senior Vice President and General
Cousel
DATE: January 28, 1998 DATE: January 28, 1998
AMERICAN TELEMEDIA, LTD.
BY: /S/ ALFRED WEST
TITLE: Chief Executive Officer
<PAGE>
TABLE OF CONTENTS
ARTICLE 1: DEFINITIONS 1
1.01. Certain Definitions 1
1.02. Accounting Principles; Subsidiaries 9
1.03. UCC Terms 10
1.04. General Construction; Captions 10
1.05. References to Documents and Laws 10
ARTICLE 2: LOANS 10
2.01. Commitment 10
2.02. Note and Payment Terms 10
2.03. Procedures for Borrowing 12
2.04. Prepayments 13
2.05. Computation of Interest 13
2.06. Payments 13
2.07. Indemnity 14
2.08. Use of Proceeds 14
2.09. Fees 14
2.10. Lender's Expenses 14
ARTICLE 3: COLLATERAL AND SECURITY AGREEMENT 15
3.01. Grant of Security Interest 15
3.02. Priority of Security Interests 16
3.03. Further Documentation; Pledge of Instruments 16
3.04. Further Identification of Collateral 16
3.05. Remedies 16
3.06. Standard of Care 16
3.07. Advances to Protect Collateral 16
3.08. License to Use 17
3.09 Priority of Security Interests and/or Liens on Equipment
located outside of the United States 17
ARTICLE 4: REPRESENTATIONS AND WARRANTIES 17
4.01. Organization and Qualification 17
4.02. Authority and Authorization 17
4.03. Execution and Binding Effect 17
4.04. Governmental Authorizations 18
4.05. Regulatory Authorizations 18
4.06. Material Agreement; Absence of Conflicts 18
4.07. No Restrictions 18
4.08. Financial Statements 18
4.09. Financial Accounting Practices 18
4.10. Accurate and Complete Disclosure 19
4.11. No Event of Default; Compliance with Material Agreements 19
4.12. Litigation 19
4.13. Rights to Property 19
4.14. Financial Condition 19
ii
<PAGE>
4.15. Taxes 19
4.16. No Material Adverse Change 20
4.17. No Regulatory Event 20
4.18. Trade Relations 20
4.19. No Brokerage Fees 20
4.20. Margin Stock; Regulation U 20
4.21. Investment Company; Public Utility Holding Company 20
4.22. Personal Holding Company 20
4.23. ERISA 20
4.24. Environmental Warranties 21
4.25. Security Interests 21
4.26. Place of Business 21
4.27. Location of Collateral 21
4.28. Clear Title To Collateral 21
4.29. Assumed Names 21
4.30. [INTENTIONALLY OMITTED] 21
4.31. NTI Purchase Agreement 22
ARTICLE 5: CONDITIONS OF CLOSING 22
5.01 Initial Closing 22
5.02 Tranche 3 Closing 23
ARTICLE 6: CONDITIONS OF LENDING 24
6.01. Conditions for Initial Advance 24
6.02. Conditions for All Advances 25
6.03. Affirmation of Representations and Warranties 26
6.04. Deadline for Funding Conditions 26
ARTICLE 7: AFFIRMATIVE COVENANTS 26
7.01. Reporting and Information Requirements 27
7.02 Other Notices 28
7.03. Notice of Pension-Related Events 28
7.04. Inspection Rights 28
7.05. Preservation of Corporate Existence and Qualification 29
7.06. Continuation of Business 29
7.07. Insurance 29
7.08. Payment of Taxes, Charges, Claims and Current
Liabilities 30
7.09. Financial Accounting Practices 31
7.10. Compliance with Laws 31
7.11. Use of Proceeds 31
7.12. Government Authorizations; Regulatory Authorizations, Etc 31
7.13. Contracts and Franchises 31
7.14. Consents 31
7.15. Financial Covenants 31
7.16. Construction and Storage 31
7.17. Upgrade NTI Equipment 32
ARTICLE 8: NEGATIVE COVENANTS 32
iii
<PAGE>
8.01. Additional Indebtedness 32
8.02. Restrictions on Liens and Sale of Collateral 32
8.03. Limitation on Contingent Obligations 33
8.04. Fees and Commissions 33
8.05. Prohibition of Mergers, Acquisitions, Name, Office or
Business Changes 33
8.06. Limitation on Equity Payments 33
8.07. Limitation on Investments, Advances and Loans 34
8.08. Capital Expenditures 34
8.09. Limitation on Leases 34
8.10. Transactions with Affiliates 34
8.11. Termination of NTI Purchase Agreement 34
8.12. Removal of Collateral 34
8.13. Assumed Names 35
ARTICLE 9: EVENTS OF DEFAULT 35
9.01. Events of Default 35
9.02. Consequences of an Event of Default 38
9.03. Exercise of Rights 38
9.04. Rights of Secured Party 38
9.05. Notices, Etc. Waived 38
9.06. Additional Remedies 39
9.07. Application of Proceeds 39
9.08. Discontinuance of Proceedings. 39
9.09. Power of Attorney 39
9.10. Regulatory Matters 40
ARTICLE 10: GENERAL CONDITIONS/MISCELLANEOUS 41
10.01. Modifications and Waivers 41
10.02. Advances Not Implied Waivers 41
10.03. Deviation from Covenants 41
10.04. Holidays 42
10.05. Records 42
10.06. Notices 42
10.07. FCC and PUC Approval 42
10.08. Lender Sole Beneficiary 43
10.09. Lender's Review of Information 43
10.10. No Joint Venture 43
10.11. Severability 43
10.12. Rights Cumulative 43
10.13. Duration; Survival 43
10.14. Governing Law 43
10.15. Counterparts 43
10.16. Successors and Assigns 44
10.17. Participation 44
10.18. Time of Essence 44
10.19. Disclosures and Confidentiality 44
10.20. Jurisdiction and Venue 46
10.21. Jury Waiver 46
iv
<PAGE>
10.22. Limitation on Liability 46
10.23. Borrower Waivers 46
10.24. Schedules 47
10.25. Agreement to Govern 47
10.26. Entire Agreement 47
v
<PAGE>
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 F Certificate of Financial Condition
Exhibit G Form of Guaranty
Exhibit H Form of Indenture
Exhibit I Form of Memorandum Draft
vi
<PAGE>
SECOND AMENDED AND RESTATED
EQUIPMENT LOAN AND SECURITY AGREEMENT
THIS SECOND AMENDED AND RESTATED EQUIPMENT LOAN AND SECURITY AGREEMENT
("Agreement") dated as of January 28, 1998, is by and among ECONOPHONE, INC.,
a New York corporation ("Econophone"), AMERICAN TELEMEDIA, LTD, an English
corporation ("ATL") and wholly owned subsidiary of Econophone (Econophone and
ATL each a "Borrower" and, collectively with such additional subsidiaries of
Econophone as may become a Borrower pursuant to Section 2.11, the "Borrowers")
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. Econophone has entered into a certain purchase agreement with
Northern Telecom Inc., as described on Schedule 1 hereto, providing for the
purchase of certain telecommunications equipment and the license of associated
software, all as described therein, and has requested Lender to extend credit
to the Borrowers to finance such purchase and license, as described on
Schedule 1 hereto.
B. Econophone, ATL and Lender previously entered into the Original Loan
Agreement, pursuant to which the Lender agreed to loan Econophone up to Five
Million Dollars ($5,000,000) subject to the terms and conditions stated in the
Original Agreement, and
C. Econophone and ATL have requested Lender to amend and restate the
Original Loan Agreement and all amendments thereto pursuant to this Agreement
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 and/or Software purchased by a
Borrower in furtherance of or in connection with the Description of Business
set forth on Schedule 1, other than the purchase of the Equipment or Software
with the Advances.
"Additional Borrower Obligations": in the case of any Borrower other than
Econophone, all Indebtedness, liabilities and obligations of such 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
<PAGE>
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 executed by such Borrower, and any expenses of
collection or protection of Lender's rights, including reasonable attorneys'
fees.
"Advance(s)": any advance or loan of funds made by Lender to a Borrower
pursuant to this Agreement.
"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 a Borrower with an Affiliate of
a Borrower or a Subsidiary thereof, whether the Borrower, such Affiliate of
a Borrower or a Subsidiary thereof, or another entity is the surviving entity,
or other combination involving a Borrower and Affiliate, provided that (i)
such Affiliate Transaction does not cause a Change of Control of Econophone;
(ii) the surviving corporation is a Subsidiary of Econophone and assumes the
obligations of such 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 any assumption by such
successor of such Borrower's obligations hereunder, there shall not exist a
Default or Event of Default.
"Basic Agreements": a collective reference to this Agreement, each Note,
and the Security Documents.
"Borrowing Certificate": a certificate substantially in the form of
Exhibit B hereto designating the applicable Borrower hereunder, and executed
by Econophone and the applicable Borrower, if other than Econophone.
"Borrower": Econophone, ATL and such additional Subsidiaries of
Econophone as may become a Borrower pursuant to Section 2.11 of this
Agreement.
"Borrowing Date": any Business Day on which an Advance is made to a
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.
"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 Econophone or its Subsidiaries free of any claims or
encumbrances.
2
<PAGE>
"Cash Flow": during any fiscal period of Econophone, the sum (on a
consolidated basis) 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 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": 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 Securities Exchange
Act of 1934 (the "Exchange Act") of voting stock representing a greater
percentage of the total voting power of the voting stock of Econophone, 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) of more than 35% of the total voting power of the voting
stock of Econophone on a fully diluted basis and such ownership represents
a greater percentage of the total voting power of the voting stock of
Econophone, on a fully diluted basis, than is held by the Existing
Stockholders and their Affiliates on such date; or (ii) individuals who on
the Tranche 3 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 Econophone'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 Tranche 3
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.
"Code": the Internal Revenue Code of 1986, as amended from time to
time.
"Collateral": as defined in Section 3.01 hereof and any other property
granted as security to Lender for Obligations hereunder.
"Commitment": the Tranche 1 Commitment, the Tranche 2 Commitment, and
the Tranche 3 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 and Landlord Consents.
"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
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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 Econophone, the sum of all
principal and interest payments that Econophone is required to make during
such period on a consolidated basis on account of all of 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 Cash Flow for such fiscal period to Debt Service for such fiscal period.
"Default": any of the conditions or occurrences specified in
Section 9.01, whether or not any 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, on a consolidated basis, Econophone's
actual operating earnings from ongoing operations and before interest, taxes,
depreciation and amortization for such fiscal period.
"Econophone Obligations": all indebtedness, liabilities and obligations
of Econophone 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 executed by Econophone, the
Guaranty and any expenses of collection or protection of Lender's rights,
including reasonable attorneys' fees.
"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.
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"Equipment": as defined in Section 3.01 hereof.
"Equity Payment": any distribution of earnings or capital to any Owner
with respect to such Owner's stock or other equity ownership interests, or any
redemption of stock or other equity ownership interests, either directly or
indirectly, whether in cash or property or in obligations of Econophone or any
of its Subsidiaries.
"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.
"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.
"FCC": the Federal Communications Commission of the United States of
America, and any successor, in whole or in part, to its jurisdiction.
"Financing Termination Date": the Tranche 1, Tranche 2 or Tranche 3
Financing Termination Date.
"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 Econophone's independent certified public accountants concur),
applied both to classification of items and amounts.
"General Intangibles": as defined in Section 3.01 hereof.
"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.
"Guaranty": the guaranty dated the date hereof in favor of Lender
executed by Econophone in the form of Exhibit G.
"High Yield Notes": $155,000,000 principal amount (or such higher amount
as may be issued) of Econophone's Senior Notes, which are issued pursuant to
the Indenture, containing such terms and conditions therein and as may be
contained in the documents referred to therein, and in any case (i) which are
unsubordinated and unsecured (except for approximately $55,000,000 (or such
proportionately higher amount in the event greater than $155,000,000 principal
amount of High Yield Notes are issued) of net proceeds from the issuance of
the High Yield Notes and accompanying warrants that will be pledged as
security for the payment of the first six scheduled interest payments due on
the High Yield Notes) obligations of Econophone, with a maturity date not
earlier than 2007, (ii) on which interest will be payable semi-annually in
arrears, and which will be subject to no put rights or redemption rights,
except for (w) upon the occurrence of asset sales under certain circumstances,
(x) an optional right of redemption by Econophone no earlier than January 1,
2002, (y) a right of Econophone to redeem up to 35% of the aggregate principal
amount of High Yield Notes, exercisable no later than July 15, 2000, with the
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proceeds of Public Equity Offerings, as such term is defined in the
Indenture as it exists on the date hereof, and (z) an obligation of
Econophone to offer to purchase the High Yield Notes at a price equal to
101% of the aggregate principal amount thereof, plus any accrued interest,
upon the occurrence of a Change in Control, as such term is defined in the
Indenture as it exists on the date hereof. The term "High Yield Notes"
shall also include any securities issued to replace, renew, or refinance,
in whole or in part, any High Yield Notes so long as such securities
contain maturity, subordination and interest payment terms no less
favorable to Lender than the terms contained in clauses (i) and (ii) above.
"High Yield Period": the time during which High Yield Notes are issued
and outstanding.
"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 Indebtedness constituting trade
payables incurred by Borrower in the ordinary course of business.
Indenture: that certain Indenture dated as of July 1, 1997, between
the Borrower and The Bank of New York as trustee, pursuant to which
Borrower's High Yield Notes are issued.
"Initial Payment Date": either a Tranche 1, Tranche 2 or Tranche 3
Initial Payment Date.
"Interest Payment Date": either a Tranche 1, Tranche 2 or Tranche 3
Interest Payment Date.
"Interest Rate": either a Tranche 1, Tranche 2, or Tranche 3 Interest
Rate, in each case as defined in 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": Any loan made pursuant to the Tranche 1 Commitment, the Tranche
2 Commitment or the Tranche 3 Commitment.
"Loan Documents": a collective reference to this Agreement, each Note,
the Guaranty, 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 Econophone and its Subsidiaries taken as a whole,
(ii) the ability of Econophone 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.
"1996 Flexible Incentive Plan": the 1996 Flexible Incentive Plan of
Econophone, as amended from time to time, pursuant to which options for shares
of common stock of Econophone may from time to time be granted or sold to key
employees of Econophone and its Subsidiaries and other third parties in order
to retain or to create an incentive for such key employees and other third
parties.
"Note": collectively, the Tranche 1 Note, the Tranche 2 Note, the Tranche
3 Note and any other promissory notes issued by a 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 Econophone (or to another Borrower with
respect to which Advances hereunder are used directly or indirectly to finance
the acquisition cost thereof upon the satisfaction of the requirements of
Section 3.09) at any time pursuant to the NTI Purchase Agreement or any
purchase order issued by Econophone to NTI (or such other Borrower), 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 Econophone (or with any other
Borrower covering NTI Equipment for which Advances hereunder are used directly
or indirectly to finance the acquisition cost thereof upon the satisfaction
of the requirements of Section 3.09) and all purchase orders and invoices
issued pursuant thereto, all as approved by Lender.
"Obligations": all Econophone Obligations and Additional Borrower
Obligations.
"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,
in each case as may be in effect from time to time.
"Original Loan Agreement": that certain Equipment Loan and Security
Agreement, dated as of May 28, 1996 between Econophone and Lender, as first
amended by that certain Letter Agreement dated as of November 18, 1996
extending the funding date, and as subsequently amended and restated and
joined in by ATL. as of March 27, 1997, and further amended by that First
Amendment to Amended and Restated Equipment Loan and Security Agreement dated
as of April 24, 1997, by that Second Amendment to Amended and Restated
Equipment Loan and Security Agreement dated as of June 26, 1997, by that Third
Amendment to Amended and Restated Equipment Loan and Security Agreement, dated
as of August 7, 1997 and by that Fourth Amendment to Amended and Restated Loan
and Security Agreement, dated as of December 31, 1997.
"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, Tranche 2 or Tranche 3 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; (g) money market mutual funds which invest solely in investments
meeting the criteria of Permitted Investments; and (h) during the High Yield
Period, Temporary Cash
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Investments, as such term is defined in the Indenture as it exists on the date
hereof.
"Person": an individual, corporation, limited liability company,
partnership, business or other trust, unincorporated association, joint
venture, joint-stock company, Governmental Authority or any other entity.
"Plan": any employee pension benefit plan to which Section 4021 of ERISA
applies and (i) which is maintained for employees of Econophone or (ii) to
which Econophone 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 Econophone 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 Econophone'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.
"Public Equity Offering": an underwritten primary public offering of
common stock of Econophone pursuant to an effective registration statement
under the Securities Act of 1933.
"Public Market": (i) a Public Equity Offering has been consummated and
(ii) at least 15% of the total issued and outstanding Common Stock of
Econophone has been distributed by means of an effective registration
statement under the Securities Act or sales pursuant to Rule 144 under the
Securities Act.
"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 Econophone or its Subsidiaries
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) Econophone or any Subsidiary becomes subject to regulation by any
Governmental Authority in any way that is materially different from the
regulation existing at the Tranche 3 Closing Date and that could materially
adversely affect Econophone's ability to perform its material obligations
under the Loan Documents or Lender's rights thereunder or the Collateral, or
(iii) the FCC or PUC issues an order revoking, denying or refusing to
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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.
"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 Econophone or its Subsidiaries, 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 Econophone other than
an Unrestricted Subsidiary.
"Security Documents": this Agreement, the Consents, all financing
statements, all documents and instruments executed and/or delivered by or on
behalf of any Borrower in favor of Lender granting and perfecting liens and
security interests on NTI Equipment and related Software to be installed in
the United Kingdom, Belgium, France, the Netherlands, Germany and such other
locations outside the United States as Lender may approve 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, Econophone or any of its Subsidiaries or with respect to
which Econophone or any of its Subsidiaries has or may have license or use
rights.
"Subsidiary": as to any Person, a corporation, partnership, limited
liability company or other entity of which shares of stock or other ownership
interests having ordinary voting power (other than stock or other ownership
interests having such power only by reason of the happening of a contingency)
to elect a majority of the board of directors or other managers of such
corporation, partnership, limited liability company, or other entity, are at
the time owned, or the management of which is otherwise
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controlled, directly or indirectly, through one or more intermediaries, or
both, by such Person. Unless otherwise qualified, all references to a
"Subsidiary" or to "Subsidiaries" in this Agreement shall refer to a
Subsidiary or Subsidiaries of Econophone.
"Subordination Agreement": one or more subordination agreements
reasonably acceptable to Lender.
"Subordinated Indebtedness": Indebtedness of any Borrower for money
borrowed for the use of such Borrower, payment of which is fully
subordinated to the payment of all Additional Borrower Obligations or
Econophone Obligations, as applicable, upon terms and provisions set forth
in a Subordination Agreement.
"System": Econophone's complete telecommunications network or system
constructed and/or operated by Econophone and its Subsidiaries, of which
the Equipment forms a part.
"Tranche 1 Closing Date": as defined in Schedule 1 hereto.
"Tranche 2 Closing Date": as defined in Schedule 1 hereto.
"Tranche 3 Closing Date": as defined in Schedule 1 hereto.
"Tranche 1 Commitment": as defined in Section 2.01 hereof.
"Tranche 2 Commitment": as defined in Section 2.01 hereof.
"Tranche 3 Commitment": as defined in Section 2.01 hereof.
"Tranche 1 Financing Termination Date": as defined in Schedule 2.02
hereto.
"Tranche 2 Financing Termination Date": as defined in Schedule 2.02
hereto.
"Tranche 3 Financing Termination Date": as defined in Schedule 2.02
hereto.
"Tranche 1 First Borrowing Date": the date of the first borrowing by
Borrower hereunder for Advances made prior to the Tranche 2 Closing Date.
"Tranche 2 First Borrowing Date": the date of the first borrowing by
Borrower hereunder for Advances made on or after the Tranche 2 Closing
Date, but before the Tranche 3 Closing Date.
"Tranche 3 First Borrowing Date": With respect to each Borrower, the
date of the first borrowing by such Borrower hereunder for Advances made on
or after the Tranche 3 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 3 Initial Payment Date": as defined on Schedule 2.02 hereto.
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"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 3 Interest Payment Date": as defined on Schedule 2.02 hereto.
"Tranche 1 Interest Rate": as defined in Schedule 2.02 hereto.
"Tranche 2 Interest Rate": as defined in Schedule 2.02 hereto.
"Tranche 3 Interest Rate": as defined in 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 3 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 3 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 up to $2,000,000 executed by Econophone
in favor of Lender pursuant to this Agreement evidencing loans under the
Tranche 1 Commitment, 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 up to $3,000,000 executed by
Econophone and by ATL as joint and several obligors in favor of Lender and any
other promissory notes issued by Econophone to Lender pursuant to this
Agreement evidencing loans under the Tranche 2 Commitment, and all extensions,
renewals, modifications, replacements, amendments, restatements and
refinancings thereof.
"Tranche 3 Note": one or more promissory notes in an aggregate principal
amount of up to $19,000,000 executed by Econophone and one or more other
Borrowers as joint and several obligors in favor of Lender and any other
promissory notes issued by a Borrower to Lender pursuant to this Agreement
evidencing loans under the Tranche 3 Commitment, 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.
"Tranche 3 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
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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 Econophone that at the
time of determination shall be designated an Unrestricted Subsidiary by the
board of directors of Econophone in the manner provided below and (ii) any
Subsidiary of an Unrestricted Subsidiary. The board of directors of
Econophone may designate any Restricted Subsidiary (including any newly
acquired or newly formed Subsidiary of Econophone) to be an Unrestricted
Subsidiary unless such Subsidiary owns any Capital Stock of, or owns or holds
any Lien on any property of, Econophone or any Restricted Subsidiary; provided
that (A) any Guarantee by Econophone 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 Econophone 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 of the
Indenture as it exists on the date hereof 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 of the Indenture
as they exist on the date hereof. 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 Indenture shall have the meanings assigned to them in the
Indenture as it exists on the date hereof.
"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 Indenture shall have the meanings assigned to them in the
Indenture as it exists on the date hereof.
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.
1.03. UCC Terms. Except as otherwise provided 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 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
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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
2.01. Commitment. (a) 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 Econophone, from time to time from and
after the Tranche 1 Closing Date and before the Tranche 1 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 "Tranche
1 Commitment"), solely for the purpose set forth on Schedule 2.01.
(b) 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 the Borrowers, from time to time from and after the Tranche 2
Closing Date and before the Tranche 2 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 "Tranche 2 Commitment"), solely for the
purpose set forth on Schedule 2.01.
(c) 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 the Borrowers, from time to time from and after the Tranche 3
Closing Date and before the Tranche 3 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 "Tranche 3 Commitment"), solely for the
purpose set forth on Schedule 2.01.
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 the applicable Borrower,
payable to the order of Lender, and shall evidence the obligation of such
Borrower to repay all principal amounts advanced under or pursuant to
this Agreement, together with interest and all other amounts due
thereunder. All Loans made under the Tranche 1 Commitment ("Tranche 1
Loans") shall be evidenced by the Tranche 1 Note originally dated May 28,
1996, and all such Tranche 1 Loans shall have a stated maturity that is
the Tranche 1 Maturity Date, and will bear interest at the Tranche 1
Interest Rate from and including the borrowing date of such Tranche 1
Loan until such Tranche 1 Loan or any
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amount thereof is paid in full (whether on the Tranche 1 Maturity Date,
by acceleration or otherwise). All Loans made under the Tranche 2
Commitment ("Tranche 2 Loans") shall be evidenced by the Tranche 2 Note,
originally dated March 27, 1997, and all such Tranche 2 Loans shall have
a stated maturity that is the Tranche 2 Maturity Date, and will bear
interest at the Tranche 2 Interest Rate from and including the Tranche
2 First Borrowing Date until Tranche 2 Note or any amount thereof is paid
in full (whether on the Tranche 2 Maturity Date, by acceleration or
otherwise). All Loans made pursuant to the Tranche 3 Commitment
("Tranche 3 Loans") shall be evidenced by one or more Tranche 3 Notes
which will have a stated maturity that is the Tranche 3 Maturity Date,
and bear interest at the Tranche 3 Interest Rate from and including the
borrowing date of such Tranche 3 Loan until such Tranche 3 Loan or any
amount thereof is paid in full (whether on the Tranche 3 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 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 the applicable 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 applicable Interest Rate
and shall be payable, in arrears, on each applicable Interest Payment
Date. Interest shall not accrue with respect to principal that is repaid
on any date if such principal shall have been repaid prior to 1:00 p.m,
New York time, on such date. All accrued interest shall be payable, in
arrears, with the principal payments described below.
(c) Principal Payments. (i) All Tranche 1 Loans are term loans and
all principal amounts due with respect to Tranche 1 Loans 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 Tranche 2 Closing Date, based on the
aggregate amount of all Advances made under the Tranche 1 Commitment at
any time. Borrower and Lender understand that this payment schedule is
intended to amortize fully the principal amount advanced under the
Tranche 1 Commitment 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 Tranche 2 Closing Date will be added to the final
payment on the Tranche 1 Maturity Date. In any event, the entire
outstanding principal amount of all Tranche 1 Loans and all accrued but
unpaid interest and all other outstanding amounts due with respect
thereto shall be paid on the Tranche 1 Maturity Date.
(ii) All Tranche 2 Loans are term loans, and all principal amounts due
with respect to the Tranche 2 Loans 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 Tranche 2 Closing Date and before the Tranche
3 Closing Date, based on the aggregate amount of all Advances made under
the Tranche 2 Commitment at any time. Borrower and Lender understand that
this payment schedule is intended to amortize fully the principal amount
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advanced under the Tranche 2 Commitment 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 Tranche 2 Closing Date and before the Tranche
3 Closing Date will be added to the final payment on the Tranche 2
Maturity Date. In any event, the entire outstanding principal amount of
all Tranche 2 Loans and all accrued but unpaid interest and all other
outstanding amounts due with respect thereto shall be paid on the Tranche
2 Maturity Date.
(iii) Tranche 3 Loans are term loans, and all principal amounts due with
respect to the Tranche 3 Loans shall be payable in installments in
accordance with the Tranche 3 Payment Schedule set forth on Schedule 2.02
hereto, commencing on the Tranche 3 Initial Payment Date and on each
Payment Date thereafter until the Tranche 3 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 3 First Borrowing Date; provided, however, that the principal
payment amounts shall be recalculated by Lender each time Advances are
made hereunder after the Tranche 3 Closing Date, based on the aggregate
amount of all Advances made under the Tranche 3 Commitment at any time.
Borrower and Lender understand that this payment schedule is intended to
amortize fully the principal amount advanced under the Tranche 3
Commitment in equal monthly payments from the date of such Advance to the
Tranche 3 Maturity Date and any other principal and interest amounts
outstanding representing amounts owed under Advances after the Tranche
3 Closing Date will be added to the final payment on the Tranche 3
Maturity Date. In any event, the entire outstanding principal amount of
all Tranche 3 loans and all accrued but unpaid interest and all other
outstanding amounts due with respect thereto shall be paid on the Tranche
3 Maturity Date.
(d) Late Payments and Default Rate. Notwithstanding the foregoing,
if a 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, such Borrower shall pay to Lender, to defray
the administrative costs of handling such late payments, an amount equal
to interest on the amount overdue and unpaid, to the extent permitted
under applicable law, at the Default Rate (instead of the applicable
Interest Rate), from and including 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 cured by
a Borrower or 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 Borrowers 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 the
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applicable Borrower due to Lender, and if none is outstanding, shall be
paid to the applicable Borrower. In determining whether or not the
interest paid or payable, under any specific contingency, exceeds the
highest lawful rate, each 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
the applicable 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 under the Tranche 1, Tranche 2, or Tranche 3
Commitment on or after the Financing Termination Date for such tranche.
Lender is hereby authorized to retain from each Advance all amounts of
Lender's Expenses that are accrued and unpaid and for which invoices have
been sent to Econophone at least five (5) Business Days before such
Advance. In any event, all outstanding Lender's expenses consisting of
legal fees, charges and expenses not paid 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, a
Borrower shall send to Lender, at least five (5) 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
Lender's expenses consisting of legal fees, charges and expenses arising
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 reasonably determined by Lender.
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(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 a Borrower shall be
necessary to warrant such direct advances, and the execution of this Loan
Agreement by Econophone and borrowings hereunder by any Borrower shall,
and hereby do, 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 such
Borrower.
2.04. Prepayments.
(a) Voluntary Prepayments. Econophone may, at its option, at any
time, prepay and cause the other Borrowers to prepay the Loans, in whole
but not in part, upon at least thirty (30) Business Days prior written
notice to Lender specifying the date and amount 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 the sum of (i) the amount of additional interest (if
any) that would have been payable by Borrowers under the Tranche 3 Loans
had the Tranche 3 Rate Adjustment been fixed at three hundred ninety five
basis (395) points during the entire term of the Tranche 3 Loans and not
subject to adjustment as provided in Schedule 2.02, plus (ii) a
percentage of the amount prepaid as follows: three percent (3%) if the
prepayment is made not more than one year after the date hereof; two
percent (2%) if the prepayment is made more than one (1), but not more
than two (2) years after the date hereof, one percent (1%) if the
prepayment is made more than two (2), but not more than three (3) years
after the date hereof, and zero percent (0%) if the prepayment is made
more than three (3) years after the date hereof. Amounts prepaid may not
be reborrowed and shall be applied as provided in Section 2.04(c).
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.
(b) Mandatory Prepayment. Upon Lender's demand, 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.
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2.06. Payments. All payments and prepayments to be made in respect
of principal, interest, prepayment premiums or other amounts due from any
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. Econophone 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 any 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 any Borrower to pay when due (by acceleration or
otherwise) any principal, interest, fee or any other amount due hereunder or
under any Note, and any failure of any 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.
Econophone's obligations under this Section 2.07 shall be part of the
Obligations and shall be secured by the Collateral. Econophone agrees that
upon written notice by Lender of the assertion of any Claims, Econophone
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 the Borrowers only for the purposes and in the amounts described
in Section 2.01 hereof, and no amounts repaid may be reborrowed.
2.09. Fees. Econophone shall pay Lender the fees described on
Schedule 2.09 hereto in connection with this Agreement.
2.10. Lender's Expenses. Econophone 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
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Documents. 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 Econophone has not paid to Lender the amount of all Lender's Expenses
billed to Econophone 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. Econophone'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
accrued at the time of any Advance before any of Econophone's legal fees or
similar expenses.
2.11 Additional Borrowers. Lender acknowledges and agrees that subject
to compliance with the terms and conditions of this Agreement (including but
not limited to Section 3.09), the Borrowers in respect of the Tranche 2 and
Tranche 3 Loans made hereunder may include Econophone, ATL and other foreign
or domestic Subsidiaries of Econophone that are designated in a Borrowing
Certificate delivered pursuant to Section 2.03(b) hereof. The Borrowers agree
that, prior to making any Advance in accordance with the terms hereof to any
Borrower other than Econophone or ATL, such Borrower shall execute and deliver
to Lender a written acknowledgement, in form reasonably satisfactory to Lender
of such Borrower's assumption of the terms of this Agreement insofar as such
terms are applicable to such Borrower together with a Note evidencing the
amount of the Advance made to such Borrower.
ARTICLE 3: COLLATERAL AND SECURITY AGREEMENT
3.01. Grant of Security Interest. As security for the Obligations,
in the case of Econophone and for the Additional Borrower Obligations in the
case of any other Borrower, each 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 each Borrower's rights under the NTI Purchase Agreement;
(b) All (i) general intangibles and intangible property
constituting part of, or provided by or through NTI in connection with,
the Equipment and (ii) general intangibles and intangible property
constituting part of, or provided by or through NTI in connection with,
the System which is necessary for the proper operation of the Equipment
by a Person other than such Borrower, including in clauses (i) and (ii)
without limitation, 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
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to such Borrower by Lender or NTI, but excluding any general intangibles
or intangible property not financed by Lender that is used by any
Borrower in its business for a purpose exclusive of the operation of the
Equipment (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 such 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").
3.02. Priority of Security Interests. The security interests granted
by the Borrowers 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.
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 applicable Borrower, each 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 Borrowers also hereby authorize
the Lender, during the existence of an Event of Default or Default, to file
any such financing statement or amendment thereto, without the signature of
the applicable 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 applicable Borrower
as such 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. Each 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 any 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 a Borrower, shall be
deemed a failure to exercise reasonable care in the custody or preservation
of such Collateral.
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3.07. Advances to Protect Collateral. All insurance expense and all
reasonable expenses of protecting, storing, warehousing, insuring, handling,
maintaining and shipping the Collateral (including, without limitation, all
rent payable by the Borrowers 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
the Borrowers. After the occurrence and during the continuance of a Default,
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
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, but solely following the occurrence of an Event
of Default and in connection with Lender's exercise of remedies hereunder
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 during the
continuance of an Event of Default and thereafter if Lender is attempting to
sell Collateral which it has acquired from the Borrowers by way of foreclosure
or deed in lieu of foreclosure, and Borrowers' 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 the Borrowers acknowledge that
Advances (i) under the Tranche 2 Commitment may be used by a Borrower to
acquire NTI Equipment and related Software which will be installed in London,
England, Brussels, Belgium and/or Paris, France and (ii) under the Tranche 3
Commitment may be used by a Borrower to acquire NTI Equipment and related
Software which will be installed in the United States or the United Kingdom,
Belgium, France, the Netherlands, Germany or such other location outside the
United States as Lender may approve. As a condition to any Advance by Lender
to a Borrower to finance the acquisition of NTI Equipment to be located
outside the United States, such Borrower shall (i) deliver a list identifying
all NTI Equipment and specifying where in such country such NTI Equipment will
be located, (ii) at the sole expense of such 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 enforceable against Borrower and third
parties in accordance with its terms, and subject to no other liens or
security interest other than Permitted Encumbrances, and (iii) deliver an
opinion of counsel in favor of Lender, in form and substance to the reasonable
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 which is enforceable against Borrower and third parties in
accordance with its terms, 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
Econophone hereby represents and warrants to Lender as follows:
4.01. Organization and Qualification. Each Borrower and its
Subsidiaries is duly organized,
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validly existing and in good standing as a corporation or other business
entity under the laws of its jurisdiction of organization. Each Borrower and
its Subsidiaries 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. Each 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. Each Borrower's execution, delivery and performance of the Basic
Agreements to which such Borrower is a party has been duly and validly
authorized by all necessary corporate proceedings on the part of such
Borrower.
4.03. Execution and Binding Effect. All Basic Agreements have been
or will be duly and validly executed and delivered by the applicable
Borrowers, and constitute or, when executed and delivered will constitute, the
legal, valid and binding obligations of the applicable Borrower enforceable
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, and general equitable
principles (whether considered in a proceeding at law or in equity).
4.04. Governmental Authorizations. Except for the consents identified
on Schedule 4.04 hereto (the "Required Consents"), and such consents with
respect to which the failure to obtain will not have a Material Adverse
Effect, 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 any Borrower or any Subsidiary thereof, consummation of the
transactions herein or therein contemplated, performance of or compliance by
any Borrower or any Subsidiary thereof with the terms and conditions hereof
or thereof or the legality, validity and enforceability hereof or thereof.
4.05. Regulatory Authorizations. Other than for authorizations,
permits and licenses with respect to which the failure to obtain will not have
a Material Adverse Effect, the Borrowers hold, directly or through
Subsidiaries, 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 any 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 any Borrower or of any Subsidiary thereof or any
agreement or instrument to which any Borrower is a party or by which any
Borrower or any Subsidiary or any of their respective properties is bound; or
(c) result in the creation or imposition of any Lien upon any property (now
owned or hereafter acquired) of any Borrower or any Subsidiary thereof except
as otherwise permitted by this Agreement.
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4.07. No Restrictions. Neither the Borrowers nor any Subsidiary
thereof is 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. Neither the Borrowers nor any Subsidiary thereof is a party or
subject to any contract or agreement which restricts its right or ability to
incur Indebtedness hereunder, other than as set forth on Schedule 4.07, none
of which prohibit the Borrower's execution of or compliance with this
Agreement. Neither the Borrowers nor any Subsidiary has 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. Econophone has furnished to Lender the
most recent annual or quarterly financial statements of Econophone, certified
by a Responsible Officer of Econophone, including balance sheets and related
statements of income, retained earnings and cash flow statements, as described
on Schedule 4.08 hereof. Such financial statements (including the notes
thereto) present fairly the financial condition of Econophone 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 (except that quarterly financial statements may be subject to
normal year end adjustments), all in conformity with GAAP applied on a basis
consistent with that of the preceding fiscal period.
4.09. Financial Accounting Practices. Each Borrower and its
Subsidiaries has made and kept books, records and accounts which, in
reasonable detail, accurately and fairly reflect its respective transactions
and dispositions of its assets, and each Borrower and its Subsidiaries 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 in any
financial statement, certificate, report, exhibit or document furnished by
Borrower 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
respect (including by omission of information necessary to make such
representation, warranty or statement not misleading), other than which are
unintentional and do not have a Material Adverse Effect. There are no facts
known to Borrower that constitute a Material Adverse Effect, or, in Borrower's
reasonable estimation, will constitute 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 date
hereof.
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 first Advance to
be made on or after the Tranche 3 Closing Date. As of the date hereof, no
Borrower nor any Subsidiary thereof is in violation of any material 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 to Econophone's knowledge threatened proceeding by or
before any Governmental Authority against or
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affecting any Borrower, any Subsidiary thereof or any of their respective
properties, rights or licenses which if adversely decided would have a
Material Adverse Effect.
4.13. Rights to Property; Intellectual Property. Econophone or, to
the extent permitted by Section 3.09, such other Borrower has good and
marketable title, subject only to the Permitted Encumbrances, (i) to the
Collateral acquired with proceeds of an Advance to such party and (ii) 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 a manner permitted by this Agreement 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). Econophone (either directly or through its
Subsidiaries) 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. Econophone's financial condition is
accurately described in the Certificate of Financial Condition executed by
Econophone pursuant hereto.
4.15. Taxes. Econophone'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 each
Borrower have been properly prepared, executed and filed other than for such
failure to file that will not have a Material Adverse Effect, 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 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 Econophone
or by any of its Subsidiaries have been properly prepared, executed and filed
and all taxes, assessments, fees and other governmental charges upon Borrower
or upon a Subsidiary or upon any of their 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 or
such Subsidiary 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.
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 Econophone or any of its Subsidiaries and
any carrier, any labor organization, any customer any supplier or any group
thereof whose agreements with Econophone or any such Subsidiary or use of the
Equipment individually or in the aggregate are material to the business of
Econophone and its Subsidiaries on a consolidated basis and which would have
a Material Adverse Effect, 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 (either directly or through a
Subsidiary) after the consummation of the transactions contemplated by this
Agreement.
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4.19. No Brokerage Fees. No brokerage or other fee, commission or
compensation is to be paid by any Borrower to any Person other than Lender in
connection with the loans to be made hereunder. Econophone hereby indemnifies
Lender against any claims brought against Lender for brokerage fees or
commissions of any Person based on an agreement with any 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. No Borrower is 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. No Borrower
is 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. No Borrower is a "personal holding
company" as defined in Section 542 of the Code.
4.23. ERISA. Except as would not have a Material Adverse Effect, (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 any Plan or to appoint a trustee to administer any such Plan, (v)
neither Econophone nor any Affiliate has withdrawn, completely or partially,
from any Plan and (vi) neither Econophone nor any Affiliate has incurred
secondary liability for withdrawal liability payments under any Plan.
4.24. Environmental Warranties. Each Borrower and its Subsidiaries
are in compliance with all Environmental Laws applicable to it or its business
or to the real or personal property owned, leased or operated by it, with
respect to which noncompliance would have a Material Adverse Effect. Neither
Borrower nor any Subsidiary has received notice of, or is aware of, any
violations or alleged violations, or any liability or asserted liability,
under any such Environmental Laws, with respect to it 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,
first priority security interest in all right, title, estate and interest of
the Borrowers in the Collateral subject to no Liens except for Permitted
Encumbrances. 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, except to the extent permitted to take
place thereafter by operation of Section 3.09 or Schedule 6.02. The recording
and filings shown on Schedule 4.25 are all the actions (other than the
periodic filing of continuation statements) necessary or advisable in order
to establish, protect and perfect the interest of Lender in the Collateral as
of the date hereof.
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4.26. Place of Business. The chief executive offices of Econophone
are identified on Schedule 4.26 hereto. Each Borrower's principal place of
business in the state(s) where the Equipment is located is identified on
Schedule 4.26 hereto or on a supplemental schedule delivered pursuant to
Section 3.09. The Borrowers' 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 indicated pursuant to Section 3.09 or 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 on a supplemental
schedule delivered pursuant to Section 3.09 (or such other location as may be
permitted after compliance with Section 8.12) to any other location identified
on Schedule 4.26 or on a supplemental schedule delivered pursuant to Section
3.09 (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 applicable Borrower is, or will
be, upon purchase pursuant to the NTI Purchase Agreement or otherwise the sole
owner of each item of the Collateral acquired with proceeds of such Advance
borrowed by such Borrower, having good and insurable title thereto, free and
clear of any and all Liens, claims, or rights of others, except for the
security interest granted to the Lender herein (or in a separate agreement
between such Borrower and Lender) and the other Permitted Encumbrances.
4.29. Assumed Names. Except as set forth on Schedule 4.29 hereto,
none of the Borrowers conducts 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.
4.30. [INTENTIONALLY OMITTED].
4.31. [INTENTIONALLY OMITTED].
ARTICLE 5: CONDITIONS OF CLOSING
5.01 Tranche 1 and Tranche 2 Closings. On or before the Tranche 1
Closing Date and the Tranche 2 Closing Date, the conditions set forth in the
Original Loan Agreement for such closings shall have been satisfied. Lender
acknowledges that all such conditions have been satisfied as of the date
hereof.
5.02 Amendment and Restatement. Except as provided in Schedule 6.02, on
or before the Tranche 3 Closing Date and the date hereof, the following
conditions shall have been satisfied:
(a) A certificate of Econophone signed by a duly authorized
Responsible Officer, certifying as to (i) true copies of Organizational
Documents of Econophone in effect on such date; (ii) true copies of all
corporate action taken by Econophone relative to this Agreement, each Note and
the other Loan Documents; (iii) the names, true signatures and incumbency of
the Responsible Officers of Econophone authorized to execute and deliver this
Agreement, each Note and the other Loan Documents; (iv) a Certificate of Good
Standing (or equivalent certificate) for Econophone, duly issued by the
Secretary of State of (A) each state in which the Borrower intends to locate
Equipment and (B) each state in which the failure to be so qualified would
have a Material Adverse Effect; and (v) such other matters as Lender
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shall reasonably request.
(b) A certificate of ATL signed by a duly authorized Responsible
Officer, certifying as to (i) true copies of Organizational Documents of ATL
in effect on such date; (ii) true copies of all corporate action taken by ATL
relative to this Agreement, each Note and the other Loan Documents to which
it is a party; (iii) the names, true signatures and incumbency of the
Responsible Officers of ATL authorized to execute and deliver this Agreement,
each Note and the other Loan Documents to which it is a party; (iv) a
Certificate of Good Standing (or equivalent certificate) for ATL, duly issued
by the appropriate government office of the United Kingdom; and (v) such other
matters as Lender shall reasonably request.
(c) Opinions of Counsel. Lender shall have received the following
opinions, all dated as of the date hereof and all in form and substance
satisfactory to Lender:
(i) A written opinion of counsel to Borrower substantially in the
form of Exhibit C-1 hereto; and
(ii) A written opinion of counsel to ATL substantially in the form
of Exhibit C-2 hereto; and
(iii) A written opinion of regulatory counsel for Econophone,
substantially in the form of Exhibit D hereto.
(d) Closing Documents. Lender shall have received the following
documents, all in form and substance satisfactory to Lender:
(i) Agreement. This Agreement, duly executed by Econophone and ATL;
(ii) Guaranty. An Guaranty Agreement duly executed By Econophone
unconditionally guaranteeing all amounts advanced hereunder;
(iii) Financing Statements. Except as provided in Schedule 6.02,
all UCC-1 financing statements necessary to perfect the Liens granted
hereby, each duly executed by the appropriate Borrower, and duly recorded
in all the offices identified on Schedule 4.25 hereto;
(iv) Insurance. Except as provided in Schedule 6.02, Policies and
certificates of insurance required by Section 7.07, accompanied by
evidence of the payment of the premiums therefor;
(v) Financial Statements. The financial statements described in
Section 4.08 hereto;
(vi) Balance Sheet. A balance sheet of Econophone, dated as of
September 30, 1997, certified by a Responsible Officer as fairly
presenting the financial condition of the Borrower.
ARTICLE 6: CONDITIONS OF LENDING
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6.01. Conditions for Initial Advance. Except as provided in Schedule
6.02, on or before the Tranche 3 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 on the Collateral other than security interests 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 Borrowers' 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. Except as provided in Schedule
6.02, 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:
(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 and Note. 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
reasonably satisfactory to Lender, together with a Note executed by such
Borrower in the principal amount of the Advance requested evidencing the
Loan under the applicable tranche.
(c) Reporting Requirements. The Borrowers shall have provided
Lender with all relevant reports and information required under Article
7 hereof.
(d) No Regulatory Event. No Regulatory Event (in the reasonable
determination of Lender or any Borrower) 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
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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), subject to and as provided in Section 2.03 hereof.
(i) Opinions. Lender shall have received from the applicable
Borrower (if requested) such opinions of counsel for such 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 and the enforceability of
the written acknowledgement such Borrower's assumption of the terms of
this Agreement insofar as such terms are applicable to such Borrower and
the Note evidencing the amount of the Advance made to such Borrower.
(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.
(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) Advances for NTI Equipment and Related Software to be located
outside the United States. In the event the proceeds of an Advance are
to be used for the purchase of NTI Equipment and related Software to be
located outside the United States, the Borrowers shall have complied with
the requirements of Section 3.09 of this Agreement.
(m) Consents. Lender shall have received Consents duly executed
by all necessary parties and in form satisfactory to Lender.
(n) NTI Purchase Agreement. Lender shall have received a copy of
the executed NTI Purchase Agreement with respect to which proceeds of an
Advance shall be used to acquire NTI Equipment, and Lender's shall have
reviewed and approved the NTI Equipment to be acquired with proceeds of
an Advance.
(o) Minimum Financial Performance. For any Advance occurring after
December 31, 1997 or that would cause total Advances under the Tranche
3 Commitment to be in excess of
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$5,000,000, Econophone must have satisfied the minimum financial
performance requirement set forth in Schedule 6.02 during the time
periods set forth therein.
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
Econophone 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, Econophone shall keep
and perform fully each and all of the following covenants:
7.01. Reporting and Information Requirements.
(a) Annual Audit Reports. Within three (3) months after the close
of each fiscal year of Econophone, Econophone shall furnish or cause to
be furnished to Lender audited statements of income, retained earnings
and statements of cash flows for such fiscal year and the Econophone's
balance sheet as of the close of such fiscal year, and notes to each, all
in reasonable detail, and beginning with Econophone'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
Econophone and reasonably satisfactory to Lender.
(b) Quarterly Reports. Within forty-five (45) days after the end
of the first three fiscal quarters, Econophone shall furnish to Lender
(i) unaudited consolidated statements of income and retained earnings and
cash flow statements for Econophone for such quarter and for the period
from the beginning of Econophone's then current fiscal year to the end
of such quarter, and an unaudited consolidated balance sheet of
Econophone as of the end of such month, all in reasonable detail and
certified by a Responsible Officer of Econophone as presenting fairly the
financial position of Econophone 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.
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(c) Compliance Certificates. Within sixty (60) days after the end
of each Calendar Quarter, Econophone shall deliver to Lender a
certificate dated as of the end of such period, signed on behalf of
Econophone by a Responsible Officer of Econophone: (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
Econophone; (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 Econophone's
compliance with the financial covenants set forth in Section 7.15 hereof;
and (iv) certifying an attached aging schedule of Econophone's accounts
receivables and trade payables for the period then ended.
(d) [INTENTIONALLY DELETED].
(e) [INTENTIONALLY OMITTED]
(f) Other Reports and Information. Promptly upon their becoming
available to Econophone, Econophone shall deliver to Lender copies of (i)
all regular or special reports or effective registration statements which
Econophone 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 Econophone to its
creditors or the financial community in general, (iii) all press releases
issued by or concerning Econophone 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 indenture as it exists on the date hereof).
(g) Further Information. Econophone 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 Econophone or
any other Borrower becoming aware of any of the following, Econophone or such
other Borrower shall give Lender notice thereof, together with a written
statement of a Responsible Officer of Econophone or such other Borrower
setting forth the details thereof and any action with respect thereto taken
or contemplated to be taken by Econophone or such other Borrower:
(a) a Default or Event of Default;
(b) any Material Adverse Change;
(c) a material default or breach by Econophone or any of its
Subsidiaries 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 Econophone on a consolidated basis;
(d) any event that Econophone or such other Borrower reasonably
determines would constitute a Regulatory Event;
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(e) the commencement, existence or threat of any proceeding by or
before any Governmental Authority against Econophone or any of its
Subsidiaries which, if adversely decided, would have a Material Adverse
Effect;
(f) Econophone's or any Subsidiary's receipt of any notice of
violation of, or liability under, any Environmental Laws affecting
Econophone, a Subsidiary or any of their respective properties; or
(g) any Change in Control or any material change in the management
of Borrower.
7.03. Notice of Pension-Related Events. Econophone shall promptly
furnish Lender with written notice upon the receipt by Econophone 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 Econophone
describing the event or the action taken and the reasons therefor.
7.04. Inspection Rights. Econophone shall upon reasonable notice
permit (and shall cause its Subsidiaries to permit) such persons as Lender may
designate to visit and inspect the Collateral or any other properties of
Econophone and its Subsidiaries, 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 request. Econophone hereby authorizes (and shall cause
its Subsidiaries to authorize) such officers, employees, and independent
engineers to discuss with Lender the affairs of Econophone and its
Subsidiaries. Lender agrees that it will not use any such confidential
information in a manner prohibited by law or, directly or indirectly, disclose
to any third party confidential information of Econophone 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 Econophone 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
Econophone; or (iv) is or becomes publicly available free of any obligation
to keep it confidential.
7.05. Preservation of Corporate Existence and Qualification.
Econophone shall (and shall cause each other Borrower) maintain its existence,
good standing and rights in full force and effect in its jurisdiction of
organization and shall (and shall cause each other Borrower to) 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 any Borrower or any
Subsidiary thereof from
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entering into an Affiliate Transaction.
7.06. Continuation of Business. Econophone shall continue to engage
solely in the business described on Schedule 1 hereto, and shall acquire and
maintain in full force and effect all material 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) Econophone 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 any 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) Econophone shall cause (i) all liability insurance policies
covering any premises in which Collateral is located and all policies
insuring against liability arising from the Borrowers' 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 Econophone 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 any insurance
coverage. Except as set forth in Schedule 6.02, Econophone shall furnish
Lender copies of, or acceptable certificates with respect to, all such
policies prior to the date hereof, and shall provide to Lender, at least
thirty days prior to each policy expiration date, evidence of the
insurance being maintained by Econophone 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,
Econophone 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
Econophone 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
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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.
Econophone 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 (other than a Permitted
Encumbrance) 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 a
Borrower in a case under Title 11 (Bankruptcy) of the United States Code,
as amended, or in any 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 $250,000, is overdue more than ninety
(90) days.
Notwithstanding the foregoing, the Borrowers shall be entitled to contest
or appeal the requirements of any Law or Governmental Authority or the payment
of any tax, assessment, charge, levy, claim or other liability, or any
judgment entered against a 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, Econophone 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) the applicable 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 such
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 a Borrower or any of its
properties in connection
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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. Econophone 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. The Borrowers shall comply in all
respects with all Laws applicable to the Borrowers, provided that the
Borrowers 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 direct liability
or exposure to Lender or any fines, penalties, injunctive relief or other
civil or criminal liabilities which, in the aggregate, would have a Material
Adverse Effect.
7.11. Use of Proceeds. The Borrowers shall use the proceeds of
Advances hereunder only as set forth in Section 2.01 hereof.
7.12. Government Authorizations; Regulatory Authorizations, Etc.
Other than for any matter in which the failure to comply with this covenant
will not have a Material Adverse Effect, the Borrowers 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 the legality, validity
and enforceability hereof or thereof.
7.13. Contracts and Franchises. The Borrowers 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 the Borrowers 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. The Borrowers shall obtain such Landlord'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. Econophone 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. All Equipment financed with the proceeds of the Loan
shall be safeguarded and stored until installed in appropriate storage
facilities owned or leased by Econophone or any other Borrower. In the event
of any cessation of construction for more than fifteen
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(15) successive calendar days, Econophone or such other 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. Econophone shall update the software
customarily used in equipment of the same type as the Equipment within two
releases of the most current batch change supplement release. The Borrowers
shall maintain the Equipment in good working order in accordance with
established maintenance procedures such that the Equipment performs to
published specifications 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 Tranche 3 Closing Date.
ARTICLE 8: NEGATIVE COVENANTS
Econophone 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, Econophone shall
not, and shall not permit any Subsidiary to, 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 $250,000 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 Econophone or
its Subsidiaries, 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
"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 Econophone or such Subsidiary; (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 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 Econophone or such Subsidiary in compliance with Section 7.08
hereof.
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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 and guarantees thereof 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 otherwise in the telecommunications business.
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 such 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 Econophone 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 that does not result in a Change of Control of Borrower,
amend, restate or otherwise modify, or violate any terms of, its
Organizational Documents in any manner that affects the Lender without
the prior written 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 Econophone or its Subsidiaries 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 Econophone or its Subsidiaries
as currently conducted or related to the telecommunications industry.
(g) Enter into any new business other than 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
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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
in Schedule 7.15, 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 Econophone or its Subsidiaries as currently conducted or
as otherwise in the telecommunications business 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 Econophone or its Subsidiaries as
currently conducted or otherwise in the telecommunications business (other
than Permitted Investments) without Lender's prior written consent, and (y)
other than on terms no more onerous to Econophone or its Subsidiaries than if
negotiated on an arms-length basis with an unrelated person.
8.08. Capital Expenditures. Directly or indirectly make or commit to
make any expenditure in excess of $250,000 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 Econophone and its
Subsidiaries as currently conducted or otherwise in the telecommunications
business and normal replacements and maintenance which are properly charged
to current operations; provided that the limitations of this section shall not
apply during the High Yield Period.
8.09. Limitation on Leases. Enter into any agreement, or be or become
liable under any agreement, not in existence as of the date hereof and
reflected on Econophone's financial statements, for the lease, hire or use of
any real or personal property in excess of $250,000 in the aggregate,
including, without limitation, capital or operating leases, except that
Econophone and its Subsidiaries Borrower or such Subsidiary may, in the
ordinary course of business and on term standard in the industry, enter into
leases or 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; provided that the limitations of this section shall not apply
during the High Yield Period.
8.10. Transactions with Affiliates. In the case of Econophone and
Restricted Subsidiaries 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 or any Restricted
Subsidiary, except upon fair and reasonable terms no less favorable to
Econophone 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 Econophone or (B) for which the Econophone or a
Restricted Subsidiary delivers to the Lender a written opinion of a nationally
recognized
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investment banking firm stating that the transaction is fair to Econophone or
such Restricted Subsidiary from a financial point of view, (ii) any
transaction solely between Econophone 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 Econophone, (iv) any payments or other transactions
pursuant to any tax-sharing agreement between Econophone and any other Person
with which Econophone files a consolidated tax return or with which Econophone
is part of a consolidated group for tax purpose, (v) any Restricted Payments
not prohibited by Section 4.04 or 4.05 of the Indenture as it exists on the
date hereof, (vi) employment agreements with, and loans and advances to,
officers and employees of Econophone and its Restricted Subsidiaries, in each
case in the ordinary course of business, (vii) customary indemnification
arrangements in favor of directors and officers of Econophone and its
Restricted Subsidiaries, (viii) transactions in accordance with the provisions
of the Preferred Stock of Econophone as set forth in the Certificate of
Incorporation of the Borrower on the date of the issuance of the High Yield
Notes or (ix) 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
(vi) of this paragraph, the aggregate amount of which exceeds $3,000,000 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. 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, transact or engage
in business under any assumed name, fictitious name, tradestyle or "d/b/a,"
except those identified on Schedule 4.29, and provided further that this
limitation does not apply to any Subsidiary of Borrower.
8.14. Employment of, or Competition by, Key Employees. (i) Cease to
employ on a full time basis Alfred West (other than by reason of his death or
disability) or (ii) suffer to exist any material competition by any of Gary
Bondi, Alfred West or Steven West with the business conducted now or hereafter
by Econophone directly or through a Subsidiary.
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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 a 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 any Borrower 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 and shall not have been corrected or remedied to
the satisfaction of Lender within twenty (20) calendar days after the
earlier of Borrower'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]
(e) Undischarged Judgments. If one or more judgments for the
payment of money has been entered against Econophone or any Subsidiary
in an amount in excess of $1,000,000, 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 Econophone or any Subsidiary in excess of
$250,000 individually or in the aggregate have been issued against
Econophone or any Subsidiary 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
Econophone or any Subsidiary for borrowed money (including lease
obligations) in the amount of $1,000,000 individually or in the
aggregate; or
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(h) Dissolution; Discontinuance of Business, Etc. Econophone or
any other Borrower 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 Econophone or any
Subsidiary or of any substantial part of its respective property is
appointed by the order or decree of any court or agency or supervisory
authority having jurisdiction; or an order is entered adjudicating
Econophone or any Subsidiary as bankrupt or insolvent; or any
substantial part of the property of Econophone or any Subsidiary is
sequestered by court order; or a petition is filed against any
Borrower 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 and such petition is not dismissed within 30 days
of filing; or
(j) Voluntary Bankruptcy. If Econophone or any Subsidiary 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 under any such law; or
(k) Assignments for Benefit of Creditors, Etc. If Econophone or
any Subsidiary makes an assignment for the benefit of creditors, or
admits in writing its inability to pay its 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 properties; or
(l) Non-compliance with Governmental Requirements. If Econophone
or any Subsidiary 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, unless the effect of such
noncompliance in Lender's sole judgment would not have a Material
Adverse Effect; 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
Econophone 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
(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 reasonably cannot
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be effected within a time period short enough to prevent a Material
Adverse Effect;
(o) Landlord Waivers. If any Borrower fails to provide the
Landlord 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 if any Borrower (other than
Econophone) ceases to be a Subsidiary of Econophone; or
(q) ERISA Defaults. Except as does not reject in a Material
Adverse Effect, 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.
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 Econophone, as agent for each Borrower, declare the unpaid
principal amount of each Note, interest accrued thereon and all other amounts
owing by such 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
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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 the Borrowers waive, 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,
the Borrowers shall assemble, at its own expense, any or all Collateral owned
by such Borrower 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, the Borrowers hereby expressly waive, 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.
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 against the applicable Borrower
to collect such Borrower's 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 the Borrowers 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 Borrowers 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 the Borrowers, 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. The Borrowers hereby consent to the appointment of such
receiver.
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(b) Right to Cure. Following the occurrence and during the
continuance of an Event of Default, 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 any 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 any 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, such 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 such 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. The Borrowers hereby consent to and confirm 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 9, the Borrowers
hereby irrevocably constitute and appoint 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
such 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. The
Borrowers hereby ratify 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 any Borrower to accomplish the purposes of
this Agreement:
(a) upon failure of a 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;
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(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 a
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 a 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 the applicable 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 the applicable 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 the Borrowers, at their 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, the Borrowers shall promptly execute and/or cause the execution of
all 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 any Borrower fails or refuses to execute
such documents, the clerk of the court with jurisdiction may execute such
documents on behalf of such 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
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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 all Borrowers 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 any 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 a
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) Such 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 such 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.
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 a 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 a
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 a 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
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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, the Borrowers 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.
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. The Borrowers acknowledge and
agree 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 a 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 the
Borrowers. The Borrowers are not relying, and will not rely, on
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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 Borrowers 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 the
Borrowers 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 the
Borrowers 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.
Without limitation, it is understood that all obligations of the Borrowers 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 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 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 the Borrowers and their respective
successors and assigns; provided, however, that no Borrower may 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,
the Borrowers 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). The Borrowers shall not assert against
any such assignee any set-off, defense or counterclaim that the Borrowers may
have against Lender or any person other than such assignee. The Borrowers
shall also execute and deliver to Lender such documentation as any such
assignee may reasonably require, including but not limited to amended
49
<PAGE>
promissory notes and acknowledgment of or consent to the assignment which may
require the Borrowers 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 Borrowers, in which event after the date
of such assignment, Borrowers' obligations to any such assignee shall be
proportionately as set forth herein with respect to Lender, and Borrowers
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 Borrowers' 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,
provided that any Person shall invest a minimum amount of $5,000,000. The
Borrowers 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.
(b) The Borrowers agree 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 Borrowers, their Affiliates, underwriters,
prospective investors, 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.
50
<PAGE>
(c) The disclosure of information by either Lender or the
Borrowers 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 the Borrowers) 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) The Borrowers authorize 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
Borrowers and/or their 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 the Borrowers that the Lender
may distribute, whether such information was provided by the Borrowers
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 the
Borrowers 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 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. THE BORROWERS HEREBY IRREVOCABLY
CONSENT 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, the Borrowers waive 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, the Borrowers 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
51
<PAGE>
in default and judgment may be entered against the Borrowers 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 the Borrowers 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 BORROWERS. THE
BORROWERS 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. Borrowers Waivers. To the fullest extent permitted by law, the
Borrowers hereby waive (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 Borrowers may in any way be liable and
hereby ratifies and confirms whatever Lender may do in this 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 Borrowers
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 Borrowers until
termination of this Agreement and the execution by the Borrower and by any
person whose loans to the Borrowers 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 Borrowers acknowledge 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 Borrowers.
10.24. Schedules. The Schedules and Exhibits attached to this
Agreement are an integral part hereof, and are
52
<PAGE>
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. Borrowers are not entering into this Agreement in
reliance on statements or representations made by any Person other than as
set forth herein.
10.27. Several Obligations. The obligations of each Borrower
hereunder and under the other Loan Documents to which such Borrower is a
party shall be several and not joint obligations; provided, however that
notwithstanding the foregoing, Econophone shall be obligated jointly and
severally for all obligations of all other Borrowers hereunder.
10.28. Original Loan Agreement. Borrowers and Lender acknowledge and
agree that the Original Loan Agreement shall be of no further force and
effect and that, effective as of the date hereof, all Notes issued pursuant
to the Original Loan Agreement shall be deemed to be issued hereunder.
[END OF GENERAL TERMS AND CONDITIONS. NEXT PAGE IS SCHEDULE 1.]
[SIGNATURES ARE ON COVER PAGE.]
53
<PAGE>
Exhibit 10.16
PROMISSORY NOTE
$3,281,509.80 as of December 31, 1997
FOR VALUE RECEIVED, ECONOPHONE, INC., a New York corporation (the
"Borrower"), promises and agrees to pay to the order of NTFC CAPITAL
CORPORATION ("Lender"), its successors, assigns or any subsequent holder of
this Note (the "Lender") at its offices located at 220 Athens Way, Nashville,
Tennessee, 37228-1399, or at such other place as may be designated in writing
by Lender, in lawful money of the United States of America in immediately
available funds:
the lesser of Three Million, Two Hundred Eighty-One Thousand, Five Hundred
Nine and 80/100 Million Dollars ($3,281,509.80) or all amounts advanced
pursuant to the Tranche 3 Commitment of the Loan Agreement (defined below),
as noted on Schedule A hereto,
together with interest thereon and other amounts due as provided below.
Notations on the Schedule attached hereto are for convenience only, and the
failure of the Lender to make any notation on any Schedule, or any incorrect
notation by the Lender on any Schedule, shall not diminish the obligations of
the Borrower under this Note. This Note shall mature on the earlier of (i)
January 1, 2003 and (ii) the first Business Day of the sixtieth (60th) month
after the Tranche 3 First Borrowing Date (the "Tranche 3 Maturity Date") on
which all then-outstanding principal, interest, premium, expenses, fees,
penalties and other amounts due under the Note shall be finally due and
payable.
This Note is issued pursuant to that certain 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 and
that Third Amendment to Amended and Restated Equipment Loan and Security
Agreement dated as of August 7, 1997 and that Fourth Amendment to Amended and
Restated dated the date hereof (as it may be modified, amended or restated
from time to time, the "Loan Agreement"). Any term not otherwise defined in
this Note shall have the same meaning as in the Loan Agreement. Reference is
made to the Loan Agreement, which, among other things, permits the
acceleration of the maturity hereof upon the occurrence of certain events and
for prepayments in certain circumstances and upon certain terms and
conditions. This Note is secured by, among other things, the Collateral
described in the Loan Agreement and the Security Documents.
All advances hereunder shall bear interest from the date of such Advance
until such amount is due and payable (whether on any Payment Date, at the
Tranche 3 Maturity Date, by acceleration, or otherwise), at a variable
interest rate per annum (compounded monthly and computed on the basis of a
year of 360 days for the actual days elapsed) 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 $1,000 for repurchase within 90 days) as
reported in The Wall Street Journal, plus the Tranche 3 Rate Adjustment (as
defined below) (the "Interest Rate"). 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. The Tranche 3 Rate Adjustment initially
shall be three hundred and ninety-five (395) basis points,
<PAGE>
provided, that if Borrower meets any of the financial targets set forth below
as measured over any two complete successive Fiscal Quarters, the Tranche 3
Rate Adjustment shall adjust to the indicated rate at the commencement of the
Fiscal Quarter next succeeding such two Fiscal Quarters for so long as such
targets are maintained; provided further, if at any time during any Fiscal
Quarter the then applicable target is not maintained, the Tranche 3 Rate
Adjustment shall automatically increase to the appropriate amount determined
by the grid set forth below, effective as of the First Day of the first
Fiscal Quarter next succeeding the fiscal Quarter during which the applicable
target was not sustained. Borrower and Lender acknowledge that (i) any
increase or decrease in the Tranche 3 Rate Adjustment shall be retroactive to
the first day of the Fiscal Quarter immediately succeeding the Fiscal Quarter
for which targets were not sustained and (ii) Borrower shall pay Lender (or
Lender shall credit Borrower) an amount equal to any underpayment (or
overpayment) of interest by Borrower under the Tranche 3 Note for any Fiscal
Quarter on the Payment Date next following an increase or decrease in the
Tranche 3 Rate Adjustment following Borrower's reporting of results of
operation for such Fiscal Quarter pursuant to Section 7.01 of the Loan
Agreement.
<TABLE>
<CAPTION>
Financial Target Tranche 3 Rate Adjustment
- --------------------------------------------- -------------------------
<S> <C>
EBITDA is greater than -0- 350 basis points
Debt Service Coverage Ratio Greater 300 basis points
than 1.0 to 1
Debt Service Coverage Ratio greater 250 basis points
than 1.5 to 1
Debt Service Coverage Ratio Greater 200 basis points
than 2.0 to 1
</TABLE>
Interest shall accrue at the Interest Rate on all principal amounts
outstanding hereunder and shall be payable monthly in arrears, commencing on
the first Business Day of the first (1st) calendar month after the Tranche 3
First Borrowing Date and on the first Business Day of each consecutive
calendar month thereafter until the Tranche 3 Maturity Date.
Principal amounts outstanding hereunder shall be payable in sixty (60)
equal consecutive monthly installments equal initially to 1.667% of the
Advance made hereunder on the Tranche 3 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 hereunder, 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 through the Tranche 3 Maturity Date.
It is intended that the above amortization schedule will fully amortize
the principal amounts advanced under this Note. If any principal, interest,
or other charge or expense remains outstanding on
2
<PAGE>
the Tranche 3 Maturity Date, such amount shall be added to the payment due on
the Tranche 3 Maturity Date.
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 Note, Borrower shall pay to Lender, to defray the
administrative costs of handling such late payments, an amount equal to
interest on the amount overdue and unpaid, to the extent permitted under
applicable law, at a rate equal to the lesser of three percent (3%) higher
than the then applicable interest rate or the maximum permissible interest
rate under applicable law (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
the Loan Agreement. 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.
Notwithstanding any provision of this Note or the Loan Agreement to the
contrary, it is the intent of the Lender and the Borrower that the Lender or
any subsequent holder of this 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
this 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 (except that no
prepayment premium will be payable thereon), or, if the principal
indebtedness and all other amounts due are paid in full, any remaining excess
funds shall immediately be paid to the Borrower. In determining whether or
not the interest paid or payable, under any specific contingency, exceeds the
highest lawful rate, the Borrower and the 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 the 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, the Lender or any
subsequent holder of the Note shall refund to the 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, the
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.
All amounts received for payment under this Note shall at the option of
Lender be applied first to any unpaid expenses due Lender under this Note or
under any other documents evidencing or securing the obligations of Borrower
to Lender, then to any unpaid late charges, then to any unpaid interest
accrued at the Default Rate, then to all other accrued but unpaid interest
due under this Note and finally to the reduction of outstanding principal due
under this Note.
Upon the occurrence of any one or more of the Events of Default
specified in the Loan Agreement (each, an "Event of Default"), all amounts
then remaining unpaid on this Note shall be, or may be declared to be,
immediately due and payable as provided in the Loan Agreement, without
further notice, at the option of the Lender. Lender may waive any Event of
Default before or after the same has been declared and restore this Note to
full force and effect without impairing any rights hereunder, such
3
<PAGE>
right of waiver being a continuing one, but one waiver shall not imply any
additional or subsequent waiver. Time is of the essence of this Note.
Demand, presentment, notice and protest are expressly waived, except for
notices to Borrower otherwise expressly required in the Loan Agreement.
Borrower and any and all endorsers, guarantors and other parties liable on
this Note, and any and all general partners of Borrower or any endorsers,
guarantors or other parties liable on this Note (collectively, the
"Obligors") jointly and severally waive presentment for payment, protest,
notice of protest, notice of nonpayment of this Note, demand and all legal
diligence in enforcing collection, and hereby expressly consent to (i) any
and all delays, extensions, renewals or other modifications of this Note or
any waivers of any term hereof, (ii) any release or discharge by Lender of
any of the Obligors, (iii) any release, substitution or exchange of any
security for the payment hereof, (iv) any failure to act on the part of
Lender, and (v) any indulgence shown by Lender from time to time (without
notice or further assent from any of the Obligors) and hereby agree that no
such action, failure to act or failure to exercise any right or remedy by
Lender shall in any way affect or impair the obligations of any of the
Obligors.
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 NOTE, ANY DOCUMENTS EXECUTED OR DELIVERED IN CONNECTION
HEREWITH, INCLUDING WITHOUT LIMITATION THE LOAN AGREEMENT, OR ANY
RELATIONSHIP BETWEEN LENDER AND BORROWER, AND AGREES NOT TO CONTEST OR
CHALLENGE VENUE IN ANY SUCH COURTS.
Borrower irrevocably consents to the service of process of any such
courts in any such action or proceeding by the mailing of copies thereof by
registered or certified mail, postage prepaid, return receipt requested, to
Borrower at the address opposite its signature below or to such other address
as Borrower may have furnished to Lender in writing, and agrees that such
service shall become effective thirty (30) days after such mailing. However,
nothing herein shall affect the right of Lender or Borrower to serve process
in any other manner permitted by law or to commence legal proceedings or
otherwise proceed against Lender or Borrower in any other jurisdiction.
BORROWER HEREBY KNOWINGLY, WILLINGLY AND IRREVOCABLY WAIVES ITS RIGHTS
TO DEMAND A JURY TRIAL IN ANY ACTION OR PROCEEDING INVOLVING THIS NOTE, ANY
DOCUMENTS EXECUTED OR DELIVERED IN CONNECTION HEREWITH INCLUDING WITHOUT
LIMITATION THE LOAN AGREEMENT OR ANY RELATIONSHIP BETWEEN BORROWER AND
LENDER. BORROWER AGREES THAT LENDER MAY FILE AN ORIGINAL COUNTERPART OR COPY
OF THIS PARAGRAPH WITH ANY COURT AS WRITTEN EVIDENCE OF BORROWER'S EXPRESS
WAIVER OF ITS RIGHT TO TRIAL BY JURY.
IN ANY ACTION TO ENFORCE THIS NOTE, BORROWER HEREBY IRREVOCABLY AND
UNCONDITIONALLY WAIVES, TO THE EXTENT PERMITTED BY APPLICABLE LAW, ANY AND
ALL RIGHTS UNDER THE LAWS OF ANY STATE TO CLAIM OR RECOVER ANY SPECIAL,
EXEMPLARY, PUNITIVE, CONSEQUENTIAL OR OTHER DAMAGES OTHER THAN ACTUAL DIRECT
DAMAGES.
4
<PAGE>
In the event this Note is placed in the hands of one or more attorneys
for collection or enforcement or protection of the holder's rights described
herein or in the Loan Agreement or the other Loan Documents, the Borrower
agrees to pay all reasonable attorneys' fees and all court and other
out-of-pocket costs incurred by the holder hereof (as of which shall be due
on demand and shall bear interest at the rate then payable hereunder from
five (5) days after such demand is made until paid).
This Note is governed by and shall be construed in accordance with the
internal laws of the State of New York. If any provision of this Note should
for any reason be invalid or unenforceable, the remaining provisions hereof
shall remain in full force and effect.
This Note may not be changed, extended or terminated except in writing.
No waiver of any term or provision hereof shall be valid unless in writing
signed by Lender.
Executed as of December 31, 1997.
ECONOPHONE, INC.
By: /s/ Richard L. Shorten, Jr.
--------------------------------
Title: Senior Vice President and
General Cousel
5
<PAGE>
______________________________________________________________________________
STOCK PURCHASE AGREEMENT
BY and AMONG
ECONOPHONE, INC., as Buyer
and
RICHARD MASINO and ROBERT WUNDER, as Sellers
WHO ARE ALL THE SHAREHOLDERS OF
VOICENET CORPORATION
_______________________________________________________________________________
January 28, 1998
<PAGE>
TABLE of CONTENTS
Article Page
1. Purchase and Sale of Shares . . . . . . . . . . . . . . . . . . . . . . 1
2. Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
3. Additional Consideration. . . . . . . . . . . . . . . . . . . . . . . . 3
4. Purchase Price Adjustment . . . . . . . . . . . . . . . . . . . . . . . 5
5. Conditions to Closing . . . . . . . . . . . . . . . . . . . . . . . . . 8
6. Representations and Warranties of Sellers . . . . . . . . . . . . . . . 12
7. Covenants of Sellers. . . . . . . . . . . . . . . . . . . . . . . . . . 35
8. Representations and Warranties of Buyer. . . . . . . . . . . . . . . . .43
9. Covenants of Buyer. . . . . . . . . . . . . . . . . . . . . . . . . . . 45
10. Mutual Covenants. . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
11. Employee and Related Matters. . . . . . . . . . . . . . . . . . . . . . 47
12. Further Assurances. . . . . . . . . . . . . . . . . . . . . . . . . . . 47
13. Indemnification. . . . . . . . . . . . . . . . . . . . . . . . . . . . .48
14. Tax Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
15. Assignment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
16. No Third-Party Beneficiaries. . . . . . . . . . . . . . . . . . . . . . 62
17. Survival of Representations . . . . . . . . . . . . . . . . . . . . . . 62
18. Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
19. Attorney Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
20. Amendments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
21. Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .63
22. Interpretation; Exhibits and Schedules; Certain Definitions . . . . . . 64
23. Counterparts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
24. Entire Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
25. Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
26. Severability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
<PAGE>
27. Consent to Jurisdiction. . . . . . . . . . . . . . . . . . . . . . . . .66
28. Governing Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .67
29. Arbitration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .67
<PAGE>
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT ("this Agreement"), dated as of January 28,
1998, is made by and among Econophone, Inc., a New York corporation
("Buyer"); and Richard Masino, an individual domiciliary of the State of New
York ("Masino"), and Robert Wunder, an individual domiciliary of the State
of Connecticut ("Wunder"), together the holders of all the issued and
outstanding shares of capital stock of VoiceNet Corporation, a New York
corporation ("the Company") (each of Masino and Wunder individually a
"Seller" and together, jointly and severally, the "Sellers").
Sellers are the beneficial and record owners of all the issued and
outstanding shares of common stock, no par value (the "Shares"), of the
Company. Buyer desires to purchase from Sellers, and Sellers desire to sell
to Buyer, all the Shares upon the terms and subject to the conditions of
this Agreement.
Accordingly, Sellers and Buyer hereby agree as follows:
1. Purchase and Sale of Shares
1.1 On the terms and subject to the conditions of this Agreement, Sellers
shall sell, transfer and deliver or cause to be sold, transferred and
delivered to Buyer, and Buyer shall purchase from Sellers, the Shares
for an aggregate purchase price of US$21,000,000 (the "Purchase
Price"), payable as set forth below in Article 2, and subject to
adjustment as set forth herein. The Purchase Price shall be allocated
as follows: $20,500,000 for the Shares and $500,000 for the
non-competition covenant set forth in Section 7.6. Neither Buyer nor
Sellers (nor any of their respective Affiliates, as defined below)
shall take any position on any Tax return or with any taxing authority
that is inconsistent with the allocation of the Purchase Price set
forth in the preceding sentence.
<PAGE>
2. Closing
2.1 The closing of the purchase and sale of the Shares (the "Closing")
shall be held at the offices of Econophone, Inc., 45 Broadway, 30th
Floor, New York, New York, at 10:00 a.m. on February 17, 1998. The date
on which the Closing shall occur is hereinafter referred to as the
"Closing Date". At the Closing, (a) Buyer shall deliver to Sellers, by
wire transfer to a bank account or accounts (but in no event more than
two such accounts) designated in writing by Sellers at least two
business days prior to the Closing Date, immediately available funds in
the total amount of US$20,000,000 (the "Initial Consideration"); and
(b) Sellers shall deliver or cause to be delivered to Buyer
certificates representing the Shares, duly endorsed in blank or
accompanied by stock powers duly endorsed in blank in proper form for
transfer, with appropriate transfer stamps, if any, affixed.
2.2 At the Closing, Buyer shall also deliver to the escrow agent (the
"Escrow Agent") appointed by the parties pursuant to that separate
agreement dated the same date as this Agreement and in a form mutually
acceptable to Buyer and Sellers (the "Escrow Agreement"), by wire
transfer to the bank account specified in the Escrow Agreement (the
"Escrow Account"), (a) the amount of US$500,000, representing the
unadjusted balance of the purchase price for the Shares (the "Purchase
Balance"); and (b) the amount of US$500,000, representing the
allocation for the non-compete covenant (the "Non-Compete Payments")
(together, the "Escrowed Funds"). It is understood and agreed between
and among the parties that the Escrow Account may be interest-bearing
at the sole option of Sellers, and that funds contained in the Escrow
Account shall be invested pursuant to Sellers' sole instructions.
Notwithstanding the obligations on the part of Buyer to pay the
Purchase Balance and Non-Compete Payments to Sellers under the terms
and conditions of this Agreement, and the obligations of the Escrow
Agent to remit the said Purchase Balance and Non-Compete Payments to
Sellers under the terms and conditions of the Escrow Agreement, all
interest or other investment earnings accrued in the Escrow
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Account shall be for the sole account of Sellers. Amounts on deposit in
the Escrow Account shall secure Sellers' indemnification obligations
hereunder.
2.3 Subject to the terms of the Escrow Agreement, the Purchase Balance and
Non-Compete Payments shall be payable to Sellers from the Escrow
Account as follows:
2.3.1 One-half of the total Purchase Balance (i.e., US$250,000)
plus one-half of the Non-Compete Payments (i.e., US$250,000)
shall be payable to Sellers on the earlier of (a) August 14,
1998, or (b) the date of termination of Sellers' employment
with Buyer pursuant to the terms of the separate employment
agreements defined in subsection 5.1.6 hereof; and
2.3.2 The remainder of the Purchase Balance (i.e., US$250,000) plus
the balance of the Non-Compete Payments (i.e., US$250,000)
shall be payable to Sellers on February 15, 1999.
3. Additional Consideration
3.1 The Purchase Price payable in respect of the Shares shall be increased
by an amount (the "Earn-Out Bonus") which shall consist of two
components, computed monthly: (a) 8.16% of Calling Card EOB (as defined
below), plus (b) 2.4% of Additional EOB (as defined below); provided,
that no single element of Earn-Out Bonus will be calculated on both of
the separate components specified in this Section. The Earn-Out Bonus
shall be payable as set forth herein. For all purposes of this
Agreement, the following definitions shall apply:
3.1.1 "Calling Card EOB" means that amount by which Net Monthly
Revenues ("NMR," defined below) of Calling Card Services
(defined below) shall exceed US$3,500,000;
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3.1.2 "Additional EOB" shall mean the combined NMR of postpaid
"1+", prepaid "1+", fixed termination toll-free "800"/"888",
reroutable toll-free "800"/"888", ITFS, and local access PIN
services generated by the Company after the date of Closing
(collectively, the "Other Services");
3.1.3 "NMR" shall mean the gross monthly revenues of Calling Card
Services or Other Services, as the case may be, generated by
the Company; provided, however, that (a) the parties
expressly acknowledge that, as of the date of this Agreement,
the Buyer does not offer or otherwise furnish all of the
Other Services; and (b) no determination has been made as to
when or whether all of the Other Services might be introduced
by the Buyer;
3.1.4 "Calling Card Services" shall mean the following calling card
products and services only, and no other products or
services: (a) postpaid calling card products and postpaid
calling card services marketed by the Company (excluding
calling card products and services marketed by Buyer
independently of the Company); and (b) prepaid calling card
products and prepaid calling card services marketed by the
Company, but only to the extent such products or services are
provided to persons who initially sought to become customers
of the Company for post-paid calling card products or
services and who were denied credit and offered calling card
service strictly on a prepaid basis.
3.2 The Earn-Out Bonus shall be subject to the following additional terms
and conditions:
3.2.1 The Earn-Out Bonus shall be computed and paid by Econophone
no later than the 10th day following the conclusion of any
billing cycle (currently the 15th day of each calendar month)
with respect to the immediately preceding concluded billing
cycle, and shall be payable with respect to all complete
billing cycles (and on a pro rata basis for any partial
billing cycle) included in the period equal to the
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shorter of (a) the period that both Employment Agreements (as
defined in subsection 5.1.6 below) are in effect, and
(b) twelve months after the closing date (such period, as the
case may be, the "Earn-Out Bonus Period").
3.2.2 Sellers shall have 30 days in which to dispute Econophone's
computation of the Earn-Out Bonus payable with respect to any
billing cycle. The computation and payment shall become final
and binding upon Buyer and Sellers on the 30th day following
delivery thereof, unless Sellers give written notice of their
dispute ("Notice of Dispute") to Buyer prior to such 30th
day. Any Notice of Dispute shall (a) specify in reasonable
detail the nature of any disagreement so asserted; and
(b) relate to disagreements based upon mathematical errors or
based upon Earn-Out Bonus not being calculated in accordance
with this Article. If a Notice of Dispute is received by
Buyer in a timely manner, then Sellers and Buyer shall
undertake to resolve in writing any differences they have
with respect to the matters specified in the Notice of
Dispute; or, if no such resolution can be achieved between
and among the parties, then the dispute shall be submitted
for resolution to the independent accounting firm (the
"Accounting Firm") designated in Section 4.3 below.
Thereafter, the computation and payment shall become final
and binding upon Sellers and Buyer on the earlier of (i) the
date on which the parties agree to a revised version of the
computation; or (ii) the date any disputed matters are
finally resolved in writing by the Accounting Firm. The cost
of any such resolution (including the fees and expenses of
the Accounting Firm and reasonable attorney fees and expenses
of the parties) pursuant to this Section shall be borne by
Buyer and Sellers in inverse proportion as they may prevail
on matters resolved by the Accounting Firm, which
proportionate allocations shall also be determined by the
Accounting Firm at the time the determination of the
Accounting Firm is rendered on the merits of the matters
submitted.
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3.2.3 The Earn-Out Bonus shall be calculated on the NMR of all
business generated by the Company within the United States
only, excluding the NMR of any business with respect to which
Sellers do not exercise management responsibility pursuant to
their respective Employment Agreements. With respect to
foreign revenues, Sellers shall provide Buyer at Closing with
a written listing of all foreign media for which
advertisements for any or all of Calling Card Services or
Other Services are funded wholly by dealers pursuant to
arrangements negotiated by Sellers. Thereafter, for the
remainder of the Earn-Out Bonus Period, to the extent that
any NMR that are foreign revenues are generated from (i) such
dealer-funded advertising, or (ii) customer accounts
generated by those dealers who have arrangements negotiated
by Sellers, an additional Earn-Out Bonus shall be due and
payable on such foreign revenues in accordance with the NMR
formula set forth above. All other foreign revenues that are
not generated as a result of dealers introduced to Buyer by
Sellers shall be excluded from NMR and from consideration for
Earn-Out Bonus, irrespective of whether Buyer, for accounting
purposes or for any other reason of its own administrative
convenience, shall elect to book any or all such revenues
into the Company.
4. Purchase Price Adjustment
4.1 Within 60 days after the Closing Date, Buyer shall prepare and deliver
to Sellers a statement (the "Statement"), certified by an officer of
Buyer, setting forth the Net Operating Accruals (as defined below) as
of the close of business on the Closing Date ("Closing Operating
Accruals"). During the 45-day period following Sellers' receipt of the
Statement, Sellers shall be permitted to review the working papers of
Buyer relating to the Statement. The Statement shall become final and
binding upon Buyer and Sellers on the 45th day following delivery
thereof, unless Sellers give written notice of their disagreement with
the Statement ("Notice of Disagreement") to Buyer prior to such 45th
day.
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4.2 Any Notice of Disagreement shall (a) specify in reasonable detail the
nature of any disagreement so asserted; and (b) relate to disagreements
based upon mathematical errors or based upon Closing Operating Accruals
not being calculated in accordance with this Section. If a Notice of
Disagreement is received by Buyer in a timely manner, then Sellers and
Buyer shall undertake to resolve in writing any differences they have
with respect to the matters specified in the Notice of Disagreement;
or, if no such resolution can be achieved between and among the
parties, then the dispute shall be submitted for resolution to an
independent accounting firm (the "Accounting Firm") in accordance with
the procedure set forth in Section 4.3 below. Thereafter, the Statement
shall become final and binding upon Sellers and Buyer on the earlier of
(A) the date on which the parties agree to a revised version of the
Statement; or (B) the date any disputed matters are finally resolved in
writing by the Accounting Firm.
4.3 During the 45-day period following the delivery of a Notice of
Disagreement, Sellers and Buyer shall seek in good faith to resolve in
writing any differences which they may have with respect to the matters
specified in the Notice of Disagreement. During such period Buyer and
its auditors shall have access to Sellers' working papers (and the
working papers of their auditors) prepared in connection with their
certification of the Notice of Disagreement. At the end of such 45-day
period, Sellers and Buyer shall submit to the Accounting Firm (defined
immediately below) for review and resolution any and all matters which
remain in dispute and which were properly included in the Notice of
Disagreement. The Accounting Firm shall be Deloitte & Touche LLP, or,
if such firm is unable or unwilling to act, such other
nationally-recognized independent public accounting firm as shall be
agreed upon by the parties hereto in writing. Sellers and Buyer agree
to use reasonable efforts to cause the Accounting Firm to render a
decision resolving the matters submitted within 45 days following
submission. Sellers and Buyer agree that judgment may be entered upon
the determination of the Accounting Firm in any court having
jurisdiction over the party against which such determination is to be
enforced. The cost of any such resolution (including the fees and
expenses of the Accounting Firm and
7
<PAGE>
reasonable attorney fees and expenses of the parties) pursuant to this
Section shall be borne by Buyer and Sellers in inverse proportion as
they may prevail on matters resolved by the Accounting Firm, which
proportionate allocations shall also be determined by the Accounting
Firm at the time the determination of the Accounting Firm is rendered
on the merits of the matters submitted. The fees and disbursements of
Sellers' independent auditors incurred in connection with their review
of the Statement and certification of any Notice of Disagreement shall
be borne by Sellers, and the fees and disbursements of Buyer's
independent auditors incurred in connection with their review of the
Statement and review of any Notice of Disagreement shall be borne by
Buyer.
4.4 The Purchase Price shall be increased or decreased by the amount of Net
Operating Accruals as of the Closing Date. "Net Operating Accruals"
shall be calculated by fixing the sum of all receivables owed to the
Company as of the Closing Date, and subtracting from that figure the
sum of all liabilities or other amounts owed by the Company, including
any commissions, trade payables, and short-term and long-term debt
obligations; provided, however, that the receivables and payables set
forth on Schedule 4.4 hereto shall be included or excluded from this
calculation as set forth on such Schedule. If Net Operating Accruals is
a positive number (i.e., receivables greater than payables), then the
Purchase Price shall be increased by the amount of Net Operating
Accruals. If Net Operating Accruals is a negative number (i.e.,
receivables less than payables), then the Purchase Price shall be
decreased by the amount of Net Operating Accruals (the Purchase Price
as so increased or decreased shall hereinafter be referred to as the
"Adjusted Purchase Price").
4.5 All calculations required to calculate Net Operating Accruals in the
previous Section shall be made in accordance with generally accepted
accounting principles, whether or not in accordance with the historical
accounting practices of the Company. To the extent generally accepted
accounting principles permit alternate treatments of any item
comprising Net Operating Accruals, the particular treatment used in the
preparation of the Balance Sheet shall also be used in the preparation
of the Statement.
8
<PAGE>
4.6 During the period of time from and after the date of delivery of the
Statement to Sellers through the resolution of any adjustment to the
Purchase Price contemplated by this Article, Buyer shall cause the
Company to afford to Sellers and any accountants, counsel or financial
advisers retained by Sellers in connection with any adjustment to the
Purchase Price contemplated by this Article reasonable access during
normal business hours to the Company's books and records to the extent
relevant to the adjustment contemplated by this Article.
4.7 Within 10 business days after the Statement becomes final and binding
on the parties, Buyer shall pay to Sellers the amount of any increase
in the Adjusted Purchase Price, or Sellers shall pay to Buyer the
amount of any decrease in the Adjusted Purchase Price, as the case may
be. Any payment required under this Section shall be by wire transfer
in immediately available funds, together with interest thereon at a
rate equal to the rate of interest from time to time announced publicly
by Citibank, N.A. as its prime rate, calculated on the basis of the
actual number of days elapsed over 365, from the Closing Date to the
date of payment.
5. Conditions to Closing
5.1 Buyer's Obligation. The obligation of Buyer to purchase and pay for
the Shares is subject to the satisfaction (or waiver by Buyer) as of
the Closing of the following conditions:
5.1.1 The representations and warranties of Sellers made in this
Agreement qualified as to materiality shall be true and
correct, and those not so qualified shall be true and correct
in all material respects, as of the date hereof and as of the
time of the Closing as though made as of such time, except to
the extent such representations and warranties expressly
relate to an earlier date (in which case such representations
and warranties qualified as to materiality shall be true and
correct, and those not so qualified shall be true and correct
in all material respects, on and
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<PAGE>
as of such earlier date). Sellers shall have performed or
complied in all material respects with all obligations and
covenants required by this Agreement to be performed or
complied with by Sellers by the time of the Closing. Sellers
shall have delivered to Buyer a certificate dated the Closing
Date confirming the foregoing.
5.1.2 Buyer shall have received an opinion of Stroock & Stroock &
Lavan LLP, counsel to Sellers, dated the Closing Date, in a
form reasonably satisfactory to Buyer.
5.1.3 No statute, rule, regulation, executive order, decree,
temporary restraining order, preliminary or permanent
injunction or other order enacted, entered, promulgated,
enforced or issued by any Federal, state, local or foreign
government or any court of competent jurisdiction,
administrative agency or commission or other governmental
authority or instrumentality, domestic or foreign (a
"Governmental Entity") or other legal restraint or
prohibition preventing the purchase and sale of the Shares
shall be in effect.
5.1.4 There shall not be pending or threatened by any Governmental
Entity or by any other person any suit, action or proceeding
(a) challenging or seeking to restrain or prohibit the
purchase and sale of the Shares or any of the other
transactions contemplated by this Agreement or seeking to
obtain from Buyer or any of its affiliates in connection with
the purchase and sale of the Shares any material damages;
(b) seeking to prohibit or limit the ownership or operation
by Buyer, the Company or any of their respective subsidiaries
of any material portion of the business or assets of Buyer,
the Company or any of their respective affiliates, or to
compel Buyer, the Company or any of their respective
affiliates to dispose of or hold separate any material
portion of the business or assets of Buyer, the Company or
any of their respective affiliates, in each case as a result
of the purchase and sale of the Shares or any of the other
transactions contemplated by
10
<PAGE>
this Agreement; (c) seeking to impose limitations on the
ability of Buyer to acquire or hold, or exercise full rights
of ownership of, the Shares, including the right to vote the
Shares on all matters properly presented to the stockholders
of the Company; or (d) seeking to prohibit Buyer or any of
its subsidiaries from effectively controlling in any material
respect the business or operations of the Company or any of
its subsidiaries.
5.1.5 Sellers shall have obtained the written consent of the
landlord of the office premises at 2780 Middle Country Road,
Lake Grove, New York, to assignment of the Company's current
office lease to Buyer without cost or penalty.
5.1.6 Each of Sellers shall have entered into an employment
agreement with Buyer (individually, the "Employment
Agreement" and collectively, the "Employment Agreements")
substantially in the form annexed hereto as Exhibits A-1 and
A-2.
5.1.7 The Escrow Agreement shall have been duly executed by each of
Sellers.
5.1.8 To the extent that any assets are required to be transferred
by Sellers into or out of the Company in order to effectuate
the transactions contemplated hereby, such transfer of assets
is accomplished in a manner reasonably acceptable to Buyer.
5.2 Sellers' Obligation. The obligation of Sellers to sell and deliver the
Shares to Buyer is subject to the satisfaction (or waiver by Sellers)
as of the Closing of the following conditions:
5.2.1 The representations and warranties of Buyer made in this
Agreement qualified as to materiality shall be true and
correct, and those not so qualified shall be true and correct
in all material respects, as of the date hereof and as of the
time of the Closing as though made as of such time, except to
the extent such representations
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and warranties expressly relate to an earlier date (in which
case such representations and warranties qualified as to
materiality shall be true and correct, and those not so
qualified shall be true and correct in all material respects,
on and as of such earlier date). Buyer shall have performed
or complied in all material respects with all obligations and
covenants required by this Agreement to be performed or
complied with by Buyer by the time of the Closing. Buyer
shall have delivered to Sellers a certificate dated the
Closing Date and signed by an authorized officer of Buyer
confirming the foregoing.
5.2.2 Sellers shall have received an opinion dated the Closing Date
of Lacher & Fox, counsel to Buyer, in a form reasonably
satisfactory to Sellers.
5.2.3 No statute, rule, regulation, executive order, decree,
temporary restraining order, preliminary or permanent
injunction or other order enacted, entered, promulgated,
enforced or issued by any Governmental Entity or other legal
restraint or prohibition preventing the purchase and sale of
the Shares shall be in effect.
5.2.4 There shall not be pending or threatened by any Governmental
Entity or by any other person any suit, action or proceeding
challenging or seeking to restrain or prohibit the purchase
and sale of the Shares or any of the other transactions
contemplated by this Agreement or seeking to obtain from
Sellers or any of its affiliates in connection with the
purchase and sale of the Shares any material damages;
provided, however, that this condition shall be deemed to be
waived by Sellers as to any suit, action or proceeding
(except for any suit, action or proceeding by any
Governmental Entity) if Buyer provides to Sellers
indemnification in form and substance reasonably satisfactory
to Sellers and its counsel with respect to any such suit,
action or proceeding.
5.2.5 The Escrow Agreement shall have been duly executed by Buyer.
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5.2.6 Sellers shall have confirmed the Escrow Agent's receipt of
the Escrowed Funds specified in Section 2.2 hereof,
simultaneously with or prior to the Closing.
5.2.7 All commissions payable by Buyer to Sellers in connection
with the one month period ending January 15, 1998 shall have
been paid at or prior to the Closing (it being agreed by and
among Sellers and Buyer that all commissions payable by Buyer
to Sellers in connection with the period commencing January
16, 1998 and ending at the Closing shall be included in the
calculation of Net Operating Accruals).
5.3 Frustration of Closing Conditions.
5.3.1 Neither Buyer nor Sellers may rely on the failure of any
condition set forth in this Article to be satisfied if such
failure was caused by such party's failure to act in
reasonable good faith or to use its reasonable best efforts
to cause the Closing to occur.
5.3.2 In the event that Buyer shall not consummate the Closing in
accordance with the terms of this Agreement, other than as
the result of the failure of any of the conditions to Closing
set forth in Section 5.1 hereof ("Buyer's Failure To Close"),
then, in addition to all other remedies provided for in this
Agreement, Buyer shall be obligated to pay to Sellers the sum
of $10,000 for each day that the Closing shall be delayed
solely on account of Buyer's Failure To Close.
5.3.3 In the event that Sellers shall not consummate the Closing in
accordance with the terms of this Agreement, other than as
the result of the failure of any of the conditions to Closing
set forth in Section 5.2 hereof ("Sellers' Failure To
Close"), then, in addition to all other remedies provided for
in this Agreement, Sellers jointly and severally shall be
obligated to pay to Buyer the sum of $10,000 for
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each day that the Closing shall be delayed solely on account
of Sellers' Failure To Close.
6. Representations and Warranties of Sellers
Sellers hereby jointly and severally represent and warrant to Buyer as
follows (except with respect to those representations and warranties
contained Sections 6.1, 6.2 and 6.3 which pertain to Sellers
individually rather than specifically to the Company, for which each
Seller represents and warrants severally for himself):
6.1 Authority. Sellers are the sole owners of all the issued and
outstanding shares of capital stock of the Company, and Sellers
together exercise the sole management discretion and authority over the
Company's assets, liabilities and business operations. Each Seller has
all requisite power and authority to enter into this Agreement, the
Escrow Agreement and his respective Employment Agreement, to perform
his respective obligations hereunder and thereunder, and to consummate
the transactions contemplated hereby and thereby. All corporate acts
and other proceedings required to be taken by Sellers to authorize the
execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby have been duly and
properly taken. This Agreement has been duly executed and delivered by
Sellers and constitutes a legal, valid and binding obligation of
Sellers, enforceable against Sellers in accordance with its terms,
except as such enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws relating to or affecting the
enforcement of creditors' rights in general and by general principles
of equity.
6.2 No Conflicts; Consents.
6.2.1 Except as set forth in Schedule 6.2.1, the execution and
delivery of this Agreement by Sellers do not, and the
consummation of the transactions
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contemplated hereby and compliance with the terms hereof will
not, materially conflict with, or result in any material
violation of or material default (with or without notice or
lapse of time, or both) under, or give rise to a right of
termination, cancellation or acceleration of any obligation
or to loss of a material benefit under, or to increased,
additional, accelerated or guaranteed rights or entitlements
of any person under, or result in the creation of any lien,
claim, encumbrance, security interest, option, charge or
restriction of any kind upon any of the properties or assets
of the Company under, any provision of (a) the Certificate of
Incorporation or By-laws of the Company; (b) any material
note, bond, mortgage, indenture, deed of trust, license,
lease, contract, commitment, agreement or arrangement to
which Sellers, the Company or any Affiliate of either thereof
is a party or by which any of their respective properties or
assets are bound; or (c) any judgment, order or decree, or
statute, law, ordinance, rule or regulation applicable to
Sellers, the Company or any Affiliate of either thereof or
their respective properties or assets.
6.2.2 The total sales and total assets of the Company, each Seller
and Sellers together are less than US$10,000,000 and
therefore, the transactions contemplated hereby are not
subject to filing with the United States Federal Trade
Commission (the "FTC") or the United States Department of
Justice (the "DOJ") pursuant to the Hart-Scott-Rodino
Antitrust Improvements Act of 1976 (the "HSR Act").
6.2.3 No other consent, approval, license, permit, order or
authorization of, or registration, declaration or filing
with, any Governmental Entity is required to be obtained or
made by or with respect to the Sellers, the Company, or their
respective Affiliates in connection with (i) the execution,
delivery and performance of this Agreement or the
consummation of the transactions contemplated hereby; or
(ii) the conduct by the Company of its business following the
Closing as conducted on the date hereof, other than those
that may be
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required solely by reason of Buyer's (as opposed to any other
third party's) participation in the transactions contemplated
hereby.
6.3 The Shares. Sellers have good and valid title to the Shares, free and
clear of any liens, claims, encumbrances, security interests, options,
charges and restrictions of any kind. Assuming Buyer has the requisite
power and authority to be the lawful owner of the Shares, upon delivery
to Buyer at the Closing of certificates representing the Shares, duly
endorsed by Sellers for transfer to Buyer, and upon Seller's receipt of
the Initial Consideration, good and valid title to the Shares will pass
to Buyer, free and clear of any liens, claims, encumbrances, security
interests, options, charges and restrictions of any kind, other than
those arising from acts of Buyer or its affiliates. Other than this
Agreement, the Shares are not subject to any voting trust agreement or
other contract, agreement, arrangement, commitment or understanding,
including any such agreement, arrangement, commitment or understanding
restricting or otherwise relating to the voting, dividend rights or
disposition of the Shares.
6.4 Organization and Standing; Books and Records.
6.4.1 The Company is a corporation duly organized, validly existing
and in good standing under the laws of the State of New York.
The Company has full corporate power and authority and
possesses all material governmental franchises, licenses,
permits, authorizations and approvals necessary to enable it
to own, lease or otherwise hold its properties and assets and
to carry on its business as presently conducted. The Company
is duly qualified and in good standing to do business as a
foreign corporation in each jurisdiction in which the conduct
or nature of its business or the ownership, leasing or
holding of its properties makes such qualification necessary,
except such jurisdictions where the failure to be so
qualified or in good standing, individually or in the
aggregate, would not have a material adverse effect on the
business, assets, condition (financial or otherwise),
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results of operations or prospects of the Company, the value
of the Shares, or on the ability of Sellers to consummate the
transactions contemplated hereby (a "Material Adverse
Effect"). A list of the jurisdictions in which the Company is
so qualified is set forth in Schedule 6.4. Neither the
Company, nor Sellers, nor any of their respective Affiliates
is subject to, bound by or a party to any contract, agreement
or other instrument, or subject to any charter or other
corporate restriction, which has or is reasonably likely to
have, individually or in the aggregate, a Material Adverse
Effect.
6.4.2 Sellers have, prior to the execution of this Agreement, made
available to Buyer true and complete copies of the
Certificate of Incorporation and By-laws, each as amended to
date, of the Company. The stock certificate and transfer
books and the minute books of the Company (which have been
made available for inspection by Buyer prior to the date
hereof) are true, correct and complete.
6.5 Capital Stock of the Company and the Subsidiaries. The authorized
capital stock of the Company consists of 200 shares of Common Stock, no
par value, of which 100 shares, constituting the Shares, are duly
authorized and validly issued and outstanding, fully paid and
nonassessable. Each Seller is the record and beneficial owner of 50
Shares. Except for the Shares, there are no shares of capital stock or
other equity securities of the Company outstanding. The Shares have not
been issued in violation of, and none of the Shares or such shares of
capital stock are subject to, any purchase option, call, right of first
refusal, preemptive, subscription or similar rights under any provision
of applicable law, the Certificate of Incorporation or By-laws of the
Company or the comparable governing instruments of any Affiliate, any
contract, agreement or instrument to which the Sellers, the Company or
any Affiliate is subject, bound or a party or otherwise. There are no
outstanding warrants, options, rights, "phantom" stock rights,
agreements, convertible or exchangeable securities or other commitments
(other than this Agreement) (a) pursuant to which either Seller, the
Company or any Affiliate of either Seller or the Company is or
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may become obligated to issue, sell, purchase, return or redeem any
shares of capital stock or other securities of the Company; or (b) that
give any person the right to receive any benefits or rights similar to
any rights enjoyed by or accruing to the holders of shares of capital
stock of the Company. Except as set forth in Schedule 6.5, there are no
equity securities of the Company reserved for issuance for any purpose.
Except as set forth in Schedule 6.5, there are no outstanding bonds,
debentures, notes or other indebtedness having the right to vote on any
matters on which stockholders of the Company may vote.
6.6 No Subsidiaries; Equity Interests. The Company does not directly or
indirectly own any capital stock of or other equity interests in any
corporation, partnership or other person. The Company is not a member
of or participant in any partnership, joint venture or similar person.
6.7 Financial Statements; Undisclosed Liabilities.
6.7.1 Schedule 6.7 sets forth (a) the unaudited consolidated
balance sheet of the Company as of December 31, 1997 (the
"Balance Sheet"), and the unaudited consolidated statements
of income and cash flows of the Company for the period ended
December 31, 1997, and (b) the audited consolidated balance
sheets of the Company as of December 31, 1996, and the
audited consolidated statements of income and cash flows of
the Company for the year ended December 31, 1996, together
with the notes to such financial statements (the financial
statements described in clauses (a) and (b) above, together
with the notes to such financial statements, collectively,
the "Financial Statements"). The Financial Statements
referred to in clause (b) above have been prepared in
conformity with generally accepted accounting principles
consistently applied (except in each case as described in the
notes thereto) and on that basis fairly present (subject, in
the case of unaudited statements, to normal, recurring
year-end audit adjustments) the consolidated financial
condition and results of operations of the Company as of
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the respective dates thereof and for the respective periods
indicated. The Financial Statements referred to in clause (a)
above have been prepared on a cash basis of accounting and on
that basis fairly present (subject to normal, recurring
year-end audit adjustments) the consolidated financial
condition and results of operations of the Company as of the
respective dates thereof and for the respective periods
indicated.
6.7.2 The Company does not have any liabilities or obligations of
any nature (whether accrued, absolute, contingent, unasserted
or otherwise) such as would be required by United States
generally accepted accounting principles to be reflected on a
consolidated balance sheet or in the notes thereto, except
(a) as disclosed, reflected or reserved against in the
Balance Sheet and the notes thereto, (b) for items set forth
in Schedule 6.7, (c) for liabilities and obligations incurred
in the ordinary course of business consistent with past
practice since the date of the Balance Sheet and not in
violation of this Agreement, and (d) for Taxes. This
representation shall not be deemed breached as a result of a
change in law after the Closing Date.
6.8 Sufficiency of Company Assets. The assets owned by the Company
constitute, and, except for the assets set forth on Schedule 6.8 which
shall be transferred to Sellers, on the Closing Date will constitute,
all of the assets or property used or held for use in the Company's
business and, other than dispositions of assets in the ordinary course
of business, include all assets reflected on the Balance Sheet. Upon
consummation of the transactions contemplated hereby, (a) Buyer will
have acquired good and marketable title in and to the shares, free and
clear of all liens except for Permitted Liens, and (b) the Company
shall continue to have good and marketable title in and to, or a valid
leasehold interest in, all such assets or property owned by the Company
that is used or held for use in the Company's business, free and clear
of all liens except for Permitted Liens. Neither the
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Sellers nor any of their Affiliates (other than the Company) owns any
assets or property that is used or held for use in the Company's
business.
6.9 Taxes.
6.9.1 For purposes of this Agreement, (a) "Tax" or "Taxes" shall
mean all Federal, state, local and foreign taxes and
assessments, including all interest, penalties and additions
imposed with respect to such amounts; (b) "pre-Closing Tax
Period" shall mean all taxable periods ending on or before
the Closing Date and the portion ending on the Closing Date
of any taxable period that includes (but does not end on)
such day; and (c) "Code" shall mean the Internal Revenue Code
of 1986, as amended.
6.9.2 Except as set forth in Schedule 6.9, (a) the Company has
filed or caused to be filed in a timely manner (within any
applicable extension periods) all material Tax returns,
reports and forms required to be filed by the Code or by
applicable state, local or foreign tax laws; (b) all Taxes
shown to be due on such returns, reports and forms have been
timely paid in full or will be timely paid in full by the due
date thereof; and (c) no material tax liens have been filed
and no material claims are being asserted in writing with
respect to any Taxes.
6.9.3 Except as set forth in Schedule 6.9, no property of the
Company is "tax exempt use property" within the meaning of
Section 168(h) of the Code.
6.9.4 Except as set forth in Schedule 6.9, there are no outstanding
agreements or waivers extending the statutory period of
limitation applicable to any material Tax returns required to
be filed with respect to the Company, and the Company has not
requested any extension of time within which to file any
material Tax return, which return has not yet been filed.
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6.9.5 The Company is not a real property holding company within the
meaning of Section 897 of the Code.
6.9.6 Neither of Sellers is a "foreign person" within the meaning
of Section 1445 of the Code.
6.9.7 The Company has made and the Sellers have consented to a
valid election, which election has not been revoked or
terminated or otherwise become ineffective, under Section
1362(a) of the Code to be taxed as an "S corporation" under
Sections 1361 through 1379 of the Code. The Company has made
and the Sellers have consented to valid elections, which
elections have not been revoked or terminated or otherwise
become ineffective, to be taxed in a comparable fashion under
comparable state, local or foreign Tax law, for the taxable
periods and in all applicable taxing jurisdictions in which
such an election may be made. Except as a set forth in
Schedule 6.9, the Company has not been, nor will be, subject
to any Federal corporate income taxes imposed under Chapter 1
of the Code (other than Code Sections 1374 and 1375 (and
their predecessor Sections under the Internal Revenue Code of
1954, as amended)) or any state, local or foreign income or
franchise Taxes for any period for which it elected to be
taxed as an "S corporation".
6.9.8 The Company is not and has never been a member of an
affiliated group within the meaning of Section 1504 of the
Code.
6.10 Assets Other than Real Property Interests. The Company has good and
valid title to all assets reflected on the Balance Sheet or thereafter
acquired, except those sold or otherwise disposed of for fair value
since the date of the Balance Sheet in the ordinary course of business
consistent with past practice and not in violation of this Agreement,
in each case free and clear of all mortgages, liens, security interests
or encumbrances of any kind except
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(a) such as are set forth in Schedule 6.10; (b) mechanics', carriers',
workmen's, repairmen's or other like liens arising or incurred in the
ordinary course of business, liens arising under original purchase
price conditional sales contracts and equipment leases with third
parties entered into in the ordinary course of business and liens for
Taxes which are not due and payable or which may thereafter be paid
without penalty; (c) mortgages, liens, security interests and
encumbrances which secure debt that is reflected as a liability on the
Balance Sheet and the existence of which is indicated in the notes
thereto; and (d) other imperfections of title or encumbrances, if any,
which do not, individually or in the aggregate, materially impair the
continued use and operation of the assets to which they relate in the
business of the Company, taken as a whole, as presently conducted (the
mortgages, liens, security interests, encumbrances and imperfections of
title described in clauses (b), (c) and (d) above are hereinafter
referred to collectively as "Permitted Liens").
6.10.1 All the material tangible personal property of the Company
has been maintained in all material respects in accordance
with the past practice of the Company and generally accepted
industry practice. Each item of material tangible personal
property of the Company is in all material respects in good
operating condition and repair, ordinary wear and tear
excepted. All leased personal property of the Company is in
all material respects in the condition required of such
property by the terms of the lease applicable thereto during
the term of the lease and upon the expiration thereof.
6.10.2 This Section 6.10 does not relate to real property or
interests in real property, such items being the subject of
Section 6.11.
6.11 Title to Real Property. There are no interests in real property owned
in fee by the Company. Schedule 6.11 sets forth a complete list of all
real property and interests in real property leased by the Company
(individually, a "Company Property") and identifies any material base
leases and reciprocal easement or operating agreements relating
thereto. The
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Company has good and valid title to the leasehold estates in all
Company Property, in each case free and clear of all mortgages, liens,
security interests, encumbrances, leases, assignments, subleases,
easements, covenants, rights-of-way and other similar restrictions of
any nature whatsoever, except (i) such as are set forth in
Schedule 6.11, (ii) leases, subleases and similar agreements set forth
in Schedule 6.13, (iii) Permitted Liens, (iv) easements, covenants,
rights-of-way and other similar restrictions of record, (v) any
conditions that may be shown by a current, accurate survey or physical
inspection of any Company Property made prior to Closing, and
(vi) (A) zoning, building and other similar restrictions,
(B) mortgages, liens, security interests, encumbrances, easements,
covenants, rights-of-way and other similar restrictions that have been
placed by any developer, landlord or other third party on property over
which the Company has easement rights or on any Company Property and
subordination or similar agreements relating thereto, and
(C) unrecorded easements, covenants, rights-of-way and other similar
restrictions, none of which items set forth in clauses (A), (B) and
(C), individually or in the aggregate, materially impair the continued
use and operation of the property to which they relate in the business
of the Company, taken as a whole, as presently conducted. To the
knowledge of Sellers, the current use by the Company of the plants,
offices and other facilities located on Company Property does not
violate any local zoning or similar land use or government regulations
in any material respect.
6.12 Intellectual Property. Schedule 6.12 sets forth a true and complete
list of all material patents, trademarks (registered or unregistered),
trade names, service marks and copyrights and applications therefor and
other material intellectual property and proprietary rights, whether or
not subject to statutory registration or protection (collectively,
"Intellectual Property"), owned, used, filed by or licensed to the
Company. With respect to registered trademarks, Schedule 6.12 sets
forth a list of all jurisdictions in which such trademarks are
registered or applied for and all registration and application numbers.
Except as set forth in Schedule 6.12, the Company owns, and the Company
has the right to use, execute, reproduce, display, perform, modify,
enhance, distribute, prepare derivative works of and
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sublicense, without payment to any other person, all Intellectual
Property listed in Schedule 6.12 and the consummation of the
transactions contemplated hereby will not conflict with, alter or
impair any such rights. The Company owns and has all rights to
Intellectual Property in all jurisdictions and geographic areas as are
necessary in connection with the business of the Company as presently
conducted and as such business is proposed to be conducted in the most
recent business plan of the Company (the "Business Plan").
6.12.1 Neither the Company nor any of the Subsidiaries has granted
any options, licenses or agreements of any kind relating to
Intellectual Property listed in Schedule 6.12 or the
marketing or distribution thereof. Neither the Company nor
any of the Subsidiaries is bound by or a party to any
options, licenses or agreements of any kind relating to the
Intellectual Property of any other person, except as set
forth in Schedule 6.12 and except for agreements relating to
computer software licensed to the Company in the ordinary
course of business. Subject to the rights of third parties
set forth in Schedule 6.12, all Intellectual Property listed
in Schedule 6.12 is free and clear of the claims of others
and of all liens, security interests and encumbrances
whatsoever. To the knowledge of Sellers and except as
provided in Schedule 6.12, the conduct of the business of the
Company as presently conducted does not, and the conduct of
such business as proposed to be conducted in the Business
Plan will not, violate, conflict with or infringe the
Intellectual Property of any other person. Except as set
forth in Schedule 6.12, (a) no claims are pending or, to the
knowledge of Sellers, threatened, as of the date of this
Agreement, against the Company, including any predecessor or
Affiliate of the Company, by any person with respect to the
ownership, validity, enforceability, effectiveness or use of
any Intellectual Property; and (b) during the past two years,
Sellers and the Company, including any predecessor or
Affiliate of the Company, have not received any
communications alleging that the Company (any
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<PAGE>
predecessor or Affiliate) has violated any rights relating to
Intellectual Property of any person.
6.12.2 All former and current employees, agents, consultants and
independent contractors of the Company or any predecessor or
Affiliate who materially have contributed to or participated
in the conception and development of software or other
Intellectual Property listed in Schedule 6.12 (collectively,
"Personnel"), have executed and delivered to the Company a
proprietary information agreement restricting such person's
right to disclose proprietary information of the Company. All
former and current Personnel either (a) have been party to a
"work-for-hire" arrangement or agreement with the Company, in
accordance with applicable Federal and state law, that has
accorded the Company full, effective, exclusive and original
ownership of all tangible and intangible property thereby
arising; or (b) have executed appropriate instruments of
assignment in favor of the Company as assignee that have
conveyed to the Company full, effective and exclusive
ownership of all tangible and intangible property thereby
arising. No former or current Personnel have any claim
against the Company or any predecessor or Affiliate in
connection with such person's involvement in the conception
and development of any Intellectual Property and no such
claim has been asserted or is threatened. None of the current
officers and employees of the Company or any Affiliate have
any patents issued or applications pending for any device,
process, design or invention of any kind now used or needed
by the Company in the furtherance of its business operations,
which patents or applications have not been assigned to the
Company, with such assignment duly recorded in the United
States Patent Office.
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6.13 CONTRACTS. Except as set forth in Schedule 6.13, the Company is not a
party to or bound by any:
6.13.1 employment agreement or employment contract that has an
aggregate future liability in excess of $5,000 and is not
terminable by the Company by notice of not more than 60 days
for a cost of less than $5,000;
6.13.2 employee collective bargaining agreement or other contract
with any labor union;
6.13.3 covenant of the Company or any predecessor or Affiliate of the
Company not to compete (other than pursuant to any radius
restriction contained in any lease, reciprocal easement or
development, construction, operating or similar agreement) or
other covenant of the Company restricting the development,
manufacture, marketing or distribution of the products and
services of the Company;
6.13.4 agreement, contract or other arrangement with (a) Sellers or
any Affiliate of Sellers (other than the Company) or (b) any
current or former officer, director or employee of the
Company, any predecessor or Affiliate of the Company, Sellers
or any Affiliate of Sellers;
6.13.5 lease, sublease or similar agreement with any person (other
than the Company) under which the Company is a lessor or
sublessor of, or makes available for use to any person (other
than the Company), (a) any Company Property or (b) any portion
of any premises otherwise occupied by the Company;
6.13.6 lease or similar agreement with any person (other than the
Company) under which (a) the Company is lessee of, or holds or
uses, any machinery, equipment, vehicle or other tangible
personal property owned by any person; or (b) the Company is a
lessor or sublessor of, or makes available for use by any
person, any tangible
26
<PAGE>
personal property owned or leased by the Company, in any such
case which has an aggregate future liability or receivable, as
the case may be, in excess of $5,000 and is not terminable by
the Company by notice of not more than 60 days for a cost of
less than $5,000;
6.13.7 (a) continuing contract for the future purchase of materials,
supplies or equipment (other than purchase contracts and
orders for inventory in the ordinary course of business
consistent with past practice); (b) management, service,
consulting or other similar type of contract; or (c)
advertising agreement or arrangement, in any such case which
has an aggregate future liability to any person (other than
the Company) in excess of $5,000 and is not terminable by the
Company by notice of not more than 60 days for a cost of less
than $5,000;
6.13.8 material license, option or other agreement relating in whole
or in part to the Intellectual Property set forth in Schedule
6.12 (including any license or other agreement under which the
Company is license or licensor of any such Intellectual
Property) or to trade secrets, confidential information or
proprietary rights and processes of the Company, any
predecessor or Affiliate of the Company, or any other person;
6.13.9 agreement, contract or other instrument under which the
Company has borrowed any money from, or issued any note, bond,
debenture or other evidence of indebtedness to, any person
(other than the Company) or any other note, bond, debenture or
other evidence of indebtedness issued to any person (other
than the Company);
6.13.10 agreement, contract or other instrument (including so-called
take-or-pay or keepwell agreements) under which (a) any person
(including the Company) has directly or indirectly guaranteed
indebtedness, liabilities or obligations of the
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Company, or (b) the Company has directly or indirectly
guaranteed indebtedness, liabilities or obligations of any
person (in each case other than endorsements for the purpose
of collection in the ordinary course of business);
6.13.11 agreement, contract or other instrument under which the
Company has, directly or indirectly, made any advance, loan,
extension of credit or capital contribution to, or other
investment in, any person (other than the Company);
6.13.12 mortgage, pledge, security agreement, deed of trust or other
instrument granting a lien or other encumbrance upon any
Company Property, which lien or other encumbrance is set forth
in Schedule 6.10 or 6.11;
6.13.13 agreement or instrument providing for indemnification of any
person with respect to liabilities relating to any current or
former business of the Company, or any predecessor or
Affiliate; or
6.13.14 other agreement, contract, lease, license, commitment or
instrument to which the Company is a party or by or to which
it or any of its assets or business is bound or subject which
has an actual or potential aggregate future liability to any
person (other than the Company) in excess of $5,000 and is not
terminable by the Company by notice of not more than 60 days
for a cost of less than $5,000.
6.13.15 Schedule 6.13.15 sets forth a listing of those agreements,
contracts, licenses, commitments or instruments with any
dealer, reseller or agent (individually, a "Dealer Agreement"
and collectively, the "Dealer Agreements") which individually
constitute the 20 largest sources of customer usage billings
for the Company (excluding Buyer as a separate source of gross
revenues for the Company).
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Sellers have made available to Buyer true, correct and complete copies
of all material contracts listed in Schedules 6.13 and 6.13.15;
provided, however, that with respect to the five largest
revenue-generating Dealer Agreements listed in Schedule 6.13.15 only,
the contracts delivered to Buyer have been redacted, but only to the
extent of the identities of the non-Company parties thereto; and
provided further, however, that with respect to the remaining Dealer
Agreements listed in Schedule 6.13.15, such agreements contain
substantially similar terms to the forms of Dealer Agreements
previously provided to Buyer by Sellers. Except as set forth in
Schedule 6.13, all agreements, contracts, leases, licenses, commitments
or instruments of the Company listed in the Schedules hereto
(collectively, the "Contracts") are valid, binding and in full force
and effect and are enforceable by the Company in accordance with its
terms. Except as set forth in Schedule 6.13, Sellers, the Company,
their predecessors and Affiliates have performed all material
obligations required to be performed by them to date under the
Contracts and they are not (with or without the lapse of time or the
giving of notice, or both) in breach or default in any material respect
thereunder and, to the knowledge of Sellers, no other party to any of
the Contracts is (with or without the lapse of time or the giving of
notice, or both) in breach or default in any material respect
thereunder.
6.14 LITIGATION. Schedule 6.14 sets forth a list as of the date of this
Agreement of all pending lawsuits or claims, with respect to which
Sellers, the Company, its predecessors and Affiliates has been
contacted in writing by counsel for the plaintiff or claimant, against
or affecting Sellers, the Company, its predecessors or Affiliates, or
any of their respective properties, assets, operations or businesses
and which (a) relate to or involve more than $5,000, (b) seek any
material injunctive relief, or (c) may give rise to any legal restraint
on or prohibition against the transactions contemplated by this
Agreement. Except as set forth in Schedule 6.14, to the knowledge of
Sellers, there are no unasserted claims of the type that would be
required to be disclosed in Schedule 6.14 which are considered probable
of assertion and which, if asserted, would have at least a reasonable
possibility of an adverse determination. To the knowledge of Sellers,
except as set forth in Schedule 6.14, neither
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the Company nor any predecessor or Affiliate is a party or subject to
or in default under any judgment, order, injunction or decree of any
Governmental Entity or arbitration tribunal applicable to it or any of
its respective properties, assets, operations or business. Except as
set forth in Schedule 6.14, there is no lawsuit or claim by the Company
pending, or which the Company intends to initiate, against any other
person. Except as set forth in Schedule 6.14, to the knowledge of
Sellers, there is no pending or threatened investigation of or
affecting the Company by any Governmental Entity.
6.15 INSURANCE. Sellers or the Company maintain policies of fire and
casualty, liability and other forms of insurance in such amounts, with
such deductibles and against such risks and losses as are, in Sellers'
judgment, reasonable for the business and assets of the Company. The
insurance policies maintained with respect to the Company and its
assets and properties are listed in Schedule 6.15. All such policies
are in full force and effect, all premiums due and payable thereon have
been paid (other than retroactive or retrospective premium adjustments
that are not yet, but may be, required to be paid with respect to any
period ending prior to the Closing Date), and no notice of cancellation
or termination has been received with respect to any such policy which
has not been replaced on substantially similar terms prior to the date
of such cancellation. To the knowledge of Sellers, the activities and
operations of the Company have been conducted in a manner so as to
conform in all material respects to all applicable provisions of such
insurance policies.
6.16 BENEFIT PLANS.
6.16.1 Schedule 6.16 contains a list of all "employee pension benefit
plans" as defined in Section 3(2) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA") (sometimes
referred to herein as "Pension Plans"); "employee welfare
benefit plans" (as defined in Section 3(1) of ERISA), bonus,
stock option, stock purchase, deferred compensation plans or
arrangements and other employee fringe benefit plans (all the
foregoing being herein called "Benefit
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Plans") maintained or contributed to by Sellers, the Company
or any predecessor, for the benefit of any officers or
employees of the Company. Sellers have made available to Buyer
true, complete and correct copies of (a) each Benefit Plan
(or, in the case of any unwritten Benefit Plans, descriptions
thereof), (b) the most recent annual report on Form 5500 filed
with the Internal Revenue Service with respect to each Benefit
Plan (if any such report was required), (c) the most recent
summary plan description for each Benefit Plan for which such
a summary plan description is required, and (d) each trust
agreement and group annuity contract relating to any Benefit
Plan.
6.16.2 Each Benefit Plan has been administered in all material
respects in accordance with its terms. The Company and all the
Benefit Plans are in compliance in all material respects with
the applicable provisions of ERISA and the Code. Except as set
forth in Schedule 6.16, all material reports, returns and
similar documents with respect to the Benefit Plans required
to be filed with any Governmental Entity or distributed to any
Benefit Plan participant have been duly and timely filed or
distributed. Except as set forth in Schedule 6.16, there are
no lawsuits, actions, termination proceedings or other
proceedings pending, or, to the knowledge of Sellers,
threatened against or involving any Benefit Plan and, to the
knowledge of Sellers, there are no investigations by any
Governmental Entity or other claims (except claims for
benefits payable in the normal operation of the Benefit Plans)
pending or threatened against or involving any Benefit Plan or
asserting any rights to benefits under any Benefit Plan.
6.16.3 Except as set forth in Schedule 6.16, (a) all contributions
to, and payments from, the Benefit Plans that may have been
required to be made in accordance with the Benefit Plans and,
when applicable, Section 302 of ERISA or Section 412 of the
Code, have been timely made; (b) there has been no application
for or waiver of the minimum funding standards imposed by
Section 412 of the Code with respect
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to any Pension Plan; and (c) no Pension Plan has an
"accumulated funding deficiency" within the meaning of Section
412(a) of the Code as of the most recent plan year. All such
contributions to, and payments from, the Benefit Plans, except
those payments to be made from a trust qualified under Section
401(a) of the Code, for any period ending before the Closing
Date that are not yet, but will be, required to be made, will
be properly accrued and reflected in the Statement in
accordance with generally accepted accounting principles.
6.16.4 Except as set forth in Schedule 6.16, all Pension Plans have
been the subject of determination letters from the Internal
Revenue Service to the effect that such Pension Plans are
qualified and exempt from Federal income taxes under Sections
401(a) and 501(a), respectively, of the Code, and no such
determination letter has been revoked nor, to the knowledge of
Sellers, has revocation been threatened, nor has any such
Pension Plan been amended since the date of its most recent
determination letter or application therefor in any respect
that would adversely affect its qualification or materially
increase its cost.
6.16.5 No "prohibited transaction" (as defined in Section 4975 of the
Code or Section 406 of ERISA) has occurred that involves the
assets of any Benefit Plan and that could subject the Company
or any of their employees, or, to the knowledge of Sellers, a
trustee, administrator or other fiduciary of any trusts
created under any Benefit Plan to the tax or penalty on
prohibited transactions imposed by Section 4975 of ERISA or
the sanctions imposed under Title I of ERISA. Except as set
forth in Schedule 6.16, none of the Pension Plans has been
terminated nor have there been any "reportable events" (as
defined in Section 4043 of ERISA and the regulations
thereunder) with respect thereto. Neither Sellers nor any
trustee, administrator or other fiduciary of any Benefit Plan
nor any agent of any of the foregoing has engaged in any
transaction or acted
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or failed to act in a manner that could subject the Company to
any liability for breach of fiduciary duty under ERISA or any
other applicable law.
6.16.6 With respect to any Pension Plan subject to Title IV of ERISA
(including, for the purposes of this subsection and the
following subsection, any Pension Plan maintained or
contributed to by Sellers or any other person under common
control with Sellers), Sellers have not incurred any liability
to such Pension Plan or to the Pension Benefit Guaranty
Corporation, other than for the payment of premiums, all of
which have been paid when due. Sellers have made available to
Buyer the most recent actuarial report or valuation with
respect to each Pension Plan that is a "defined benefit
pension plan" (as defined in Section 3(35) of ERISA). The
information supplied to the actuary by Sellers for use in
preparing such reports and valuations was complete and
accurate and Sellers have no reason to believe that the
conclusions expressed in such reports and valuations are
incorrect.
6.16.7 Except as set forth in Schedule 6.16, as of the most recent
valuation date for each Pension Plan that is a defined benefit
pension plan, there was not any amount of "unfunded benefit
liabilities" (as defined in Section 4001(a)(18) of ERISA)
under such Pension Plan and, to the knowledge of Sellers,
there are no facts or circumstances that would materially
change the funded status of any such Pension Plan.
6.16.8 Except as set forth in Schedule 6.16, at no time within the
five years preceding the Closing Date have Sellers, the
Company or any predecessor or Affiliate been required to
contribute to any "multiemployer plan" (as defined in Section
4001(a)(3) of ERISA) for the benefit of any officers or
employees of the Company or any predecessor or Affiliate; nor
have Sellers, the Company or any predecessor or Affiliate
incurred any withdrawal liability, within the meaning of
Section 4201 of ERISA, with respect to any such multiemployer
plan, which
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liability has not been fully paid as of the date hereof; or
announced an intention to withdraw, but not yet completed such
withdrawal, from any such multiemployer plan. If Sellers or
the Company were to make a complete withdrawal from each such
multiemployer plan, within the meaning of Section 4203 of
ERISA, the withdrawal liability would not exceed $10,000 in
the aggregate.
6.16.9 With respect to any Benefit Plan that is an employee welfare
benefit plan, except as disclosed in Schedule 6.16, (a) no
such Benefit Plan is unfunded or funded through a welfare
benefits fund, as such term is defined in Section 419(e) of
the Code; (b) each such Benefit Plan that is a group health
plan, as such term is defined in Section 5000(b)(1) of the
Code, complies in all material respects with the applicable
requirements of Section 4980B(f) of the Code; and (c) each
such Benefit Plan (including any such plan covering retirees
or other former employees) may be amended or terminated
without material liability to the Company on or at any time
after the Closing Date.
6.16.10 Except as set forth in Schedule 6.16, neither the Company nor
any predecessor or Affiliate has any current or projected
liability or contingent obligation in respect of medical or
other benefits for retired or former employees of the Company
or any predecessor.
6.16.11 Except as set forth in Schedule 6.16, no employee or former
employee of the Company or any predecessor or Affiliate will
become entitled to any bonus, retirement, severance, job
security or similar benefit or any enhanced benefit solely as
a result of the transactions contemplated hereby.
6.17 ABSENCE OF CHANGES OR EVENTS. Except as set forth in Schedule 6.17,
since the date of the Balance Sheet, there has not been any material
adverse change in the business, assets,
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condition (financial or otherwise) or results of operations of the
Company. Except as set forth in Schedule 6.17, since the date of the
Balance Sheet, Sellers have caused the business of the Company to be
conducted in the ordinary course and in substantially the same manner
as previously conducted.
6.18 COMPLIANCE WITH APPLICABLE LAWS.
6.18.1 Except as previously disclosed by Sellers to Buyer in writing,
to the knowledge of Sellers, the Company is in compliance in
all material respects with all applicable statutes, laws,
ordinances, rules, orders and regulations of any Governmental
Entity ("Applicable Laws"), including those relating to
occupational health and safety. Except as set forth in
Schedule 6.18, none of Sellers, the Company, or any
predecessor or Affiliate of Sellers or the Company has
received any written communication during the past two years
from a Governmental Entity that alleges that the Company is
not in compliance in any material respect with any Applicable
Laws. This subsection does not relate to matters with respect
to Taxes or to environmental matters, which are the subject of
the following subsection.
6.18.2 Except as set forth in Schedule 6.18, (a) neither Seller, the
Company, nor any predecessor or Affiliate of Sellers or the
Company has received any oral or written communication from a
Governmental Entity that alleges that the Company or any
predecessor or Affiliate is not in compliance in any material
respect with any Environmental Laws; (b) the Company holds,
and is in compliance with, all permits, licenses and
governmental authorizations required for the Company to
conduct its business under the Environmental Laws, and is in
compliance with all Environmental Laws; (c) Sellers, after
inquiry, have no knowledge of any environmental reports other
than those set forth in Schedule 6.18; and (d) neither
Sellers, the Company, nor any predecessor or Affiliate has
entered into or agreed
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to any court decree or order and none of the foregoing are
subject to any judgment, decree or order relating to
compliance with any Environmental Law or to investigation or
cleanup of contaminants under any Environmental Law. As used
in this Agreement, the term "Environmental Laws" means any and
all applicable treaties, laws, regulations, enforceable
requirements, binding determinations, orders, decrees,
judgments, injunctions, permits, approvals, authorizations,
licenses, variances, permissions, notices or binding
agreements issued, promulgated or entered into by any
Governmental Entity, relating to the environment, preservation
or reclamation of natural resources, or to the management,
release or threatened release of contaminants or noxious odor,
including the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended by the
Superfund Amendments and Reauthorization Act of 1986, 42
U.S.C. Sections 9601 et seq., the Federal Water Pollution
Control Act, as amended by the Clean Water Act of 1977, 33
U.S.C. Sections 1251 et seq., Clean Air Act of 1970, as
amended, 42 U.S.C. Sections 7401 et seq., the Toxic Substances
Control Act of 1976, 15 U.S.C. Sections 2601 et seq., the
Occupational Safety and Health Act of 1970, as amended, 29
U.S.C. Sections 651 et seq., the Emergency Planning and
Community Right-to-Know Act of 1986, 42 U.S.C. Sections 11001
et seq., the Safe Drinking Water Act of 1974, as amended, 42
U.S.C. Sections 300(f) et seq., the Hazardous Materials
Transportation Act, 49 U.S.C. Sections 1801 et seq., and any
similar or implementing state or local law, and all amendments
or regulations promulgated thereunder.
6.19 EMPLOYEE AND LABOR MATTERS.
6.19.1 Except as set forth in Schedule 6.19, (a) there is, and during
the past two years there has been, no labor strike, dispute,
work stoppage or lockout pending, or, to the knowledge of
Sellers, threatened, against or affecting the Company or any
predecessor or Affiliate; (b) to the knowledge of Sellers, no
union organizational
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campaign is in progress with respect to the employees of the
Company and no question concerning representation exists
respecting such employees; (c) the Company is not engaged in
any unfair labor practice; (d) there is no unfair labor
practice charge or complaint against the Company or any
predecessor or Affiliate pending, or, to the knowledge of
Sellers, threatened, before the National Labor Relations
Board; (e) there are no pending, or, to the knowledge of
Sellers, threatened, union grievances against the Company or
any predecessor or Affiliate as to which there is a reasonable
possibility of adverse determination and that, if so
determined, individually or in the aggregate, would have a
Material Adverse Effect; (f) there are no pending, or, to the
knowledge of Sellers, threatened, charges against the Company,
any predecessor or Affiliate of the Company, or any current or
former employee of the Company before the Equal Employment
Opportunity Commission or any state or local agency
responsible for the prevention of unlawful employment
practices; and (g) neither Seller, the Company, nor any
predecessor or Affiliate of the Company has received notice
during the past two years of the intent of any Governmental
Entity responsible for the enforcement of labor or employment
laws to conduct an investigation of or affecting the Company
or any predecessor or Affiliate of the Company and, to the
knowledge of Sellers, no such investigation is in progress.
6.19.2 No officer or director of the Company or any predecessor or
Affiliate of the Company is, and, to the knowledge of Sellers,
no other employee of the Company is, a party to or bound by
any contract, license, covenant or agreement of any nature, or
subject to any judgment, decree or order of any Governmental
Entity, that may (a) interfere with the use of such person's
best efforts to promote the interests of the Company, (b)
conflict with the business of the Company or the transactions
contemplated hereby, or (c) have a Material Adverse Effect. To
the knowledge of Sellers, no activity of any employee of the
Company or any
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predecessor or Affiliate as or while an employee of the
Company or any predecessor or Affiliate of the Company has
caused a violation of any employment contract, confidentiality
agreement, patent disclosure agreement, or other contract or
agreement. To the knowledge of Sellers, neither the execution
and delivery of this Agreement, nor the conduct of the
business of the Company by the employees of the Company, 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 under which any such employees are now
obligated.
6.20 Accounts Receivable; Inventories of Promotional Materials and
Calling Cards.
6.20.1 All accounts receivable of the Company, whether reflected on
the Balance Sheet or subsequently created, have arisen from
bona fide transactions in the ordinary course of business. To
the knowledge of Sellers, all such accounts receivable are
good and collectible at the aggregate recorded amounts
thereof, net of any applicable reserves for doubtful accounts
reflected on the Balance Sheet. The Company has good and
marketable title to its accounts receivable, free and clear of
all liens, except as set forth in Schedule 6.20. Since the
date of the Balance Sheet, there have not been any write-offs
as uncollectible of any notes or accounts receivable of the
Company, except for immaterial write-offs in the ordinary
course of business and consistent with past practice.
6.20.2 To the knowledge of Sellers, the inventories of promotional
materials, calling cards and any other products distributed to
customers, dealers or agents of the Company (the
"Inventories"), whether reflected on the Balance Sheet or
subsequently acquired, are generally of a quality and quantity
usable and consistent in all material respects with past
practice in the ordinary course of business. To the extent
material, the Inventories are reflected on the Balance Sheet
and in the books and records in accordance with generally
accepted accounting
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principles applied on a basis consistent with past practice
(except as described in the notes to the Balance Sheet).
6.21 LICENSES; PERMITS. Schedule 6.21 sets forth a true and complete list
of all material licenses, permits and authorizations issued or granted
to the Company or any predecessor by Governmental Entities which are
necessary or desirable for the conduct of the business of the Company.
Except as set forth in Schedule 6.21, all such licenses, permits and
authorizations are validly held by the Company; the Company has
complied in all material respects with all terms and conditions
thereof; and the same will not be subject to suspension, modification,
revocation or non-renewal as a result of the execution and delivery of
this Agreement or the consummation of the transactions contemplated
hereby. All such licenses, permits and authorizations which are held in
the name of any employee, officer, director, stockholder, agent or
otherwise on behalf of the Company shall be deemed included under this
warranty.
6.22 ACCOUNTS; SAFE DEPOSIT BOXES; POWERS OF ATTORNEY; OFFICERS AND
DIRECTORS. Schedule 6.22 sets forth (a) a true and correct list of all
bank and savings accounts, certificates of deposit and safe deposit
boxes of the Company and those persons authorized to sign thereon; (b)
true and correct copies of all corporate borrowing, depository and
transfer resolutions and those persons entitled to act thereunder; (c)
a true and correct list of all powers of attorney granted by the
Company and those persons authorized to act thereunder; and (d) a true
and correct list of all officers and directors of the Company.
6.23 TRANSACTIONS WITH AFFILIATES. Except as set forth in Schedule 6.23,
none of the agreements, contracts or other arrangements set forth in
Schedule 6.13 between the Company or any predecessor, on the one hand,
and Sellers or any Affiliate of either Seller (other than the Company),
on the other hand, will continue in effect subsequent to the Closing.
Except as set forth in Schedule 6.23, after the Closing neither Sellers
nor any Affiliate of either Seller will have any interest in any
property (real or personal, tangible or intangible) or contract
39
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used in or pertaining to the business of the Company. Except as set
forth in Schedule 6.23 and as permitted by Section 7.6 hereof and the
Employment Agreements, after the Closing neither Sellers nor any
Affiliate will have any direct or indirect ownership interest in any
entity in which the Company has any direct or indirect ownership
interest or with which the Company competes or has a business
relationship. Except as set forth in Schedule 6.23 or pursuant to the
Employment Agreements, neither Seller provides services to the Company.
6.24 CORPORATE NAME. Except as set forth in Schedule 6.24, the Company (a)
has the right to use its name as the name of a corporation in any
jurisdiction in which the Company does business; and (b) has not
received any notice of conflict during the past two years with respect
to the rights of others regarding the corporate names of the Company.
Except as set forth in Schedule 6.24, to the knowledge of Sellers, no
person is presently authorized by Sellers, the Company or any
predecessor or Affiliate to use the name of the Company. Sellers have
previously made available to Buyer copies of any documents in the
possession of Sellers granting any authorizations of the type referred
to in the previous sentence.
6.25 EFFECT OF TRANSACTION. Except as set forth in Schedule 6.25, no
creditor, employee, client, customer or other person having a material
business relationship with the Company has informed Sellers, the
Company or any predecessor or Affiliate of the Company that such person
intends to change such relationship because of the purchase and sale of
the Shares or the consummation of any other transaction contemplated
hereby.
6.26 DISCLOSURE. No representation or warranty of Sellers contained in this
Agreement, and no statement contained in any document, certificate or
Schedule furnished or to be furnished by or on behalf of Sellers to
Buyer or any of its representatives pursuant to this Agreement,
contains or will contain any untrue statement of a material fact, or
omits or will omit to state any material fact necessary, in light of
the circumstances under which it was or will be made, in order to make
the statements herein or therein not misleading or necessary in
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order to fully and fairly provide the information required to be
provided in any such document, certificate or Schedule.
6.27 SUPPLIERS. Except as set forth in Schedule 6.27, between the date of
the Balance Sheet and the date of this Agreement, neither the Company
nor any predecessor has entered into or made any contract or commitment
for the purchase of merchandise or services other than in the ordinary
course of business consistent with past practice. Except for the
suppliers named in Schedule 6.27, neither the Company nor any
predecessor has any supplier (other than the Company) from whom it
purchased more than 5% of the merchandise or services which it
purchased during its most recent full fiscal year. Except as set forth
in Schedule 6.27, since the date of the Balance Sheet, there has not
been (a) any material adverse change in the business relationship of
the Company with any supplier of merchandise or services named in
Schedule 6.27, or (b) any change in any material term (including credit
terms) of the supply agreements or related arrangements with any such
supplier.
6.28 CUSTOMERS. Except for the customers named in Schedule 6.28, neither
the Company nor any predecessor has any customer to whom it made more
than 5% of its sales during its most recent full fiscal year. Except as
set forth in Schedule 6.28, since the date of the Balance Sheet, there
has not been (a) any material adverse change in the business
relationship of the Company with any customer named in Schedule 6.28,
or (b) any change in any material term (including credit terms) of the
sales agreements or related agreements with any such customer. During
the past two years, neither the Company nor any predecessor or
Affiliate of the Company has received any customer complaints
concerning its products and services, nor have they had any of their
products returned or services canceled by a purchaser thereof, other
than complaints, returns and cancellations in the ordinary course of
business which have not, and are not likely to have, individually or in
the aggregate, a Material Adverse Effect.
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6.29 PRIVATE OFFERING. Neither Sellers, nor any predecessor or Affiliate of
the Company, nor anyone acting on its or their behalf has issued, sold
or offered any security of the Company to any person under
circumstances that would cause the issuance and sale of the Shares, as
contemplated by this Agreement, to be subject to the registration
requirements of the Securities Act of 1933, as amended (the "Securities
Act"). Neither Sellers, nor any predecessor or Affiliate of the
Company, nor anyone acting on its or their behalf will offer the Shares
or any part thereof or any similar securities for issuance or sale to,
or solicit any offer to acquire any of the same from, anyone so as to
make the issuance and sale of the Shares subject to the registration
requirements of Section 5 of the Securities Act. Assuming the
representations of Buyer contained in Section 8.3 hereof are true and
correct, the issuance, sale and delivery of the Shares hereunder are
exempt from the registration and prospectus delivery requirements of
the Securities Act.
7. COVENANTS OF SELLERS
Sellers covenant and agree as follows:
7.1 CONFIDENTIALITY. Sellers shall keep confidential, and cause its
Affiliates and instruct its and their officers, directors, employees
and advisors to keep confidential, all information relating to the
Company and their business, except as required by law or administrative
process and except for information which is available to the public on
the Closing Date, or thereafter becomes available to the public other
than as a result of a breach of this Section 7.1. The covenant set
forth in this Section 7.1 shall terminate 5 years after the Closing
Date.
7.2 INSURANCE. As of the Closing, Sellers shall assign to Buyer and to the
Company any and all assignable rights which Sellers may have under such
insurance policies covering claims relating to the period on or prior
to the Closing Date. Any and all additional insurance policies not
listed in Schedule 6.15 which are maintained with respect to the
Company and
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its assets and properties are owned and maintained by Sellers and its
Affiliates (other than the Company). Neither Buyer nor the Company will
have any rights under any such additional insurance policies from and
after the Closing Date.
7.3 ASSIGNMENT OF CONFIDENTIALITY AGREEMENTS. On the Closing Date, Sellers
shall assign to Buyer their rights under all confidentiality agreements
entered into by Sellers with any person in connection with the proposed
sale of the Company to the extent such rights relate to the Company.
Copies of such confidentiality agreements shall be provided to Buyer on
the Closing Date.
7.4 RESIGNATIONS. On the Closing Date, Sellers shall cause to be delivered
to Buyer duly signed resignations (from the applicable board of
directors), effective immediately after the Closing, of all directors
of the Company, and shall take such other action as is necessary to
accomplish the foregoing.
7.5 SUPPLEMENTAL DISCLOSURE.
7.5.1 Sellers shall have the continuing obligation until the Closing
promptly to supplement or amend the Schedules hereto with
respect to any matter hereafter arising or discovered which,
if existing or known at the date of this Agreement, would have
been required to be set forth or described in such Schedules;
provided, however, that no supplement or amendment to such
Schedules shall have any effect for purposes of determining
whether any person is entitled to indemnification pursuant to
Section 13.
7.5.2 Sellers shall promptly notify Buyer of, and furnish Buyer any
information it may reasonably request with respect to, the
occurrence to Sellers' knowledge of any event or condition or
the existence to Sellers' knowledge of any fact
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that would cause any of the conditions to Buyer's obligation
to consummate the purchase and sale of the Shares not to be
fulfilled.
7.6 NON-COMPETITION AND PERMITTED COMPETITION.
7.6.1 Each of Sellers shall become employed by Buyer pursuant to the
Employment Agreements, effective as of the Closing Date. The
initial term of the Employment Agreements shall be one year,
subject to early termination as provided therein. During the
respective terms of their Employment Agreements, the Sellers
shall be permitted to continue to operate their existing
businesses known as National Business Society, Inc.,
IntelliChoice, Inc. and Telecom Solutions, Inc., and, through
those companies or other companies established by Sellers, to
offer all telecommunications products and services, including
calling cards, at such prices as Sellers may determine;
provided, however, that the gross billings attributable to
calling card products and services generated by all such
companies shall not be permitted to exceed the sum of
US$60,000 per month in the aggregate (all of the foregoing
terms and conditions of this subsection 7.6.1 referred to
hereafter as "the Permitted Competition Carve-out"). All
amounts payable to Sellers with respect to any such gross
billings in excess of $60,000 per month shall be immediately
payable to Buyer. For the duration of the Employment
Agreements, Sellers shall submit, within 15 days of the end of
each calendar month, a written statement executed by each of
Sellers, certifying the compliance of each of Sellers with the
terms and conditions of this subsection 7.6.1 (the "Compliance
Certificate"). At the request of Buyer, Sellers shall permit
the Accounting Firm designated in Section 4.3 hereof to review
Sellers' books and records on a confidential basis, solely to
confirm to Buyer the completeness and accuracy of the
Compliance Certificate and Sellers' compliance with this
subsection. Buyer shall pay all costs and expenses of the
Accounting Firm in connection with any review pursuant to this
subsection 7.6.1.
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7.6.2 From and after the expiration or termination of their
respective Employment Agreements and continuing for a period
of 2 years following such expiration or termination, each of
the Sellers shall be free to engage in any aspect of the
telecommunications business in addition to the Permitted
Competition Carve-out, provided, however, that any calling
card products or calling card services, other than the
Permitted Competition Carve-out, shall be ancillary to the
other products and services offered by any business with which
either Seller is affiliated or by which either Seller is
employed, and calling card products and calling card services
shall not be the primary focus of the business of Sellers or
either of them. For purposes of this Section 7.6.2, the term
"ancillary" shall mean: (a) that the calling card products and
services are offered at the rate of not less than twenty-five
cents ($0.25) per minute for domestic calls within the United
States, or at any rate for international calls; and (b) that
such products and services do not constitute more than 15% of
the total minutes billed in the aggregate by all such
businesses for all telecommunications services; and (c) that
no advertising shall be permitted for any such business in
which the offer of a calling card product or service is the
primary focus of such advertisement. Any amounts received in
violation of this Section shall become immediately payable to
Buyer.
7.6.3 For the duration of their respective Employment Agreements and
continuing for a period of 5 years following the termination
or expiration thereof, each Seller shall be prohibited from
approaching or soliciting, either directly or through
third-party agents or dealers, any customers of the Company or
of Buyer of whom Sellers have actual knowledge (other than
customers who can be demonstrated by written records to be
customers of National Business Society, Inc., IntelliChoice,
Inc. or Telecom Solutions, Inc. for purposes of the Permitted
Competition Carve-out). The foregoing restriction applies to
customers of Buyer prior to Closing, customers of the Company
as of the date of Closing, and new customers of either the
Company or Buyer who are signed at any time after the Closing
and prior to
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the termination or expiration of the applicable Employment
Agreement. The covenant in this Section 7.6.3 applies to
Calling Card Services and Other Services; provided, however,
that it shall not be a violation of this covenant for Sellers
or any of their Affiliates to conduct mass market
solicitations of prospective telecommunications customers
which are not targeted specifically at customers of the
Company or Buyer, and which mass market solicitations are not
conducted for the sole or primary purpose of inducing
customers of the Company or Buyer to switch telecommunications
service providers.
7.6.4 For the duration of their respective Employment Agreements and
continuing for a period of 2 years following the termination
or expiration thereof and subject to the additional
limitations set forth in subsections 7.6.1 or 7.6.2, as
applicable, (a) with respect to the dealers or agents listed
on Schedule 6.13.15 hereof that are not listed on Schedule
7.6.4, each Seller shall be prohibited from approaching,
soliciting or contracting with, either directly or indirectly,
such dealers or agents; (b) with respect to the dealers or
agents listed on Schedule 7.6.4, Sellers shall in no way be
prohibited from approaching, soliciting or contracting with,
either directly or indirectly, such dealers or agents, except
as otherwise explicitly provided in such Schedule; and (c)
with respect to all other dealers or agents, Sellers shall in
no way be prohibited from contracting with such dealers or
agents, provided, however, that Sellers shall be prohibited
from specifically targeting or otherwise directly approaching
such dealers or agents.
7.6.5 For the duration of their respective Employment Agreements and
continuing for a period of 2 years following the termination
or expiration thereof, each Seller shall be prohibited from
directly or indirectly owning, managing, operating, joining,
controlling or participating in the ownership, management,
operation or control of, or being connected as a developer of,
consultant with respect to, or director, officer, employee,
partner, lender or otherwise with, any profit or non-
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profit business or organization which, directly or indirectly,
offers or otherwise markets any calling card product or
service, whether on a stand-alone basis or bundled with other
telecommunications services, except as specifically permitted
under subsections 7.6.1 and 7.6.2 hereof. The foregoing
provisions of this subsection 7.6.5 shall not prohibit the
ownership by either Seller of 5% or less of any class of
securities of a company which is publicly traded on a national
securities exchange or over-the-counter on the NASDAQ System
or otherwise.
7.6.6 For the duration of their respective Employment Agreements and
continuing for a period of 2 years following the termination
or expiration thereof, each Seller shall be prohibited from
directly or indirectly approaching, soliciting, raiding,
enticing or inducing any person who is an employee of Buyer
during the term of Sellers' employment to become employed by
either Seller or any other person or entity with which either
of them might become affiliated after the term of employment;
provided however, that the provisions of this Section shall
not apply with respect to any person who was not induced to
leave the employ of the Company or Buyer, directly or
indirectly, by or with the cooperation of either Seller; and
7.6.7 For the duration of their respective Employment Agreements and
continuing for a period of 5 years following the termination
or expiration thereof, each Seller shall be prohibited from
any direct or indirect use or disclosure of confidential or
proprietary business information of Buyer, including, but not
limited to customer lists, marketing plans, product offerings,
pricing structures, business retention, and business expansion
plans. Upon the termination or expiration of their respective
Employment Agreements, each Seller shall deliver to Buyer all
copies of any such confidential or proprietary information
then in such Seller's possession or control.
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7.6.8 Notwithstanding any other term, condition or provision of this
Agreement to the contrary, in the event of any breach or
threatened breach of any of the provisions of this Section
7.6, Buyer shall have the right and remedy to have such
provision specifically enforced by any court having
jurisdiction, it being acknowledged and agreed that any such
breach or threatened breach will cause irreparable injury to
Buyer and that money damages will not provide an adequate
remedy to Buyer. Nothing in this subsection shall be construed
to limit the right of Buyer to collect money damages in the
event of a breach of any of the provisions of this Section 7.6.
7.7 CERTAIN LICENSES AND PERMITS. Sellers covenant that all licenses,
permits and authorizations which are held in the name of either Seller
or any employee, officer, director, stockholder, agent or otherwise on
behalf of the Company shall be duly and validly transferred to the
Company without consideration prior to the Closing, and that the
warranties, representations, covenants and conditions contained in this
Agreement shall apply to the same as if held by the Company as of the
date hereof.
7.8 ORDINARY CONDUCT; OTHER TRANSACTIONS
7.8.1 Except as expressly permitted by the terms of this Agreement,
from the date hereof to the Closing, Sellers shall cause the
business of the Company to be conducted in the ordinary course
in substantially the same manner as presently conducted
(including with respect to advertising, promotions, capital
expenditures and inventory levels), and shall make all
reasonable efforts consistent with past practices to preserve
their and the Company's relationships with customers, dealers,
agents, suppliers and others with whom the Company deals.
Sellers shall not, and shall not permit the Company to, take
any action that would, or that could reasonably be expected
to, result in any of the conditions to the purchase and sale
of the Shares set forth in Section 5.1 not being satisfied. In
addition, except as
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otherwise expressly permitted by the terms of this Agreement,
Sellers shall not permit the Company to do any of the
following without the prior written consent of Buyer:
7.8.1.1 amend its Certificate of Incorporation or By-laws;
7.8.1.2 redeem or otherwise acquire any shares of its capital stock or
issue any capital stock or any option, warrant or right
relating thereto or any securities convertible into or
exchangeable for any shares of capital stock;
7.8.1.3 adopt or amend in any material respect any Benefit Plan or
collective bargaining agreement, except as required by law;
7.8.1.4 grant to any executive officer or employee any increase in
compensation or benefits, except in the ordinary course of
business consistent with past practice or as may be required
under existing agreements and except for any increases for
which the Company shall not be obligated following the Closing;
7.8.1.5 incur or assume any liabilities, obligations or indebtedness
for borrowed money or guarantee any such liabilities,
obligations or indebtedness, other than in the ordinary course
of business consistent with past practice; provided that in no
event shall the Company incur, assume or guarantee any
long-term indebtedness for borrowed money;
7.8.1.6 permit, allow or suffer any of its assets to become subjected
to any mortgage, lien, security interest, encumbrance,
easement, covenant, right-of-way or other similar restriction
of any nature whatsoever;
7.8.1.7 cancel any material indebtedness (individually or in the
aggregate) or waive any claims or rights of substantial value;
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7.8.1.8 pay, loan or advance any amount to, or sell, transfer or lease
any of its assets to, or enter into any agreement or
arrangement with, Sellers or any of their affiliates (other
than the Company);
7.8.1.9 make any change in any method of accounting or accounting
practice or policy other than those required by United States
generally accepted accounting principles;
7.8.1.10 acquire by merging or consolidating with, or by purchasing a
substantial portion of the assets of, or by any other manner,
any business or any corporation, partnership, association or
other business organization or division thereof or otherwise
acquire any assets (other than inventory) which are material,
individually or in the aggregate, to the Company;
7.8.1.11 make or incur any capital expenditure that is not currently
approved in writing or budgeted and which, individually, is in
excess of $5,000, except in the ordinary course of business
consistent with past practice;
7.8.1.12 sell, lease or otherwise dispose of any of its assets which
are material, individually or in the aggregate, to the
Company, except in the ordinary course of business consistent
with past practice;
7.8.1.13 enter into any lease of real property, except any renewals of
existing leases in the ordinary course of business with
respect to which Buyer shall have the right to participate;
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7.8.1.14 modify, amend, terminate or permit the lapse of any lease of,
or other material agreement relating to, real property
(except modifications or amendments associated with renewals
of existing leases in the ordinary course of business with
respect to which Buyer shall have the right to participate);
or
7.8.1.15 agree, whether in writing or otherwise, to do any of the
foregoing.
7.8.2 From the date of this Agreement to the Closing, none of Sellers, the
Company, or any other Affiliate of Sellers or the Company shall, nor
shall any of them permit any of their respective officers, directors,
stockholders or other representatives to, directly or indirectly,
encourage, solicit, initiate or participate in discussions or
negotiations with, or provide any information or assistance to, any
person or group (other than Buyer and its representatives) concerning
any merger, sale of securities, sale of substantial assets or similar
transaction involving the Company. Without limiting the foregoing, it
is understood that any violation of the restrictions set forth in the
preceding sentence by any officer, director, stockholder or other
representative of the Company or any other Affiliate of Sellers or the
Company, whether or not such person is purporting to act on behalf of
Sellers, the Company, any other Affiliate of Sellers or otherwise,
shall be deemed to be a breach of this subsection by Sellers. In the
event that Sellers, the Company or any other Affiliate of Sellers or
the Company receives a proposal relating to any such transaction,
Seller shall promptly notify Buyer of such proposal.
7.8.3 Notwithstanding any other term, condition or provision of this
Agreement to the contrary, in the event of any breach or threatened
breach of any of the provisions of this Section 7.8, Buyer shall have
the right and remedy to have such provision specifically enforced by
any court having jurisdiction, it being acknowledged and agreed that
any such breach or threatened breach will cause irreparable injury to
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Buyer and that money damages will not provide an adequate remedy to
Buyer. Nothing in this subsection shall be construed to limit the
right of Buyer to collect money damages in the event of a breach
of any of the provisions of this Section 7.8.
8. Representations and Warranties of Buyer
Buyer hereby represents and warrants to Sellers as follows:
8.1 Authority. Buyer is a corporation duly organized, validly existing and
in good standing under the laws of the State of New York. Buyer has all
requisite corporate power and authority to enter into this Agreement,
the Escrow Agreement and the Employment Agreements, to perform its
obligations hereunder and thereunder, and to consummate the
transactions contemplated hereby and thereby. All corporate acts and
other proceedings required to be taken by Buyer to authorize the
execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby have been duly and
properly taken. This Agreement has been duly executed and delivered by
Buyer and constitutes a legal, valid and binding obligation of Buyer,
enforceable against Buyer in accordance with its terms.
8.2 No Conflicts; Consents. The execution and delivery of this Agreement
do not, and the consummation of the transactions contemplated hereby
and compliance with the terms hereof shall not, conflict with, or
result in any violation of or default (with or without notice or lapse
of time, or both) under, or give rise to a right of termination,
cancellation or acceleration of any obligation or to loss of a material
benefit under, or to increased, additional, accelerated or guaranteed
rights or entitlements of any person under, or result in the creation
of any lien, claim, encumbrance, security interest, option, charge or
restriction of any kind upon any of the properties or assets of Buyer
or any subsidiary of Buyer under, any provision of (a) the Certificate
of Incorporation or By-laws of Buyer or
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the comparable governing instruments of any subsidiary of Buyer; (b)
any material note, bond, mortgage, indenture, deed of trust, license,
lease, contract, commitment, agreement or arrangement to which Buyer or
any subsidiary of Buyer is a party or by which any of their respective
properties or assets are bound; or (c) any judgment, order, or decree,
or material statute, law, ordinance, rule or regulation applicable to
Buyer or any subsidiary of Buyer or their respective properties or
assets, other than, in the case of clauses (b) and (c) above, any such
items that, individually or in the aggregate, would not have a material
adverse effect on the ability of Buyer to consummate the transactions
contemplated hereby. No consent, approval, license, permit, order or
authorization of, or registration, declaration or filing with, any
Governmental Entity is required to be obtained or made by or with
respect to Buyer or any of its subsidiaries or their respective
affiliates in connection with the execution, delivery and performance
of this Agreement or the consummation of the transactions contemplated
hereby, other than (i) compliance with and filings under Section 13(a)
or 15(d), as the case may be, of the Exchange Act; and (ii) those that
may be required solely by reason of Sellers' (as opposed to any other
third party's) participation in the transactions contemplated hereby.
8.3 Securities Act. The Shares purchased by Buyer pursuant to this
Agreement are being acquired for investment only and not with a view to
any public distribution thereof, and Buyer shall not offer to sell or
otherwise dispose of the Shares so acquired by it in violation of any
of the registration requirements of the Securities Act.
8.4 Actions and Proceedings, etc. There are no (a) outstanding judgments,
orders, injunctions or decrees of any Governmental Entity or
arbitration tribunal against Buyer or any of its affiliates; (b)
lawsuits, actions or proceedings pending or, to the knowledge of Buyer,
threatened against Buyer or any of its affiliates; or (c)
investigations by any Governmental Entity which are, to the knowledge
of Buyer, pending or threatened against Buyer or any of its affiliates,
and which, in the case of each of clauses (a), (b) and (c), have a
material adverse effect on the ability of Buyer to consummate the
transactions contemplated hereby.
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9. Covenants of Buyer
Buyer covenants and agrees as follows:
9.1 Confidentiality. Buyer acknowledges that the information being
provided to it in connection with the purchase and sale of the Shares
and the consummation of the other transactions contemplated hereby is
subject tothe terms of a confidentiality agreement between Buyer and
the Company (the "Confidentiality Agreement"), the terms of which are
incorporated herein by reference. Effective upon, and only upon, the
Closing, the Confidentiality Agreement shall terminate. Notwithstanding
anything herein to the contrary, Buyer shall not disclose the amount of
Purchase Price to any third party, except as may be required by
applicable law or the rules and regulations of any United States or
foreign securities exchange; provided that Sellers acknowledge at the
time of execution of this Agreement that Buyer will disclose the amount
of Purchase Price in accordance with the rules and regulations of the
United States Securities and Exchange Commission.
9.2 No Additional Representations. Buyer acknowledges that none of
Sellers, the Company, or any other person has made any representation
or warranty, expressed or implied, as to the accuracy or completeness
of any information regarding the Company furnished or made available to
Buyer and its representatives, except as expressly set forth in this
Agreement or the Schedules hereto, and none of Sellers, the Company, or
any other person shall have or be subject to any liability to Buyer or
any other person resulting from the distribution to Buyer, or Buyer's
use of, any such information.
9.3 Supplemental Disclosure. Buyer shall promptly notify Sellers of, and
furnish Sellers any information it may reasonably request with respect
to, the occurrence to Buyer's knowledge of any event or condition or
the existence to Buyer's knowledge of any fact that would cause any of
the conditions to Sellers' obligation to consummate the purchase and
sale of the Shares not to be fulfilled.
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10. Mutual Covenants
Each of Sellers and Buyer covenants and agrees as follows:
10.1 Cooperation. In addition to any separate undertakings of Buyer and
Sellers in the Employment Agreements, Buyer and Sellers shall cooperate
with each other, and shall cause their officers, employees, agents,
auditors and representatives to cooperate with each other, for a period
of 180 days after the Closing to ensure the orderly transition of the
Company from Sellers to Buyer and to minimize any disruption to the
respective businesses of Sellers, Buyer or the Company that might
result from the transactions contemplated hereby. After the Closing,
upon reasonable written notice, Buyer and Sellers shall furnish or
cause to be furnished to each other and their employees, counsel,
auditors and representatives, access, during normal business hours, to
such information and assistance relating to the Company as is
reasonably necessary for financial reporting and accounting matters,
the preparation and filing of any tax returns, reports or forms or the
defense of any tax claim or assessment. Each party shall reimburse the
other for reasonable out-of-pocket costs and expenses incurred in
assisting the other pursuant to this Section. Neither party shall be
required by this Section to take any action that would unreasonably
interfere with the conduct of its business or unreasonably disrupt its
normal operations (or, in the case of Buyer, the business or operations
of the Company).
10.2 Publicity. Sellers and Buyer agree that, from the date hereof through
the Closing Date, no public release or announcement concerning the
transactions contemplated hereby shall be issued by either party
without the prior consent of the other party (which consent shall not
unreasonably be withheld), except as such release or announcement by
Buyer may be required by law or the rules or regulations of any United
States or foreign securities exchange; provided, however, that Buyer
may make internal announcements to its employees regarding the
transactions contemplated hereby, and provided further, however, that
Sellers, solely with the participation and prior consent of Buyer, may
inform the
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Company's dealers, agents and vendors of such proposed transactions in
order to promote a smooth transfer of the Company to Buyer.
10.3 Records. On the Closing Date, Sellers shall deliver or cause to be
delivered to Buyer all original agreements, documents, books, records
and files, including records and files stored on computer disks or
tapes or any other storage medium (collectively, "Records"), if any, in
the possession of Sellers relating to the business and operations of
the Company, subject to the following exceptions:
10.3.1 Buyer recognizes that certain Records may contain incidental
information relating to the Company or may relate primarily to
Affiliates of Sellers other than the Company , and that Sellers
may retain such Records and shall provide copies of the relevant
portions thereof to Buyer;
10.3.2 Sellers may retain all Records prepared in connection with the
sale of the Shares, including bids received from other parties
and analyses relating to the Company; and
10.3.3 Sellers may retain any tax returns, reports or forms, and Buyer
shall be provided with copies of such returns, reports or forms
only to the extent that they relate to the Company's separate
returns or separate tax liability.
11. Employee and Related Matters
11.1 Continuation of Comparable Benefit Plans. For not less than 1 year
following the Closing Date, Buyer shall maintain, or shall cause the
Company to maintain, compensation and employee benefit plans and
arrangements (other than any plans and arrangements based on equity
securities or any equivalent thereof) for employees of the Company
that, in the aggregate, are substantially comparable to those provided
pursuant to the compensation
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and employee benefit plans and arrangements in effect on the date
hereof as set forth in Schedule 6.16. Notwithstanding the above, Buyer
shall have the right (a) following the Closing Date, to transfer, to
one or more employee benefit plans maintained by Buyer which are, in
the aggregate, substantially comparable to the plans of the Company,
any employee of the Company or any Subsidiary who becomes an employee
of Buyer or any of its other Affiliates; and (b) in the good faith
exercise of its managerial discretion, to make changes or cause changes
to be made in compensation, benefits and other terms of employment and
to terminate the employment ofany employee.
12. Further Assurances
12.1 From time to time, as and when requested by either party hereto, the
other party shall execute and deliver, or cause to be executed and
delivered, all such documents and instruments and shall take, or cause
to be taken, all such further or other actions as such other party may
reasonably deem necessary or desirable to consummate the transactions
contemplated by this Agreement.
13. Indemnification
13.1 Tax Indemnification.
13.1.1 Sellers jointly and severally shall indemnify Buyer and its
Affiliates (including the Company) and each of their
respective officers, directors, employees, stockholders,
agents and representatives and hold them harmless from (a)
all liability for Taxes of the Company for the Pre-Closing
Tax Period; (b) all liability for Taxes resulting from the
Section 338(g) (if applicable) and 338(h)(10) elections (or
any comparable elections under state or local Tax law)
contemplated by Section 14.1 of this Agreement, and (c) all
liability for reasonable legal fees and expenses for any item
attributable to any item in clauses (a) or (b) above.
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Notwithstanding the foregoing, Sellers shall not indemnify
and hold harmless Buyer and its affiliates, and each of their
respective officers, directors, employees and agents, from
any liability for Taxes attributable to any action taken
after the Closing by Buyer, any of its affiliates
(including the Company or any of the Subsidiaries), or any
transferee of Buyer or any of its affiliates (other than any
such action expressly required by applicable law or by this
Agreement) (a "Buyer Tax Act") or attributable to a breach by
Buyer of its obligations under this Agreement.
13.1.2 Buyer shall, and shall cause the Company to, indemnify
Sellers and its affiliates and each of their respective
officers, directors, employees, stockholders, agents and
representatives and hold them harmless from (a) all liability
for Taxes of the Company for any taxable period ending after
the Closing Date (except to the extent such taxable period
began before the Closing Date, in which case Buyer's
indemnity will cover only that portion of any such Taxes that
are not for the Pre-Closing Tax Period); (b) all liability
for Taxes attributable to a Buyer Tax Act or to a breach by
Buyer of its obligations under this Agreement; (c) Taxes
payable by Sellers solely as a result of the Sellers making
the elections referred to in Section 14.1 (to the extent that
such Taxes exceed the Taxes otherwise payable by Sellers if
such election had not been made); and (d) all liability for
reasonable legal fees and expenses attributable to any item
in clause (a), (b) or (c) above.
13.1.3 In the case of any taxable period that includes (but does not
end on) the Closing Date (a "Straddle Period"):
13.1.3.1 real, personal and intangible property Taxes
("property Taxes") of the Company for the
Pre-Closing Tax Period shall be equal to the amount
of such property Taxes for the entire Straddle
Period multiplied by a fraction, the numerator of
which is the number of days during the
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Straddle Period that are in the Pre-Closing Tax
Period and the denominator of which is the number
of days in the Straddle Period; and
13.1.3.2 the Taxes of the Company (other than property
Taxes) for the Pre-Closing Tax Period shall be
computed as if such taxable period ended as of
the close of business on the Closing Date.
13.1.4 Sellers' indemnity obligation in respect of Taxes for a
Straddle Period shall initially be effected by its payment
to Buyer of the excess of (x) such Taxes for the Pre-Closing
Tax Period over (y) the amount of such Taxes paid by Sellers
or any of its Affiliates (other than the Company) at any
time, plus the amount of such Taxes paid by the Company on
or prior to the Closing Date. Sellers shall initially pay
such excess to Buyer within 30 days after the return, report
or form with respect to the final liability for such Taxes is
required to be filed (or, if later, is actually filed). If
the amount of such Taxes paid by Sellers or any of its
Affiliates (other than the Company) at any time plus the
amount of such Taxes paid by the Company on or prior to the
Closing Date exceeds the amount payable by Sellers pursuant
to the preceding sentence, Buyer shall pay to Sellers the
amount of such excess (a) in the case of property Taxes, at
the Closing (the "Closing Tax Adjustment Amount") and (b) in
all other cases, within 30 days after the return, report or
form with respect to the final liability for such Taxes is
required to be filed. The payments to be made pursuant to
this subsection by Sellers or Buyer with respect to a
Straddle Period shall be appropriately adjusted to reflect
any final determination (which shall include the execution
of Form 870-AD or successor form) with respect to Straddle
Period Taxes.
13.2 Other Indemnification by Sellers.
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13.2.1 Sellers jointly and severally shall indemnify Buyer, its
Affiliates (including the Company) and each of their
respective officers, directors, employees, stockholders,
agents and representatives against and hold them harmless
from any loss, liability, claim, damage or expense (including
reasonable legal fees and expenses) suffered or incurred by
any such indemnified party (other than any relating to Taxes,
for which indemnification provisions are set forth in Section
13.1) arising from, relating to or otherwise in respect of
(a) any breach of any representation or warranty of Sellers
which survives the Closing and which is contained in this
Agreement or in any certificate delivered pursuant hereto;
and (b) any breach of any covenant of Sellers contained in
this Agreement; provided, however, that each of Sellers only
shall be severally liable with respect to indemnification for
breaches of those representations and warranties contained
Sections 6.1, 6.2 and 6.3 which pertain to Sellers
individually rather than specifically to the Company; and
provided further, however, that Sellers shall not have any
liability under this Section 13.2 to the extent the
liability or obligation arises as a result of any action
taken or omitted to be taken by Buyer or any of its
Affiliates after the Closing.
13.2.2 Buyer acknowledges and agrees that, other than the
representations and warranties of Sellers specifically
contained in this Agreement, there are no representations or
warranties of Sellers either expressed or implied with
respect to the transactions contemplated hereby, the Company
or its assets, liabilities and business.
13.2.3 Buyer further acknowledges and agrees that, should the
Closing occur, its sole and exclusive remedy with respect to
any and all claims relating to this Agreement, the
transactions contemplated hereby, the Company and its assets,
liabilities and business (other than claims of, or causes of
action arising from, fraud) shall be pursuant to the
indemnification provisions set forth in this Section 13. In
furtherance of the foregoing, Buyer hereby waives, from
and after the Closing, to
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the extent permitted under applicable law, any and all rights,
claims and causes of action (other than claims of, or causes
of action arising from, fraud) that Buyer or the Company may
have against Sellers and its Affiliates arising under or
based upon any Federal, state, local or foreign statute, law,
ordinance, rule or regulation or otherwise (except pursuant
to the indemnification provisions set forth in this Section
13).
13.3 Other Indemnification by Buyer. Buyer shall, and shall cause the
Company to, indemnify Sellers, their Affiliates and each of their
respective officers, directors, employees, stockholders, agents and
representatives against and hold them harmless from any loss,
liability, claim, damage or expense (including reasonable legal fees
and expenses) suffered or incurred by any such indemnified party (other
than any relating to Taxes, for which indemnification provisions are
set forth in Section 13.1) arising from, relating to or otherwise in
respect of a) any breach of any representation or warranty of Buyer
which survives the Closing contained in this Agreement or in any
certificate delivered pursuant hereto; (b) any breach of any covenant
of Buyer contained in this Agreement or the Employment Agreements; (c)
any guarantee or obligation to assure performance given or made by
Sellers or an Affiliate of Sellers with respect to obligations of the
Company set forth in clause (d) below; (d) all obligations and
liabilities of the Company, including any such obligations or
liabilities contained in the Contracts or any agreement, lease,
license, permit, plan or commitment that, because it fails to meet the
relevant threshold amount or term, is not included within the
definition of Contracts, or the Benefit Plans set forth in Schedule
6.16 or any plan, fund, program, policy, contract or arrangement
described in Section 6.16 but not required to be set forth in Schedule
6.16 (collectively, the "Plans") (in each case other than items which
Sellers have expressly agreed to pay or perform pursuant to this
Agreement or for which indemnification is provided under Section 13.2);
and (e) any claims made by Howard Carson or his Affiliates, but only to
the extent such claims arise under or in connection with the ordinary
course operation of the Company's business;
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provided, however, that Buyer shall not have any liability under
clauses (a) and (b) above for any breach if Sellers had knowledge of
such breach at the time of the Closing.
13.4 Losses Net of Insurance, etc. The amount of any loss, liability, claim,
damage, expense or Tax for which indemnification is provided under this
Section 13 shall be net of any amounts recovered or recoverable by the
indemnified party under insurance policies with respect to such loss,
liability, claim, damage, expense or Tax (collectively, a "Loss") and
shall be (a) increased to take account of any net Tax cost incurred by
the indemnified party arising from the receipt of indemnity payments
hereunder (grossed up for such increase); and (b) reduced to take
account of any net Tax benefit realized by the indemnified party
arising from the incurrence or payment of any such Loss. In computing
the amount of any such Tax cost or Tax benefit, the indemnified party
shall be deemed to recognize all other items of income, gain, loss,
deduction or credit before recognizing any item arising from the
receipt of any indemnity payment hereunder or the incurrence or payment
of any indemnified Loss. Any indemnification payment hereunder shall
initially be made without regard to this paragraph and shall be
increased or reduced to reflect any such net Tax cost (including
gross-up) or net Tax benefit only after the indemnified party has
actually realized such cost or benefit. For purposes of this Agreement,
an indemnified party shall be deemed to have "actually realized" a net
Tax cost or a net Tax benefit to the extent that, and at such time as,
the amount of Taxes payable by such indemnified party is increased
above or reduced below, as the case may be, the amount of Taxes that
such indemnified party would be required to pay but for the receipt of
the indemnity payment or the incurrence or payment of such Loss, as the
case may be. The amount of any increase or reduction hereunder shall be
adjusted to reflect any final determination (which shall include the
execution of Form 870-AD or successor form) with respect to the
indemnified party's liability for Taxes, and payments between Sellers
and Buyer to reflect such adjustment shall be made if necessary. Any
indemnity payment under this Agreement shall be treated as an
adjustment to the Purchase Price for Tax purposes, unless a final
determination (which shall include the execution of a Form 870-AD or
successor form)
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with respect to the indemnified party or any of its Affiliates causes
any such payment not to be treated as an adjustment to the Purchase
Price for United States Federal income Tax purposes.
13.5 Termination of Indemnification. The obligations to indemnify and hold
harmless a party hereto (a) pursuant to Section 13.1, shall terminate
at the time the applicable statutes of limitations with respect to the
Tax liabilities in question expire (giving effect to any extension
thereof); (b) pursuant to clause (a) of Section 13.2.1 and clause (a)
of Section 13.3, shall terminate when the applicable representation or
warranty terminates pursuant to Section 17; and (c) pursuant to the
other clauses of Sections 13.2 and 13.3 shall not terminate; provided,
however, that as to clauses (a) and (b) of this Section 13.5, such
obligations to indemnify and hold harmless shall not terminate with
respect to any item as to which the person to be indemnified or the
related party thereto shall have, before the expiration of the
applicable period, previously made a claim by delivering a notice of
such claim (stating in reasonable detail the basis of such claim) to
the indemnifying party.
13.6 Procedures Relating to Indemnification (Other than under Section 13.1).
13.6.1 In order for a party (the "indemnified party") to be entitled
to any indemnification provided for under this Agreement
(other than under Section 13.1) in respect of, arising out of
or involving a claim or demand made by any person against the
indemnified party (a "Third Party Claim"), such indemnified
party must notify the indemnifying party in writing, and in
reasonable detail, of the Third Party Claim within 10
business days after receipt by such indemnified party of
written notice of the Third Party Claim; provided, however,
that failure to give such notification shall not affect the
indemnification provided hereunder except to the extent the
indemnifying party shall have been actually prejudiced as a
result of such failure (except that the indemnifying party
shall not be liable for any expenses incurred during the
period in which the indemnified party failed to give such
notice).
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Thereafter, the indemnified party shall deliver to the
indemnifying party, within 5 business days after the
indemnified party's receipt thereof, copies of all notices
and documents (including court papers) received by the
indemnified party relating to the Third Party Claim.
13.6.2 If a Third Party Claim is made against an indemnified party,
the indemnifying party shall be entitled to participate in
the defense thereof and, if it so chooses and acknowledges
its obligation to indemnify the indemnified party therefor,
to assume the defense thereof with counsel selected by the
indemnifying party; provided that such counsel is not
reasonably objected to by the indemnified party. Should the
indemnifying party so elect to assume the defense of a Third
Party Claim, the indemnifying party shall not be liable to
the indemnified party for legal expenses subsequently
incurred by the indemnified party in connection with the
defense thereof. If the indemnifying party assumes such
defense, the indemnified party shall have the right to
participate in the defense thereof and to employ counsel (not
reasonably objected to by the indemnifying party), at its own
expense, separate from the counsel employed by the
indemnifying party, it being understood that the indemnifying
party shall control such defense. The indemnifying party
shall be liable for the fees and expenses of counsel employed
by the indemnified party for any period during which the
indemnifying party has failed to assume the defense thereof
(other than during the period prior to the time the
indemnified party shall have given notice of the Third Party
Claim as provided above).
13.6.3 If the indemnifying party so elects to assume the defense of
any Third Party Claim, all of the indemnified parties shall
cooperate with the indemnifying party in the defense or
prosecution thereof. Such cooperation shall include the
retention and (upon the indemnifying party's request) the
provision to the indemnifying party of records and
information which are reasonably relevant to such Third
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Party Claim, and making employees available on a mutually
convenient basis to provide additional information and
explanation of any material provided hereunder. Whether or
not the indemnifying party shall have assumed the defense of
a Third Party Claim, the indemnified party shall not admit
any liability with respect to, or settle, compromise or
discharge, such Third Party Claim without the indemnifying
party's prior written consent (which consent shall not
unreasonably be withheld). If the indemnifying party shall
have assumed the defense of a Third Party Claim, the
indemnified party shall agree to any settlement, compromise
or discharge of a Third Party Claim which the indemnifying
party may recommend and which by its terms obligates the
indemnifying party to pay the full amount of the liability in
connection with such Third Party Claim, which releases the
indemnifying party completely in connection with such Third
Party Claim and which would not otherwise adversely affect
the indemnified party.
13.6.4 Notwithstanding the foregoing, the indemnifying party shall
not be entitled to assume the defense of any Third Party
Claim (and shall be liable for the reasonable fees and
expenses of counsel incurred by the indemnified party in
defending such Third Party Claim) if the Third Party Claim
seeks an order, injunction or other equitable relief or
relief for other than money damages against the indemnified
party which the indemnified party reasonably determines,
after conferring with its outside counsel, cannot be
separated from any related claim for money damages. If such
equitable relief or other relief portion of the Third Party
Claim can be so separated from that for money damages, the
indemnifying party shall be entitled to assume the defense of
the portion relating to money damages. The indemnification
required by Sections 13.2 and 13.3 shall be made by periodic
payments of the amount thereof during the course of the
investigation or defense, as and when bills are received or
loss, liability, claim, damage or expense is incurred. All
claims under Sections 13.2 and 13.3 other than Third Party
Claims
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shall be governed by Section 13.7. All Tax Claims (as defined
in Section 13.8) shall be governed by Section 13.8.
13.7 Other Claims. In the event any indemnified party should have a claim
against any indemnifying party under Sections 13.2 or 13.3 that does
not involve a Third Party Claim being asserted against or sought to be
collected from such indemnified party, the indemnified party shall
deliver notice of such claim with reasonable promptness to the
indemnifying party. The failure by any indemnified party so to notify
the indemnifying party shall not relieve the indemnifying party from
any liability which it may have to such indemnified party under
Sections 13.2 or 13.3, except to the extent that the indemnifying party
demonstrates that it has been materially prejudiced by such failure. If
the indemnifying party does not notify the indemnified party within 10
calendar days following its receipt of such notice that the
indemnifying party disputes its liability to the indemnified party
under Sections 13.2 or 13.3, such claim specified by the indemnified
party in such notice shall be conclusively deemed a liability of the
indemnifying party under Sections 13.2 or 13.3 and the indemnifying
party shall pay the amount of such liability to the indemnified party
on demand or, in the case of any notice in which the amount of the
claim (or any portion thereof) is estimated, on such later date when
the amount of such claim (or such portion thereof) becomes finally
determined. If the indemnifying party has timely disputed its liability
with respect to such claim, as provided above, the indemnifying party
and the indemnified party shall proceed in good faith to negotiate a
resolution of such dispute and, if not resolved through negotiations,
such dispute shall be resolved by litigation in an appropriate court of
competent jurisdiction.
13.8 Procedures Relating to Indemnification of Tax Claims.
13.8.1 If a claim shall be made by any taxing authority, which, if
successful, might result in an indemnity payment to Buyer,
one of its Affiliates or any of their respective officers,
directors, employees, stockholders, agents or representatives
pursuant to
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Section 13.1, Buyer shall promptly notify Sellers in
writing of such claim (a "Tax Claim"). If notice of a Tax
Claim is not given to Sellers within a sufficient period of
time to allow Sellers to effectively contest such Tax Claim,
or in reasonable detail to apprise Sellers of the nature of
the Tax Claim, in each case taking into account the facts and
circumstances with respect to such Tax Claim, Sellers shall
not be liable to Buyer, any of its affiliates or any of their
respective officers, directors, employees, stockholders,
agents or representatives to the extent that Sellers'
position is actually prejudiced as a result thereof.
13.8.2 If a Tax Claim shall be made by any taxing authority, which,
if successful, might result in an indemnity payment by Buyer
to Sellers or to any of Sellers' Affiliates or any of their
respective officers, directors, employees, stockholders,
agents or representatives pursuant to Section 13.1, Sellers
shall promptly notify Buyer in writing of such claim. If
notice of a Tax Claim is not given to Buyer within a
sufficient period of time to allow Buyer to effectively
contest such Tax Claim, or in reasonable detail to apprise
Buyer of the nature of the Tax Claim, in each case taking
into account the facts and circumstances with respect to such
Tax Claim, Buyer shall not be liable to Sellers, any of their
Affiliates or any of their respective officers, directors,
employees, stockholders, agents or representatives to the
extent that Buyer's position is actually prejudiced as a
result thereof.
13.8.3 With respect to any Tax Claim (other than a Tax Claim
relating solely to Taxes of the Company for a Straddle Period
or a Tax Claim for which Buyer is required to provide
indemnity pursuant to Section 13.8.2), Sellers shall control
all proceedings taken in connection with such Tax Claim
(including selection of counsel) and, without limiting the
foregoing, may in Sellers' sole discretion pursue or forego
any and all administrative appeals, proceedings, hearings and
conferences with any taxing authority with respect thereto,
and may, in Sellers' sole discretion, either pay the Tax
claimed and sue for a refund where applicable law permits
such refund suits or contest the Tax Claim in any permissible
manner.
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Sellers and Buyer shall jointly control all proceedings taken
in connection with any Tax Claim relating solely to Taxes of
the Company for a Straddle Period. Buyer shall have the
right, but not the responsibility, to control all proceedings
taken in connection with any Tax Claim for which Buyer is
required to provide indemnity pursuant to Section 13.8.2.
13.8.5 Buyer, the Company, and each of their respective Affiliates
shall cooperate with Sellers in contesting any Tax Claim,
which cooperation shall include, without limitation, the
retention and (upon Sellers' request) the provision to
Sellers of records and information which are reasonably
relevant to such Tax Claim, and making employees available on
a mutually convenient basis to provide additional information
or explanation of any material provided hereunder or to
testify at proceedings relating to such Tax Claim.
13.8.5 In no case shall Buyer, the Company, or any of their
respective officers, directors, employees, stockholders,
agents or representatives settle or otherwise compromise any
Tax Claim without Sellers' prior written consent. Neither
party shall settle a Tax Claim relating solely to Taxes of
the Company for a Straddle Period without the other party's
prior written consent.
13.9 Mitigation. Buyer and Sellers shall cooperate with each other with
respect to resolving any claim or liability with respect to which one
party is obligated to indemnify the other party hereunder, including by
making commercially reasonably efforts to mitigate or resolve any such
claim or liability; provided that such party shall not be required to
make such efforts if they would be detrimental in any material respect
to such party. In the event that Buyer or Sellers shall fail to make
such commercially reasonably efforts to mitigate or resolve any claim
or liability, then (unless the proviso to the foregoing covenant shall
be applicable) notwithstanding anything else to the contrary contained
herein, the other party shall not be required to indemnify any person
for any loss, liability, claim, damage
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or expense that could reasonably be expected to have been avoided if
Buyer or Sellers, as the case may be, had made such efforts.
13.10 Limitation of Liability. The obligations and liabilities of Sellers
for indemnification under this Agreement shall be subject to the
following limitations:
13.10.1 Buyer's right to indemnification shall be limited to a
maximum recovery from Sellers of an amount equal to the
Purchase Price, and Buyer agrees that this amount shall
constitute Buyer's sole and exclusive remedy with respect to
any loss, liability, claim, damage or expense (including,
without limitation, any liability for Taxes) suffered or
incurred by Buyer (collectively, "Buyer's Losses").
13.10.2 No indemnification shall be required to be made by Sellers
under this Article 13 unless the aggregate amount of Buyer's
Losses exceeds an amount equal to $100,000, and then only to
the extent of such excess.
13.10.3 If, on the Closing Date, Buyer has knowledge of the untruth,
inaccuracy or breach of any representation or warranty by
Sellers (jointly or severally) contained in, or Sellers'
(joint or several) breach of or failure to comply with any
covenant or obligations under, this Agreement or any
other document to be delivered in connection with the
transactions contemplated hereby, then any liability,
obligation, claim, loss, cost, damage and expense,
including attorneys' fees and disbursements, arising out of
or resulting therefrom shall not be included as part of
Buyer's Losses and Seller shall have no obligation to
indemnify Buyer therefor.
13.11 Exclusive Remedy. Except for the remedies provided in Sections 7.6 and
7.8 for Sellers' breach of the terms and conditions contained therein,
the parties hereto agree that the remedies provided by this Article 13
shall be the exclusive remedy under this Agreement.
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13.12 Exclusion of Certain Damages. Notwithstanding any other provision
hereof, in no event shall Sellers be liable for or obligated to
indemnify Buyer from and against any consequential, indirect or
special damages, including, without limitation, lost profits, business
interruption and loss of business opportunities or goodwill. This
exclusion of any such consequential, indirect or special damages shall
apply whether the action in which recovery of damages is sought is
based on contract, tort (including sole, concurrent or other
negligence or strict liability), statute or otherwise. To the extent
permitted by law, any statutory remedies which are inconsistent with
this Section 13.12 are waived.
14. Tax Matters
14.1 If Buyer so elects, (a) Sellers and Buyer shall join in timely making
an election under Section 338(h)(10) of the Code (and any comparable
election under state or local Tax law) with respect thereto; and
(b) Sellers and Buyer shall cooperate in the completion and timely
filing of such elections in accordance with the provisions of
Temporary Regulation Section 1.338(h)(10)-1T (or any comparable
provisions of state or local Tax law) or any successor provision.
Sellers and Buyer agree that the fair market value of the assets of
the Company are as set forth in Schedule 14.1. Neither Sellers nor
Buyer (nor any of their respective affiliates) shall take any position
on any Tax return or with any taxing authority that is inconsistent
with the agreed fair market values set forth in Schedule 14.1.
14.2 For any taxable period of the Company that includes (but does not end
on) the Closing Date, Buyer shall timely prepare and file with the
appropriate authorities all Tax returns, reports and forms required to
be filed and shall pay all Taxes due with respect to such returns,
reports and forms; provided that Sellers shall reimburse Buyer (in
accordance with the procedures set forth in Section 13.1) for any
amount owed by Sellers pursuant to Section 13.1 with respect to the
taxable periods covered by such returns, reports
or forms. For any taxable period of the Company that ends on or before
the Closing Date, Sellers shall timely prepare and file with the
appropriate authorities all Tax returns, reports
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and forms required to be filed, and shall pay all Taxes due with
respect to such returns, reports and forms. Buyer and Sellers agree
to cause the Company to file all Tax returns, reports and forms for
the period including the Closing Date on the basis that the relevant
taxable period ended as of the close of business on the Closing Date,
unless the relevant taxing authority will not accept a return, report
or form filed on that basis.
14.3 Sellers, the Company, and Buyer shall reasonably cooperate, and shall
cause their respective Affiliates, officers, employees, agents,
auditors and representatives reasonably to cooperate, in preparing and
filing all returns, reports and forms relating to Taxes, including
maintaining and making available to each other all records necessary
in connection with Taxes and in resolving all disputes and audits with
respect to all taxable periods relating to Taxes. Buyer and Sellers
recognize that Sellers and their Affiliates will need access, from
time to time, after the Closing Date, to certain accounting and Tax
records and information held by the Company to the extent such
records and information pertain to events occurring prior to the
Closing Date; therefore, Buyer agrees, and agrees to cause the
Company, (a) to use its best efforts to properly retain and maintain
such records until such time as Sellers agree that such retention and
maintenance is no longer necessary; and (b) to allow Sellers and their
agents and representatives (and agents or representatives of any of
their Affiliates), at times and dates mutually acceptable to the
parties, to inspect, review and make copies of such records as Sellers
may deem necessary or appropriate from time to time, such activities
to be conducted during normal business hours and at Sellers' expense.
14.4 Any refunds or credits of Taxes of the Company for any taxable period
ending on or before the Closing Date shall be for the account of
Sellers. Any refunds or credits of Taxes of the Company for any
taxable period beginning after the Closing Date shall be for the
account of the Buyer. Any refunds or credits of Taxes of the Company
for any Straddle Period shall be equitably apportioned between Sellers
and Buyer. Buyer shall, if Sellers so request and at Sellers' expense,
cause the Company to file for and obtain any refunds or credits to
which Sellers are entitled under this Section. Buyer shall permit
Sellers to control the prosecution of any such refund claim and, where
deemed appropriate by Sellers, shall
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cause the Company to authorize by appropriate powers of attorney such
persons as Sellers shall designate to represent the Company with
respect to such refund claim. Buyer shall cause the Company to forward
to Sellers any such refund within 10 days after the refund is received
(or reimburse Sellers for any such credit within 10 days after the
credit is allowed or applied against other Tax liability); provided,
however, that any such amounts payable to Sellers shall be net of any
Tax cost or benefit to Buyer or the Company, as the case may be,
attributable to the receipt of such refund and/or the payment of such
amounts to Sellers. Sellers and Buyer shall treat any payments under
the preceding sentence that Sellers shall receive pursuant to this as
an adjustment to the Purchase Price, unless a final determination
(which shall include the execution of a Form 870-AD or successor form)
with respect to the Buyer or any of its affiliates causes any such
payment not to be treated as an adjustment to the Purchase Price for
United Stated Federal income Tax purposes. Notwithstanding the
foregoing, the control of the prosecution of a claim for refund of
Taxes paid pursuant to a deficiency assessed subsequent to the Closing
Date as a result of an audit shall be governed by the provisions of
Section 13.8. In the event that any federal or state authority takes
an action that results in the disallowance of deductions taken into
account when calculating the Company's income which was included by
the Sellers in their individual taxable incomes, and the effect of
such disallowance is to permit the Company or Buyer to deduct from its
gross income the amount of such disallowed deduction for a tax period
ending after the Closing Date, the Company or Buyer shall pay to
Sellers the amount of any tax benefit actually obtained by Buyer as a
result of Buyer taking any deduction arising in respect of such
disallowed deduction taken by Sellers, provided, however, that Buyer
shall have no obligation under this clause for the actual amount of
any additional Taxes, interest or penalties owed or paid by Sellers
resulting from such disallowance, except to the extent explicitly set
forth herein.
14.5 Sellers shall be responsible for filing any amended consolidated,
combined or unitary Tax returns for taxable years ending on or prior
to the Closing Date which are required as a result of examination
adjustments made by the Internal Revenue Service or by the applicable
state, local or foreign taxing authorities for such taxable years as
finally
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determined. For those jurisdictions in which separate Tax returns are
filed by the Company, any required amended returns resulting from such
examination adjustments, as finally determined, shall be prepared by
Sellers and furnished to the Company or such Subsidiary, as the case
may be, for approval (which approval shall not unreasonably be
withheld), signature and filing at least 30 days prior to the due date
for filing such returns.
14.6 All transfer, documentary, sales, use, registration and other such
Taxes (including all applicable real estate transfer or gains Taxes)
and related fees (including any penalties, interest and additions to
Tax) incurred in connection with this Agreement and the transactions
contemplated hereby (other than stock transfer Taxes) shall be paid by
Buyer, and Sellers and Buyer shall cooperate in timely making all
filings, returns, reports and forms as may be required to comply with
the provisions of such Tax laws. Sellers shall pay any stock transfer
Taxes due as a result of the sale of the Shares.
14.7 On the Closing Date, Buyer shall cause the Company to conduct its
business in the ordinary course in substantially the same manner as
presently conducted and on the Closing Date shall not permit the
Company to effect any extraordinary transactions (other than any such
transactions expressly required by applicable law or by this
Agreement) that could result in Tax liability to the Company in excess
of Tax liability associated with the conduct of its business in the
ordinary course.
14.8 Sellers shall cause the provisions of any Tax sharing agreement
between Sellers and any of its Affiliates (other than the Company) to
be terminated on or before the Closing Date.
15. Assignment
15.1 This Agreement and the rights and obligations hereunder shall not be
assignable or transferable by Buyer or Sellers (including by operation
of law in connection with a merger, or sale of substantially all the
assets, of Buyer or Sellers) without the prior written consent of the
other party hereto; provided, however, that Buyer may assign its right
to
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purchase the Shares hereunder to an Affiliate of Buyer without the
prior written consent of Sellers; and provided further, however, that
no assignment shall limit or affect the assignor's obligations
hereunder. Any attempted assignment in violation of this Section shall
be void.
16. No Third-Party Beneficiaries
16.1 Except as provided in Section 11.1 and Article 13, this Agreement is
for the sole benefit of the parties hereto and their permitted assigns
and nothing herein expressed or implied shall give or be construed to
give to any person, other than the parties hereto and such assigns,
any legal or equitable rights hereunder.
17. Survival of Representations
17.1 The representations and warranties in this Agreement and in any
certificate delivered pursuant hereto (in each case other than the
representations and warranties relating to Taxes) shall survive the
Closing solely for purposes of Sections 13.2 and 13.3 and shall
terminate at the close of business one year following the Closing
Date.
18. Expenses
18.1 Except as provided in Section 18.2 hereof, whether or not the
transactions contemplated hereby are consummated, and except as
otherwise specifically provided in this Agreement, all costs and
expenses incurred in connection with this Agreement and the
transactions contemplated hereby shall be paid by the party incurring
such costs or expenses.
18.2 In the event that the Closing does not occur and the transactions
contemplated hereby are not consummated for any reason other than
Sellers' refusal to close, Buyer shall pay to the Company the actual
costs of the financial audit conducted in connection herewith.
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19. Attorney Fees
19.1 A party in breach of this Agreement shall, on demand, indemnify and
hold harmless the other party for and against all reasonable
out-of-pocket expenses, including legal fees, incurred by such other
party by reason of the enforcement and protection of its rights under
this Agreement. The payment of such expenses is in addition to any
other relief to which such other party may be entitled.
20. Amendments
20.1 No amendment, modification or waiver in respect of this Agreement
shall be effective unless it shall be in writing and signed by both
parties hereto.
21. Notices
21.1 All notices or other communications required or permitted to be given
hereunder shall be in writing and shall be delivered by hand or sent,
postage prepaid, by registered, certified or express mail or reputable
overnight courier service and shall be deemed given when so delivered
by hand, or if mailed, three days after mailing (one business day in
the case of express mail or overnight courier service), as follows:
21.1.1 if to Buyer:
Econophone, Inc.
45 Broadway, 30th Floor
New York, NY 10016
Attention: Richard Shorten, Jr., Esq.
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with a copy to:
Lacher & Fox
99 Park Avenue, 25th Floor
New York, NY 10016-1601
Attention: David Lacher, Esq.
21.1.2 if to Sellers:
Richard Masino
7 Inwood Road
St. James, NY 11780
and
Robert Wunder
65 High Ridge Road
Suite 458
Stamford, CT 06905
with a copy to:
Stroock & Stroock & Lavan LLP
180 Maiden Lane
New York, NY 10038-4982
Attention: Mark A. Rosenbaum, Esq.
22. Interpretation; Exhibits and Schedules; Certain Definitions
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22.1 The headings contained in this Agreement, in any Exhibit or Schedule
hereto and in the table of contents to this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. All Exhibits and Schedules annexed
hereto or referred to herein are hereby incorporated in and made a
part of this Agreement as if set forth in full herein. Any capitalized
terms used in any Schedule or Exhibit but not otherwise defined
therein, shall have the meaning as defined in this Agreement.
22.2 For all purposes hereof:
22.2.1 "Affiliate" means (a) any Person (as defined below),
corporation or business entity of which securities or other
ownership interests representing fifty percent (50%) or more of
the equity or fifty percent (50%) or more of the ordinary
voting power or fifty percent (50%) or more of the general
partnership interests are, at the time such determination is
being made, owned, Controlled (as defined below) or held,
directly or indirectly, by such corporation or business entity;
or (b) any other Person, corporation or business entity which,
at the time such determination is being made, is Controlling,
Controlled by or under common Control with, such corporation or
business entity. For purposes of this definition, "Control,"
whether used as a noun or verb, refers to the possession,
direct or indirect, of the power to direct, or cause the
direction of, the management or policies of any corporation or
business entity, whether through the ownership of voting
securities, by contract or otherwise;
22.2.2 "including" means including, without limitation;
22.2.3 "knowledge" of Sellers means the knowledge of Richard Masino or
Robert Wunder;
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22.2.4 "knowledge" of Buyer means the knowledge of Alfred West, Alan
Levy, Ira Riesenberg or Monte Banash; and
22.2.5 "Person" means any individual, firm, corporation, partnership,
limited liability company, trust, joint venture, Governmental
Entity or other entity.
23. Counterparts
23.1 This Agreement may be executed in one or more counterparts, all of
which shall be considered one and the same agreement, and shall become
effective when one or more such counterparts have been signed by each
of the parties and delivered to the other party.
24. Entire Agreement
24.1 This Agreement, the Escrow Agreement, the Employment Agreements and the
Confidentiality Agreement contain the entire agreement and
understanding between the parties hereto with respect to the subject
matter hereof and supersede all prior agreements and understandings
relating to such subject matter. The parties agree that the certain
Authorized Representative Agreement entered into between Econophone,
Inc. and National Business Society, Inc. on the 17th day of March,
1996, is terminated effective upon the Closing. Neither party shall be
liable or bound to any other party in any manner by any
representations, warranties or covenants relating to such subject
matter except as specifically set forth herein or in the Escrow
Agreement, Employment Agreements, or Confidentiality Agreement.
25. Fees
25.1 Each party hereto hereby represents and warrants to the other that it
has not dealt with any brokers or finders in connection with this
Agreement or the transactions contemplated
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hereby, and that no broker or finder is entitled to any brokerage fee,
finder's fee or commission in respect hereof and thereof.
26. Severability
26.1 If any provision of this Agreement (or any portion thereof) or the
application of any such provision (or any portion thereof) to any
person or circumstance shall be held invalid, illegal or unenforceable
in any respect by a court of competent jurisdiction, such invalidity,
illegality or unenforceability shall not affect any other provision
hereof (or the remaining portion thereof) or the application of such
provision to any other persons or circumstances.
27. Consent to Jurisdiction
27.1 To the extent that any claim or controversy arising out of this
Agreement or any transaction contemplated hereby shall not be
arbitrable in accordance with Article 29 hereof, each of Buyer and
Sellers irrevocably submits to the exclusive jurisdiction of (a) the
Supreme Court of the State of New York, New York County, and (b) the
United States District Court for the Southern District of New York, for
the purposes of any suit, action or other proceeding arising out of
this Agreement or any transaction contemplated hereby. Each of Buyer
and Sellers agrees to commence any action, suit or proceeding relating
hereto either in the United States District Court for the Southern
District of New York or, if such suit, action or other proceeding may
not be brought in such court for jurisdictional reasons, in the Supreme
Court of the State of New York, New York County. Each of Buyer and
Sellers further agrees that service of any process, summons, notice or
document by U.S. registered mail to such party's respective address set
forth above shall be effective service of process for any action, suit
or proceeding in New York with respect to any matters to which it has
submitted to jurisdiction in this Article. Each of Buyer and Sellers
irrevocably and unconditionally waives any objection to the laying of
venue of any action, suit or proceeding arising out of this Agreement
or the transactions contemplated hereby in (i) the Supreme Court of the
State of New York, New York County, or (ii) the United
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States District Court for the Southern District of New York, and hereby
further irrevocably and unconditionally waives and agrees not to plead
or claim in any such court that any such action, suit or proceeding
brought in any such court has been brought in an inconvenient forum.
Each of Buyer and Sellers irrevocably and unconditionally waives trial
by jury in any action or proceeding arising under this Agreement or the
transactions contemplated hereby.
28. Governing Law
28.1 This Agreement shall be governed by and construed in accordance with
the internal laws of the State of New York applicable to agreements
made and to be performed entirely within such State, without regard to
the conflicts of law principles of such State.
29. Arbitration
29.1 Any controversy, dispute or claim arising out of, in connection with,
or in relation to the interpretation, performance, non-performance,
validity or breach of this Agreement or otherwise arising out of, or in
any way related to, this Agreement, including any claim based on
contract, tort, statute or constitution, shall be determined, except as
otherwise provided in Section 4.3 hereof, at the request of any party,
by arbitration conducted in New York City, before and in accordance
with the then-existing Rules for Commercial Arbitration of the American
Arbitration Association (the "Rules"), and any judgment or award
rendered by the arbitrator shall be final, binding and unappealable,
and judgment may be entered by any state or Federal court having
jurisdiction thereof. The pre-trial discovery procedures of the
then-existing Federal Rules of Civil Procedure and the then-existing
Rules 46 and 47 of the Civil Rules for the United States District Court
for the Southern District of New York shall apply to any arbitration
pursuant to this Section 29. Any controversy concerning whether a
dispute is an arbitrable dispute, whether arbitration has been waived,
whether an assignee of this Agreement is bound to arbitrate, or as to
the interpretation or enforceability of this Section 29 shall be
determined by the arbitrator. The
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arbitrator shall be an individual who has had substantial professional
experience with regard to the telecommunications business. The parties
intend that the provisions to arbitrate set forth in this Section 29 be
valid, enforceable and irrevocable. The designation of a situs or a
governing law for this Agreement or the arbitration shall not be deemed
an election to preclude application of the Federal Arbitration Act, if
it would be applicable. In his or her award, the arbitrator shall
allocate, in his or her discretion, among the parties to the
arbitration all costs of the arbitration, including the fees and
expenses of the arbitrator and reasonable attorneys' fees, costs and
expert witness expenses of the parties. The undersigned agree to comply
with any award made in any such arbitration proceedings that has become
final in accordance with the Rules and agree to the entry of a judgment
in any jurisdiction upon any award rendered in such proceedings
becoming final under the Rules. The arbitrator shall be entitled, if
appropriate, to award any remedy in such proceedings, including
monetary damages, specific performance and all other forms of legal and
equitable relief, including punitive damages. The provisions of this
Section 29 shall not apply to any arbitration between the parties
conducted by the Accounting Firm pursuant to Section 4.3.
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IN WITNESS WHEREOF, the parties have caused this Agreement
to be duly executed as of the date first written above.
SELLERS: BUYER:
ECONOPHONE, INC.
/s/ RICHARD MASINO By: /s/ ALFRED WEST
_____________________________ ____________________________
RICHARD MASINO
Name: Alfred West
__________________________
/s/ ROBERT WUNDER Title: Chief Executive Officer
_____________________________ _________________________
ROBERT WUNDER
By: /s/ ALAN L. LEVY
_____________________________
Name: Alan L. Levy
__________________________
Title: President and Chief
Operating Officer
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Exhibit 12.1
ECONOPHONE, INC.
RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
For the year ended December 31,
--------------------------------------- ------------
1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C>
Income (loss) before provision for taxes 206 799 121 (8,312) (30,128)
Fixed charges 27 128 213 722 8,798
--------------------------------------- -----------
233 927 334 (7,590) (21,330)
--------------------------------------- -----------
--------------------------------------- -----------
FIXED CHARGES:
Interest 19 103 148 296 7,748
Accretion of preferred stock 0 0 0 15 91
Rent attributable to interest factor 8 25 65 130 80
Preferred stock dividend 0 0 0 281 879
--------------------------------------- -----------
27 128 213 722 8,798
--------------------------------------- -----------
--------------------------------------- -----------
RATIO OF EARNINGS TO FIXED CHARGES 8.6 7.2 1.6 N/A N/A
--------------------------------------- -----------
--------------------------------------- -----------
Deficiency of earnings available to N/A N/A N/A (8,312) (30,128)
cover fixed charges --------------------------------------- -----------
--------------------------------------- -----------
</TABLE>
<PAGE>
Exhibit 21.1
SUBSIDIARIES
Name Jurisdiction
--------------------------------------------------------
American Telemedia, Inc. Delaware
--------------------------------------------------------
Telerific Inc. Delaware
--------------------------------------------------------
Econophone Permit Inc. Delaware
--------------------------------------------------------
Voicenet Corporation New York
--------------------------------------------------------
Econo Fax Inc. New York
--------------------------------------------------------
American Telemedia, Ltd. United Kingdom
--------------------------------------------------------
Call the World, Limited Ireland
--------------------------------------------------------
Econophone, Ltd. Ireland
--------------------------------------------------------
Econophone, GMBH Germany
--------------------------------------------------------
Telco Global Communications, GMBH Germany
--------------------------------------------------------
Econophone Hellas S.A. Greece
--------------------------------------------------------
Econophone, GMBH Switzerland
--------------------------------------------------------
Econophone Services S.A. Switzerland
--------------------------------------------------------
Econophone France SARL France
--------------------------------------------------------
Econophone B.V. Netherlands
--------------------------------------------------------
Telco Global United Kingdom
Communications, Limited
--------------------------------------------------------
<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
Form S-4.
/s/ ARTHUR ANDERSEN LLP
New York, New York
March 9, 1998
<PAGE>
Exhibit 25.1
THIS CONFORMING PAPER FORMAT DOCUMENT IS BEING SUBMITTED PURSUANT TO RULE
901(d) OF REGULATION S-T
================================================================================
FORM T-1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF A
CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE
ELIGIBILITY OF A TRUSTEE PURSUANT TO
SECTION 305(b)(2) |__|
------------------------
THE BANK OF NEW YORK
(Exact name of trustee as specified in its charter)
New York 13-5160382
(State of incorporation (I.R.S. employer
if not a U.S. national bank) identification no.)
48 Wall Street, New York, N.Y. 10286
(Address of principal executive offices) (Zip code)
------------------------
ECONOPHONE, INC.
(Exact name of obligor as specified in its charter)
Delaware 11-3132722
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
45 Broadway 10006
New York, New York (Zip code)
(Address of principal executive offices)
------------------------
11% Senior Discount Notes due 2008
(Title of the indenture securities)
<PAGE>
===============================================================================
2
<PAGE>
THIS CONFORMING PAPER FORMAT DOCUMENT IS BEING SUBMITTED PURSUANT TO RULE
901(d) OF REGULATION S-T
1. General information. Furnish the following information as to the Trustee:
(a) Name and address of each examining or supervising authority to which
it is subject.
- -----------------------------------------------------------------------------
Name Address
- -----------------------------------------------------------------------------
Superintendent of Banks of the 2 Rector Street, New York,
State of New York N.Y. 10006, and Albany, N.Y. 12203
Federal Reserve Bank of New York 33 Liberty Plaza, New York,
N.Y. 10045
Federal Deposit Insurance Corporation Washington, D.C. 20429
New York Clearing House Association New York, New York 10005
(b) Whether it is authorized to exercise corporate trust powers.
Yes.
2. Affiliations with Obligor.
If the obligor is an affiliate of the trustee, describe each such
affiliation.
None.
16. List of Exhibits.
Exhibits identified in parentheses below, on file with the Commission, are
incorporated herein by reference as an exhibit hereto, pursuant to
Rule 7a-29 under the Trust Indenture Act of 1939 (the "Act")
and 17 C.F.R. 229.10(d).
1. A copy of the Organization Certificate of The Bank of New York
(formerly Irving Trust Company) as now in effect, which contains the
authority to commence business and a grant of powers to exercise
corporate trust powers. (Exhibit 1 to Amendment No. 1 to Form T-1
filed with Registration Statement No. 33-6215, Exhibits 1a and 1b to
Form T-1 filed with Registration Statement No. 33-21672 and Exhibit 1
to Form T-1 filed with Registration Statement No. 33-29637.)
4. A copy of the existing By-laws of the Trustee. (Exhibit 4 to Form T-1
filed with Registration Statement No. 33-31019.)
6. The consent of the Trustee required by Section 321(b) of the Act.
(Exhibit 6 to Form T-1 filed with Registration Statement
No. 33-44051.)
7. A copy of the latest report of condition of the Trustee published
pursuant to law or to the requirements of its supervising or
examining authority.
3
<PAGE>
SIGNATURE
Pursuant to the requirements of the Act, the Trustee, The Bank of New
York, a corporation organized and existing under the laws of the State of New
York, has duly caused this statement of eligibility to be signed on its
behalf by the undersigned, thereunto duly authorized, all in The City of New
York, and State of New York, on the 2nd day of March, 1998.
THE BANK OF NEW YORK
By: /S/JAMES W.P. HALL
--------------------------------
Name: JAMES W.P. HALL
Title: VICE PRESIDENT
4
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
AMENDED AND RESTATED FINANCIAL DATA SCHEDULE.
</LEGEND>
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996 DEC-31-1997
<PERIOD-START> JAN-01-1995 JAN-01-1996 JAN-31-1997
<PERIOD-END> DEC-31-1995 DEC-31-1996 DEC-31-1997
<CASH> 106,122 6,271,641 67,201,901
<SECURITIES> 0 0 10,462,500
<RECEIVABLES> 7,819,744 8,707,414 18,389,784
<ALLOWANCES> (470,610) (761,372) (1,593,531)
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 7,616,082 14,729,009 96,328,595
<PP&E> 3,216,066 7,885,623 26,906,315
<DEPRECIATION> (634,749) (1,643,151) 3,689,550
<TOTAL-ASSETS> 10,508,221 24,677,558 178,004,938
<CURRENT-LIABILITIES> 9,079,386 15,259,094 41,787,278
<BONDS> 0 0 149,680,000
0 13,357,940 14,327,588
0 0 0
<COMMON> 2,000 2,000 2,000
<OTHER-SE> 391,393 481,870 5,977,990
<TOTAL-LIABILITY-AND-EQUITY> 10,508,221 24,677,558 178,004,938
<SALES> 27,490,490 45,102,882 83,002,625
<TOTAL-REVENUES> 27,490,490 45,102,882 83,002,625
<CGS> 19,735,530 35,368,603 63,707,453
<TOTAL-COSTS> 27,211,773 53,252,033 105,220,676
<OTHER-EXPENSES> (9,672) 133,229 (162,595)
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 147,826 295,677 7,747,219
<INCOME-PRETAX> 121,219 (8,311,599) (30,127,865)
<INCOME-TAX> 0 0 0
<INCOME-CONTINUING> 121,219 (8,311,599) (30,127,865)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 121,219 (8,311,599) (30,127,865)
<EPS-PRIMARY> .01 (.43) (1.55)
<EPS-DILUTED> 0 0 0
</TABLE>
<PAGE>
Exhibit 99.1
LETTER OF TRANSMITTAL
for
Offer to Exchange
11% Senior Discount Notes due 2008
for all Outstanding
11% Senior Discount Notes due 2008
-------------------------------------------------
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:
or
By Facsimile:
The Bank of New York
Attention:
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
at maturity of 11% Senior Discount Notes due 2008 (the "Exchange Notes"), for
each $1,000 in principal amount at maturity of outstanding 11% Senior
Discount Notes due 2008 (the "Original Notes"). The terms of the Exchange
Notes are substantially identical in all respects (including principal
amount, rate of accretion, 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.
11% Senior Discount 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 at maturity of its 11% Senior
Discount Notes due 2008 (the "Exchange Notes") for each $1,000 in principal
amount at maturity of its outstanding 11% Senior Discount Notes due 2008 (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 11% Senior Discount Notes due 2008.
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 11% Senior Discount Notes
due 2008.
* The minimum permitted tender is $1,000 in principal
amount at maturity of Original Notes. All other tenders
must be in integral multiples of $1,000 of principal
amount at maturity.
/ / 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.
11% Senior Discount Notes due 2008
This form must be used by a holder of the 11% Senior Discount Notes due
2008 (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:
or
By Facsimile:
The Bank of New York
Attention:
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.
