<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 12, 1997
REGISTRATION NO. 333-35377
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
---------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
NEW RES, INC.
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<CAPTION>
DELAWARE 4813 75-2720091
<C> <C> <C>
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Number) Identification Number)
</TABLE>
8750 NORTH CENTRAL EXPRESSWAY, SUITE 2000
DALLAS, TEXAS 75231
(214) 863-8000
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
---------------------
J. CHRISTOPHER DANCE, ESQ.
EXECUTIVE VICE PRESIDENT, SECRETARY AND GENERAL COUNSEL
NEW RES, INC.
8750 NORTH CENTRAL EXPRESSWAY, SUITE 2000
DALLAS, TEXAS 75231
(214) 863-8000
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent For Service)
---------------------
Copies to:
<TABLE>
<C> <C> <C>
FREDERICK S. GREEN, ESQ. BRYAN K. RACHLIN, ESQ. MORRIS F. DEFEO, JR., ESQ.
WEIL, GOTSHAL & MANGES LLP CHIEF OPERATING OFFICER, SECRETARY SWIDLER & BERLIN, CHARTERED
767 FIFTH AVENUE AND GENERAL COUNSEL 3000 K STREET, N.W., SUITE 300
NEW YORK, NEW YORK 10153 TELCO COMMUNICATIONS GROUP, INC. WASHINGTON, D.C. 20007
(212) 310-8000 4219 LAFAYETTE CENTER DRIVE (202) 424-7500
CHANTILLY, VIRGINIA 20151-1209
(703) 631-5600
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effectiveness of this Registration Statement and the
effective time ("Effective Time") of the mergers (the "Mergers") of one
subsidiary of New RES, Inc. ("Holdings") with and into EXCEL Communications,
Inc. ("EXCEL") and of another subsidiary of Holdings with and into Telco
Communications Group, Inc. ("Telco") as described in the Agreement and Plan of
Merger dated as of June 5, 1997.
If the 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, check the following box. [ ]
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH
SECTION 8(a), MAY DETERMINE.
================================================================================
<PAGE> 2
LOGO
September 15, 1997
Dear Fellow Stockholder:
You are cordially invited to attend a special meeting of stockholders of
EXCEL Communications, Inc. ("EXCEL") on October 11, 1997, at which you will be
asked to approve the combination of the businesses of EXCEL and Telco
Communications Group, Inc. ("Telco"). Upon the consummation of this business
combination, EXCEL and Telco will become wholly owned subsidiaries of a newly
formed holding company, New RES, Inc. ("Holdings"), which will change its name
to EXCEL Communications, Inc. In addition, you will be asked to approve the
adoption of the Holdings 1997 Stock Option Plan (the "Stock Option Plan") and
the Holdings 1997 Director Stock Option Plan (the "Director Stock Option Plan").
Upon the completion of the business combination:
- each outstanding share of EXCEL common stock will be converted into the
right to receive one share of Holdings common stock; and
- each outstanding share of Telco common stock will be converted into the
right to receive 0.7595 shares of Holdings common stock and $15.00 in
cash.
The accompanying Joint Proxy Statement/Prospectus provides you with
detailed information concerning the special meeting, the proposed business
combination and the Holdings common stock to be issued in connection with the
transaction, each of the Stock Option Plan and the Director Stock Option Plan,
and certain other information. Please give this information your careful
attention.
Your Board of Directors (excluding T. Allan McArtor, who did not become a
member of the Board of Directors until after the date of the Board action
approving the Merger Agreement) has carefully reviewed and considered the terms
and conditions of the proposed business combination and believes that the
proposed business combination will provide opportunities to achieve substantial
benefits for EXCEL stockholders and customers through the more efficient
utilization of the combined assets, management and personnel of EXCEL and Telco.
Your Board further believes that Holdings will be better able to capitalize on
growth opportunities in the telecommunications industry, both domestically and
internationally, and be better positioned to compete effectively in the rapidly
changing telecommunications industry.
Lehman Brothers Inc., the Board's financial advisor in connection with this
transaction, has delivered a written opinion to the Board, a copy of which is
attached to the accompanying Joint Proxy Statement/Prospectus, to the effect
that, as of the date of such opinion and based on and subject to the
assumptions, limitations and qualifications set forth therein, from a financial
point of view, the exchange ratio of Holdings common stock to EXCEL common stock
was fair to the stockholders of EXCEL and the consideration to be paid by
Holdings to holders of Telco common stock in the proposed transaction was fair
to EXCEL.
Your Board of Directors, by unanimous vote, has determined that the terms
and provisions of the proposed business combination are fair to, and in the best
interests of, EXCEL and the stockholders of EXCEL, and recommends that you vote
FOR the proposal to approve the business combination.
Your Board of Directors also has carefully reviewed and considered the
Stock Option Plan and the Director Stock Option Plan and unanimously recommends
that you vote FOR the proposals to approve each of these plans.
Please complete, sign and date the enclosed proxy card and return it in the
enclosed prepaid envelope as soon as possible. This action will not limit your
right to revoke your proxy by attending the special meeting and voting in
person.
Sincerely yours,
/s/ KENNY A. TROUTT
- ------------------------------------
Kenny A. Troutt
Chief Executive Officer and
Chairman of the Board
<PAGE> 3
LOGO
8750 North Central Expressway
Suite 2000
Dallas, Texas 75231
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON OCTOBER 11, 1997
Dallas, Texas
September 15, 1997
Notice is hereby given that a special meeting of the stockholders (the
"Special Meeting") of EXCEL Communications, Inc. ("EXCEL") will be held on
October 11, 1997 at 10:00 a.m. local time, at Wyndham Anatole Hotel, 2201
Stemmons Freeway, Dallas, Texas, for the following purposes:
1. To consider and vote on a proposal to approve and adopt the
Agreement and Plan of Merger, dated as of June 5, 1997 (the "Merger
Agreement"), by and among New RES, Inc., a newly formed holding company (to
be renamed "EXCEL Communications, Inc."; hereinafter "Holdings"), EXCEL,
Telco Communications Group, Inc. ("Telco"), T-Sub, Inc. and E-Sub, Inc.
(two newly formed subsidiaries of Holdings), pursuant to which E-Sub, Inc.
will be merged with and into EXCEL, and T-Sub, Inc. will be merged with and
into Telco (the "Mergers"). As a result of the Mergers, EXCEL and Telco
will become wholly owned subsidiaries of Holdings. Upon the consummation of
the Mergers, each outstanding share of EXCEL common stock will be converted
into the right to receive one share of Holdings common stock and each
outstanding share of Telco common stock will be converted into the right to
receive 0.7595 shares of Holdings common stock and $15.00 in cash.
2. To consider and vote on a proposal to approve the Holdings 1997
Stock Option Plan.
3. To consider and vote on a proposal to approve the Holdings 1997
Director Stock Option Plan.
4. To transact such other business as may properly come before the
Special Meeting.
Stockholders of record at the close of business on September 3, 1997 will
be entitled to receive notice of, and to vote at, the Special Meeting. Please
note that attendance at the Special Meeting will be limited to stockholders of
EXCEL as of the record date (or their authorized representatives). If your
shares are held by a bank or broker, please bring to the Special Meeting your
bank or broker statement evidencing your beneficial ownership of EXCEL common
stock. A complete list of stockholders entitled to vote at the Special Meeting
will be maintained in EXCEL's offices at 8750 North Central Expressway, Suite
2000, Dallas, Texas 75231 for ten (10) days prior to the Special Meeting and
will be open to the examination of any stockholder during ordinary business
hours of EXCEL.
Please advise EXCEL's Transfer Agent, Bank of Boston, c/o Boston Equiserve,
LP, P.O. Box 8040, Boston, Massachusetts 02266-8040 of any changes in your
address.
WHETHER OR NOT YOU INTEND TO BE PRESENT AT THE SPECIAL MEETING, PLEASE
PROMPTLY MARK, SIGN AND DATE THE ACCOMPANYING PROXY CARD AND RETURN IT IN THE
ENCLOSED ADDRESSED ENVELOPE. STOCKHOLDERS WHO DECIDE TO ATTEND THE SPECIAL
MEETING MAY REVOKE THEIR PROXIES AT OR PRIOR TO THE SPECIAL MEETING AND VOTE IN
PERSON EVEN IF THEY HAVE PREVIOUSLY RETURNED A PROXY.
By Order of the Board of Directors,
J. Christopher Dance
Secretary
<PAGE> 4
LOGO
September 15, 1997
Dear Fellow Shareholder:
You are cordially invited to attend a special meeting of shareholders of
Telco Communications Group, Inc. ("Telco") on October 11, 1997, at which you
will be asked to approve the combination of the businesses of Telco and EXCEL
Communications, Inc. ("EXCEL"). Upon the consummation of this business
combination, Telco and EXCEL will become wholly owned subsidiaries of a newly
formed holding company, New RES, Inc. ("Holdings"), which will change its name
to "EXCEL Communications, Inc." In addition, you will be asked to approve the
adoption of the Holdings 1997 Stock Option Plan (the "Stock Option Plan") and
the Holdings 1997 Director Stock Option Plan (the "Director Stock Option Plan").
Upon the completion of the business combination:
- each outstanding share of Telco common stock will be converted into the
right to receive 0.7595 shares of Holdings common stock and $15.00 in
cash; and
- each outstanding share of EXCEL common stock will be converted into the
right to receive one share of Holdings common stock.
The accompanying Joint Proxy Statement/Prospectus provides you with
detailed information concerning the special meeting, the proposed business
combination and the Holdings common stock to be issued in connection with the
transaction, each of the Stock Option Plan and the Director Stock Option Plan,
and certain other information. Please give this information your careful
attention.
Your Board of Directors has carefully reviewed and considered the terms and
conditions of the proposed business combination and believes that the proposed
business combination will provide opportunities to achieve substantial benefits
for Telco shareholders and customers through the more efficient utilization of
the combined assets, management and personnel of EXCEL and Telco. Your Board
further believes that Holdings will be better able to capitalize on growth
opportunities in the telecommunications industry, both domestically and
internationally, and be better positioned to compete effectively in the rapidly
changing telecommunications industry.
Donaldson, Lufkin & Jenrette Securities Corporation, the Board's financial
advisor in connection with this transaction, has delivered a written opinion, a
copy of which is attached to the accompanying Joint Proxy Statement/Prospectus,
to the effect that, as of the date of such opinion and based on and subject to
the assumptions, limitations and qualifications set forth therein, the merger
consideration to be received by the shareholders of Telco was fair to such
shareholders from a financial point of view.
Your Board of Directors, by unanimous vote, has determined that the terms
of the proposed business combination are fair to, and in the best interests of,
Telco and the shareholders of Telco, and recommends that you vote FOR the
proposal to approve the business combination.
Your Board of Directors also has carefully reviewed and considered the
Stock Option Plan and the Director Stock Option Plan and recommends that you
vote FOR the proposals to approve each of these plans.
Please complete, sign and date the enclosed proxy card and return it in the
enclosed prepaid envelope as soon as possible. This action will not limit your
right to revoke your proxy by attending the special meeting and voting in
person.
Sincerely yours,
/s/ HENRY G. LUKEN, III
Henry G. Luken, III
Chairman of the Board
<PAGE> 5
LOGO
4219 Lafayette Center Drive
Chantilly, Virginia 20151-1209
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON OCTOBER 11, 1997
September 15, 1997
Notice is hereby given that a special meeting of shareholders (the "Special
Meeting") of Telco Communications Group, Inc. ("Telco") will be held on October
11, 1997 at 10:30 a.m. local time, with registration beginning at 9:30 a.m. at
Hyatt Fair Lakes, 12777 Fair Lakes Circle, Fairfax, Virginia, for the following
purposes:
1. To consider and vote on a proposal to approve and adopt the
Agreement and Plan of Merger, dated as of June 5, 1997 (the "Merger
Agreement"), by and among New RES, Inc., a newly formed holding company (to
be renamed "EXCEL Communications, Inc."; hereinafter "Holdings"), Telco,
EXCEL Communications, Inc. ("EXCEL"), T-Sub, Inc. and E-Sub, Inc. (two
newly formed subsidiaries of Holdings), pursuant to which E-Sub, Inc. will
be merged with and into EXCEL, and T-Sub, Inc. will be merged with and into
Telco (collectively, the "Mergers"). As a result of the Mergers, EXCEL and
Telco will become wholly owned subsidiaries of Holdings. Upon the
consummation of the Mergers, each outstanding share of Telco common stock
will be converted into the right to receive 0.7595 shares of Holdings
common stock and $15.00 in cash and each outstanding share of EXCEL common
stock will be converted into the right to receive one share of Holdings
common stock.
2. To consider and vote on a proposal to approve the Holdings 1997
Stock Option Plan.
3. To consider and vote on a proposal to approve the Holdings 1997
Director Stock Option Plan.
4. To transact such other business as may properly come before the
Special Meeting.
Your Board of Directors has fixed the close of business on August 29, 1997
as the record date for the purpose of determining those shareholders entitled to
notice of, and to vote at, the Special Meeting or at any postponement or
adjournment thereof.
In order to ensure a quorum, it is important that shareholders who do not
expect to attend the Special Meeting in person complete, sign, date and promptly
return the enclosed proxy card in the accompanying envelope.
By Order of the Board of Directors,
/s/ BRYAN K. RACHLIN
Bryan K. Rachlin
Secretary
<PAGE> 6
LOGO LOGO
JOINT PROXY STATEMENT
For Special Meetings of Stockholders
To be held on October 11, 1997
NEW RES, INC.
(to be renamed "EXCEL Communications, Inc." upon the consummation of the Mergers
described herein)
PROSPECTUS
This Joint Proxy Statement/Prospectus is being furnished to holders of
common stock, par value $.001 per share, of EXCEL Communications, Inc. ("EXCEL
Common Stock"), a Delaware corporation ("EXCEL"), and holders of common stock,
no par value, of Telco Communications Group, Inc. ("Telco Common Stock"), a
Virginia corporation ("Telco"), in connection with the solicitation of proxies
by the respective Boards of Directors of EXCEL and Telco for use at their
respective special meetings of stockholders, and at any adjournment or
postponement thereof (each, a "Special Meeting" and collectively, the "Special
Meetings"), called to consider and vote upon (i) a proposal to approve and adopt
the Agreement and Plan of Merger, dated as of June 5, 1997 (the "Merger
Agreement"), by and among New RES, Inc., a Delaware corporation ("Holdings"),
Telco, EXCEL, T-Sub, Inc., a Virginia corporation and a wholly owned subsidiary
of Holdings ("T-Sub"), and E-Sub, Inc., a Delaware corporation and a wholly
owned subsidiary of Holdings ("E-Sub"), and (ii) proposals (collectively, the
"Plan Proposals") to approve each of the Holdings 1997 Stock Option Plan (the
"Stock Option Plan") and the Holdings 1997 Director Stock Option Plan (the
"Director Stock Option Plan"). The combination of the businesses of EXCEL and
Telco contemplated by the Merger Agreement is referred to herein as the
"Transaction." Upon or prior to the consummation of the Transaction, Holdings
will be renamed "EXCEL Communications, Inc."
The Merger Agreement provides, among other things, for (a) the merger of
E-Sub with and into EXCEL (the "EXCEL Merger") and (b) the merger of T-Sub with
and into Telco (the "Telco Merger" and together with the EXCEL Merger, the
"Mergers"), with EXCEL and Telco surviving the Mergers as wholly owned
subsidiaries of Holdings. Upon the effectiveness of the Mergers, the holders of
EXCEL Common Stock and the holders of Telco Common Stock will become
stockholders of Holdings on the terms described in this Joint Proxy
Statement/Prospectus. The Mergers are expected to become effective after the
receipt of the requisite regulatory and stockholder approvals (the "Effective
Time"). See "The Transaction" and "The Merger Agreement."
SEE "RISK FACTORS" BEGINNING ON PAGE 21 OF THIS JOINT PROXY
STATEMENT/PROSPECTUS FOR A DISCUSSION OF CERTAIN MATTERS WHICH SHOULD BE
CAREFULLY CONSIDERED BY HOLDERS OF EXCEL COMMON STOCK AND HOLDERS OF TELCO
COMMON STOCK IN DETERMINING HOW TO VOTE WITH RESPECT TO THE MERGER AGREEMENT.
Holdings has filed a registration statement on Form S-4 (together with all
amendments, schedules and exhibits filed or incorporated by reference as a part
thereof, the "Registration Statement") under the Securities Act of 1933, as
amended (the "Securities Act"), with respect to up to 141,665,880 shares of
common stock, par value $.001 per share, of Holdings ("Holdings Common Stock")
that are proposed to be issued (i) in connection with the Mergers to holders of
outstanding shares of EXCEL Common Stock and to holders of outstanding shares of
Telco Common Stock and (ii) upon the exercise of EXCEL and Telco options that
are outstanding and unexercised at the Effective Time and that, pursuant to the
Mergers, will be assumed by Holdings and converted into options to purchase
shares of Holdings Common Stock. Prior to the Effective Time, EXCEL shall use
its best efforts to obtain the approval for listing on the New York Stock
Exchange (the "NYSE"), subject to official notice of issuance, of the Holdings
Common Stock registered under the Registration Statement. See "The Merger
Agreement -- Consideration to be Received in the Mergers," "-- Treatment of
Stock Options" and "-- Certain Conditions." This Joint Proxy
Statement/Prospectus also constitutes the Prospectus of Holdings filed as part
of the Registration Statement.
This Joint Proxy Statement/Prospectus and the accompanying form of proxy
are first being mailed to holders of EXCEL Common Stock and holders of Telco
Common Stock on or about September 15, 1997.
THE SECURITIES TO BE ISSUED PURSUANT TO THIS JOINT PROXY
STATEMENT/PROSPECTUS HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
JOINT PROXY STATEMENT/ PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THIS JOINT PROXY STATEMENT/PROSPECTUS DOES NOT COVER ANY RESALES OF THE
HOLDINGS COMMON STOCK TO BE RECEIVED BY THE HOLDERS OF EXCEL COMMON STOCK OR THE
HOLDERS OF TELCO COMMON STOCK UPON THE CONSUMMATION OF THE MERGERS, AND NO
PERSON IS AUTHORIZED TO MAKE ANY USE OF THIS JOINT PROXY STATEMENT/PROSPECTUS IN
CONNECTION WITH ANY SUCH RESALE.
THE DATE OF THIS JOINT PROXY STATEMENT/PROSPECTUS IS SEPTEMBER 15, 1997.
<PAGE> 7
AVAILABLE INFORMATION
EXCEL and Telco are each subject to the information reporting requirements
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith file reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed with the Commission can be inspected and
copied at the public reference facilities maintained by the Commission at
Judiciary Plaza, 450 Fifth Street, Room 1024, N.W., Washington, D.C. 20549 and
at the Regional Offices of the Commission at Seven World Trade Center, 13th
Floor, New York, New York 10048 and Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511. Copies of such material can also be
obtained at prescribed rates from the Public Reference Branch of the Commission
at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549. The
Commission maintains a Web site on the Internet that contains reports, proxy and
information statements and other information (http://www.sec.gov). Such
information with respect to EXCEL may also be inspected at the offices of the
NYSE, 20 Broad Street, New York, New York 10005. Such information with respect
to Telco may also be inspected at the offices of the National Association of
Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006.
This Joint Proxy Statement/Prospectus does not include all of the
information set forth in the Registration Statement filed by Holdings with the
Commission under the Securities Act, as permitted by the rules and regulations
of the Commission. The Registration Statement is available for inspection and
copying as set forth above. Statements contained in this Joint Proxy
Statement/Prospectus or in any document incorporated herein by reference
concerning the contents of any contract or other document referred to herein or
therein are not necessarily complete and in each instance reference is made to
the copy of such contract or other document filed as an exhibit to the
Registration Statement or such other document, and each statement shall be
deemed qualified in its entirety by such reference.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN THIS
JOINT PROXY STATEMENT/PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS JOINT
PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY THE SECURITIES COVERED BY THIS JOINT PROXY
STATEMENT/PROSPECTUS OR A SOLICITATION OF A PROXY IN ANY JURISDICTION WHERE, OR
TO OR FROM ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS JOINT PROXY STATEMENT/PROSPECTUS NOR
ANY DISTRIBUTION OF SECURITIES MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF EXCEL,
TELCO OR HOLDINGS SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED OR
INCORPORATED HEREIN BY REFERENCE IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS
DATE.
2
<PAGE> 8
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents previously filed by EXCEL with the Commission under
the Exchange Act (collectively, the "EXCEL Reports") are incorporated herein by
reference:
(a) EXCEL's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996;
(b) EXCEL's Quarterly Report on Form 10-Q for the fiscal quarter ended
March 31, 1997;
(c) EXCEL's Quarterly Report on Form 10-Q for the fiscal quarter ended
June 30, 1997;
(d) EXCEL's Proxy Statement for the Annual Meeting of Stockholders
held on May 15, 1997; and
(e) EXCEL's Current Reports on Form 8-K dated March 31, 1997, June 5,
1997 and June 25, 1997.
The following documents previously filed by Telco with the Commission under
the Exchange Act (collectively, the "Telco Reports") are incorporated herein by
reference:
(a) Telco's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996, as amended by Form 10-K/A, dated September 11, 1997;
(b) Telco's Quarterly Report on Form 10-Q for the fiscal quarter ended
March 31, 1997;
(c) Telco's Quarterly Report on Form 10-Q for the fiscal quarter ended
June 30, 1997;
(d) Telco's Proxy Statement for the Annual Meeting of Shareholders
held on May 15, 1997; and
(e) Telco's Current Reports on Form 8-K dated March 11, 1997, March
18, 1997, April 15, 1997, June 5, 1997 and June 24, 1997.
All documents filed by EXCEL or Telco pursuant to Sections 13(a), 13(c), 14
or 15(d) of the Exchange Act after the date of this Joint Proxy
Statement/Prospectus and prior to the Special Meetings shall be deemed to be
incorporated herein by reference and to be a part hereof from the date of filing
of such documents.
Any statement contained in a document incorporated or deemed to be
incorporated herein by reference shall be deemed to be modified or superseded
for purposes hereof to the extent that a statement contained herein (or in any
other subsequently filed document that is or is deemed to be incorporated herein
by reference) modifies or supersedes such previous statement. Any statement so
modified or superseded shall not be deemed to constitute a part hereof except as
so modified or superseded. All information contained or incorporated herein by
reference relating to EXCEL has been supplied by EXCEL and all such information
relating to Telco has been supplied by Telco.
THIS JOINT PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE
THAT ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS (OTHER THAN
EXHIBITS TO SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY
REFERENCE HEREIN) ARE AVAILABLE WITHOUT CHARGE, UPON WRITTEN OR ORAL REQUEST BY
ANY PERSON TO WHOM THIS JOINT PROXY STATEMENT/PROSPECTUS HAS BEEN DELIVERED, IN
THE CASE OF DOCUMENTS RELATING TO EXCEL, FROM EXCEL COMMUNICATIONS, INC., 8750
NORTH CENTRAL EXPRESSWAY, SUITE 2000, DALLAS, TEXAS 75231 (TELEPHONE (214)
863-8000), AND, IN THE CASE OF DOCUMENTS RELATING TO TELCO, FROM TELCO
COMMUNICATIONS GROUP, INC., 4219 LAFAYETTE CENTER DRIVE, CHANTILLY, VIRGINIA
20151-1209 (TELEPHONE (703) 631-5600). IN ORDER TO ENSURE TIMELY DELIVERY OF THE
DOCUMENTS, ANY SUCH REQUEST SHOULD BE MADE BY SEPTEMBER 29, 1997.
3
<PAGE> 9
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This Joint Proxy Statement/Prospectus contains certain forward-looking
statements that are based on the beliefs of EXCEL and/or Telco as well as
assumptions made by and information currently available to management of EXCEL
and Telco. Forward-looking statements include (without limitation) the
information concerning possible or assumed future results of operations of EXCEL
and Telco set forth under "The Transaction -- Recommendation of EXCEL Board,"
"-- Recommendation of Telco Board," "-- Reasons for the Transaction,"
"-- Opinions of Financial Advisors," "Business of Holdings," "Summary -- Summary
Selected Unaudited Pro Forma Combined Condensed Financial Data" and "Unaudited
Pro Forma Combined Condensed Financial Statements," statements preceded by,
followed by or that include the words "believes," "expects," "anticipates" or
similar expressions and all other statements that are not historical facts. All
forward-looking statements involve risks and uncertainties. Readers are
cautioned that the following important factors, in addition to those discussed
elsewhere herein (including, without limitation, the matters discussed under
"Risk Factors") and in the documents incorporated herein by reference, could
affect the future results of EXCEL, Telco and Holdings and cause those results
to differ materially from those expressed in such forward-looking statements:
Holdings' ability to migrate EXCEL's minutes of use by long distance customers
from third party providers to Telco's facilities-based network without incurring
unexpected costs or delays; Holdings' ability to manage growth; Holdings'
ability to attract, maintain and motivate a large base of independent
representatives; competition in the telecommunications and paging industries;
Holdings' ongoing relationship with its long distance carriers; Holdings'
dependence upon key personnel; Holdings' ability to attract and retain
customers; the costs associated with the continued expansion of Telco's
Commercial Sales Division; increases in rates for access and transmission
facilities; federal and state governmental regulation of the long distance
telecommunications industry, including pending reforms concerning access charges
and the contemplated conversion to 10-10-XXX casual calling; Holdings' ability
to further develop and manage its own long distance network; Holdings' ability
to maintain, operate and upgrade its information systems; Holdings' success in
the offering of paging, local telephone service and other new communications
products and services; possible claims relating to the ownership of proprietary
rights; and general economic conditions.
4
<PAGE> 10
TABLE OF CONTENTS
<TABLE>
<S> <C>
AVAILABLE INFORMATION....................................... 2
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............. 3
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING
STATEMENTS................................................ 4
SUMMARY..................................................... 8
The Companies............................................. 8
The Special Meetings...................................... 9
The Mergers............................................... 10
Risk Factors.............................................. 15
The Plan Proposals........................................ 15
Summary Selected Unaudited Pro Forma Combined Condensed
Financial Data......................................... 16
Summary Selected Historical Financial Data of EXCEL....... 17
Summary Selected Historical Financial Data of Telco....... 18
Comparative Per Share Information......................... 19
Comparative Per Share Market Price Information............ 20
Listing of Holdings Common Stock and Payment of
Dividends.............................................. 20
RISK FACTORS................................................ 21
Fixed Exchange Ratio...................................... 21
Risk of Nonrealization of Synergies and Other Benefits.... 21
Leverage.................................................. 22
Dependence on Key Personnel............................... 22
Regulation and Management of EXCEL's Independent
Representatives........................................ 22
Litigation................................................ 23
Concentration of Ownership................................ 23
Interests of Management................................... 23
THE TRANSACTION............................................. 24
General................................................... 24
Background of the Transaction............................. 24
Recommendation of EXCEL Board............................. 29
Recommendation of Telco Board............................. 29
Reasons for the Transaction............................... 30
Fairness Opinions......................................... 32
Interests of Certain Persons in the Transaction........... 43
Accounting Treatment...................................... 46
Certain United States Federal Income Tax Consequences..... 47
Regulatory Approvals...................................... 48
Certain Related Financing................................. 49
Stock Exchange Listing.................................... 49
Delisting and Deregistration of EXCEL Common Stock and
Telco Common Stock; Cessation of Periodic Reporting.... 49
Federal Securities Laws Consequences...................... 50
Appraisal Rights.......................................... 50
BUSINESS OF HOLDINGS........................................ 50
COMPARATIVE PER SHARE MARKET PRICE AND DIVIDEND
INFORMATION............................................... 51
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS........... 52
</TABLE>
5
<PAGE> 11
DIRECTORS AND MANAGEMENT OF HOLDINGS........................ 58
Directors................................................. 58
Committees of the Board of Directors...................... 58
Compensation of Directors and Officers.................... 58
Executive Compensation.................................... 58
OWNERSHIP OF HOLDINGS....................................... 59
THE SPECIAL MEETINGS........................................ 61
General................................................... 61
Record Dates.............................................. 62
Times and Places; Purposes................................ 62
Voting Rights; Votes Required for Approval................ 62
Proxies................................................... 63
THE MERGER AGREEMENT........................................ 65
General................................................... 65
Consideration to be Received in the Mergers............... 65
Treatment of Stock Options................................ 66
Holdings Following the Merger............................. 66
Certain Conditions........................................ 66
Certain Representations and Warranties.................... 67
Certain Covenants......................................... 67
No Solicitation of Transactions........................... 68
Certain Benefits Matters.................................. 68
Indemnification and Insurance............................. 68
Termination............................................... 69
Termination Fee........................................... 69
Expenses.................................................. 70
Modification or Amendment................................. 70
THE PLAN PROPOSALS.......................................... 71
The Stock Option Plan..................................... 71
The Director Stock Option Plan............................ 73
Certain Federal Income Tax Consequences................... 73
COMPARISON OF STOCKHOLDERS' RIGHTS.......................... 76
Classes and Series of Capital Stock....................... 76
Director and Officer Liability and Indemnification........ 76
Special Meetings of Stockholders.......................... 78
Annual Meeting of Stockholders............................ 78
Notice of Stockholder Proposals........................... 78
Dividends and Distributions............................... 79
Appraisal Rights.......................................... 79
Stock Repurchases......................................... 80
Removal of Directors...................................... 80
Charter Amendments........................................ 81
Bylaw Amendments.......................................... 82
Stockholder Action Without a Meeting...................... 82
Anti-Takeover Laws........................................ 83
Voluntary Dissolution..................................... 84
Transactions with Directors............................... 84
Filling Vacancies on the Board of Directors............... 85
Number and Qualification of Directors..................... 86
Preemptive Rights......................................... 86
6
<PAGE> 12
DESCRIPTION OF HOLDINGS CAPITAL STOCK....................... 87
Authorized Capital Stock.................................. 87
Common Stock.............................................. 87
Series Preferred Stock.................................... 87
Preemptive Rights......................................... 87
Transfer Agent and Registrar.............................. 88
Certain Anti-Takeover Effects............................. 88
CERTAIN TRANSACTIONS........................................ 88
LEGAL MATTERS............................................... 88
EXPERTS..................................................... 89
FUTURE STOCKHOLDER PROPOSALS................................ 89
Appendix I -- Merger Agreement
Appendix II -- Opinion of Lehman Brothers Inc.
Appendix III -- Opinion of Donaldson, Lufkin & Jenrette Securities Corporation
Appendix IV -- Holdings Certificate of Incorporation
Appendix V -- Holdings Bylaws
7
<PAGE> 13
SUMMARY
The following summary is intended only to highlight certain information
contained elsewhere in this Joint Proxy Statement/Prospectus. This summary is
not intended to be complete and is qualified in its entirety by the more
detailed information contained elsewhere in this Joint Proxy
Statement/Prospectus, the appendices hereto and the documents incorporated by
reference or otherwise referred to herein. Holders of EXCEL Common Stock and
holders of Telco Common Stock are urged to review this entire Joint Proxy
Statement/ Prospectus carefully, including the appendices hereto and the
documents incorporated by reference or otherwise referred to herein. Unless the
context otherwise requires or as otherwise expressly provided herein, references
in this Joint Proxy Statement/Prospectus to "Holdings" refer to New RES, Inc.
and its subsidiaries, collectively.
THE COMPANIES
EXCEL
EXCEL Communications, Inc., a Delaware corporation which was formed in 1988
and commenced operations in 1989, is a provider of long distance
telecommunications and paging services in the United States. EXCEL ranks fourth,
after AT&T Corp., MCI Telecommunications Corp. and Sprint Corporation, in the
U.S. long distance telecommunications industry based upon domestic residential
long distance revenues, and ranks fifth overall based upon the number of
pre-subscribed lines. EXCEL markets its services through a network marketing
system of independent representatives ("IRs"). EXCEL encourages IRs to enroll
subscribers with whom they have ongoing relationships, such as family members,
friends, business associates, neighbors or other acquaintances. EXCEL also
encourages, but does not require, IRs to use EXCEL's products and services and
to communicate the results of their use of such products and services to their
subscribers.
The mailing address of EXCEL's principal executive offices is 8750 North
Central Expressway, Suite 2000, Dallas, Texas 75231 and its telephone number is
(214) 863-8000.
Additional information concerning EXCEL is included in the EXCEL Reports
incorporated herein by reference. See "Incorporation of Certain Documents by
Reference" and "Available Information."
TELCO
Telco Communications Group, Inc., a Virginia corporation formed in 1993, is
a facilities-based provider of domestic and international long distance
telecommunications services to both residential and commercial customers in the
United States. The majority of Telco's current revenue is generated by customers
accessing the Telco network by dialing a unique five digit Carrier
Identification Code ("CIC Code") before dialing the number they are calling.
Using a CIC Code to access Telco's network is known as "dial around" or "casual
calling" because customers can use Telco's services at any time without changing
their existing pre-subscribed long distance carrier. Telco also sells
pre-subscribed telecommunications services to wholesale and commercial customers
using a direct sales force of approximately 400 persons. Telco recently acquired
the voice network assets of Advantis (the "Advantis Network"), which includes
approximately 100,000 network miles of DS-3 fiber optic capacity under a long
term right-to-use agreement.
The mailing address of Telco's principal executive offices is 4219
Lafayette Center Drive, Chantilly, Virginia 20151-1209 and its telephone number
is (703) 631-5600.
Additional information concerning Telco is included in the Telco Reports
incorporated herein by reference. See "Incorporation of Certain Documents by
Reference" and "Available Information."
8
<PAGE> 14
HOLDINGS
The combination of EXCEL and Telco will create one of the largest
facilities-based long distance telecommunications companies in the United
States, the revenue sources of which will be diversified across multiple
distribution channels. These distribution channels include pre-subscribed
residential customers and small and home office commercial customers targeted by
EXCEL's IR network, commercial and wholesale customers targeted by the Telco
direct sales force and non-presubscribed, lower volume, residential customers
targeted by Telco's dial around marketing efforts. See "Business of Holdings."
Holdings is a Delaware corporation that was formed on May 30, 1997 to
become a holding company for EXCEL and Telco and their respective subsidiaries
following the consummation of the Mergers. Prior to the consummation of the
Mergers, Holdings has had and will have no operations other than those incident
to its formation, its execution of the Merger Agreement and the preparation of
this Joint Proxy Statement/Prospectus. Holdings currently has no operations and
nominal or no assets and liabilities. At or prior to the Effective Time, the
name of Holdings will be changed to "EXCEL Communications, Inc."
The mailing address of Holdings' principal executive offices is 8750 North
Central Expressway, Suite 2000, Dallas, Texas 75231 and its telephone number is
(214) 863-8000.
THE SPECIAL MEETINGS
EXCEL
The Special Meeting of the stockholders of EXCEL will be held at Wyndham
Anatole Hotel, 2201 Stemmons Freeway, Dallas, Texas on October 11, 1997,
starting at 10:00 a.m., local time. At the Special Meeting, or at any
adjournment or postponement thereof (the "EXCEL Meeting"), holders of EXCEL
Common Stock will be asked to (i) approve and adopt the Merger Agreement and
(ii) approve the Plan Proposals. See "The Transaction," "The Merger Agreement"
and "The Plan Proposals."
Holders of record of EXCEL Common Stock at the close of business on
September 3, 1997 (the "EXCEL Record Date") have the right to receive notice of,
and to vote at, the EXCEL Meeting. On the EXCEL Record Date, there were
approximately 107,595,420 shares of EXCEL Common Stock issued and outstanding
and entitled to vote. Each share of EXCEL Common Stock is entitled to one vote
on each matter that is properly presented to stockholders for a vote at the
EXCEL Meeting. Under the General Corporation Law of the State of Delaware, as
amended (the "DGCL"), the affirmative vote of the holders of a majority of the
outstanding shares of EXCEL Common Stock entitled to vote thereon is required to
approve and adopt the Merger Agreement. The affirmative vote of a majority of
the votes cast by the holders of EXCEL Common Stock at the EXCEL Meeting is
required to approve the Plan Proposals. The Merger Agreement and the Plan
Proposals must also be approved by the holders of Telco Common Stock as
described below.
Kenny A. Troutt, the Chief Executive Officer and Chairman of the Board of
EXCEL, and certain of his affiliates (collectively, the "Troutt Group")
beneficially own 64,180,800 shares of EXCEL Common Stock, which represent
approximately 60% (approximately 57% on a fully diluted basis) of the
outstanding shares of EXCEL Common Stock. The members of the Troutt Group have
agreed to vote all of their respective shares of EXCEL Common Stock in favor of
the approval of the Merger Agreement, subject to the condition set forth in the
EXCEL Shareholders Agreement (as hereinafter defined). Accordingly, assuming
that the condition set forth in the EXCEL Shareholders Agreement is satisfied,
approval of the Merger Agreement by the holders of EXCEL Common Stock is
assured. See "The Transaction -- Interests of Certain Persons in the
Transaction -- EXCEL Shareholders Agreement."
TELCO
The Special Meeting of the shareholders of Telco will be held at Hyatt Fair
Lakes, 12777 Fair Lakes Circle, Fairfax, Virginia on October 11, 1997, starting
at 10:30 a.m., local time. At the Special Meeting, or at any adjournment or
postponement thereof (the "Telco Meeting"), holders of Telco Common Stock will
be asked to (i) approve and adopt the Merger Agreement and (ii) approve the Plan
Proposals. See "The Transaction," "The Merger Agreement" and "The Plan
Proposals."
9
<PAGE> 15
Holders of record of Telco Common Stock at the close of business on August
29, 1997 (the "Telco Record Date") have the right to receive notice of, and to
vote at, the Telco Meeting. On the Telco Record Date, there were approximately
33,341,732 shares of Telco Common Stock outstanding. Each share of Telco Common
Stock is entitled to one vote on each matter that is properly presented to
shareholders for a vote at the Telco Meeting. Under the Virginia Stock
Corporation Act (the "VSCA"), the affirmative vote of the holders of a majority
of the outstanding shares of Telco Common Stock entitled to vote thereon is
required to approve and adopt the Merger Agreement. The affirmative vote of a
majority of the Telco Common Stock represented at the Telco Meeting and entitled
to vote thereon is required to approve the Plan Proposals. The Merger Agreement
and the Plan Proposals must also be approved by the holders of EXCEL Common
Stock as described above.
Donald A. Burns, Thomas J. Cirrito, Henry G. Luken, III and Bryan K.
Rachlin, each of whom is currently a director and/or executive officer of Telco,
and certain affiliates of such persons (collectively, the "Telco Management
Group"), beneficially own 18,638,507 shares of Telco Common Stock, which
represent approximately 56% (approximately 50% on a fully diluted basis) of the
issued and outstanding shares of Telco Common Stock. The members of the Telco
Management Group have agreed to vote all of their respective shares of Telco
Common Stock in favor of the approval of the Merger Agreement, subject to the
conditions set forth in the Telco Shareholders Agreement (as hereinafter
defined). Accordingly, assuming that the conditions set forth in the Telco
Shareholders Agreement are satisfied, approval of the Merger Agreement by the
holders of Telco Common Stock is assured. See "The Transaction -- Interests of
Certain Persons in the Transaction -- Telco Shareholders Agreement."
THE MERGERS
CONSIDERATION TO BE RECEIVED BY STOCKHOLDERS
Pursuant to the Merger Agreement, T-Sub will be merged with and into Telco,
with Telco surviving the Telco Merger as a wholly owned subsidiary of Holdings.
Upon consummation of the Telco Merger, (i) each outstanding share of Telco
Common Stock will be converted into the right to receive (a) 0.7595 shares (the
"Telco Exchange Ratio") of Holdings Common Stock (the "Stock Consideration") and
(b) $15.00 in cash (the "Cash Consideration" and, together with the Stock
Consideration, the "Telco Merger Consideration") and (ii) any outstanding shares
of Telco Common Stock held by Telco in its treasury will be canceled and will
cease to exist. Fractional shares of Holdings Common Stock will not be issued in
connection with the Telco Merger. For a discussion of the treatment of
fractional shares that would otherwise be issued, see "The Merger
Agreement -- Consideration to be Received in the Mergers." For a description of
Holdings Common Stock, see "Description of Holdings Capital Stock." For a
summary of the principal differences between the rights of holders of Telco
Common Stock and holders of Holdings Common Stock, see "Comparison of
Stockholders' Rights."
Pursuant to the Merger Agreement, E-Sub will be merged with and into EXCEL,
with EXCEL surviving the EXCEL Merger as a wholly owned subsidiary of Holdings.
Upon consummation of the EXCEL Merger, (i) each outstanding share of EXCEL
Common Stock will be converted into the right to receive one share of Holdings
Common Stock (the "EXCEL Exchange Ratio") and (ii) any outstanding shares of
EXCEL Common Stock held by EXCEL in its treasury will be canceled and will cease
to exist. See "The Merger Agreement -- Consideration to be Received in the
Mergers." For a description of Holdings Common Stock, see "Description of
Holdings Capital Stock." For a summary of the principal differences between the
rights of holders of EXCEL Common Stock and holders of Holdings Common Stock,
see "Comparison of Stockholders' Rights."
For a description of the treatment of outstanding options to purchase EXCEL
Common Stock and options to purchase Telco Common Stock upon the consummation of
the Mergers, see "The Transaction -- Interests of Certain Persons in the
Transaction -- Telco Shareholders Agreement" and "The Merger
Agreement -- Treatment of Stock Options."
10
<PAGE> 16
HOLDERS OF TELCO COMMON STOCK AND HOLDERS OF EXCEL COMMON STOCK SHOULD NOT
SEND IN THEIR STOCK CERTIFICATES WITH THEIR PROXY CARDS.
OWNERSHIP OF HOLDINGS AFTER THE TRANSACTION
Immediately following the Mergers, the former holders of EXCEL Common Stock
will collectively hold approximately 81% of the issued and outstanding shares of
Holdings Common Stock (approximately 78% on a fully diluted basis and treating
option holders as former stockholders) and the former holders of Telco Common
Stock will collectively hold approximately 19% of the issued and outstanding
shares of Holdings Common Stock (approximately 22% on a fully diluted basis and
treating option holders as former shareholders).
RECOMMENDATION OF EXCEL'S BOARD OF DIRECTORS
The Board of Directors of EXCEL (the "EXCEL Board"), by unanimous vote
(excluding T. Allan McArtor, who did not become a member of the Board of
Directors of EXCEL until June 25, 1997), has determined that the terms and
provisions of the Merger Agreement are fair to, and in the best interests of,
EXCEL and the holders of EXCEL Common Stock and recommends that holders of EXCEL
Common Stock vote in favor of approval of the Merger Agreement. The decision of
the EXCEL Board to enter into the Merger Agreement and to recommend that holders
of EXCEL Common Stock vote in favor of the approval of the Merger Agreement is
based upon its evaluation of a number of factors, including, among others, the
written opinion of Lehman Brothers Inc. ("Lehman Brothers"), EXCEL's financial
advisor in connection with the Transaction, dated June 5, 1997 and updated as of
the date of this Joint Proxy Statement/Prospectus, stating that, as of such
dates and based on and subject to the assumptions, limitations and
qualifications set forth therein, from a financial point of view, the EXCEL
Exchange Ratio was fair to the stockholders of EXCEL and the consideration to be
paid by Holdings to holders of Telco Common Stock in the Transaction was fair to
EXCEL. See "The Transaction -- Recommendation of EXCEL Board" and "-- Fairness
Opinions -- Opinion of EXCEL's Financial Advisor."
RECOMMENDATION OF TELCO'S BOARD OF DIRECTORS
The Board of Directors of Telco (the "Telco Board"), by unanimous vote, has
determined that the Transaction is in the best interests of the holders of Telco
Common Stock and recommends that the holders of Telco Common Stock vote in favor
of approval of the Merger Agreement. The decision of the Telco Board to enter
into the Merger Agreement and to recommend that holders of Telco Common Stock
vote in favor of the approval of the Merger Agreement is based upon its
evaluation of a number of factors, including, among others, the written opinion
of Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), Telco's
financial advisor in connection with the Transaction, dated June 5, 1997 and
updated as of the date of this Joint Proxy Statement/Prospectus, stating that,
as of such dates and based on and subject to the assumptions, limitations and
qualifications set forth therein, the quotient of the Telco Exchange Ratio and
the EXCEL Exchange Ratio (the "Exchange Ratio") together with the Cash
Consideration to be received by the shareholders of Telco was fair to such
shareholders from a financial point of view. See "The
Transaction -- Recommendation of Telco Board" and "-- Fairness
Opinions -- Opinion of Telco's Financial Advisor."
REASONS FOR THE TRANSACTION
The combination of EXCEL and Telco will create one of the largest
facilities-based long distance telecommunications companies in the United
States. Holdings would have had 1996 pro forma combined revenues and operating
income of approximately $1.8 billion and $240 million, respectively, and
approximately 5.8 million long distance customers as of June 30, 1997. The EXCEL
Board and the Telco Board (collectively, the "Boards") believe that the
Transaction will provide opportunities to achieve substantial benefits for the
respective stockholders and customers of each company through the more efficient
utilization of the combined assets, management and personnel of EXCEL and Telco.
The Boards further believe that the combined company, operating in the combined
markets and with the combined assets, financial resources, management, personnel
and technical expertise of both EXCEL and Telco, will be better able to
capitalize on
11
<PAGE> 17
growth opportunities in the telecommunications industry, both domestically and
internationally, and be better positioned to compete effectively in the rapidly
changing telecommunications industry, than either EXCEL or Telco on a
stand-alone basis.
The primary strategic advantages of the Transaction that were considered by
the Boards in reaching their determinations to recommend the Transaction were
(i) the cost savings expected to result from the increased utilization of the
Telco network, (ii) the expected diversification of Holdings' distribution
channels, (iii) the expected opportunities for Holdings to capitalize on greater
economies of scale, (iv) the enhanced management capabilities expected to result
from the combined and complementary experience and expertise of EXCEL and Telco
management and (v) the opportunities for revenue growth expected to result from
the combined resources of EXCEL and Telco.
In addition to the joint reasons for the Transaction described above, other
important factors considered by the EXCEL Board in reaching its determination to
recommend the Transaction were (i) the benefit of obtaining immediate access to
an existing lower cost network, which will enable EXCEL to avoid the cost, delay
and management time commitment required to build a new network infrastructure
and (ii) the enhanced revenue growth opportunities created by the new product
and customer opportunities for EXCEL's IRs resulting from the Transaction.
In addition to the joint reasons for the Transaction described above,
another important factor considered by the Telco Board in reaching its
determination to recommend the Transaction was the increased financial strength
of the combined company, which should enhance Holdings' ability to take
advantage of other telecommunications opportunities, such as acquisitions, new
product introductions and international expansion.
For a more complete discussion of EXCEL's and Telco's reasons for the
Transaction, see "The Transaction -- Reasons for the Transaction."
OPINIONS OF FINANCIAL ADVISORS
On June 5, 1997, Lehman Brothers delivered its written opinion to the EXCEL
Board to the effect that, as of such date and based on and subject to the
assumptions, limitations and qualifications set forth therein, from a financial
point of view, the EXCEL Exchange Ratio was fair to the stockholders of EXCEL
and the consideration to be paid by Holdings to holders of Telco Common Stock in
the Transaction was fair to EXCEL. Lehman Brothers subsequently updated such
opinion by delivery of its written opinion dated as of the date of this Joint
Proxy Statement/Prospectus. A COPY OF THE LEHMAN BROTHERS OPINION, DATED AS OF
THE DATE OF THIS JOINT PROXY STATEMENT/PROSPECTUS, WHICH SETS FORTH THE
ASSUMPTIONS MADE AND MATTERS CONSIDERED BY LEHMAN BROTHERS IN RENDERING ITS
OPINION, IS ATTACHED AS APPENDIX II TO THIS JOINT PROXY STATEMENT/PROSPECTUS.
HOLDERS OF EXCEL COMMON STOCK ARE URGED TO READ SUCH OPINION IN ITS ENTIRETY.
On June 5, 1997, DLJ delivered its written opinion to the Telco Board to
the effect that, as of such date and based on and subject to the assumptions,
limitations and qualifications set forth therein, the Exchange Ratio together
with the Cash Consideration to be received by the shareholders of Telco was fair
to such shareholders from a financial point of view. DLJ subsequently updated
such opinion by delivery of its written opinion dated as of the date of this
Joint Proxy Statement/Prospectus. A COPY OF THE DLJ OPINION, DATED AS OF THE
DATE OF THIS JOINT PROXY STATEMENT/PROSPECTUS, WHICH SETS FORTH THE ASSUMPTIONS
MADE, PROCEDURES FOLLOWED AND OTHER MATTERS CONSIDERED BY DLJ IN RENDERING ITS
OPINION, IS ATTACHED AS APPENDIX III TO THIS JOINT PROXY STATEMENT/PROSPECTUS.
HOLDERS OF TELCO COMMON STOCK ARE URGED TO READ SUCH OPINION IN ITS ENTIRETY.
BOARD OF DIRECTORS AND MANAGEMENT OF HOLDINGS, EXCEL AND TELCO
The Board of Directors of Holdings (the "Holdings Board") initially will
consist of Kenny A. Troutt, who will be Chairman of the Board, Donald A. Burns,
Henry G. Luken, III, T. Allan McArtor, John J. McLaine, Ronald A. McDougall and
Stephen R. Smith.
12
<PAGE> 18
Following the consummation of the Mergers, Mr. Troutt will be Chief
Executive Officer and Chairman of the Board of Holdings, Mr. McLaine will be
President and Chief Operating Officer of Holdings, J. Christopher Dance will be
Executive Vice President, Secretary and General Counsel of Holdings, Mr. Luken
will be Executive Vice President of Holdings, Nicholas A. Merrick will be
Executive Vice President and Chief Financial Officer of Holdings, Thomas Marino
will be Executive Vice President of Network Operations of Holdings, Mr. Smith
will be Executive Vice President of Marketing of Holdings, Paul D. Fletcher will
be Vice President and Treasurer of Holdings and Craig E. Holmes will be Vice
President and Chief Accounting Officer of Holdings.
The Merger Agreement provides that, at or prior to the Effective Time,
Telco will enter into new employment agreements with each of Steven G. Canton
and Messrs. Burns, Merrick and Rachlin, and Holdings will enter into an
employment agreement with Mr. Luken (collectively, the "Employment Agreements").
See "The Transaction -- Interests of Certain Persons in the
Transaction -- Employment Agreements."
CERTAIN RELATED FINANCING
Prior to the consummation of the Mergers, Holdings intends to enter into a
new credit facility (the "New Credit Facility") with Lehman Commercial Paper
Inc., as agent (the "Agent"), and a syndicate of lenders. The New Credit
Facility will consist of a five-year reducing revolving credit facility in the
principal amount of $1 billion, with a $50 million letter of credit
sub-facility. Availability under the New Credit Facility will reduce on dates
and in amounts to be determined. Borrowings thereunder will be guaranteed by
Holdings' subsidiaries (including EXCEL and Telco) and will be secured by a
pledge of the capital stock of Holdings' subsidiaries.
Holdings intends to make an initial borrowing of approximately $513 million
under the New Credit Facility concurrently with the consummation of the Mergers
and to use the proceeds thereof to finance the Mergers and costs and expenses
associated therewith and to refinance existing indebtedness of Telco. Future
borrowings will be available for general corporate purposes, including
acquisitions (subject to the terms and conditions of the New Credit Facility).
For a more complete description of the New Credit Facility, see "The
Transaction -- Certain Related Financing."
ACCOUNTING TREATMENT
The Telco Merger will be accounted for by Holdings under the "purchase"
method of accounting and the EXCEL Merger will be accounted for as a
reorganization, in each case in accordance with generally accepted accounting
principles. See "The Transaction -- Accounting Treatment."
CONDITIONS TO THE MERGERS
The respective obligations of EXCEL and Telco to consummate the Mergers are
subject to the satisfaction of certain conditions, including, among others, (a)
receipt of material regulatory approvals, (b) receipt of tax opinions by each of
Telco and EXCEL from their respective special tax counsel, (c) receipt by EXCEL
of a regulatory opinion from Telco's regulatory counsel and (d) the absence of
any event that has had or could reasonably be expected to have a Material
Adverse Effect (as defined in the Merger Agreement) on the other or on Holdings.
In addition, the obligation of EXCEL to consummate the Mergers is subject to the
condition that the Employment Agreements and Non-Competition Agreements (as
hereinafter defined) are in full force and effect. See "The Merger
Agreement -- Certain Conditions."
TERMINATION OF THE MERGER AGREEMENT; TERMINATION FEE
The Merger Agreement may be terminated prior to the Effective Time, (a) by
either EXCEL or Telco under certain circumstances, including if (i) the Mergers
are not consummated on or before December 31, 1997 (the "Termination Date"),
unless such failure to consummate is caused solely by reason of the failure to
13
<PAGE> 19
obtain certain regulatory approvals, in which case the Termination Date shall be
extended to May 31, 1998, (ii) a Material Adverse Effect or an event which could
reasonably be expected to result in a Material Adverse Effect on the other or on
Holdings occurs or (iii) the Board of Directors of the other, or any committee
thereof, (A) resolves to or does withdraw or modify in any adverse manner its
approval or recommendation of the Merger Agreement or the Mergers, (B) fails to
reaffirm such approval upon the request of the other or (C) approves or
recommends any acquisition of such corporation or a material portion of its
assets or any tender offer for shares of its capital stock, in each case, other
than by a party to the Merger Agreement or one of its affiliates (collectively,
a "Withdrawal"), and (b) by Telco if (i) under certain situations and subject to
certain conditions, prior to the approval of the Merger Agreement by the holders
of Telco Common Stock, the Telco Board determines in good faith that its
fiduciary obligations under applicable law require such action (a "Fiduciary
Obligation") or (ii) under certain circumstances, EXCEL engages in any Proposed
Activity (as defined in the Merger Agreement) to which Telco has objected. See
"The Merger Agreement -- Termination."
Under certain circumstances, the Merger Agreement obligates Telco to pay to
EXCEL a fee of $20 million if the Merger Agreement is terminated. See "The
Merger Agreement -- No Solicitation of Transactions" and "The Merger
Agreement -- Termination Fee."
REGULATORY APPROVALS
The Transaction is subject to the requirements of the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act"), and the rules
and regulations thereunder, which provide that certain transactions may not be
consummated until required information and materials are furnished to the
Antitrust Division of the Department of Justice (the "Antitrust Division") and
the Federal Trade Commission (the "FTC") and the requisite waiting period has
expired or has been terminated. Early termination of such waiting period was
granted on July 15, 1997. The Transaction also is subject to review by the
applicable state regulatory authorities governing telecommunications services in
each of the states in which EXCEL or Telco provides telephone service and to
receipt of the approval of the Federal Communications Commission (the "FCC").
See "The Transaction -- Regulatory Approvals."
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The Transaction has been structured to qualify as a nontaxable transaction
under the Internal Revenue Code of 1986, as amended (the "Code"). It is a
condition to the obligations of each of EXCEL and Telco under the Merger
Agreement that EXCEL receive an opinion from Weil, Gotshal & Manges LLP, special
counsel to EXCEL ("Weil, Gotshal & Manges"), and that Telco receive an opinion
from Swidler & Berlin, Chartered, special counsel to Telco ("Swidler & Berlin"),
to the effect that no gain or loss will be recognized by EXCEL or Telco, as the
case may be, or their respective holders of common stock in connection with the
Mergers, except (i) gain, if any, will be recognized by holders of Telco Common
Stock to the extent of the Cash Consideration and (ii) with respect to cash
received in lieu of fractional shares by holders of Telco Common Stock. See "The
Transaction -- Certain United States Federal Income Tax Consequences."
APPRAISAL RIGHTS
The holders of EXCEL Common Stock and the holders of Telco Common Stock
will not be entitled to any appraisal rights in connection with the Transaction.
See "The Transaction -- Appraisal Rights."
14
<PAGE> 20
RISK FACTORS
SEE "RISK FACTORS" FOLLOWING THIS SUMMARY FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY INVESTORS IN EVALUATING AN INVESTMENT IN
THE SECURITIES OFFERED HEREBY.
THE PLAN PROPOSALS
THE STOCK OPTION PLAN
The Stock Option Plan is intended to provide a means by which selected
employees of and consultants to Holdings may be given an opportunity to purchase
Holdings Common Stock. Options granted under the Stock Option Plan may be either
options that qualify for treatment as "incentive stock options" under Section
422 of the Code ("Incentive Stock Options") or options that do not so qualify
("Nonqualified Stock Options"). Stock Options may be granted under the Stock
Option Plan to any person who is an officer or other employee (including,
subject to certain conditions, officers and employees who are also directors) of
Holdings or any of its subsidiaries. The exercise price of Incentive Stock
Options must be at least the fair market value of a share of Holdings Common
Stock on the date of grant (and not less than 110% of the fair market value in
the case of an Incentive Stock Option granted to an optionee owning 10% or more
of Holdings Common Stock). The exercise price of Nonqualified Stock Options may
be less than the fair market value of a share of Holdings Common Stock on the
date of grant. A total of 13,000,000 shares of Holdings Common Stock have been
reserved for issuance upon the exercise of options to be granted under the Stock
Option Plan and the maximum number of shares with respect to which options may
be granted to any participant during the term of the Stock Option Plan is
2,000,000.
THE DIRECTOR STOCK OPTION PLAN
The Director Stock Option Plan is intended to encourage ownership of
Holdings by eligible non-employee directors of Holdings whose continued services
are considered essential to Holdings' future progress and to provide them with a
further incentive to remain as directors of Holdings. All options to be granted
under the Director Stock Option Plan will be Nonqualified Options that will not
be eligible for treatment as Incentive Stock Options. The exercise price per
share of each option granted under the Director Stock Option Plan will be equal
to 100% of the fair market value of Holdings Common Stock on the date of grant.
A total of 400,000 shares of Holdings Common Stock have been reserved for
issuance upon the exercise of options to be granted under the Director Stock
Option Plan.
For a more detailed description of the Stock Option Plan and the Director
Stock Option Plan, see "The Plan Proposals."
The adoption of each of the Stock Option Plan and the Director Stock Option
Plan has been unanimously approved by the Compensation Committee of Holdings and
approved by each of the EXCEL Board, the Telco Board and the Holdings Board, in
each case subject to the approval of the holders of the common stock of EXCEL,
Telco and Holdings. The EXCEL Board recommends that holders of EXCEL Common
Stock vote FOR the approval of the Plan Proposals and the Telco Board recommends
that holders of Telco Common Stock vote FOR the approval of the Plan Proposals.
See "The Plan Proposals."
15
<PAGE> 21
SUMMARY SELECTED UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL DATA
The following unaudited pro forma balance sheet and income statement data
of Holdings illustrates the effect of the Transaction as if the Transaction had
occurred on June 30, 1997 for the pro forma balance sheet data and as of January
1, 1996 for the pro forma income statement data. The pro forma data is not
necessarily indicative of the results of operations or the financial condition
that would have been reported by Holdings had the Transaction been in effect
during those periods, or as of those dates, or that may be reported in the
future. Pro forma combined per share data of EXCEL and Telco give effect to the
exchange of each share of Telco Common Stock for 0.7595 shares of Holdings
Common Stock.
This information should be read in conjunction with, and is qualified in
its entirety by, the Consolidated Financial Statements of EXCEL and Telco and
the related notes thereto incorporated herein by reference and the Unaudited Pro
Forma Combined Financial Statements and the related notes thereto. See
"Incorporation of Certain Documents By Reference" and "Unaudited Pro Forma
Combined Financial Statements."
<TABLE>
<CAPTION>
FOR THE FOR THE
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 31, 1996
---------------- -----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
INCOME STATEMENT DATA:
Total revenues.............................................. $ 934,678 $1,802,900
Operating income............................................ 128,265 240,111
Net income from continuing operations....................... 66,306 123,348
Net income from continuing operations per share............. $ 0.48 $ 0.92
Cash dividends declared per common share.................... -- --
BALANCE SHEET DATA:
Working capital............................................. $ 124,143
Property and equipment, net................................. 292,300
Total assets................................................ 1,520,669
Long-term debt and capital lease obligations................ 513,363(1)
Stockholders' equity........................................ 746,952
SUPPLEMENTAL OPERATING DATA:
Long distance minutes of usage.............................. 5,232,901 9,234,283
</TABLE>
- ---------------
(1) Includes $513.3 million of borrowings under the New Credit Facility to fund
the Mergers and related costs. See "Certain Related Financing."
16
<PAGE> 22
SUMMARY SELECTED HISTORICAL FINANCIAL DATA OF EXCEL
The following table sets forth selected consolidated financial data for
EXCEL as of the dates and for the periods indicated. The financial data for each
of the years ended December 31, 1992, 1993, 1994, 1995 and 1996 are derived from
audited financial statements of EXCEL. The financial data for the six months
ended June 30, 1996 and 1997 are derived from unaudited consolidated financial
statements of EXCEL, which, in the opinion of EXCEL management, contain all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation thereof. The results of operations for the six months ended
June 30, 1997 are not necessarily indicative of the results to be expected for
the full year. The data set forth below in this table are qualified in their
entirety by, and should be read in conjunction with, the Consolidated Financial
Statements of EXCEL and the related notes thereto and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" of EXCEL
incorporated herein by reference. See "Incorporation of Certain Documents By
Reference."
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
----------------------- ------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AND PER MINUTE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:(1)
Communication services.................... $ 596,599 $ 477,200 $1,090,649 $ 363,301 $108,819 $24,198 $20,670
Marketing services........................ 65,342 148,955 260,653 143,397 43,339 6,650 3,497
---------- ---------- ---------- ---------- -------- ------- -------
Total revenues.............................. 661,941 626,155 1,351,302 506,698 152,158 30,848 24,167
Operating expenses:
Communication............................. 322,485 264,935 596,598 209,995 58,925 13,761 13,264
Marketing services (2).................... 122,201 170,759 367,103 147,476 46,724 7,730 5,255
General and administrative................ 106,231 80,424 170,072 71,514 19,779 5,811 5,866
---------- ---------- ---------- ---------- -------- ------- -------
Total operating expenses.................... 550,917 516,118 1,133,773 428,985 125,428 27,302 24,385
---------- ---------- ---------- ---------- -------- ------- -------
Operating income (loss)..................... 111,024 110,037 217,529 77,713 26,730 3,546 (218)
---------- ---------- ---------- ---------- -------- ------- -------
Interest and other income (expense)......... 4,154 6,096 12,386 (6,374) (212) (51) (74)
Provision for income taxes.................. 43,083 43,727 85,488 26,893 10,648 1,126 17
---------- ---------- ---------- ---------- -------- ------- -------
Net income (loss) before cumulative effect
of change in accounting principle......... 72,095 72,406 144,427 44,446 15,870 2,369 (309)
Cumulative effect of change in accounting
principle (2)............................. (65,214) -- -- -- -- -- --
---------- ---------- ---------- ---------- -------- ------- -------
Net income (loss)........................... $ 6,881 $ 72,406 $ 144,427 $ 44,446 $ 15,870 $ 2,369 $ (309)
========== ========== ========== ========== ======== ======= =======
Net income per share before cumulative
effect of change in accounting
principle................................. $ 0.65 $ 0.70 $ 1.35 $ 0.46 $ 0.18 $ 0.03 $ --
========== ========== ========== ========== ======== ======= =======
Net income (loss) per share................. $ 0.06 $ 0.70 $ 1.35 $ 0.46 $ 0.18 $ 0.03 $ --
========== ========== ========== ========== ======== ======= =======
Cash dividends declared per share........... $ -- $ -- $ -- $ 0.202 $ 0.046 $ -- $ --
========== ========== ========== ========== ======== ======= =======
SUPPLEMENTAL OPERATING DATA:
Long distance minutes of usage (3).......... 3,303,301 2,781,770 6,271,203 2,101,240 544,552 118,357 99,592
---------- ---------- ---------- ---------- -------- ------- -------
Weighted average long distance revenue per
minute of usage (4)....................... $ 0.179 $ 0.172 $ 0.174 $ 0.173 $ 0.200 $ 0.204 $ 0.208
Weighted average communication charges per
minute of usage (5)....................... $ 0.096 $ 0.095 $ 0.095 $ 0.100 $ 0.108 $ 0.116 $ 0.133
BALANCE SHEET DATA (AT PERIOD END):
Working capital (deficit)................... $ 213,199 $ 209,227 $ 1,071 $ 7,134 $ (186) $ (648)
Property and equipment, net................. 99,532 76,912 8,560 2,476 662 597
Total assets (2)............................ 475,707 579,164 203,581 59,412 9,058 2,604
Long-term debt and capital lease
obligations............................... 70 100 345 3,369 313 420
Stockholders' equity (deficit) (2).......... 302,170 322,281 37,708 13,635 1,995 (336)
</TABLE>
- ---------------
(1) EXCEL's revenues consist of sales revenues for communication services and
for marketing services. Revenues for communication services include revenues
for long distance minutes of usage billable to subscribers during the period
and revenues for the usage of EXCEL's paging products billable during the
period, and are net of the effect of certain adjustments, including
unbillable call records. Marketing services revenues are comprised of
receipts from independent representatives and training coordinators for
training, business forms, promotional and presentation materials, ongoing
technical and administrative support services, and monthly reports. Revenues
from marketing services include the effect of deferring a portion of the
cash received from IRs during each period and amortizing the deferred
revenues over 12 months. See Note 1 to the Consolidated Financial Statements
of EXCEL and the related notes thereto incorporated herein by reference. See
"Incorporation of Certain Documents By Reference."
(2) Marketing services costs for each of the fiscal years ended December 31,
1992, 1993, 1994, 1995 and 1996 and for the six months ended June 30, 1996
include the effect of capitalizing the portion of commissions paid for
acquisition of new subscribers and amortizing the capitalized costs over 12
months. Beginning January 1, 1997, EXCEL began fully expensing subscriber
acquisition costs in the period incurred in order to present its operating
results in a manner more consistent with other telecommunications companies
against which its results are now compared. See Note 1 to the Consolidated
Financial Statements of EXCEL and the related notes thereto incorporated
herein by reference. See "Incorporation of Certain Documents By Reference."
(3) Long distance minutes of usage represent minutes billable to subscribers
during the period.
(4) Weighted average long distance revenue per minute of usage equals the
revenues for long distance phone services sold to EXCEL's subscribers
divided by the aggregate minutes of usage.
(5) Weighted average communication charges per minute of usage equals the cost
to purchase all long distance phone services sold to EXCEL's subscribers
divided by the aggregate minutes of usage.
17
<PAGE> 23
SUMMARY SELECTED HISTORICAL FINANCIAL DATA OF TELCO
The following table sets forth selected consolidated financial data for
Telco as of the dates and for the periods indicated. The financial data for each
of the periods ended December 31, 1993, 1994, 1995 and 1996 are derived from
audited financial statements of Telco. The financial data for the six months
ended June 30, 1996 and 1997 are derived from unaudited consolidated financial
statements of Telco, which, in the opinion of Telco management, contain all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation thereof. The results of operations for the six months ended
June 30, 1997 are not necessarily indicative of the results to be expected for
the full year. Certain reclassifications have been made to the historical
financial data to conform to the presentation expected to be used by Holdings.
The data set forth below are qualified in their entirety by, and should be read
in conjunction with, the Consolidated Financial Statements of Telco and the
related notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" of Telco incorporated herein by reference.
See "Incorporation of Certain Documents By Reference."
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
------------------------ -----------------------------------------------
1997 1996 1996 1995 1994 1993(1)
---------- ---------- ----------- ---------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE AND PER MINUTE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Communication services................. $ 272,737 $ 209,208 $ 451,598 $ 224,520 $47,332 $ 1,135
Operating expenses:
Communication.......................... 152,068 115,532 252,036 133,728 27,736 993
Marketing services..................... 47,310 31,335 69,034 26,630 4,552 838
Selling, general and administrative.... 40,366 41,269 79,587 38,450 10,091 472
Depreciation and amortization.......... 6,263 3,305 7,967 3,326 496 54
---------- ---------- ----------- ---------- ------- --------
Total operating expenses................. 246,007 191,441 408,624 202,134 42,875 2,357
---------- ---------- ----------- ---------- ------- --------
Operating income (loss).................. 26,730 17,767 42,974 22,386 4,457 (1,222)
---------- ---------- ----------- ---------- ------- --------
Interest and other income (expense)...... (1,905) (2,071) (3,014) (3,044) (882) (25)
Provision for income taxes............... 9,385 6,676 16,394 7,531 1,432 --
Minority interest........................ -- 554 689 1,046 137 --
---------- ---------- ----------- ---------- ------- --------
Net income (loss)........................ $ 15,440 $ 8,466 $ 22,877 $ 10,765 $ 2,006 $ (1,247)
========== ========== =========== ========== ======= ========
Net income (loss) per share.............. $ 0.45 $ 0.30 $ 0.75 $ 0.38 $ 0.07 $ (0.05)
========== ========== =========== ========== ======= ========
SUPPLEMENTAL OPERATING DATA:
Long distance minutes of usage (2)....... 1,929,600 1,356,200 2,963,080 1,384,300
Weighted average long distance revenue
per minute of usage (3)................ $ 0.141 $ 0.153 $ 0.152 $ 0.162
Weighted average communication charges
per minute of usage (4)................ $ 0.074 $ 0.084 $ 0.085 $ 0.097
BALANCE SHEET DATA (AT PERIOD END):
Working capital (deficit)................ $ 44,797 $ 65,994 $ 28,361 $13,886 $ (959)
Property and equipment, net.............. 192,768 39,666 27,527 5,874 1,198
Total assets............................. 373,723 210,596 87,124 33,533 2,051
Long-term debt and capital lease
obligations............................ 115,121 2,620 41,437 17,785 1,559
Minority interest........................ -- -- 1,183 137 --
Shareholders' equity (deficit)........... 161,887 145,720 12,420 1,655 (376)
</TABLE>
- ---------------
(1) Telco commenced operations in November 1993.
(2) Long distance minutes of usage represent minutes billable to customers
during the period.
(3) Weighted average long distance revenue per minute of usage equals revenues
for long distance phone services sold to Telco's customers divided by the
aggregate minutes of usage.
(4) Weighted average communication charges per minute of usage equals the third
party cost of long distance phone services sold to Telco's customers divided
by the aggregate minutes of usage.
18
<PAGE> 24
COMPARATIVE PER SHARE INFORMATION
The following table sets forth, for the periods indicated, selected pro
forma per share amounts for Holdings Common Stock, pro forma per share
equivalent amounts for Telco Common Stock and the corresponding historical per
share data for EXCEL Common Stock and Telco Common Stock, giving effect to the
Transaction. The information presented is based upon, and is qualified in its
entirety by, the Consolidated Financial Statements and the related notes thereto
of each of EXCEL and Telco incorporated herein by reference. These data are not
necessarily indicative of the results of the future operations of Holdings or
the actual results that would have occurred if the Transaction had been
consummated prior to the periods indicated. See "Unaudited Pro Forma Combined
Financial Statements."
<TABLE>
<CAPTION>
AT OR FOR THE
AT OR FOR THE YEAR ENDED
SIX MONTHS ENDED DECEMBER 31,
JUNE 30, 1997 1996
---------------- -------------
<S> <C> <C>
UNAUDITED PRO FORMA COMBINED(1)
Net income from continuing operations per share......... $0.48 $0.92
Cash dividends declared per share....................... -- --
Book value per share.................................... $5.46 $5.73
TELCO PER SHARE EQUIVALENTS(2)
Net income per share.................................... $0.36 $0.70
Cash dividends declared per share....................... -- --
Book value per share.................................... $4.15 $4.35
EXCEL HISTORICAL
Net income before cumulative effect of change in
accounting principle per share........................ $0.65 $1.35
Cash dividends declared per share....................... -- --
Book value per share.................................... $2.74 $3.01
TELCO HISTORICAL
Net income per share.................................... $0.45 $0.75
Cash dividends declared per share....................... -- --
Book value per share.................................... $4.71 $4.77
</TABLE>
- ---------------
(1) The pro forma EXCEL per share equivalents are equal to the Unaudited Pro
Forma Combined per share amounts as the exchange ratio of EXCEL Common Stock
to Holdings Common Stock is 1 to 1.
(2) The Telco Per Share Equivalents were calculated by multiplying the Unaudited
Pro Forma Combined per share amounts by the Telco Exchange Ratio to reflect
the exchange of .7595 shares of Holdings Common Stock for each share of
Telco Common Stock pursuant to the Merger Agreement. Upon the consummation
of the Telco Merger, each holder of Telco Common Stock also will receive
$15.00 in cash, which is not reflected in the Telco Per Share Equivalents
data above.
19
<PAGE> 25
COMPARATIVE PER SHARE MARKET PRICE INFORMATION
EXCEL Common Stock is listed on the NYSE and Telco Common Stock is listed
on the Nasdaq National Market System (the "NMS"). On June 5, 1997, the last full
trading day prior to the public announcement of the proposed Mergers, the
closing price of EXCEL Common Stock on the NYSE Composite Tape was $18 3/4 per
share and the closing price of Telco Common Stock on the NMS was $22 per share.
On September 11, 1997, the most recent practicable date prior to the mailing of
this Joint Proxy Statement/Prospectus, the closing price of EXCEL Common Stock
on the NYSE Composite Tape was $31 1/2 per share and the closing price of Telco
Common Stock on the NMS was $23 11/16 per share. Holders of EXCEL Common Stock
and holders of Telco Common Stock are urged to obtain current market quotations
prior to making any decision with respect to the Mergers. See "Comparative Per
Share Market Price and Dividend Information."
From time to time EXCEL purchases shares of EXCEL Common Stock in the open
market pursuant to a share repurchase program. Concurrently with approval of the
Transaction, the EXCEL Board approved an increase in the number of shares
authorized for repurchase under the program from 2 million shares to 10 million
shares. As of the date hereof, EXCEL has repurchased approximately 2.6 million
shares under the program. All shares repurchased pursuant to the program have
been or will be canceled.
LISTING OF HOLDINGS COMMON STOCK AND PAYMENT OF DIVIDENDS
Holdings intends to apply for listing of the Holdings Common Stock on the
NYSE and anticipates that its shares will trade on the NYSE, upon official
notice of issuance, under the symbol "ECI." See "The Transaction -- Stock
Exchange Listing."
Holdings currently intends to retain all future earnings for use in the
operation of its business and, therefore, does not anticipate paying any cash
dividends in the foreseeable future. The declaration and payment in the future
of any cash dividends will be at the discretion of the Holdings Board and will
depend upon, among other factors, the earnings, capital requirements and
financial position of Holdings, existing and/or future loan covenants and
general economic conditions. It is expected that the New Credit Facility will
contain covenants restricting Holdings from declaring or paying any dividends.
20
<PAGE> 26
RISK FACTORS
FIXED EXCHANGE RATIO
Pursuant to the terms of the Merger Agreement, upon consummation of the
Mergers, each share of Telco Common Stock issued and outstanding immediately
prior to the Effective Time will be converted into the right to receive the
Telco Merger Consideration. The Merger Agreement does not contain any provisions
for adjustment of the Telco Exchange Ratio or the EXCEL Exchange Ratio based
upon fluctuations in the price of EXCEL Common Stock or Telco Common Stock.
Accordingly, the value of the stock consideration to be received by holders of
Telco Common Stock upon the consummation of the Mergers is not presently
ascertainable and will depend upon the market price of Holdings Common Stock at
the Effective Time, which in turn will be affected by the market price of EXCEL
Common Stock at the Effective Time. On June 5, 1997, the last trading day prior
to the public announcement of the proposed Mergers, the closing price of EXCEL
Common Stock on the NYSE Composite Tape was $18 3/4 per share and the closing
price of Telco Common Stock on the NMS was $22 per share, and on September 11,
1997 (the latest practicable date preceding the mailing of this Joint Proxy
Statement/Prospectus for which such price information was available), the
closing price of EXCEL Common Stock on the NYSE Composite Tape was $23 11/16 per
share and the closing price of Telco Common Stock on the NMS was $31 1/2 per
share. Holders of EXCEL Common Stock and holders of Telco Common Stock are urged
to obtain current market quotations prior to making any decisions with respect
to the Mergers. The Merger Agreement does not provide EXCEL or Telco the right
to terminate the agreement based upon fluctuations in the price of EXCEL Common
Stock or Telco Common Stock. However, it is a condition to EXCEL's and Telco's
obligation to close under the Merger Agreement that there not have occurred an
event that has had or could reasonably be expected to have a Material Adverse
Effect (as defined in the Merger Agreement) on the other party or on Holdings.
RISK OF NONREALIZATION OF SYNERGIES AND OTHER BENEFITS
The Transaction involves the integration of two companies that have
previously operated independently. There can be no assurances that Holdings will
not encounter significant difficulties in integrating the respective operations
of EXCEL and Telco or that the benefits expected from such integration will be
realized. In addition, the achievement of the benefits expected from such
integration will require Holdings to incur significant costs in connection with,
among other things, network and sales force expansion. The incurrence of any
such costs, as well as any unexpected costs or delays, in connection with such
integration, could have a material adverse effect on Holdings' business,
operating results or financial condition.
Among the factors considered by the EXCEL Board and the Telco Board in
connection with their respective approvals of the Merger Agreement were the
opportunities for operating cost savings and revenue growth that could result
from the Transaction. However, there can be no assurance that such savings or
revenue growth will be realized. The realization of operating cost savings will
be affected primarily by Holdings' ability to direct EXCEL's minutes to Telco's
facilities-based network, resulting in a lower per minute cost than EXCEL pays
for the use of third party networks. EXCEL's ability to migrate its traffic from
its higher cost contracts with third parties to Telco's existing lower cost
network infrastructure (and thereby reduce per minute costs through purchasing
efficiencies and reduced access charges) may be limited by the continuing
minimum commitment requirements under EXCEL's agreements with third parties,
such as WorldCom Network Services, Inc. ("WorldCom"), MCI Telecommunications
Corporation ("MCI"), IXC Long Distance, Inc. ("IXC") and Frontier Communications
Services, Inc. ("Frontier"). The most significant of these commitments is
EXCEL's non-exclusive agreement with WorldCom, which calls for a $900 million
cumulative commitment over four years, subject to certain discounts. EXCEL is
currently exceeding its minimum commitments to WorldCom and expects to fulfill
its aggregate commitments under this agreement in 1999. However, there can be no
assurance that EXCEL will continue to meet or exceed such requirements. Pursuant
to EXCEL's agreement with Frontier, EXCEL has agreed to utilize the Frontier
network on an exclusive basis for calling card and PIN 800 traffic, though EXCEL
currently is exceeding the on-going minimum commitment requirements under the
Frontier Agreement and its other minimum commitment agreements (including the
MCI and IXC agreements), there can be no assurance that it will continue to meet
21
<PAGE> 27
or exceed such requirements. Delays in migrating EXCEL's traffic to the Telco
network (as a result of EXCEL not continuing to meet or exceed such contractual
requirements, delays in expansion of the network or otherwise) may have an
adverse effect on Holdings' ability to achieve operating cost savings and/or the
timing of the achievement of any such savings.
LEVERAGE
Upon the consummation of the Transaction, Holdings will incur approximately
$513 million of indebtedness under the New Credit Facility. Additional
indebtedness (up to an aggregate of $1 billion) may be incurred under the New
Credit Facility in the future. The New Credit Facility will contain various
restrictive covenants, including covenants limiting the incurrence of debt,
capital expenditures, payment of dividends and acquisitions and dispositions, as
well as financial covenants. These covenants may limit the ability of Holdings
to take advantage of certain strategic opportunities that may be available to
Holdings in the future. In addition, the capital stock of Holdings' subsidiaries
(including EXCEL and Telco) will be pledged to secure the indebtedness under the
New Credit Facility. See "The Transaction -- Certain Related Financing."
DEPENDENCE ON KEY PERSONNEL
The success of Holdings' business will depend, in part, on the continued
services of certain members of Holdings management, EXCEL and Telco. In
particular, the loss of the services of Kenny A. Troutt, Chief Executive Officer
and Chairman of the Board of Holdings and Chairman and Chief Executive Officer
of EXCEL, John J. McLaine, President and Chief Operating Officer of Holdings and
President, Chief Financial Officer and Chief Operating Officer of EXCEL, or
Donald A. Burns, Chief Executive Officer and President of Telco, could have a
material adverse effect on the business, results of operations and financial
condition of Holdings.
REGULATION AND MANAGEMENT OF EXCEL'S INDEPENDENT REPRESENTATIVES
Because the IRs are classified as independent contractors and not as
employees of EXCEL, EXCEL is not able to have the same level of direction and
oversight with respect to the IRs as it does with respect to EXCEL employees.
While EXCEL has policies and rules in place governing the conduct of the IRs and
periodically reviews the sales tactics of the IRs, it is difficult to enforce
such policies and rules. Violations of these policies and rules reflect
negatively on EXCEL and have led to informal complaints by various federal and
state regulatory authorities. EXCEL, like other long distance carriers, has been
subject to complaints before the FCC and state public utility commissions
regarding the unauthorized switching of subscribers' long distance carriers. In
addition, informal complaints regarding IR misrepresentations and subscriber
billing issues have been filed from time to time with state attorney general
offices, state public utility commissions and the FCC. These offices contact
EXCEL from time to time and meet with representatives of EXCEL to review the
activities of EXCEL and the IRs in their respective states, although such
agencies never approve or endorse any company's business practices. Additional
informal complaints by federal and state regulatory authorities may occur in the
future and could have a material adverse effect on Holdings' results of
operations.
EXCEL's network marketing system is or may be subject to or affected by
extensive government regulation, including, without limitation, federal and
state regulation of the offer and sale of business franchises, business
opportunities and securities. Various governmental agencies monitor direct
selling activities, and EXCEL has occasionally been requested to supply
information regarding its marketing plan to certain of such agencies. Although
EXCEL believes that its network marketing system is in substantial compliance
with the laws and regulations relating to direct selling activities, there can
be no assurance that legislation and regulations adopted in particular
jurisdictions in the future will not adversely affect Holdings' operations.
EXCEL also could be found to be in non-compliance with existing statutes or
regulations as a result of, among other things, misconduct by IRs, the ambiguous
nature of certain of the regulations relating to direct selling activities and
the considerable interpretive and enforcement discretion given to regulators.
Any assertion or determination that EXCEL or the IRs are not in compliance with
existing statutes or
22
<PAGE> 28
regulations could have a material adverse effect on Holdings. Furthermore, an
adverse determination by any one jurisdiction could influence the decisions of
regulatory authorities in other jurisdictions.
LITIGATION
In August 1996, AT&T Corp. ("AT&T") commenced an action against EXCEL
alleging past and continued infringement by EXCEL of an AT&T patent. The claim
does not specify the amount of damages sought. EXCEL does not believe that this
claim is meritorious, and intends to vigorously defend the claim. Accordingly,
EXCEL believes that this claim will not have a material adverse effect on its
results of operations or financial position. However, there can be no assurance
that, if this claim were determined adversely to EXCEL, it would not have a
material adverse effect on EXCEL's results of operations or financial position.
In May 1996, a group of IRs, including one IR who was one of the top ten
highest earning IRs during the first half of 1996, commenced an action against
EXCEL and others claiming, among other things, defamation, unfair competition,
interference with contractual relations, fraud, and intentional infliction of
emotional distress, for which they seek actual damages of $31.5 million and
punitive damages in excess of $500 million. EXCEL does not believe that this
claim is meritorious, and intends to vigorously defend the claim. Accordingly,
EXCEL believes that this claim will not have a material adverse effect on its
results of operations or financial position. However, there can be no assurance
that, if this claim were determined adversely to EXCEL, it would not have a
material adverse effect on EXCEL's results of operations or financial position.
CONCENTRATION OF OWNERSHIP
Following the consummation of the Mergers, Kenny A. Troutt, Chairman and
Chief Executive Officer of EXCEL, will beneficially own approximately 48%
(approximately 45% on a fully diluted basis) of the outstanding shares of
Holdings Common Stock, and the current officers and directors of EXCEL and Telco
will beneficially own, in the aggregate, approximately 65% (approximately 62% on
a fully diluted basis) of the outstanding shares of Holdings Common Stock.
Accordingly, Mr. Troutt, acting alone, may be in a position to exercise
substantial influence over actions that require the consent of Holdings'
stockholders, and the current officers and directors of EXCEL and Telco, acting
as a group, will have the ability to elect all of the directors of Holdings and
to control Holdings management, operations and affairs.
INTERESTS OF MANAGEMENT
Certain members of Telco management have interests in the Transaction that
are in addition to the interests of EXCEL stockholders and Telco shareholders
generally. The Transaction will give rise to certain entitlements and benefits
(including, subject to the approval of the Compensation Committee of Holdings,
the expected granting of options to purchase shares of Holdings Common Stock)
pursuant to the Employment Agreements. In addition, upon consummation of the
Mergers, the vesting of certain outstanding stock options of certain members of
Telco management will be accelerated resulting in aggregate payments to Messrs.
Canton and Merrick of an estimated $18.7 million based on the closing price of
EXCEL Common Stock on the NYSE Composite Tape on September 4, 1997. The actual
payment to such individuals will be based on the closing price of EXCEL Common
Stock on the trading day immediately prior to the Effective Time. The Merger
Agreement also provides that, upon consummation of the Mergers, Holdings will
grant registration rights to certain members of Telco management with respect to
the shares of Holdings Common Stock to be issued to such persons in the Mergers.
See "The Transaction -- Interests of Certain Persons in the Transaction."
23
<PAGE> 29
THE TRANSACTION
GENERAL
The Merger Agreement provides for a business combination between EXCEL and
Telco in which, subject to the satisfaction of the conditions set forth therein,
E-Sub will be merged with and into EXCEL and T-Sub will be merged with and into
Telco, with EXCEL and Telco continuing as the surviving corporations of the
Mergers. Upon the effectiveness of the Mergers, each outstanding share of Telco
Common Stock will be converted into the right to receive the Telco Merger
Consideration and each outstanding share of EXCEL Common Stock will be converted
into the right to receive one share of Holdings Common Stock. As a result of the
Mergers, the former holders of EXCEL Common Stock collectively will hold
approximately 81% (approximately 78% on a fully diluted basis and treating
option holders as former stockholders) of the issued and outstanding shares of
Holdings Common Stock and the former holders of Telco Common Stock collectively
will hold approximately 19% (approximately 22% on a fully diluted basis and
treating option holders as former shareholders) of the issued and outstanding
shares of Holdings Common Stock.
BACKGROUND OF THE TRANSACTION
EXCEL and Telco each regularly evaluate strategic opportunities, including
possible alliances, joint ventures, acquisitions and other business combinations
with various industry participants. Under appropriate circumstances,
representatives of EXCEL or Telco may establish direct or indirect contact with
potential candidates. Set forth below is a summary of the background of these
negotiations.
In February 1997, Kenny A. Troutt, then Chairman of the Board, President
and Chief Executive Officer of EXCEL, John J. McLaine, then Executive Vice
President, Chief Financial Officer and Secretary of EXCEL, and J. Christopher
Dance, then the Vice President -- Legal Affairs and Assistant Secretary of
EXCEL, were introduced to Henry G. Luken, III, Chairman of the Board of Telco,
Donald A. Burns, Vice Chairman, President and Chief Executive Officer of Telco,
Bryan K. Rachlin, Chief Operating Officer and General Counsel of Telco, and
Nicholas A. Merrick, Chief Financial Officer of Telco, during a CompTel
Conference in Palm Springs, California. During the meeting, discussions were
limited to general conversation regarding each business and the similarities
between the companies.
On April 1, 1997, Messrs. Troutt and McLaine attended a Telco presentation
delivered at a DLJ sponsored telecommunications conference. EXCEL delivered a
presentation at the same event and Mr. Burns attended the EXCEL presentation.
During the week of April 14, 1997, Lehman Brothers, on behalf of EXCEL,
contacted Mr. Burns to suggest a meeting between EXCEL and Telco to discuss a
range of potential strategic relationships, including a commercial arrangement,
a joint venture or a merger.
On April 16, 1997, Messrs. Troutt and McLaine met with representatives of
Lehman Brothers, who presented preliminary business, market and financial
overviews, pro forma financial information and preliminary valuation materials,
and certain public information regarding Telco.
On April 23, 1997, the Telco Board held a scheduled meeting in San Antonio,
Texas. At the meeting, Mr. Burns briefed the Telco Board regarding the
developments with EXCEL and received authorization for representatives of Telco
to meet with EXCEL management to discuss a possible business relationship.
On April 24, 1997, Messrs. Troutt and McLaine met with Messrs. Burns, Luken
and Merrick at EXCEL's corporate headquarters in Dallas, Texas. At this meeting,
the parties discussed the operations, marketing, industry opportunities, long
range plans and management goals of each company. As a result of these
discussions, the representatives of both companies determined that it would be
advisable to have further discussions with regard to a strategic relationship.
Telco retained DLJ, pursuant to a letter agreement dated as of May 1, 1997,
to assist in analyzing a potential relationship between Telco and EXCEL, and on
May 7, 1997, EXCEL and Telco entered into a confidentiality agreement.
24
<PAGE> 30
On May 12, 1997, Messrs. Troutt, McLaine and Dance and representatives of
Lehman Brothers met with Messrs. Burns, Luken, Merrick and Rachlin and
representatives of DLJ in the Washington, D.C. office of Swidler & Berlin,
Telco's outside legal counsel, to discuss a potential strategic relationship
between Telco and EXCEL. At the meeting, Telco presented a review and analysis
of Telco, its network and network capacity, its consumer and commercial sales
and certain marketing activities, its acquisition in April 1997 of the Advantis
Network, its historical financial performance, and future opportunities for
Telco. During the course of this meeting, Mr. McLaine inquired whether Telco
management would consider a merger with EXCEL in which holders of Telco Common
Stock would receive a combination of cash and stock in the public corporation
that would survive the business combination. Mr. McLaine emphasized that in any
potential transaction it would be very important to EXCEL to create a structure
that would facilitate the retention of key members of Telco management,
including the receipt by Telco management of capital stock of the combined
company and the negotiation of employment agreements with such individuals.
After discussions, Telco management indicated that it would consider such a
transaction in light of the potential synergies between the companies. At the
conclusion of this meeting, both parties agreed that EXCEL would perform
additional analysis and would advise Telco within a week whether it wished to
proceed further with the discussions.
On May 13, 1997, EXCEL retained Weil, Gotshal & Manges to serve as outside
legal counsel to EXCEL in connection with a possible transaction with Telco.
On May 15, 1997, at a board meeting prior to EXCEL's first annual meeting
of stockholders as a public company, Messrs. Troutt and McLaine advised the
EXCEL Board of the status of the discussions with Telco and described the
potential synergies between the businesses of EXCEL and Telco. The EXCEL Board
discussed whether an acquisition of Telco would fit with EXCEL's strategic
plans. Among other factors, the EXCEL Board considered the potential for such a
transaction to contribute to the diversification of EXCEL's channels of
distribution and to provide additional access to transmission facilities, as
well as the strength of Telco management. In addition, the EXCEL Board
considered whether such a transaction was likely to be dilutive in the long
term.
On May 15, 1997, at a board meeting following Telco's first annual meeting
of shareholders as a public company, Messrs. Burns, Luken, Merrick and Rachlin
apprised the Telco Board of the discussions with EXCEL, including the
discussions concerning a possible merger or other business combination between
Telco and EXCEL in which holders of Telco Common Stock would receive a
combination of cash and stock.
Between May 15 and May 19, 1997, there were numerous telephone discussions
between Messrs. Burns, Merrick and Rachlin and the members of the Telco Board
regarding certain issues relating to a possible transaction with EXCEL.
On May 16, 1997, Lehman Brothers revised the preliminary Telco valuation
materials and the pro forma combination analyses, and presented these materials
to EXCEL management.
On May 19, 1997, Messrs. Troutt and McLaine and representatives of Lehman
Brothers participated in a conference call with Messrs. Burns, Merrick and
Rachlin and representatives of DLJ to discuss the general structure and terms of
a merger that would be an acquisition involving the payment of some combination
of cash and stock to the holders of Telco Common Stock. No agreement was reached
regarding the structure, consideration to be paid or other terms of such a
transaction, and each side agreed that further review and analysis was needed.
Between May 19 and May 27, 1997, EXCEL and Telco and their respective
representatives continued to discuss various terms and conditions concerning a
possible merger of the two companies. The discussions covered such matters as
the valuation of the two companies, the treatment of outstanding options to
purchase Telco Common Stock, employment arrangements, registration rights and
lock-up agreements, representation on the Board of the new company, financing
for a potential combination, a non-solicitation agreement and corresponding
termination fee payable by Telco, and other legal, tax and financial
considerations relating to a possible transaction.
25
<PAGE> 31
On May 22, 1997, Lehman Brothers and DLJ held a meeting at which they
reviewed the potential cost savings between Telco and EXCEL. It was agreed that
EXCEL and Telco management would meet with Lehman Brothers and DLJ at EXCEL's
Dallas headquarters on May 27, 1997.
At the May 27, 1997 meeting, Telco management, EXCEL management and
representatives of DLJ and Lehman Brothers discussed the principal terms of and
structure for a possible business combination.
On May 28, 1997, Messrs. Burns, Luken, Merrick and Rachlin, together with
representatives of DLJ and Swidler & Berlin, met with Messrs. Troutt, McLaine
and Dance, Craig Holmes, EXCEL's Vice President and Chief Accounting Officer,
representatives of Lehman Brothers and representatives of Weil, Gotshal & Manges
at EXCEL's corporate headquarters to continue negotiations concerning the
principal terms of the proposed merger between the companies. At this meeting,
there was also a due diligence presentation by EXCEL, which included financial
due diligence, back office operations, marketing plan and structure,
organizational structure, information systems and legal review. Although
agreement had not been reached on all material terms of the proposed
transaction, at the end of the meeting, Weil, Gotshal & Manges was instructed to
begin preparation of the transaction agreements.
On the evening of May 28, 1997, representatives of Lehman Brothers met with
the EXCEL Board to evaluate the status of the negotiations and the proposed
terms, conditions and structure of the merger, including the status of business,
financial and legal due diligence, certain tax implications of the proposed
transaction and the status of the financing commitment.
On May 29, 1997, Messrs. Luken and Rachlin and representatives of Swidler &
Berlin remained in Dallas to continue negotiations of the terms of the
transaction and perform legal and information systems due diligence. Arthur
Andersen LLP, EXCEL's accountants, met with Deloitte and Touche LLP, Telco's
accountants, to begin financial and accounting due diligence. EXCEL and Telco's
respective legal advisors also began legal due diligence with respect to the
other company. The EXCEL Board met, together with representatives of Lehman
Brothers, to continue their review of the proposed transaction. On the evening
of May 29, 1997, a preliminary draft of the Merger Agreement was delivered to
Telco and its legal and financial advisors.
On May 30, 1997, Mr. Burns convened a special meeting of the Telco Board to
apprise the Telco directors of the status of the discussions with EXCEL,
including the preliminary terms of the proposed transaction, the scope and
timing of the ongoing due diligence by both companies, the drafting and
negotiation of definitive documentation for the proposed transaction,
information about EXCEL, and certain legal, tax and financial aspects of the
proposed transaction. Members of Telco management and representatives of DLJ and
Swidler & Berlin made presentations to the Telco Board, including, in the case
of Swidler & Berlin, a discussion of the Telco Board's fiduciary duties and
other matters of Virginia corporate law applicable to the proposed transaction.
DLJ reviewed EXCEL's business and financial position and discussed the potential
strategic benefits of a business combination, DLJ's role as Telco's financial
advisor in the proposed transaction and the terms and scope of the proposed
fairness opinion that would be requested of DLJ in connection with the proposed
transaction. The discussion by the Telco Board was wide ranging and included,
among other things, a discussion of (i) the benefits of the size and position of
the combined companies, (ii) Telco's potential as a vehicle for the growth of
EXCEL and (iii) the potential cost savings to be achieved.
Following such presentations and discussions, the Telco Board established a
special committee of directors who were neither officers nor employees of Telco,
consisting of Gary L. Nelson and Robert W. Ross, to evaluate and negotiate the
terms and conditions of the proposed transaction (the "Telco Special
Committee"). The Telco Special Committee engaged the law firm of Hunton &
Williams to represent the Telco Special Committee with respect to the proposed
transaction, and the Telco Special Committee subsequently was authorized by the
Telco Board to utilize the financial advisory services of DLJ, Telco's financial
advisor, in connection with its evaluation and negotiation of the proposed
transaction.
On May 30, 1997, EXCEL and Telco management and representatives of DLJ and
Lehman Brothers met at Telco's headquarters in Chantilly, Virginia to conduct
further due diligence with respect to Telco, which included in-depth reviews of
accounting, legal, information technology, network, network capacity, sales
26
<PAGE> 32
and marketing. Negotiations with respect to outstanding terms of the proposed
merger continued between EXCEL and Telco and their respective legal and
financial advisors.
On May 31, 1997, the Telco Special Committee held a meeting, at which
representatives of Hunton & Williams and DLJ were present, to (i) discuss the
Telco Special Committee's legal duties and responsibilities with respect to the
proposed transaction, (ii) review the status of Telco's due diligence of EXCEL
to date and the status of the negotiations with respect to the Merger Agreement
and related documentation and (iii) further discussed DLJ's role as Telco's
financial advisor in the proposed transaction and the terms and scope of the
proposed fairness opinion that would be requested of DLJ in connection with the
proposed transaction. The members of the Telco Special Committee, its legal
counsel and representatives of DLJ traveled to Washington, D.C. the following
day (June 1, 1997) to be present for due diligence presentations with respect to
EXCEL and to actively participate in the negotiations.
On May 31, 1997, the EXCEL Board held a special meeting. Present at the
invitation of the EXCEL Board were Mr. Dance, representatives of Lehman Brothers
and a representative of Weil, Gotshal & Manges. At this meeting, the EXCEL Board
was briefed by Weil, Gotshal & Manges regarding the EXCEL Board's fiduciary
duties and other matters of Delaware corporate law. Lehman Brothers then
reviewed with the EXCEL Board, in detail, the preliminary analysis of Telco
prepared by Lehman Brothers (copies of which had been previously delivered to
each of the directors). Lehman Brothers' presentation included the strategic
considerations for the proposed transaction; the basis for the valuation
analysis; an overview of Telco's products, operating data, history, marketing
strategies and telecommunications network; the recent acquisition by Telco of
the Advantis Network; the potential synergies between EXCEL and Telco; and the
key management personnel of Telco. In addition, Mr. Dance reviewed with the
EXCEL Board the material agreements for the proposed transaction, including the
material terms of the Merger Agreement, the Telco Shareholders Agreement, the
EXCEL Shareholders Agreement, the Registration Rights Agreement, the Employment
Agreements and the Non-Competition Agreements.
From June 1, 1997 through June 4, 1997, the Telco Special Committee
remained in Washington, D.C. to deliberate upon the proposed transaction and to
participate in on-going due diligence and merger negotiations. In the course of
such discussions, the Telco Special Committee considered, among other things,
(i) the structure of the proposed transaction, (ii) the issues raised in
connection with the due diligence conducted on EXCEL, (iii) the proposed
purchase price and other financial aspects of the proposed transaction,
including whether the exchange ratio should be fixed and whether purchase price
protections such as a "cap" or "collar" should be sought in order to reduce the
impact on the holders of Telco Common Stock of possible fluctuations in EXCEL's
stock price, (iv) other strategic alternatives available to Telco, (v) the
potential cost savings and synergies that could be realized by merging with
EXCEL, (vi) EXCEL's contractual obligations and its ability to move traffic onto
Telco's network, (vii) the legal, tax and accounting issues related to the
proposed transaction, (viii) EXCEL's ability to obtain the financing necessary
to consummate the proposed transaction, (ix) the various methodologies used by
DLJ to assess the fairness of the merger consideration to be received by
shareholders of Telco from a financial point of view and (x) the proposed
employment agreements with certain members of Telco management. The Telco
Special Committee and its counsel took an active role in negotiating the terms
and conditions of the Merger Agreement.
On June 1, 1997, the EXCEL Board held a special meeting to discuss the
progress of the proposed transaction. By invitation of the EXCEL Board, Mr.
Dance and representatives of Lehman Brothers were present. Lehman Brothers
continued the review of its preliminary analysis with the EXCEL Board. Mr.
McLaine explained that the consideration proposed to be paid to Telco
shareholders would be paid approximately one half in cash and one half in
Holdings Common Stock. Mr. Troutt discussed marketing strategies for combining
Telco's commercial sales force with the EXCEL residential sales force. Stephen
R. Smith, Executive Vice President of Marketing and a director of EXCEL,
discussed various synergistic marketing strategies, including mechanisms for
calculating compensation for the respective sales forces. The EXCEL Board then
discussed marketing, billing platforms and other strategic opportunities unique
to a combination of the companies. Mr. Dance then gave a presentation regarding
the results of the due diligence evaluation of Telco and updated the EXCEL Board
on the status of the negotiations.
27
<PAGE> 33
On June 2, 1997, the EXCEL Board held a special meeting to discuss the
progress of the proposed transaction. By invitation of the EXCEL Board, Mr.
Dance and representatives of Lehman Brothers and Weil, Gotshal & Manges were
present. The EXCEL Board again discussed issues relating to the structure,
price, expected synergies, terms and conditions of the proposed transaction,
including the fixed exchange ratio versus fixed value merger consideration, the
absence of purchase price protections such as a "collar" or "cap" and the
proposed employment agreements with key members of Telco senior management.
Representatives of Lehman Brothers made a presentation to the EXCEL Board on the
results of its analysis of the proposed transaction and delivered its oral
opinion to the EXCEL Board that, as of such date and subject to certain
assumptions, limitations and qualifications, from a financial point of view, the
EXCEL Exchange Ratio was fair to the stockholders of EXCEL and the consideration
to be paid by Holdings to holders of Telco Common Stock in the proposed
transaction was fair to EXCEL. See "-- Fairness Opinions -- Opinion of EXCEL's
Financial Advisor." The EXCEL Board then discussed the proposed financing
commitment of Lehman Brothers and the use of the proceeds thereof to finance the
Mergers and the costs and expenses associated therewith, to refinance certain
existing indebtedness of Telco, and for general corporate purposes. Mr. Dance
reviewed the material terms and conditions of Lehman Brothers' proposed
commitment. After deliberations, the EXCEL Board approved the Merger Agreement
and the transactions contemplated thereby, subject to any material changes.
On June 3, 1997, DLJ presented written valuation materials and discussed
with the Telco Special Committee and the Telco Board various financial aspects
of the proposed transaction and reviewed their valuation methodologies. At such
meeting, DLJ delivered its oral opinion to the Telco Board and the Telco Special
Committee that, as of such date and subject to certain assumptions, limitations
and qualifications, the Exchange Ratio together with the Cash Consideration to
be received by the shareholders of Telco was fair to such shareholders from a
financial point of view. Based on such opinion and its own deliberations over
the course of the prior several days, the Telco Special Committee preliminarily
concluded that the Telco Merger Consideration to be received by the shareholders
of Telco was fair to such shareholders from a financial point of view and
recommended proceeding with the proposed transaction. See "-- Fairness
Opinions -- Opinion of Telco's Financial Advisor."
During the period from May 31 through June 4, 1997, representatives of
EXCEL and Telco, their respective financial and legal advisors, and members of
the Telco Special Committee and its legal and financial advisors, conducted
negotiations with respect to various terms of the Merger Agreement and the
related agreements. On June 5, 1997, a meeting took place in the New York City
offices of Weil Gotshal & Manges between EXCEL, Telco and their respective
financial and legal advisors to finalize the definitive transaction
documentation.
On the evening of June 5, 1997, the EXCEL Board held a special meeting. Mr.
Dance and representatives of Lehman Brothers and Weil, Gotshal & Manges were
present by invitation of the EXCEL Board. At the meeting, Mr. Dance and Weil,
Gotshal & Manges reviewed with the EXCEL Board the material terms and conditions
of the Merger Agreement and the related agreements. Lehman Brothers delivered
its written opinion to the EXCEL Board that, as of such date and based on and
subject to the assumptions, limitations and qualifications set forth therein,
from a financial point of view, the EXCEL Exchange Ratio was fair to the
stockholders of EXCEL and the consideration to be paid by Holdings to holders of
Telco Common Stock in the proposed transaction was fair to EXCEL. After
deliberations with respect thereto, the EXCEL Board unanimously determined that
the provisions and terms of the Merger Agreement were fair to and in the best
interest of EXCEL and EXCEL's stockholders and authorized the officers of EXCEL
to execute the Merger Agreement and the related agreements.
On the evening of June 5, 1997, the Telco Board held a special meeting to
consider the proposed Merger Agreement and related documents and the transaction
contemplated thereby. After being briefed on the final details of the proposed
transaction, the Telco Special Committee recommended approval of the proposed
transaction by the Telco Board. Representatives of DLJ then delivered their
written opinion to the Telco Board and the Telco Special Committee to the effect
that, as of such date and based on and subject to the assumptions, limitations
and qualifications set forth therein, the Exchange Ratio together with the Cash
Consideration to be received by the shareholders of Telco was fair to such
shareholders from a financial point
28
<PAGE> 34
of view. After deliberations, the Telco Board concluded that the proposed
transaction was in the best interest of Telco and its shareholders and, by the
unanimous vote of all directors, approved the Merger Agreement and the
transactions contemplated thereby and authorized the officers of Telco to
execute and deliver the Merger Agreement and the related agreements.
On June 5, 1997, EXCEL and Telco executed the Merger Agreement, the Telco
Shareholders (as hereinafter defined) and EXCEL executed the Telco Shareholders
Agreement and the EXCEL Shareholders (as hereinafter defined) and Telco executed
the EXCEL Shareholders Agreement.
On June 6, 1997, prior to the opening of trading on the NYSE and the NMS,
EXCEL and Telco issued a joint press release announcing the Transaction.
The Compensation Committee of the Holdings Board, by unanimous written
consent dated as of September 8, 1997, approved and adopted the Stock Option
Plan. The Holdings Board, by unanimous written consent dated as of September 8,
1997, approved the Stock Option Plan and the Director Stock Option Plan.
The EXCEL Board, by unanimous written consent dated as of September 8,
1997, approved the Stock Option Plan and the Director Stock Option Plan and
agreed to recommend such plans to the holders of EXCEL Common Stock.
The Telco Board, by unanimous written consent dated as of August 25, 1997,
approved the Stock Option Plan and the Director Stock Option Plan and agreed to
recommend such plans to the holders of Telco Common Stock.
RECOMMENDATION OF EXCEL BOARD
THE EXCEL BOARD, BY UNANIMOUS VOTE, HAS DETERMINED THAT THE TERMS OF THE
MERGER AGREEMENT ARE FAIR TO, AND IN THE BEST INTERESTS OF, EXCEL AND THE
HOLDERS OF EXCEL COMMON STOCK AND RECOMMENDS THAT HOLDERS OF EXCEL COMMON STOCK
VOTE FOR THE APPROVAL OF THE MERGER AGREEMENT.
In reaching its determination to approve the Merger Agreement and the
transactions contemplated thereby, the EXCEL Board consulted with EXCEL
management and financial and legal advisors and considered the proposed terms of
the Merger Agreement and the related agreements. In reaching its conclusions,
the EXCEL Board also considered the strategic advantages of the Transaction
described below, as well as, among other things, the following: (i) information
concerning the financial performance and condition, business operations, capital
levels, asset quality and prospects of Telco, and the projected future financial
performance of EXCEL as a separate entity and of EXCEL and Telco on a combined
basis; (ii) current industry, economic and market conditions and trends,
including the likelihood of continuing consolidation and increasing competition
in the telecommunications industry; (iii) the current and historical market
prices of Telco Common Stock; (iv) the opinion of Lehman Brothers described
below as to the fairness, from a financial point of view, of the EXCEL Exchange
Ratio and the consideration to be paid to holders of Telco Common Stock (which
was determined through arm's-length negotiations between EXCEL and Telco); (v)
the likelihood of obtaining required regulatory approvals and the possibility
that regulatory authorities may impose burdensome conditions to the grant of
such approvals; (vi) alternative transactions; (vii) presentations by EXCEL
management and its financial and legal advisors regarding Telco; and (viii) the
impact of the Transaction on the customers, IRs and employees of EXCEL.
RECOMMENDATION OF TELCO BOARD
THE TELCO BOARD, BY UNANIMOUS VOTE AND UPON THE RECOMMENDATION OF ITS
SPECIAL COMMITTEE APPOINTED TO EVALUATE THE TRANSACTION, HAS DETERMINED THAT THE
TERMS OF THE MERGER AGREEMENT ARE FAIR TO, AND IN THE BEST INTERESTS OF, TELCO
AND THE HOLDERS OF TELCO COMMON STOCK AND RECOMMENDS THAT THE HOLDERS OF TELCO
COMMON STOCK VOTE FOR THE APPROVAL OF THE MERGER AGREEMENT.
29
<PAGE> 35
In reaching its determination to approve the Merger Agreement and the
transactions contemplated thereby, the Telco Board considered the recommendation
of the Telco Special Committee, consulted with Telco management and financial
and legal advisors and considered the proposed Merger Agreement and the related
agreements. In reaching its conclusions, the Telco Board also considered the
strategic advantages of the Transaction described below, as well as, among other
things, the following: (i) the recommendation of the Telco Special Committee
that the Transaction be approved by the Telco Board as being in the best
interests of the holders of Telco Common Stock; (ii) the terms of the Merger
Agreement, including the premium over the historical trading price of Telco
Common Stock represented by the Telco Merger Consideration and the ability of
the holders of Telco Common Stock to receive a combination of cash and Holdings
Common Stock in exchange for their Telco Common Stock; (iii) the opinion of its
financial advisor, DLJ, as to the fairness of the Exchange Ratio and the Cash
Consideration to the shareholders of Telco from a financial point of view; (iv)
its knowledge of the business, operations, properties, assets, financial
condition, operating results and prospects of Telco and EXCEL; (v) current
industry, economic and market conditions; (vi) presentations by Telco management
and its financial and legal advisors regarding EXCEL; (vii) the compatibility of
the respective business philosophies of Telco and EXCEL; (viii) the opportunity
for the holders of Telco Common Stock to participate in a larger, stronger and
more competitive telecommunications company; and (ix) continuing the existing
business plan of Telco as an independent corporation.
REASONS FOR THE TRANSACTION
The combination of EXCEL and Telco will create one of the largest
facilities-based long distance telecommunications companies in the United
States. Holdings would have had 1996 pro forma combined revenues and operating
income of approximately $1.8 billion and $240 million, respectively, and
approximately 5.8 million long distance customers as of June 30, 1997. The
Boards believe that the Transaction will provide opportunities to achieve
substantial benefits for the respective stockholders and customers of each
company through the more efficient utilization of the combined assets,
management and personnel of EXCEL and Telco. The Boards further believe that the
combined company, operating in the combined markets and with the combined
assets, financial resources, management, personnel and technical expertise of
both EXCEL and Telco, will be better able to capitalize on growth opportunities
in the telecommunications industry, both domestically and internationally, and
will be better positioned to compete effectively in the rapidly changing
telecommunications industry, than either EXCEL or Telco on a stand-alone basis.
The following are the primary strategic advantages of the Transaction that
were considered by the Boards in reaching their determinations to recommend the
Transaction:
Utilization of Telco's Low Cost Network. The Boards believe that the
Transaction will create significant cost savings to both EXCEL and Telco, which
are expected to result primarily from the migration of EXCEL's minutes of use by
long distance customers from the facilities of third party providers to Telco's
lower cost, facilities-based network, which currently is not fully utilized. As
a facilities-based provider that will seek to capitalize on its owned and leased
switches and fiber optic capacity, the combined company is expected to incur
lower per minute costs than could be obtained under arrangements with third
party providers, such as the arrangements upon which EXCEL presently relies.
While EXCEL will continue to have contractual obligations to place a portion of
its minutes of use on the networks of third party providers until at least 1999,
EXCEL currently is exceeding its minimum obligations under such contracts and
has excess minutes of use it can migrate immediately to Telco's lower cost
network. In addition, most of EXCEL's contracts with third party carriers either
have cancellation clauses or expire in 1998 or 1999. As a result, management of
both EXCEL and Telco estimate that after the contemplated expansion of the Telco
network, a substantial portion of EXCEL's minutes of use can be migrated to the
Telco network during 1998 and 1999. Such migration is also expected to reduce
Telco's costs per minute of use as a result of the increased and more efficient
utilization of the Telco network.
In addition, EXCEL historically has purchased its minutes of use on a
bundled basis, thereby incurring higher LEC access and termination charges as
well as service charges from third party carriers. Upon consummation of the
Transaction, Telco's switch-based network should enable the combined company to
purchase minutes of use, particularly international and off-net domestic
terminations, from third parties on an
30
<PAGE> 36
unbundled basis. As a result, the Boards believe, based on the estimates of
management of both EXCEL and Telco, that additional significant cost savings can
be achieved.
Diversification of Distribution Channels. The Boards believe that the
Transaction will provide the combined company with greater diversification of
its distribution channels. These distribution channels include pre-subscribed
residential, small and home office commercial customers targeted by EXCEL's IRs,
non-presubscribed, lower volume, residential customers targeted by Telco's dial
around marketing efforts and commercial and wholesale customers targeted by
Telco's direct sales force.
Greater Economies of Scale. The Boards believe that the combination of
EXCEL and Telco provides numerous opportunities for the combined company to
capitalize on greater economies of scale. The Transaction is expected to result
in increased volume over the Telco network, thereby reducing the combined
company's costs per minute of use and increasing each of EXCEL and Telco's
ability to compete on price. The Boards also believe that the combined
purchasing power of EXCEL and Telco will enable Holdings to benefit from more
favorable pricing with third party providers, LECs and competitive local
exchange carriers. In addition, the Boards also believe that there are
opportunities to consolidate other third party costs, particularly with regard
to information systems and LEC billing fees and expenses.
Enhanced Management Capabilities. The Boards believe that the combined
company will benefit substantially from the combined experience of the senior
management teams of EXCEL and Telco.
Opportunities for Revenue Growth. The Boards believe that the combined
resources of EXCEL and Telco will enable the combined company to accelerate the
expansion of its product offerings across all of its distribution channels.
Products such as Internet services, wireless services (such as PCS) and
data-related services are being considered by the management teams of EXCEL and
Telco. In addition, the Boards believe that the combined company, operating with
the combined assets (including the Telco network), financial resources and
technical expertise of EXCEL and Telco, will be better positioned to enter the
local telephone market and other communications markets if it should choose to
do so. Furthermore, the Boards believe that the expansion of the Telco network,
which will become both necessary and more cost effective following the
consummation of the Transaction as a result of the increased usage of the Telco
network, will enable the combined company to seek further expansion of its
commercial operations. The Boards also believe that the Transaction will
facilitate the expansion of the combined company's operations internationally
through increased penetration by its IR and commercial sales forces. In
addition, the Boards believe that the Transaction will create opportunities for
the combined company to generate revenue growth through increased cross-selling
opportunities, particularly between the IR network and the commercial sales
force.
In addition to the joint reasons for the Transaction described above, other
principal factors considered by the EXCEL Board in reaching its determination to
recommend the Transaction were:
Acceleration of Network Strategy. One of EXCEL's business strategies has
been to become a facilities-based carrier. The Transaction will accelerate the
achievement of this strategy by providing EXCEL with access to Telco's existing
network, thereby enabling EXCEL to avoid the cost, delay and management time
commitment required to build a new network infrastructure.
Increased Opportunities for IRs. The EXCEL Board believes that the addition
of Telco's commercial operations will create enhanced opportunities for EXCEL
and its IRs to obtain commercial accounts, and thereby enhance the combined
company's revenue growth opportunities.
In addition to the joint reasons for the Transaction described another
principal factor considered by the Telco Board and the Telco Special Committee
was:
Enhanced Competitive Position. The Telco Board and the Telco Special
Committee believe that the increased financial strength of the combined company
will enhance Telco's ability to take advantage of telecommunications
opportunities such as acquisitions, new product introductions and international
expansion.
There can be no assurance that any of the potential advantages,
efficiencies or opportunities described above under "Reasons for the
Transaction" will be achieved through the consummation of the Transaction. See
"Cautionary Statement Concerning Forward-Looking Statements" and "Risk Factors."
31
<PAGE> 37
The foregoing discussion of the information and factors considered by the
Boards is not intended to be exhaustive, but is intended to include the material
factors considered by each Board. In view of the wide variety of factors
considered by each of the Boards, the directors of each Board did not find it
practical to, and did not, quantify or otherwise assign relative weight to the
specific factors considered and individual directors may have ascribed different
weights to different factors.
FAIRNESS OPINIONS
Opinion of EXCEL's Financial Advisor.
Lehman Brothers served as financial advisor to EXCEL in connection with the
Mergers and delivered an oral opinion to the EXCEL Board on June 2, 1997,
subsequently confirmed in a written opinion to the EXCEL Board dated June 5,
1997, to the effect that, as of the date of the Lehman Opinion and based on and
subject to the assumptions, limitations and qualifications set forth therein,
from a financial point of view, the EXCEL Exchange Ratio was fair to the
stockholders of EXCEL and the consideration to be paid by Holdings to holders of
Telco Common Stock in the Transaction was fair to EXCEL. Lehman Brothers
subsequently updated such opinion by delivery of its written opinion dated as of
the date of this Joint Proxy Statement/ Prospectus (such updated written
opinion, the "Lehman Opinion").
THE FULL TEXT OF THE LEHMAN OPINION IS ATTACHED AS ANNEX II TO THIS JOINT
PROXY STATEMENT/PROSPECTUS AND IS INCORPORATED HEREIN BY REFERENCE. EXCEL
STOCKHOLDERS SHOULD READ THE LEHMAN OPINION IN ITS ENTIRETY FOR ASSUMPTIONS
MADE, PROCEDURES FOLLOWED AND OTHER MATTERS CONSIDERED BY LEHMAN BROTHERS.
No limitations were imposed by EXCEL on the scope of Lehman Brothers'
investigation or the procedures to be followed by Lehman Brothers in rendering
its opinion. Lehman Brothers was not requested to and did not make any
recommendation to the EXCEL Board as to the form or amount of the consideration
to be paid by Holdings to holders of Telco Common Stock in the Telco Merger,
which was determined through arm's-length negotiations between the parties. In
arriving at its opinion, Lehman Brothers did not ascribe a specific range of
values to Telco or EXCEL, but rather made its determination as to the fairness
to EXCEL, from a financial point of view, of the consideration to be paid by
Holdings to holders of Telco Common Stock in the Telco Merger and of the EXCEL
Exchange Ratio to the holders of EXCEL Common Stock on the basis of the
financial and comparative analyses described below. Lehman Brothers' opinion is
for the use and benefit of the EXCEL Board and was rendered to the EXCEL Board
in connection with its consideration of the Mergers. Lehman Brothers' opinion is
not intended to be and does not constitute a recommendation to any holder of
EXCEL Common Stock as to how such stockholder should vote with respect to the
Mergers. Lehman Brothers was not requested to opine as to, and its opinion does
not address, EXCEL's underlying business decision to proceed with or effect the
Mergers.
In arriving at its opinion, Lehman Brothers reviewed and analyzed (1) the
Merger Agreement and the specific terms of the Mergers, (2) such publicly
available information concerning EXCEL and Telco as Lehman Brothers believed to
be relevant to its analysis, (3) financial and operating information with
respect to the business, operations and prospects of EXCEL furnished to Lehman
Brothers by EXCEL, (4) financial and operating information with respect to the
business, operations and prospects of Telco furnished to Lehman Brothers by
Telco and by EXCEL, (5) a trading history of EXCEL's common stock from its
initial public offering date to May 27, 1997 and a comparison of that trading
history with those of other companies that Lehman Brothers deemed relevant, (6)
a trading history of Telco's common stock from its initial public offering date
to May 27, 1997 and a comparison of that trading history with those of other
companies that Lehman Brothers deemed relevant, (7) a comparison of the
historical financial results and present financial condition of EXCEL with those
of other companies that Lehman Brothers deemed relevant, (8) a comparison of the
historical financial results and present financial condition of Telco with those
of other companies that Lehman Brothers deemed relevant, (9) third party
research analysts' quarterly and annual earnings estimates and recommendations
for EXCEL and for Telco, (10) the potential pro forma financial effects of the
Mergers, including the cost savings expected to result from a combination of the
businesses of EXCEL and Telco which were estimated by EXCEL management to be
$126.3 million for 1998 and greater than that in each year thereafter, and (11)
a comparison of the financial terms of the Mergers with the financial terms of
32
<PAGE> 38
certain other transactions that Lehman Brothers deemed relevant. In addition,
Lehman Brothers had discussions with the management of EXCEL and Telco
concerning their respective businesses, operations, assets, financial conditions
and prospects and the potential strategic benefits of the Mergers, and undertook
such other studies, analyses and investigations as Lehman Brothers deemed
appropriate.
In arriving at its opinion, Lehman Brothers assumed and relied upon the
accuracy and completeness of the financial and other information used by Lehman
Brothers without assuming any responsibility for independent verification of
such information and further relied upon the assurances of EXCEL management that
they are not aware of any facts that would make such information inaccurate or
misleading. With respect to the financial projections of EXCEL, Telco and
Holdings following the consummation of the Mergers, upon advice of EXCEL, Lehman
Brothers assumed that such projections were reasonably prepared on a basis
reflecting the best currently available estimates and judgments of the
management of EXCEL or Telco, as the case may be, as to the future financial
performance of EXCEL, Telco and Holdings (including, without limitation, the
cost savings expected to result from a combination of the businesses of EXCEL
and Telco), and that EXCEL and Telco would, and following the consummation of
the Mergers Holdings will, perform substantially in accordance with such
projections. In arriving at its opinion, Lehman Brothers conducted a limited
physical inspection of the properties and facilities of EXCEL and Telco and did
not make or obtain any evaluations or appraisals of the assets or liabilities of
EXCEL or Telco. Upon advice of EXCEL, Lehman Brothers assumed that the EXCEL
Merger will qualify as a tax-free transaction to the stockholders of EXCEL.
Lehman Brothers' opinion necessarily is based upon market, economic and other
conditions as they existed on, and could be evaluated as of, the date of its
opinion.
The following is a summary of certain financial and comparative analyses
performed by Lehman Brothers and presented to the EXCEL Board.
Comparable Company Analysis. Using publicly available information, Lehman
Brothers compared the financial performance and stock market valuation of Telco
with the following companies, which were selected based on general business,
operating and financial characteristics representative of long distance
telecommunications companies: Frontier Corporation, IXC Communications, Inc.,
LCI International, Inc., Midcom Communications Inc., Network Long Distance,
Inc., Tel-Save Holdings, Inc. and U.S. Long Distance Corp. (the "Comparable
Public Companies"). The median multiples for the Comparable Public Companies for
the equity market value to estimated 1997 and 1998 earnings were 26.6x and
17.8x, respectively. The range of multiples was from 16.7x to 44.3x and 11.6x to
35.2x, respectively. The calculation of such medians and ranges excluded certain
exceptionally high and/or low (or negative) multiples. These compared to public
market trading multiples of 24.4x and 16.9x for Telco. Among other multiples,
Lehman Brothers also calculated the median multiples for the Comparable Public
Companies for the equity market value plus net indebtedness, preferred stock and
minority interests ("Firm Value") to latest twelve months ("LTM") revenues and
the Firm Value to estimated 1997 revenues. The median multiples were 1.9x and
1.6x, respectively. The range of multiples was from 1.4x to 4.1x and 0.9x to
3.1x, respectively. These compared to public market trading multiples of 2.1x
and 1.7x for Telco. The ratios for Telco and the Comparable Public Companies are
based on public financial statements dated December 31, 1996 and/or March 31,
1997, closing stock market prices on May 30, 1997, the most recent earnings per
share ("EPS") estimates for 1997 and 1998 published by the Institutional Broker
Estimate System ("IBES"), a service company widely used by the investment
community to gather earnings estimates from various research analysts, and the
most recent third party equity research reports available to Lehman Brothers on
May 30, 1997 that contained projections for revenue and earnings before
interest, taxes, depreciation and amortization ("EBITDA").
Lehman Brothers noted that for each of the foregoing multiples, the Telco
multiples were within the range of multiples for the Comparable Public
Companies. However, because of the inherent differences between the businesses,
operations and prospects of Telco and the businesses, operations and prospects
of the Comparable Public Companies, Lehman Brothers believed that it was
inappropriate to, and therefore did not, rely solely on the quantitative results
of the analysis, and accordingly also made qualitative judgments concerning
differences between the characteristics of Telco and the Comparable Public
Companies that would affect the public trading values of Telco and the
Comparable Public Companies.
33
<PAGE> 39
Transaction Premium Analysis. Lehman Brothers calculated the premium to be
paid to holders of Telco Common Stock over the closing market price of the Telco
Common Stock on May 30, 1997 (the "Transaction Premium"). The Transaction
Premium to be paid in the Telco Merger is 27.0% based on the $19.75 closing
price of EXCEL Common Stock on May 27, 1997 (the "EXCEL Valuation Price"), the
price used in Lehman Brothers' analysis, and Telco's closing market price of
$23.625 on May 30, 1997. Lehman Brothers compared the Transaction Premium to be
paid in the Telco Merger to the transaction premium paid over the acquired
company's closing market price on the day prior to announcement of other merger
or acquisition transactions. The following transactions were selected based upon
the business of the acquired company, the size of the transaction and the form
of consideration, among other factors (identified by acquiror/acquiree): LDDS
Communications, Inc./Advanced Telecommunications Corporation; LDDS
Communications, Inc./ Resurgens Communications Group, Inc. and Metromedia
Communications Corporation; Peter Kiewit Sons', Inc. (RCN Corporation)/C-TEC
Corporation; GTE Corporation/Contel Cellular Inc.; MFS Communications Company,
Inc./Centex Telemanagement, Inc.; Pacificorp/Pacific Telecom, Inc.; Arch
Communications Group, Inc./USA Mobile Communications Holdings, Inc.; Frontier
Corporation/ALC Communications Corporation; MCI Communications
Corporation/Nationwide Cellular Service, Inc.; Airtouch Communications,
Inc./Cellular Communications, Inc.; and Metrocall, Inc./A+ Network, Inc. (the
"Comparable Transaction Premiums"). The mean of the Comparable Transaction
Premiums was 37.9%. Lehman Brothers noted that the Transaction Premium was below
the mean of the Comparable Transaction Premiums.
Comparable Transaction Analysis. Using publicly available information,
Lehman Brothers reviewed certain terms and financial characteristics of six long
distance telecommunications company merger or acquisition transactions which
Lehman Brothers deemed to be comparable (based on the business of the acquired
company, the size of the transaction and the form of the consideration, among
other factors) to the Merger. The transactions considered by Lehman Brothers in
its analysis consisted of (identified by acquiror/ acquiree): Frontier
Corporation/ALC Communications Corporation; LDDS Communications, Inc./Williams
Telecommunications Group, Inc. (WilTel Network Services); LDDS Communications,
Inc./IDB Communications Group, Inc.; LDDS Communications, Inc./Resurgens
Communications Group, Inc. and Metromedia Communications Corporation; LDDS
Communications, Inc./Advanced Telecommunications Corporation and MCI
Communications Corporation/Telecom * USA, Inc. (the "Comparable Transactions").
The median for the transaction price to LTM earnings multiple for the Comparable
Transactions was 33.8x. The range of multiples for the Comparable Transactions
was from 26.1x to 109.1x. The calculation of such medians and ranges excluded
certain exceptionally high and/or low (or negative) multiples. This compared to
a transaction multiple of 36.1x for the Telco Merger based on the EXCEL
Valuation Price. Lehman Brothers also calculated the median multiples for the
Comparable Transactions for the Firm Value (using the transaction price for
equity market value) to LTM revenues and the Firm Value to LTM EBITDA. The
median multiples were 2.3x and 13.9x, respectively. The range of multiples was
from 1.9x to 3.2x and 11.4x to 33.9x, respectively. These compared to
transaction multiples of 2.6x and 21.4x for the Telco Merger based on the EXCEL
Valuation Price.
Lehman Brothers noted that for each of the foregoing multiples, the
transaction multiples for the Mergers based on the EXCEL Valuation Price were
within the range of multiples for the Comparable Transactions. However, because
the reasons for and the circumstances surrounding each of the Comparable
Transactions were specific to each transaction and because of the inherent
differences in the businesses, operations and prospects of EXCEL and Telco and
the businesses, operations and prospects of the acquired companies included in
the Comparable Transactions, Lehman Brothers believed that it was inappropriate
to, and therefore did not, rely solely on the quantitative results of the
analysis, and accordingly also made qualitative judgments concerning differences
between the characteristics of these transactions and the Merger that would
affect the acquisition values of Telco and such acquired companies. In
particular, Lehman Brothers considered the level of cost savings and synergies
available to the acquiror in each transaction.
Discounted Cash Flow Analysis of Telco. Lehman Brothers calculated the
present value of the future streams of after-tax cash flows that Telco could be
expected to produce over a five and one-half year period. The analysis utilized
financial and operating information relating to the business, operations and
prospects of Telco provided by Telco's management and relied on certain
assumptions with respect to Telco's future
34
<PAGE> 40
business and operations. After-tax cash flows for the five and one-half year
period beginning on July 1, 1997 and ending on December 31, 2002 were calculated
as unlevered after-tax earnings plus amortization and depreciation less net
changes in non-cash, non-debt working capital and capital expenditures. Lehman
Brothers calculated terminal values for Telco in 2002 by applying to projected
EBITDA a range of multiples of 7x to 9x. Lehman Brothers' determination of the
appropriate range of multiples was based on an assessment of forward EBITDA
trading multiples in the current market of the Comparable Public Companies and
on Lehman Brothers' general experience in valuations of companies. The cash flow
streams and terminal values were then discounted to present values using a range
of discount rates of 14% to 17%, which were chosen based on several assumptions
regarding factors such as the inflation rate, interest rates, the inherent
business risk in Telco's business and the cost of capital to Telco.
Telco management provided Lehman Brothers with two sets of projections for
the period beginning April 1, 1997 and ending December 31, 2003: (1) a base case
(the "Telco Base Case") and (2) a case prepared for financing sources reflecting
more conservative assumptions (the "Telco Bank Case"). Telco management utilized
the same financial projections for 1997 and 1998 in the Telco Base Case and the
Telco Bank Case, but applied different assumptions thereafter. The Telco Base
Case contained less conservative assumptions than the Telco Bank Case with
respect to, among other things, revenue growth rates, gross profit margins and
operating profit margins for 1999 and thereafter. Based upon the cost savings
estimates provided by EXCEL for 1998 through 2001, Lehman Brothers made
estimates of merger-related cost savings for the six month period ended December
31, 1997 and for 2002. Lehman Brothers performed discounted cash flow analyses
(discounting all cash flows to July 1, 1997) and generated per share equity
value ranges based on four scenarios. The four scenarios are (a) Telco Base Case
without cost savings, which generated a per share equity value range of $37.55
to $53.29, (b) Telco Base Case with cost savings, which generated a per share
equity value range of $85.04 to $118.61, (c) Telco Bank Case without cost
savings, which generated a per share equity value range of $20.09 to $28.43 and
(d) Telco Bank Case with cost savings, which generated a per share equity value
range of $67.59 to $93.75.
Discounted Cash Flow Analysis of EXCEL. Lehman Brothers calculated the
present value of the future streams of after-tax cash flows that EXCEL could be
expected to produce over a five and one-half year period. The analysis utilized
financial and operating information relating to the business, operations and
prospects of EXCEL provided by EXCEL management and relied on certain
assumptions with respect to EXCEL's future business and operations. EXCEL
provided to Lehman Brothers base case projections (the "EXCEL Base Case") and a
case prepared for potential financing sources reflecting more conservative
assumptions (the "EXCEL Bank Case"). Both sets of projections covered the period
January 1, 1997 through December 31, 2001. The EXCEL Bank Case contained more
conservative assumptions than the EXCEL Base Case with respect to, among other
things, revenue growth rates and operating profit margins. In performing the
discounted cash flow analysis of EXCEL, only the EXCEL Bank Case projections
were used. Based on such projections, Lehman Brothers made estimates for the one
year period ending on December 31, 2002. After-tax cash flows for the five and
one-half year period beginning on July 1, 1997 and ending on December 31, 2002
were calculated as unlevered after-tax earnings plus amortization and
depreciation less net changes in non-cash, non-debt working capital and capital
expenditures. Lehman Brothers calculated terminal values for EXCEL in 2002 by
applying to projected EBITDA a range of multiples of 7x to 9x. Lehman Brothers'
determination of the appropriate range of multiples was based on an assessment
of forward EBITDA trading multiples in the current market of the Comparable
Public Companies and on Lehman Brothers' general experience in valuations of
companies. The cash flow streams and terminal values were then discounted to
present values using a range of discount rates of 14% to 17%, which were chosen
based on several assumptions regarding factors such as the inflation rate,
interest rates, the inherent business risk in EXCEL's business, and the cost of
capital to EXCEL.
Lehman Brothers performed a discounted cash flow analysis (discounting all
cash flows to July 1, 1997) and generated a per share equity value range of
$31.53 to $43.15.
Pro Forma Ownership Analysis. Lehman Brothers analyzed the relative
ownership of Holdings after the Mergers on a fully diluted basis by present
holders of EXCEL Common Stock and holders of Telco Common Stock, employing
certain assumptions as to the exercise of options presently held by holders of
Telco Common
35
<PAGE> 41
Stock and further assuming shares of EXCEL and Telco would be exchanged for
consideration as described in the Merger Agreement. This analysis indicated that
holders of EXCEL Common Stock and holders of Telco Common Stock would own 79.2%
and 20.8%, respectively, of Holdings after the Merger.
Contribution Analysis. Lehman Brothers analyzed the contribution to
combined estimated revenues and EBITDA before cost savings for EXCEL and Telco
for 1997 and 1998. The EXCEL projections used were the EXCEL Bank Case
projections and the Telco projections used were the Telco Bank Case projections.
This analysis indicated that in 1997 and 1998 EXCEL is projected to contribute
73.4% and 75.5%, respectively, and Telco is projected to contribute 26.6% and
24.5%, respectively, of estimated revenues. This analysis also indicated that in
1997 and 1998, EXCEL is projected to contribute 75.8% and 76.1%, respectively,
and Telco is projected to contribute 24.2% and 23.9%, respectively, of estimated
EBITDA before cost savings.
Lehman Brothers also analyzed the relative contribution to the equity value
of Holdings, on a discounted cash flow basis, of the equity values of EXCEL and
Telco, also on a discounted cash flow basis. The discounted cash flow equity
value of Holdings was assumed to be the sum of the discounted cash flow equity
values of EXCEL and Telco. The discounted cash flow equity value of Telco was
calculated net of the cash consideration to be paid to holders of Telco Common
Stock.
Without including cost savings or synergies, EXCEL and Telco contributed
90% and 10% of the discounted cash flow equity value of Holdings, respectively.
Including cost savings and synergies and allocating such cost savings and
synergies to Telco, EXCEL and Telco contributed 63% and 37% of the discounted
cash flow equity value of Holdings, respectively. Lehman Brothers compared the
results of the foregoing discounted cash flow contribution analysis with the
results of its pro forma ownership analysis.
Pro Forma Merger Analysis. Using the EXCEL Bank Case projections for 1998
with respect to EXCEL and the Telco Bank Case projections for 1998 with respect
to Telco, and employing the estimates by EXCEL management as to potential cost
savings anticipated to result from the Mergers of $126.3 million for 1998, and
making other financial assumptions with respect to the Mergers, Lehman Brothers
compared EXCEL's estimated EPS for calendar year 1998 on a stand-alone basis
with Holdings' estimated EPS for calendar year 1998 assuming consummation of the
Mergers. These estimates assume that each share of Telco Common Stock and EXCEL
Common Stock will be exchanged for consideration as described in the Merger
Agreement. Based upon the assumptions and estimates relied upon and including
the $126.3 million potential cost savings, Lehman Brothers noted that the
Mergers would result in EPS accretion for current holders of EXCEL Common Stock
of 5.5% in 1998. Lehman Brothers also performed pro forma merger analyses using
various other assumptions with respect to cost savings.
The summary set forth above does not purport to be a complete description
of the analyses performed by Lehman Brothers, but describes in summary form the
principal elements of the analyses performed in connection with the delivery of
its opinion to the EXCEL Board. The preparation of a fairness opinion involves
various determinations as to the most appropriate and relevant methods of
financial and comparative analysis and the application of those methods to the
particular circumstances and, therefore, such an opinion is not readily
susceptible to summary description. Furthermore, in arriving at its opinion,
Lehman Brothers did not attribute any particular weight to any analysis or
factor considered by it, but rather made qualitative judgments as to the
significance and relevance of each analysis and factor. Accordingly, Lehman
Brothers believes that its analyses must be considered as a whole and that
considering any portion of such analyses and factors, without considering all
analyses and factors, could create a misleading or incomplete view of the
process underlying its opinion. In its analyses, Lehman Brothers made numerous
assumptions with respect to industry performance, general business and economic
conditions and other matters, many of which are beyond the control of EXCEL and
Telco. Any estimates contained in these analyses are not necessarily indicative
of actual values or predictive of future results or values, which may be
significantly more or less favorable than as set forth therein. In addition,
analyses relating to the value of businesses do not purport to be appraisals or
to reflect the prices at which businesses actually may be sold.
Lehman Brothers is an internationally recognized investment banking firm
and, as part of its investment banking activities, is regularly engaged in the
evaluation of businesses and their securities in connection with mergers and
acquisitions, negotiated underwritings, competitive bids, secondary
distributions of listed and
36
<PAGE> 42
unlisted securities, private placements and valuations for corporate and other
purposes. The EXCEL Board selected Lehman Brothers because of its expertise,
reputation and familiarity with EXCEL in particular and the telecommunications
industry in general and because its investment banking professionals have
substantial experience in transactions similar to the Mergers.
As compensation for its services in connection with the Mergers, EXCEL has
agreed to pay Lehman Brothers a fee for acting as financial advisor in
connection with the Mergers, including rendering its opinion. This fee includes
(i) a $100,000 retainer which was payable upon signing of the engagement letter
between EXCEL and Lehman Brothers, dated June 1, 1997, (ii) an additional
$100,000 retainer payable upon each three month anniversary of the signing of
the engagement letter and (iii) an additional fee based on the aggregate value
of the consideration paid by EXCEL to holders of Telco Common Stock, and payable
upon the closing of the Mergers, equal to 1.5% of the first $50 million of such
consideration, 0.75% of the next $200 million and 0.50% of any amount over $250
million, against which the retainer fees paid to Lehman Brothers will be
credited. In addition, EXCEL has agreed to reimburse Lehman Brothers for
reasonable out-of-pocket expenses incurred in connection with the Mergers and to
indemnify Lehman Brothers and certain related persons for certain liabilities
that may arise out of its engagement by EXCEL and the rendering of its opinion.
An affiliate of Lehman Brothers has committed to underwrite the New Credit
Facility for Holdings in connection with the Mergers. See "The
Transaction -- Certain Related Financing." The New Credit Facility will be used
in part to finance the cash portion of the consideration to be paid to holders
of Telco Common Stock in the Telco Merger. EXCEL has agreed to pay such
affiliate of Lehman Brothers a customary fee for arranging and underwriting the
New Credit Facility.
In the ordinary course of its business, Lehman Brothers may actively trade
in EXCEL Common Stock and Telco Common Stock for its own account and for the
accounts of its customers and, accordingly, may at any time hold a long or short
position in such securities.
Opinion of Telco's Financial Advisor.
DLJ served as financial advisor to Telco and, pursuant to the authorization
of Telco, to the Telco Special Committee in connection with the Mergers. In this
capacity, on June 3, 1997, DLJ rendered an oral opinion to the Telco Special
Committee and the Telco Board, which was confirmed in a written opinion, dated
June 5, 1997, to the effect that, as of such date and based upon and subject to
the assumptions, limitations and qualifications set forth in such opinion, the
Exchange Ratio and the Cash Consideration to be received by the shareholders of
Telco was fair to such shareholders from a financial point of view. DLJ
subsequently updated such opinion by delivery of its written opinion dated as of
the date of this Joint Proxy Statement/Prospectus.
THE FULL TEXT OF DLJ'S WRITTEN OPINION, DATED AS OF THE DATE OF THIS JOINT
PROXY STATEMENT/PROSPECTUS, IS ATTACHED AS ANNEX III TO THIS JOINT PROXY
STATEMENT/PROSPECTUS. TELCO SHAREHOLDERS SHOULD READ THE DLJ OPINION IN ITS
ENTIRETY FOR ASSUMPTIONS MADE, PROCEDURES FOLLOWED AND OTHER MATTERS CONSIDERED
BY DLJ.
The opinion of DLJ was prepared for the Telco Special Committee and the
Telco Board and is directed only to the fairness of the Exchange Ratio and the
Cash Consideration to be received by holders of Telco Common Stock in the Telco
Merger. The opinion of DLJ does not constitute a recommendation to any
shareholder of Telco as to how such shareholder should vote on the Telco Merger.
The opinion of DLJ does not constitute an opinion as to the price at which
Holdings Common Stock will actually trade at any time. The type and amount of
consideration was determined in arm's-length negotiations between,
representatives of Telco management, the Telco Special Committee and
representatives of EXCEL. During such negotiations, Telco management and the
Telco Special Committee were advised by DLJ. No restrictions or limitations were
imposed upon DLJ with respect to the investigations made or the procedures
followed by DLJ in rendering its opinion.
In arriving at its opinion, DLJ reviewed the Merger Agreement and the
appendices thereto, as well as certain financial and other information that was
publicly available or furnished to DLJ by Telco and EXCEL, including information
furnished to DLJ during discussions with their respective managements. Included
in the
37
<PAGE> 43
information provided during discussions with the management of Telco were two
sets of projections: the Telco Base Case and the Telco Bank Case. A third set of
Telco projections was developed by the Telco management in conjunction with
DLJ's performance of its analyses described below through December 31, 2002 (the
"Telco Adjusted Base Case"). The Telco Adjusted Base Case utilized the same
assumptions as the Telco Bank Case for 1997 and 1998. For 1999 and thereafter,
the Telco Adjusted Base Case utilized assumptions that were more conservative
than the Telco Base Case, but generally not as conservative as the Telco Bank
Case with respect to, among other things, revenue growth rates, gross profit
margins and operating profit margins. Included in the information provided to
DLJ during discussions with the EXCEL management were the EXCEL Base Case and
the EXCEL Bank Case projections. A third set of EXCEL projections was prepared
by DLJ in consultation with Telco management in conjunction with the preparation
of DLJ's analyses described below (the "EXCEL Adjusted Base Case") for 1997
through December 31, 2002. The EXCEL Adjusted Base Case contained generally more
conservative assumptions than the EXCEL Bank Case with respect to revenue growth
rates and operating profit margins. In addition, DLJ compared certain financial
and securities data of Telco and EXCEL with that of various other companies
whose securities are traded in public markets, reviewed the historical stock
prices and trading volumes of the Telco Common Stock and the EXCEL Common Stock,
reviewed prices and premiums paid in certain other business combinations and
conducted such other financial studies, analyses and investigations as DLJ
deemed appropriate for purposes of its opinion. DLJ was not requested to, nor
did it, solicit the interest of any other party in acquiring Telco.
In rendering its opinion, DLJ relied upon and assumed the accuracy and
completeness of all of the financial and other information that was available to
it from public sources, that was provided to it by Telco or EXCEL or their
respective representatives or that was otherwise reviewed by it. DLJ also relied
upon the estimates of Telco management of the operating cost savings achievable
as a result of the Mergers, which would be phased in during 1998 and would be
approximately $130 million on an annualized basis in 1998 and would grow each
year thereafter (the "Cost Savings"), and upon their discussions with the
management of Telco and EXCEL. DLJ assumed that the financial projections
provided to them by the management of Telco and EXCEL were reasonably prepared
on a basis reflecting the best currently available estimates and judgments of
the respective managements of Telco and EXCEL as to the future operating and
financial performance of Telco and EXCEL, respectively. DLJ did not assume any
responsibility for making any independent verification of any of the information
reviewed by it. DLJ relied as to certain legal matters on the advice of counsel
to Telco, including, without limitation, as to the tax-free nature of the
formation of Holdings under the Code. The opinion of DLJ is necessarily based on
economic, market, financial and other conditions as they existed on, and on the
information made available to it as of, the date of the opinion.
The following is a summary of certain financial analyses performed by DLJ
and presented to the Telco Special Committee and the Telco Board at their June
3, 1997 meetings. All analyses discussed below, unless otherwise indicated, (i)
exclude the Cost Savings, and (ii) assume that the aggregate value of the Telco
Merger Consideration equals $30.00 per share ($15.00 in cash and the Stock
Consideration, which is assumed to represent $15.00 of value).
Summary of Valuation Multiples. For reference purposes, DLJ compared
Telco's equity and enterprise values based on the $23.625 closing price of the
Telco Common Stock on the NMS on May 30, 1997 ("Telco Equity Value," "Telco
Enterprise Value" and "Telco Trading Price Per Share," respectively) to Telco's
equity and enterprise values based upon the Telco Merger Consideration ("Telco
Offer Equity Value" and "Telco Offer Enterprise Value," respectively). The Telco
Equity Value and the Telco Enterprise Value were $781.4 million and $893.8
million, respectively, as compared to the Telco Offer Equity Value and the Telco
Offer Enterprise Value which were $1,104.5 million and $1,182.5 million,
respectively.
The Telco Merger Consideration represented multiples of LTM EPS, 1997 EPS,
1998 EPS and book value per share of 35.7x, 28.3x, 19.6x and 7.3x, respectively
(collectively, the "Telco Merger Consideration Equity Multiples"), as compared
to the Telco Trading Price Per Share which represented multiples of LTM EPS,
1997 EPS, 1998 EPS and book value per share of 28.1x, 22.3x, 15.4x and 5.2x,
respectively. The Telco Offer Enterprise Value represented multiples of LTM
revenues, last quarter annualized ("LQA") revenues, 1997 revenues and 1998
revenues of 2.6x, 2.4x, 2.0x and 1.6x, respectively (collectively, the "Telco
Offer Revenue Multiples"). In addition, the Telco Offer Enterprise Value
represented multiples of LTM EBITDA,
38
<PAGE> 44
1997 EBITDA and 1998 EBITDA of 21.5x, 14.6x and 10.3x, respectively
(collectively, the "Telco Offer EBITDA Multiples"). By comparison, the Telco
Enterprise Value represented multiples of LTM revenues, LQA revenues, 1997
revenues and 1998 revenues of 1.9x, 1.8x, 1.5x and 1.2x, respectively, and
multiples of LTM EBITDA, 1997 EBITDA and 1998 EBITDA of 16.2x, 11.1x and 7.8x,
respectively.
Comparable Transactions Analysis. DLJ reviewed publicly available
information for completed domestic merger and acquisition transactions of
comparable public and private telecommunications providers with transaction
values in excess of $100 million which were announced since June 1992. Within
this group of transactions, DLJ focused on five transactions announced since
August 1994: Frontier Corporation's acquisitions of Schneider Communications,
Inc., ALC Communications Corporation and American Sharecom, Inc., LCI
International, Inc.'s acquisition of Corporate Telemanagement Group, Inc., and
LDDS Communications, Inc.'s acquisition of Williams Telecommunications Group,
Inc. (collectively, the "Primary Comparable Transactions"). For each of the
Primary Comparable Transactions, DLJ calculated for each acquired company, to
the extent such information was available, its (i) equity value as a multiple of
its LTM net income and (ii) transaction value as a multiple of its LTM revenues,
LQA revenues, estimated revenues for the first full fiscal year following the
transaction announcement date ("FY+1 revenues") and LTM EBITDA. DLJ's analysis
of the Primary Comparable Transactions indicated that transaction values as a
multiple of (i) LTM revenues ranged from 1.6x to 3.2x, with an average of 2.5x,
(ii) LQA revenues ranged from 1.3x to 2.8x, with an average of 2.0x, (iii) FY+1
revenues ranged from 1.2x to 2.0x, with an average of 1.6x, and (iv) LTM EBITDA
ranged from 8.2x to 14.6x, with an average of 11.1x. In addition, the analysis
of the Primary Comparable Transactions indicated that equity values as a
multiple of LTM net income ranged from 11.1x to 42.1x, with an average of 28.5x
(collectively, the "Primary Comparable Transaction Multiples"). In the case of
the Primary Comparable Transactions, due to the limited number of data points,
the average multiples include the high and low values.
DLJ compared the Primary Comparable Transaction Multiples to the Telco
Offer Revenue Multiples, the Telco Offer EBITDA Multiples and the Telco Merger
Consideration Equity Multiples. Using the average multiples of the Primary
Comparable Transactions, DLJ calculated an implied price per share for the Telco
Common Stock and compared these results to the Telco Merger Consideration. Using
average multiples of LTM revenues, LQA revenues, FY+1 revenues, LTM EBITDA and
LTM EPS, the implied price per share was $29.21, $24.58, $23.75, $14.49 and
$21.51, respectively, which represented discounts to the Telco Merger
Consideration of 2.6%, 18.1%, 20.8%, 51.7% and 28.3%, respectively.
Comparable Company Analysis. To provide contextual data and comparative
market information, DLJ analyzed the operating performance and public market
valuation of Telco relative to five publicly traded companies: Frontier
Corporation, LCI International, Inc., Tel-Save Holdings, Inc., ACC Corporation
and EXCEL (the "Comparable Companies"). In performing its analysis, DLJ examined
(i) the Comparable Companies overall and (ii) focused on those companies which
DLJ believed to be most comparable to Telco given Telco's network, size and
market position (the "Primary Comparables"). The Primary Comparables consisted
of Frontier Corporation and LCI International, Inc. Historical financial
information used in connection with DLJ's analysis is as of the most recent
publicly available financial statements for each company prior to June 3, 1997.
DLJ analyzed Telco's public valuation by comparing certain operating data
and market trading statistics of Telco with those of the Comparable Companies.
DLJ examined certain publicly available financial data of the Comparable
Companies, including (i) enterprise value as multiples of LTM revenues, LQA
revenues, 1997 revenues, 1998 revenues, LTM EBITDA, 1997 EBITDA and 1998 EBITDA
and (ii) price to earnings ("P/E") ratios for the calendar years ending 1997 and
1998. Projected revenues, EBITDA and EPS for the Comparable Companies and the
Primary Comparables were based on available research reports, except for EXCEL
which were based on the EXCEL Adjusted Base Case.
DLJ's analysis of the Comparable Companies as a whole indicated that
enterprise values as a multiple of (i) LTM revenues range from 1.4x to 3.8x,
with an average of 1.6x, (ii) LQA revenues ranged from 1.4x to 3.4x, with an
average of 1.6x, (iii) 1997 revenues ranged from 1.2x to 2.9x, with an average
of 1.5x, and (iv) 1998 revenues ranged from 0.9x to 1.4x, with an average of
1.2x (collectively, the "Comparable
39
<PAGE> 45
Companies Revenue Multiples"). DLJ's analysis of the Comparable Companies also
indicated that enterprise values as a multiple of (i) LTM EBITDA ranged from
6.3x to 32.0x, with an average of 10.7x, (ii) 1997 EBITDA ranged from 6.2x to
17.4x, with an average of 8.1x, and (iii) 1998 EBITDA ranged from 5.7x to 7.0x,
with an average of 6.1x (collectively, the "Comparable Companies EBITDA
Multiples"). In addition, the analysis of the Comparable Companies indicated
that per share common stock prices as a multiple of (i) LTM EPS ranged from
13.8x to 67.8x, with an average of 26.9x, (ii) 1997 EPS ranged from 13.7x to
29.8x, with an average of 20.7x, (iii) 1998 EPS ranged from 10.3x to 17.8x, with
an average of 14.0x, and (iv) book value per share ranged from 3.0x to 7.2x,
with an average of 3.8x (collectively, the "Comparable Companies Equity
Multiples"). In the case of the Comparable Companies as a whole, the average
multiples exclude the high and low values.
DLJ's analysis of the Primary Comparables indicated that enterprise values
as a multiple of (i) LTM revenues averaged 1.7x, (ii) LQA revenues averaged
1.7x, (iii) 1997 revenues averaged 1.5x and (iv) 1998 revenues averaged 1.3x
(collectively, the "Primary Comparables Revenue Multiples"). DLJ's analysis of
the Primary Comparables also indicated that enterprise values as a multiple of
(i) LTM EBITDA averaged 8.0x, (ii) 1997 EBITDA averaged 7.1x and (iii) 1998
EBITDA averaged 6.0x (collectively, the "Primary Comparables EBITDA Multiples").
In addition, the analysis of the Primary Comparables indicated that per share
common stock prices as a multiple of (i) LTM EPS averaged 20.1x, (ii) 1997 EPS
averaged 20.1x, (iii) 1998 EPS averaged 15.6x and (iv) book value per share
averaged 3.6x (collectively, the "Primary Comparables Equity Multiples"). In the
case of the Primary Comparables, due to the limited number of data points, the
average multiples include the high and low values.
DLJ compared the Comparable Companies Revenue Multiples, Comparable
Companies EBITDA Multiples and the Comparable Companies Equity Multiples to the
Telco Offer Revenue Multiples, Telco Offer EBITDA Multiples and the Telco Merger
Consideration Equity Multiples, respectively. DLJ also compared the Primary
Comparables Revenue Multiples, Primary Comparables EBITDA Multiples and the
Primary Comparables Equity Multiples to the Telco Offer Revenue Multiples, Telco
Offer EBITDA Multiples and the Telco Merger Consideration Equity Multiples,
respectively. Using the average multiples of the Primary Comparables, DLJ
calculated an implied price per share for the Telco Common Stock and compared
these results to the Telco Merger Consideration. Using the average multiples of
LTM revenues, LQA revenues, 1997 revenues, 1998 revenues, LTM EBITDA, 1997
EBITDA, 1998 EBITDA, LTM EPS, 1997 EPS, 1998 EPS and book value per share, the
implied price per share of Telco Common Stock was $19.18, $20.57, $22.13,
$24.58, $9.85, $13.46, $16.51, $15.17, $19.14, $21.44 and $14.74, respectively,
which represent discounts to the Telco Merger Consideration of 36.1%, 31.4%,
26.2%, 18.1%, 67.2%, 55.1%, 45.0%, 49.4%, 36.2%, 28.5% and 50.9%, respectively.
Premium Analysis. DLJ reviewed publicly available information relating to
selected domestic merger and acquisition transactions ranging in size from $500
million to $1.5 billion which were completed since 1995 (the "Selected
Transactions"). DLJ compared the premium represented by the value of the Telco
Merger Consideration to the premiums offered in the Selected Transactions. DLJ's
analysis indicated that for the Selected Transactions, the median premiums to
the market price one day, one week and one month prior to the announcement date
of each transaction were 27.4%, 28.5% and 44.5%, respectively. These premiums
compare to the premiums that the Telco Merger Consideration represents to the
market price of the Telco Common Stock one day, one week and one month prior to
May 30, 1997 of 27.0%, 26.3% and 42.9%, respectively.
Contribution Analysis. For purposes of this analysis, DLJ assumed that in
the Telco Merger each share of Telco Common Stock would be converted into the
right to receive $30.00 in Holdings Common Stock rather than assuming $15.00 in
cash and $15.00 of Holdings Common Stock. Based on this assumption and after
giving effect to the Mergers, DLJ's analysis indicated that on a fully diluted
basis, holders of Telco Common Stock would own approximately 32.9% of the
outstanding Holdings Common Stock. DLJ compared this ownership percentage to the
financial contribution that Telco's financial and operating results represented
as a percentage of the pro forma combined results of Telco and EXCEL based upon
the Telco Adjusted Base Case and the EXCEL Adjusted Base Case ("Holdings Pro
Forma Results"). DLJ reviewed Telco's contribution revenues, EBITDA, earnings
before interest and taxes ("EBIT"), pre-tax income, net income
40
<PAGE> 46
and book value for estimated fiscal year 1997 and for projected fiscal years
1998, 1999 and 2000. DLJ's analysis indicated that for fiscal years 1997, 1998,
1999 and 2000, Telco was projected to contribute to (i) revenues, 28.8%, 35.5%
38.2% and 39.6%, respectively, of Holdings Pro Forma Results, (ii) EBITDA,
24.3%, 25.3%, 27.6% and 30.3%, respectively, of Holdings Pro Forma Results,
(iii) EBIT, 21.7%, 23.2%, 25.8% and 28.6%, respectively, of Holdings Pro Forma
Results, (iv) pre-tax income, 19.7%, 21.2%, 24.2% and 27.0%, respectively, of
Holdings Pro Forma Results, (v) net income, 18.9%, 20.4%, 23.3% and 26.0%,
respectively, of Holdings Pro Forma Results and (vi) book value, 32.7%, 28.8%,
27.3% and 27.0%, respectively, of Holdings Pro Forma Results.
Discounted Cash Flow Analysis. DLJ performed a discounted cash flow ("DCF")
analysis for the period beginning June 1, 1997 and ending December 31, 2002 on
the stand-alone unlevered free cash flows of Telco, based upon the Telco
Adjusted Base Case. Unlevered free cash flows were calculated as EBITDA less (i)
projected capital expenditures, (ii) projected changes in net working capital
and (iii) projected cash taxes. The unlevered free cash flows and terminal value
were then discounted to June 1, 1997 using a range of discount rates from 11.5%
to 13.5%, representing an estimated range of the weighted average cost of
capital of Telco. Based on this analysis, DLJ calculated a range of implied
prices per share of Telco Common Stock of $29.08 to $39.04, with a mid-point of
$33.85.
DLJ noted that the DCF analysis was included because it is a widely used
methodology to estimate value, but also noted that this methodology necessarily
relies upon numerous assumptions, including revenue growth rates, gross profit,
EBITDA and operating profit margins, terminal values and discount rates, among
others. Changes in any one of the assumptions could have a significant effect on
the results of the analysis; therefore its usefulness in analyzing the
Transaction is limited.
EXCEL Valuation Analysis. DLJ also performed a DCF analysis for EXCEL for
the period beginning June 1, 1997 and ending December 31, 2002. The analysis was
based on the stand-alone unlevered free cash flows of EXCEL utilizing the EXCEL
Adjusted Base Case. Unlevered free cash flows were calculated as EBITDA less (i)
projected capital expenditures, (ii) projected changes in net working capital
and (iii) projected cash taxes. DLJ calculated a terminal value by applying a
range of estimated EBITDA multiples of 8.0x to 10.0x to projected EBITDA of
EXCEL in fiscal year 2002. The unlevered free cash flows and terminal value were
then discounted to June 1, 1997 using a range of discount rates from 11.5% to
13.5%, representing an estimated range of the weighted average cost of capital
of EXCEL. Based on this analysis, DLJ calculated a range of implied prices per
share of EXCEL Common Stock ranging from $22.83 to $28.96, with a mid-point of
$25.76.
DLJ noted that the DCF analysis was included because it is a widely used
methodology to estimate value, but also noted that this methodology necessarily
relies upon numerous assumptions, including revenue growth rates, gross profit,
EBITDA and operating profit margins, terminal values and discount rates, among
others. Changes in any one of the assumptions could have a significant effect on
the results of the analysis; therefore its usefulness in analyzing the
Transaction is limited.
Combined Company Valuation Analysis. As part of its analysis, DLJ performed
a valuation analysis of Holdings based upon the public market valuation
multiples of comparable publicly traded long-distance providers (which consisted
of the Comparable Companies adjusted to exclude EXCEL (the "Holdings Comparable
Companies")), applied to Holdings Pro Forma Results and adjusted to take into
consideration the Cost Savings. DLJ's analysis of the Holdings Comparable
Companies indicated that enterprise values as a multiple of (i) LTM EBITDA
ranged from 6.3x to 32.0x, with an average of 13.3x, (ii) 1997 EBITDA ranged
from 6.2x to 17.4x, with an average of 9.2x, and (iii) 1998 EBITDA ranged from
5.7x to 7.8x, with an average of 6.5x. The analysis of the Holdings Comparable
Companies indicated that per share common stock prices as a multiple of (i) 1997
EPS ranged from 16.9x to 29.8x, with an average of 22.5x, and (ii) 1998 EPS
ranged from 12.4x to 17.8x, with an average of 15.1x. Using the average
multiples of the Holdings Comparable Companies, DLJ calculated an implied price
per share for the Holdings Common Stock. Using multiples of LTM EBITDA, 1997
EBITDA, 1998 EBITDA, 1997 EPS and 1998 EPS, the implied price per share was
$36.27, $27.50, $23.98, $35.16 and $31.12, respectively. In the case of the
Holdings Comparable Companies, the average multiples exclude the high and low
values.
41
<PAGE> 47
In addition, DLJ examined the accretion or dilution that would result to
Holdings Pro Forma EPS for fiscal year 1998 at cost savings ranging from $100
million to $180 million. The analysis showed a range of accretion from 3.0% to
22.1%, with every $10 million of incremental cost savings increasing the
accretion by approximately 2.4 percentage points. In addition, the analysis
indicated that the minimum cost savings required for the Mergers to be accretive
to Holdings Pro Forma EPS would be approximately $94.5 million in 1997, $86.4
million in 1998, $62.9 million in 1999 and $39.3 million in 2000.
DLJ also performed a DCF analysis of Holdings for the period beginning June
1, 1997 and ending December 31, 2002. The analysis was based on Holdings Pro
Forma Results taking into account the Cost Savings on a pro forma basis in
fiscal year 1997 and 1998 and with full effect thereafter. Unlevered free cash
flows were calculated as EBITDA less (i) projected capital expenditures, (ii)
projected changes in net working capital and (iii) projected cash taxes. DLJ
calculated a terminal value by applying a range of estimated EBITDA multiples of
8.0x to 10.0x to the projected EBITDA of Holdings in fiscal year 2002. The
unlevered free cash flows and terminal value were then discounted to June 1,
1997 using a range of discount rates from 11.5% to 13.5%, representing an
estimated range of the weighted average cost of capital of Holdings. Based on
this analysis, DLJ calculated a range of implied prices per share of Holdings
common stock ranging from $27.00 to $35.80, with a mid-point of $31.21.
DLJ noted that the DCF analysis was included because it is a widely used
methodology to estimate value, but also noted that this methodology necessarily
relies upon numerous assumptions, including revenue growth rates, gross profit,
EBITDA and operating profit margins, terminal values and discount rates, among
others. Changes in any one of the assumptions could have a significant effect on
the results of the analysis; therefore its usefulness in analyzing the
Transaction is limited.
No company or transaction used in the analyses described above is directly
comparable to Telco, EXCEL, Holdings or the Transaction. Accordingly, an
analysis of the results of the foregoing is not mathematical nor necessarily
precise; rather, it involves complex considerations and judgments concerning
differences in financial and operating characteristics of companies and other
factors that could affect public trading or acquisition values.
The summary set forth above does not purport to be a complete description
of the analyses performed by DLJ, but describes in summary form the principal
elements of the analyses contained in the materials presented by DLJ to the
Telco Special Committee and the Telco Board on June 3, 1997. The preparation of
a fairness opinion involves various determinations as to the most appropriate
and relevant methods of financial analysis and the application of those methods
to the particular circumstances and, therefore, such an opinion is not readily
summarized. Each of the analyses conducted by DLJ was carried out in order to
provide a different perspective on the transaction and add to the total mix of
information available. DLJ did not form a conclusion as to whether any
individual analysis, considered in isolation, supported or failed to support an
opinion as to fairness from a financial point of view. Rather, in reaching its
conclusion, DLJ considered the results of each analysis in light of each other
and ultimately reached its opinion based on the results of all analyses taken as
a whole. Accordingly, notwithstanding the separate factors summarized above, DLJ
believes that its analyses must be considered as a whole and that selecting
portions of its analyses and the factors considered by it, without considering
all analyses and factors, could create an incomplete or misleading view of the
evaluation process underlying its opinion. In performing its analyses, DLJ made
numerous assumptions with respect to industry performance, business and economic
conditions and other matters. The analyses performed by DLJ are not necessarily
indicative of actual values or future results, which may be significantly more
or less favorable than suggested by such analyses.
Pursuant to the terms of an engagement letter, dated as of May 1, 1997,
Telco agreed to pay DLJ (i) a retainer fee of $100,000, payable upon execution
of the letter (the "DLJ Retainer Fee"), (ii) a fee of $1,000,000 at the time DLJ
notified the Telco Board that it was prepared to deliver its fairness opinion
with respect to the Telco Merger and $100,000 for each update of its fairness
opinion (the "DLJ Opinion Fee") and (iii) a transaction fee to be paid upon
consummation of the Telco Merger equal to 0.5% of the aggregate value of (x)
Telco Common Stock outstanding (treating any shares issuable upon exercise of
options, warrants or other rights of conversion as outstanding) plus (y) the
amount of any debt assumed, acquired,
42
<PAGE> 48
remaining outstanding, retired or defeased or preferred stock redeemed or
remaining outstanding in connection with the Telco Merger, less the DLJ Retainer
Fee and the DLJ Opinion Fee. Telco has agreed to reimburse DLJ for all
out-of-pocket expenses (including the reasonable fees and expenses of its
counsel) and to indemnify DLJ and certain related persons for certain potential
liabilities and expenses relating to its services provided to Telco, including
liabilities under the federal securities laws.
The Telco Board selected DLJ because of its expertise, reputation and
familiarity with the telecommunications industry and because its investment
banking professionals have substantial experience in transactions similar to the
Mergers. DLJ has not performed any investment banking services for Telco prior
to its engagement in connection with the Transaction. DLJ was sole manager of
EXCEL's $150 million initial public offering consummated in May 1996, for which
it received a fee of approximately $9.6 million.
DLJ, as part of its investment banking services, is regularly engaged in
the valuation of businesses and securities in connection with mergers,
acquisitions, underwritings, sales and distributions of listed and unlisted
securities, private placements and valuations for corporate and other purposes.
In the ordinary course of its business, DLJ may trade in the securities of Telco
and EXCEL for its own account or for the account of its customers and,
accordingly, may at any time hold long or short positions in such securities.
INTERESTS OF CERTAIN PERSONS IN THE TRANSACTION
In considering the respective recommendations of the EXCEL Board and the
Telco Board with respect to the Transaction, the holders of EXCEL Common Stock
and the holders of Telco Common Stock should be aware that certain members of
the management of Telco and EXCEL have interests in the Transaction that are
different from, or in addition to, the interests of the holders of EXCEL Common
Stock and the holders of Telco Common Stock generally.
Employment Agreements
Pursuant to the terms of the Merger Agreement, it is expected that, at or
prior to the Effective Time, Holdings will enter into an employment agreement
with Henry G. Luken, III and Telco will enter into employment agreements with
each of Messrs. Burns, Canton, Merrick and Rachlin. The following is a summary
of the principal terms of the Employment Agreements.
Each of the Employment Agreements will be for an initial term of four
years, subject, in the case of Messrs. Burns and Luken, to the right of either
party to terminate such agreement upon 90 days' advance written notice at any
time after one year.
The employment agreements of Messrs. Burns and Luken will provide that they
will be President and Chief Executive Officer of Telco and Executive Vice
President of Holdings, respectively. Each of Messrs. Burns and Luken will
receive an annual base salary of $400,000, subject to increase upon review
annually by the Telco Board and the Holdings Board, respectively. In addition,
each of Messrs. Burns and Luken will be paid deferred compensation of $1,000,000
on the fourth anniversary of the Effective Date if he is alive on such date,
regardless of whether he is employed by Telco or Holdings, as the case may be,
on such date.
The employment agreements of Messrs. Canton, Merrick and Rachlin will
provide that they will be President-Consumer and Commercial of Telco, Chief
Financial Officer of Telco and General Counsel and Chief Operating Officer of
Telco, respectively. Messrs. Canton, Merrick and Rachlin will receive annual
salaries of $325,000, $300,000 and $375,000, respectively, in each case subject
to increase upon review annually by the Telco Board. In addition, the employment
agreements of Messrs. Canton, Merrick and Rachlin will provide that Telco will
recommend to the compensation committee of the Holdings Board that Messrs.
Canton, Merrick and Rachlin be granted options to purchase 500,000 shares,
200,000 shares and 200,000 shares, respectively, of Holdings Common Stock
pursuant to the Stock Option Plan, at an exercise price equal to the fair market
value of Holdings Common Stock on the date of grant, which options will vest 50%
on the third anniversary of the date of grant and 50% on the fourth anniversary
of the date of grant (subject to immediate vesting upon the termination of the
employee without Cause (as defined in the
43
<PAGE> 49
Employment Agreements) or upon certain events constituting a "change of control"
(defined consistently with the change of control provisions contained in EXCEL's
1995 Stock Option Plan). Such Employment Agreements further provide that in the
event that such options are not granted to Messrs. Canton, Merrick or Rachlin
within 30 days following the date of the agreement, such individual will be
entitled to terminate the Employment Agreement for "Good Reason." Upon such
termination, such individual will be entitled to receive certain compensation
and benefits including, without limitation, (i) severance compensation equal to
his base salary for one year, (ii) a pro rata portion of the bonus applicable to
the year in which such termination occurs and (iii) continued receipt of certain
life insurance benefits and participation in certain retirement and other
benefit plans for the remainder of the term of the Employment Agreement.
Each of the Employment Agreements will provide that, at the discretion of
the Holdings Board and the Telco Board, as the case may be, each employee may be
paid bonus compensation or, alternatively, may be allowed to participate in a
management incentive bonus plan should one be adopted by such company. Each of
the Employment Agreements also will provide for certain insurance benefits and
will provide that the employee be entitled to participate in all retirement and
other benefit plans generally available to employees of Holdings or Telco, as
the case may be, and any equity or other employee benefit plan of Holdings or
Telco, as the case may be, that is generally available to senior executive
officers of such company. In addition, each of the Employment Agreements will
provide for certain payments and benefits in the event the employee is
terminated without Cause or due to death or permanent disability, or in the
event the employee terminates the agreement for Good Reason (as defined in the
Employment Agreements).
Non-Competition Agreements
Pursuant to the Merger Agreement, it is expected that, at or prior to the
Effective Time, Holdings will enter into a non-competition agreement
(collectively, the "Non-Competition Agreements") with each of Messrs. Burns,
Canton, Luken, Merrick and Rachlin (each, an "Executive"). The following is a
summary of the principal terms of the Non-Competition Agreements.
Each of the Non-Competition Agreements will provide that the Executive will
keep confidential certain non-public information regarding Holdings. Each of the
Non-Competition Agreements will further provide that, during the Restricted
Period (as defined in the Non-Competition Agreements), the Executive will not
(subject to certain exceptions) own, manage, control, or participate in the
ownership, management or control of, or be employed by or otherwise associated
with, or receive compensation from or otherwise engage in the business of (i)
marketing or providing telecommunications services within the United States of a
type that were, or were planned to be, provided by Holdings or its affiliates at
any time during the Restricted Period or (ii) marketing products or services by
means of "network" or "multi-level" marketing. Each Executive will further agree
that during the Restricted Period he will not (i) solicit or engage the business
of any clients of Holdings or its affiliates or (ii) solicit any employee of
Holdings or its affiliates to terminate any relationship that person may have
with Holdings or its affiliates, or engage, employ or compensate any employee of
Holdings or its affiliates.
With respect to each of Messrs. Burns and Luken, the "Restricted Period"
will be the period commencing on the date such agreement is executed and ending
on the later of (i) the fourth anniversary of such date and (ii) the second
anniversary of the date such Executive ceases to be an employee or director of
Holdings, Telco or any of their affiliates. With respect to Messrs. Merrick and
Rachlin, the "Restricted Period" will be the period commencing on the date such
agreement is executed and ending on the first anniversary of the date on which
the Executive ceases to be an employee or director of Holdings, Telco or any of
their affiliates. With respect to Mr. Canton, the "Restricted Period" will be
the period commencing on the date such agreement is executed and ending on (i)
the first anniversary of the date on which Mr. Canton ceases to be an employee
or director of Holdings, Telco or any of their affiliates if Mr. Canton's
employment is terminated without Cause or by Mr. Canton for Good Reason (as such
terms are defined in Mr. Canton's Employment Agreement) and (ii) in all other
cases, the second anniversary of the date Mr. Canton ceases to be an employee or
director of Holdings, Telco or any of their affiliates.
44
<PAGE> 50
Telco Shareholders Agreement
Pursuant to the Telco Shareholders Agreement, dated June 5, 1997 (the
"Telco Shareholders Agreement"), among EXCEL and Messrs. Burns, Canton, Cirrito,
Luken, Merrick and Rachlin and Gold & Appel Transfer, S.A. ("Gold & Appel" and,
collectively, the "Telco Shareholders"), each of the Telco Shareholders (other
than Gold & Appel) has agreed, among other things, to vote (or cause to be
voted) the shares of Telco Common Stock held or beneficially owned by such Telco
Shareholder (i) in favor of the approval of the Merger Agreement and any actions
required in furtherance thereof and (ii) against (A) any other business
combination involving Telco, (B) any sale, lease or other transfer of the assets
of Telco outside the ordinary course of business or of any assets that in the
aggregate are material to Telco and its subsidiaries taken as a whole and (C)
any action that is intended to, or that could reasonably be expected to, impede,
delay or materially adversely affect the transactions contemplated by the Merger
Agreement. The foregoing agreement is subject to the condition that such
agreement will terminate upon the earlier of the Effective Time and the
termination of the Merger Agreement, including any termination by Telco in
connection with a determination by the Telco Board that its fiduciary
obligations under applicable law require that an alternative proposed
transaction be accepted. As a result of these provisions of the Telco
Shareholders Agreement (but subject to the condition described above), the
requisite approval of the Merger Agreement by the holders of Telco Common Stock
is assured.
Each of the Telco Shareholders has further agreed that, until the earlier
of the termination of the Merger Agreement and the Effective Time, such Telco
Shareholder will not, directly or indirectly, sell or otherwise transfer any of
its shares of Telco Common Stock and that, for a period of one year following
the Effective Time, such Telco Shareholder will not, directly or indirectly,
without the consent of Holdings, sell or otherwise transfer any shares of
Holdings Common Stock or securities convertible into shares of Holdings Common
Stock other than pursuant to the Registration Rights Agreement (as defined
below) and except that Messrs. Canton and Merrick may, after March 19, 1998,
sell shares of Holdings Common Stock received upon the exercise of their Assumed
Options (as defined below).
In addition, pursuant to the Telco Shareholders Agreement, Telco has agreed
to purchase 354,167 vested options from Mr. Canton and 128,387 vested options
from Mr. Merrick and 177,083 and 70,833.5 options, which will vest as a result
of the consummation of the Mergers, from Messrs. Canton and Merrick,
respectively, in each case for cash in an amount per share equal to the excess
of (x) the sum of (i) $15.00 plus (ii) the product of the Telco Exchange Ratio
multiplied by the closing price of a share of EXCEL Common Stock on the NYSE on
the trading day immediately prior to the Effective Time, over (y) the per share
exercise price of such options. Aggregate payments to Messrs. Canton and Merrick
for the purchase of these options is estimated at $18.7 million based on the
closing price of EXCEL Common Stock on the NYSE Composite Tape on September 4,
1997. The Telco Shareholders Agreement further provides that an additional
531,249 and 262,506.5 options of Messrs. Canton and Merrick, respectively, which
will vest as a result of the consummation of the Mergers, will be assumed by
Holdings (the "Assumed Options") and converted into fully-vested options to
purchase shares of Holdings Common Stock, provided, however, that pursuant to
the Telco Shareholders Agreement, Messrs. Canton and Merrick each have agreed
not to exercise any of the Assumed Options prior to March 19, 1998 or more than
50% of the Assumed Options prior to March 19, 1999.
EXCEL Shareholders Agreement
Pursuant to the EXCEL Shareholders Agreement, dated June 5, 1997 (the
"EXCEL Shareholders Agreement"), among Telco, Mr. Troutt and certain of his
affiliates (collectively, the "EXCEL Shareholders"), each of the EXCEL
Shareholders has agreed, among other things, to vote (or cause to be voted) the
shares of EXCEL Common Stock held or beneficially owned by such EXCEL
Shareholder (i) in favor of approval of the Merger Agreement and any actions
required in furtherance thereof and (ii) against any action that is intended to,
or that could reasonably be expected to, impede, delay or materially adversely
affect the transactions contemplated by the Merger Agreement. The foregoing
agreement is subject to the condition that such agreement will terminate upon
the earlier of the Effective Time and the termination of the Merger Agreement.
As a result of these provisions of the EXCEL Shareholders Agreement (but subject
to the
45
<PAGE> 51
condition described above), the requisite approval of the Merger Agreement by
the holders of EXCEL Common Stock is assured.
Each of the EXCEL Shareholders has further agreed that, until the earlier
of the termination of the Merger Agreement and the Effective Time, such EXCEL
Shareholder will not, directly or indirectly, sell or otherwise transfer any of
its shares of EXCEL Common Stock.
Registration Rights Agreement
Upon the consummation of the Mergers, Holdings will enter into a
Registration Rights Agreement (the "Registration Rights Agreement") with Messrs.
Burns, Canton, Cirrito, Luken, Merrick and Rachlin and Gold & Appel (the
"Shareholders"), pursuant to which, at any time following the first anniversary
of the Effective Time until three years thereafter, Messrs. Burns and Luken may
request, on two occasions, the registration of shares of Holdings Common Stock
having a fair market value of at least $75,000,000 (a "Demand Registration");
provided, however, that Messrs. Burns and Luken will not be permitted to
exercise a Demand Registration within three months of the effective date of any
registration statement for equity securities of Holdings (other than on Form S-4
or Form S-8) or within four months if such registration statement was filed
pursuant to a previous Demand Registration, nor will Holdings be required to
effect a Demand Registration if the shares sought to be registered may be freely
traded without a registration statement by reason of an exemption under the
Securities Act (other than Rule 144). The filing or effectiveness of the
registration statement in connection with a Demand Registration may be deferred
by Holdings for up to 120 days if Holdings is advised that such registration
would adversely affect a current underwritten public offering of Holdings Common
Stock or if the Holdings Board determines that any such filing or offering
would, among other things, adversely affect any proposed financing, offer or
sale of securities, acquisition, reorganization or other significant transaction
involving Holdings. In addition, in the event that a "piggy back" registration
is effected (as described below), a Demand Registration may not be effected
until the later of the completion of such "piggy back" registration and 90 days
after the effective date of each registration statement effected pursuant to
such "piggy back" registration.
The Registration Rights Agreement also provides for "piggy-back"
registration rights for each of the Shareholders (1) for a period of six months
commencing six months after the Effective Time if Holdings proposes to register
any shares of Holdings Common Stock for sale other than for its own account or
(2) at any time during the period commencing with the first anniversary of the
Effective Time and ending three years thereafter if Holdings proposes to
register shares of Holdings Common Stock, whether or not for sale for its own
account; provided, however, that Holdings will be relieved of its obligation to
register the shares of Holdings Common Stock held by the Shareholders if it
abandons the initial registration and may delay the "piggy back" registration
for the same period of time that the initial registration is delayed. In the
event that Holdings is advised that the inclusion of securities pursuant to a
"piggy back" registration would adversely affect the success of the offering,
then the number and kind of securities to be sold for the account of those
Shareholders requesting such registration will be reduced on a pari passu basis
with all other shareholders participating in the offering (based upon the number
of shares owned).
ACCOUNTING TREATMENT
The Telco Merger will be accounted for by Holdings under the "purchase"
method of accounting in accordance with generally accepted accounting
principles. Therefore, the aggregate consideration paid by Holdings in
connection with the Telco Merger will be allocated to Telco's assets and
liabilities based upon their fair values, with any excess being treated
primarily as goodwill. The EXCEL Merger will be accounted for as a
reorganization and the assets and liabilities of EXCEL will be reflected by
Holdings at historical costs. The assets and liabilities and results of
operations of EXCEL and Telco will be consolidated into the assets and
liabilities and results of operations of Holdings subsequent to the Effective
Time. See "Unaudited Pro Forma Combined Condensed Financial Statements."
46
<PAGE> 52
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following discussion is a general summary of the material federal
income tax consequences of the Transaction and is based on the Code, the final,
proposed and temporary treasury regulations promulgated thereunder,
administrative rulings and interpretations, and judicial decisions, in each case
as in effect as of the date hereof. All of the foregoing are subject to change
at any time, possibly with retroactive effect. The discussion set forth below
does not address all aspects of federal income taxation that may be relevant to
a stockholder in light of such stockholder's particular circumstances or to
stockholders subject to special rules under the federal income tax laws, such as
non-United States persons, financial institutions, tax-exempt organizations,
insurance companies, dealers in securities or stockholders who acquired their
EXCEL or Telco shares pursuant to the exercise of employee stock options or
otherwise as compensation, nor any consequences arising under the laws of any
state, locality or foreign jurisdiction. This discussion assumes that holders of
EXCEL Common Stock and holders of Telco Common Stock hold their respective
shares of stock as capital assets within the meaning of Section 1221 of the
Code.
None of EXCEL, Telco or Holdings intends to secure a ruling from the
Internal Revenue Service with respect to the tax consequences of the
Transaction. It is a condition to the obligation of EXCEL to consummate the
Transaction that EXCEL shall have received an opinion from Weil, Gotshal &
Manges to the effect that no gain or loss will be recognized by Holdings, EXCEL
or E-Sub as a result of the EXCEL Merger and that no gain or loss will be
recognized by holders of EXCEL Common Stock as a result of the EXCEL Merger. It
is a condition to the obligation of Telco to consummate the Transaction that
Telco shall have received an opinion from Swidler & Berlin to the effect that no
gain or loss will be recognized by Holdings, Telco or T-Sub as a result of the
Telco Merger and no gain or loss will be recognized by holders of Telco Common
Stock as a result of the Telco Merger except (i) gain, if any, will be
recognized to the extent of the Cash Consideration received and (ii) gain or
loss may be recognized with respect to the cash received in lieu of fractional
shares. The opinions of Weil, Gotshal & Manges and Swidler & Berlin referred to
in this section will be based on facts existing at the date hereof and at the
Effective Time. In rendering the opinions of counsel referred to in this
section, Weil, Gotshal & Manges and Swidler & Berlin assume the absence of
changes in existing facts and will rely on representations and covenants made by
Holdings, EXCEL, Telco and others.
Tax Implications to EXCEL Stockholders. As will be set forth in the opinion
of Weil, Gotshal & Manges referred to above, no gain or loss will be recognized
for federal income tax purposes by holders of EXCEL Common Stock who exchange
their EXCEL Common Stock for Holdings Common Stock pursuant to the EXCEL Merger.
The aggregate tax basis of Holdings Common Stock received as a result of
the EXCEL Merger will be the same as the stockholder's aggregate tax basis in
the EXCEL Common Stock surrendered in the exchange. The holding period of the
Holdings Common Stock held by former holders of EXCEL Common Stock as a result
of the exchange will include the period during which such stockholders held the
EXCEL Common Stock exchanged.
Tax Implications to Telco Shareholders. As will be set forth in the opinion
of Swidler & Berlin referred to above, no gain or loss will be recognized for
federal income tax purposes by holders of Telco Common Stock as a result of the
Telco Merger except (i) gain, if any, will be recognized to the extent of the
Cash Consideration received and (ii) gain or loss may be recognized with respect
to cash received in lieu of fractional shares as discussed below.
In the case of clause (i) of the preceding paragraph, gain will be measured
by the excess of the sum of the fair market value of the Holdings Common Stock
received plus the Cash Consideration over the tax basis of the shares of Telco
Common Stock exchanged in the Telco Merger. Any such gain will be capital gain
and, if the shares of Telco Common Stock have been held for more than 18 months
at the Effective Time, will be adjusted net capital gain taxed at a maximum rate
of 20-percent. However, if such shares of Telco Common Stock have been held for
more than one year but not more than 18 months at the Effective Time, such gain
will be "mid-term gain" (as defined in the Taxpayer Relief Act of 1997), taxed
at a maximum rate of 28 percent.
47
<PAGE> 53
Cash received in lieu of fractional share interests will be treated as
received in exchange for a fractional share of Holdings Common Stock. Gain or
loss recognized on such exchange will be measured by the difference between the
amount of cash received and the portion of the tax basis in the shares of the
Telco Common Stock surrendered that is allocable to such fractional share. Such
gain or loss will be capital gain or loss and, if such deemed exchanged
fractional share of Holdings Common Stock is considered to have been held for
more than 18 months at the Effective Time, any gain will be adjusted net capital
gain taxed at a maximum rate of 20 percent. If such deemed exchanged fractional
share of Holdings Common Stock is considered to have been held for more than one
year but not more than 18 months at the Effective Time, any gain will be
"mid-term gain," taxed at a maximum rate of 28 percent.
The aggregate tax basis of Holdings Common Stock received as a result of
the Telco Merger will be the same as the shareholder's aggregate tax basis in
the Telco Common Stock surrendered in the exchange, decreased by the basis
allocable to fractional shares for which cash is received in the Telco Merger
and by the amount of the Cash Consideration, and increased by the amount of gain
recognized on the exchange. The holding period of the Holdings Common Stock held
by former holders of Telco Common Stock as a result of the exchange will include
the period during which such shareholder held the Telco Common Stock exchanged.
Tax Implications to Holdings, EXCEL, Telco, E-Sub and T-Sub. No gain or
loss will be recognized for federal income tax purposes by Holdings, EXCEL,
Telco, E-Sub or T-Sub as a result of the formation of Holdings, T-Sub and E-Sub
and the Mergers.
STOCKHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE PARTICULAR TAX
CONSEQUENCES TO THEM OF THE TRANSACTION, INCLUDING THE APPLICABILITY AND EFFECT
OF FOREIGN, STATE, LOCAL AND OTHER TAX LAWS AND THE EFFECT OF ANY PROPOSED
CHANGES IN THE TAX LAWS.
REGULATORY APPROVALS
Antitrust. The Transaction is subject to the requirements of the HSR Act
and the rules and regulations thereunder, which provide that certain
transactions may not be consummated until required information and materials are
furnished to the Antitrust Division and the FTC and the requisite waiting period
has expired or has been terminated. The required information and materials were
filed with the Antitrust Division and the FTC effective on July 1, 1997, and
early termination of the waiting period was granted on July 15, 1997. The
Transaction is also subject to antitrust review under state law in each of the
states in which EXCEL or Telco provides telephone service.
State and Federal Regulatory Approvals. The Transaction is also subject to
certain other state and federal regulatory approvals. It is expected that the
Transaction will require prior approval by the appropriate state commissions
governing telecommunications services (the "State Commissions") in approximately
twenty-four states. All such requests for approval have been filed. Although the
Transaction does not require approval of the State Commissions in the remaining
states, notice of the Transaction has been filed with each of those State
Commissions. Where applications to expand EXCEL's or Telco's existing regulatory
authority are currently pending (or where other proceedings affecting EXCEL or
Telco are pending), notice of the Transaction has also been filed in the
appropriate proceeding. The governing legal standard varies from state to state,
but approval of the Transaction generally requires a showing that it is
consistent with the public interest.
Subsidiaries of both EXCEL and Telco hold authority from the FCC under
Section 214 of the Communications Act of 1934, as amended, to provide
international services, including resold switched international long distance
services. As a result, the Transaction will require the prior approval of the
FCC. A request for such approval has been filed. The standard for approval by
the FCC is that the Transaction is consistent with the public interest.
It is possible that the FCC or one or more of the State Commissions may
fail to provide the requested approval, or may seek, as a condition of approval,
various regulatory concessions. Receipt of all necessary regulatory approvals
(other than immaterial approvals) by each of EXCEL and Telco is a condition to
the
48
<PAGE> 54
obligations of both EXCEL and Telco to consummate the Transaction, and either
party may deem that this condition has not been satisfied if any regulatory body
conditions its approval upon concessions which would be expected to have a
Material Adverse Effect on Holdings, EXCEL or Telco. There can be no assurance
that the required regulatory approvals will be obtained within the time frame
contemplated by the Merger Agreement or on terms that are satisfactory to the
parties.
CERTAIN RELATED FINANCING
Prior to the consummation of the Mergers, Holdings intends to enter into
the New Credit Facility with Lehman Commercial Paper Inc., as Agent, and a
syndicate of lenders. Holdings and the Agent have entered into a commitment
letter pursuant to which the Agent has committed to provide the full amount of
the facility.
The New Credit Facility will consist of a five-year reducing revolving
credit facility in the principal amount of $1 billion, with a $50 million letter
of credit sub-facility. Availability under the New Credit Facility will reduce
on dates and in amounts to be determined. Borrowings will be guaranteed by
Holdings' subsidiaries (including EXCEL and Telco), and will be secured by a
pledge of the capital stock of Holdings' subsidiaries.
Holdings intends to make an initial borrowing of approximately $513 million
under the New Credit Facility concurrently with the consummation of the Mergers
and to use the proceeds thereof to finance the Mergers and costs and expenses
associated therewith and to refinance existing indebtedness of Telco. Future
borrowings will be available for general corporate purposes, including
acquisitions (subject to the terms and conditions of the New Credit Facility).
Borrowings under the New Credit Facility will bear interest, at Holdings'
option, at the London interbank offered rate ("LIBOR") or the Agent's Base Rate,
in each case plus the "Applicable Interest Margin" (to be determined by
reference to the ratio of total debt to EBITDA). The spread over LIBOR will
range between 62.5 and 175 basis points and the spread over the Agent's Base
Rate will range between 0 and 50 basis points.
A commitment fee of 0.25% per annum will accrue on the unused portion of
the New Credit Facility. In addition, a fee will accrue on the outstanding
amount of each letter of credit issued under the New Credit Facility at the rate
of LIBOR plus the Applicable Interest Margin.
The New Credit Facility also is expected to contain limitations on (i)
incurrence of debt and guarantees, (ii) capital expenditures, (iii) liens, (iv)
dividends and other payments in respect of capital stock, (v) sale-leaseback
transactions, (vi) mergers, consolidations, acquisitions, liquidations and
dissolutions, (vii) investments, loans and advances, (viii) modifications of
debt instruments, (ix) transactions with affiliates, (x) disposition of assets,
(xi) negative pledge clauses and (xii) changes in Holdings' line of business.
The New Credit Facility will also contain certain financial covenants, including
covenants relating to the ratio of total debt to EBITDA, EBITDA to fixed
charges, and EBITDA to interest expense, and certain operating covenants, each
to be negotiated. The New Credit Facility also is expected to contain customary
events of default including, without limitation, upon a change of control of
Holdings.
STOCK EXCHANGE LISTING
Holdings intends to apply for the listing of Holdings Common Stock on the
NYSE and anticipates that its shares will trade on the NYSE, upon official
notice of issuance, under the symbol "ECI." It is a condition to the Mergers
that the shares of Holdings Common Stock issuable in the Mergers be approved for
listing on the NYSE.
DELISTING AND DEREGISTRATION OF EXCEL COMMON STOCK AND TELCO COMMON STOCK;
CESSATION OF PERIODIC REPORTING
If the Mergers are consummated, EXCEL Common Stock will cease to be listed
on the NYSE and Telco Common Stock will cease to be quoted on the NMS. In such
event, Holdings intends to apply to the Commission for the deregistration of
such securities.
49
<PAGE> 55
FEDERAL SECURITIES LAWS CONSEQUENCES
All shares of Holdings Common Stock received by holders of EXCEL Common
Stock and holders of Telco Common Stock in the Mergers will be freely
transferable, except that shares of Holdings Common Stock received by persons
who are deemed to be "affiliates" (as such term is defined under the Securities
Act) of EXCEL or Telco prior to the Transaction may be resold by them only in
transactions permitted by the resale provisions of Rule 145 promulgated under
the Securities Act (or Rule 144 in the case of such persons who become
affiliates of Holdings) or as otherwise permitted under the Securities Act.
Persons who may be deemed to be affiliates of EXCEL, Telco or Holdings generally
include individuals or entities that control, are controlled by, or are under
common control with, such party and may include certain officers and directors
of such party as well as principal stockholders of such party. Each affiliate of
EXCEL and Telco has delivered a letter agreement (an "Affiliate Letter") to the
effect that such person will not offer or sell or otherwise dispose of any of
the shares of Holdings Common Stock issued to such person in the Mergers in
violation of the Securities Act or the rules and regulations promulgated
thereunder. In addition, the Merger Agreement requires EXCEL and Telco to use
their best efforts to cause any additional persons who are identified as
affiliates to execute an Affiliate Letter on or prior to the date of the closing
under the Merger Agreement.
APPRAISAL RIGHTS
Holders of EXCEL Common Stock and holders of Telco Common Stock will not be
entitled to appraisal rights in connection with the EXCEL Merger or the Telco
Merger, respectively.
BUSINESS OF HOLDINGS
The combination of EXCEL and Telco will create one of the largest
facilities-based long distance telecommunications companies in the United
States, the revenue sources of which will be diversified across multiple
distribution channels. These distribution channels will include pre-subscribed
residential customers and small and home office commercial customers targeted by
EXCEL's IR network, commercial and wholesale customers targeted by the Telco
direct sales force and non-presubscribed, lower volume, residential customers
targeted by Telco's dial around marketing efforts. Holdings' will seek to become
a low cost provider of telecommunications services by utilizing its
facilities-based network to the fullest extent possible and through the
realization of other cost savings and synergies made possible by the combination
of EXCEL and Telco.
Holdings intends to expand the current capacity of the Telco network in
order to accommodate EXCEL's traffic volume. Such expansion involves enhancing
the current capacity of Telco's switches and the addition of new switches,
expanding the capacity of the Telco network's interconnection with local phone
company networks and increasing the utilization of Telco's owned and leased
fiber optic capacity. Other opportunities that Holdings may consider include the
expansion of its commercial operations and its international operations, new
product introductions such as local service, wireless services (such as PCS),
data or Internet applications and strategic acquisitions.
Holdings is a Delaware corporation that was formed on May 30, 1997 to
become a holding company for EXCEL and Telco and their respective subsidiaries
following the consummation of the Mergers. Prior to the consummation of the
Mergers, Holdings has had and will have no operations other than those incident
to its formation, its execution of the Merger Agreement and the preparation of
this Joint Proxy Statement/ Prospectus. Holdings currently has no operations and
nominal or no assets and liabilities. At or prior to the Effective Time,
Holdings will change its name to "EXCEL Communications, Inc."
50
<PAGE> 56
COMPARATIVE PER SHARE MARKET PRICE AND DIVIDEND INFORMATION
EXCEL Common Stock has been listed on the NYSE since May 1996 under the
symbol "ECI" and Telco Common Stock has been quoted on the NMS since August 1996
under the symbol "TCGX."
The table below sets forth, for the calendar quarters indicated, the
reported high and low sale prices of EXCEL Common Stock as reported on the NYSE
Composite Tape and the high and low sale prices of Telco Common Stock as
reported on the NMS, in each case based on published financial sources.
<TABLE>
<CAPTION>
EXCEL
COMMON TELCO COMMON
STOCK STOCK
------------ ------------
MARKET PRICE MARKET PRICE
------------ ------------
HIGH LOW HIGH LOW
---- ---- ---- ----
<S> <C> <C> <C> <C>
1997
First Quarter........................................ $215/8 $13 $213/4 $133/4
Second Quarter....................................... 293/8 123/8 327/8 19
Third Quarter........................................ 287/8 2011/16 323/4 28
(through September 11, 1997)
1996
Second Quarter
(from May 10, 1996).................................. 47 251/2 N/A N/A
Third Quarter*....................................... 317/8 191/2 191/2 14
Fourth Quarter....................................... 351/2 20 191/4 15
</TABLE>
During the calendar quarters indicated above, no dividends were declared by
either EXCEL or Telco.
- ---------------
(*) With respect to Telco, from August 9, 1996.
On June 5, 1997, the last full trading day prior to the public announcement
of the proposed Mergers, the closing price of EXCEL Common Stock on the NYSE
Composite Tape was $18 3/4 per share and the closing price of Telco Common Stock
on the NMS was $22 per share. On September 11, 1997, the most recent practicable
date prior to the mailing of this Joint Proxy Statement/Prospectus, the closing
price of EXCEL Common Stock on the NYSE Composite Tape was $23 11/16 per share
and the closing price of Telco Common Stock on the NMS was $31 1/2 per share.
Holders of EXCEL Common Stock and holders of Telco Common Stock are urged to
obtain current market quotations prior to making any decision with respect to
the Mergers.
51
<PAGE> 57
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following unaudited Pro Forma Combined Balance Sheet as of June 30,
1997 and unaudited Pro Forma Combined Income Statements for the six months ended
June 30, 1997 and for the year ended December 31, 1996 illustrate the effect of
the Transaction as if the Transaction had occurred on June 30, 1997 for the Pro
Forma Combined Balance Sheet and as of January 1, 1996 for the Pro Forma
Combined Income Statements.
Pursuant to the terms of the Merger Agreement, each share of Telco Common
Stock will be converted into the right to receive the Telco Merger
Consideration. For more information regarding the Transaction, see "The
Transaction" and "The Merger Agreement." The Telco Merger will be accounted for
as a purchase transaction, and the EXCEL Merger will be accounted for as a
reorganization.
The Unaudited Pro Forma Combined Financial Statements should be read in
conjunction with the historical financial statements of EXCEL and Telco, and the
related notes thereto, which are incorporated herein by reference. See
"Incorporation of Certain Documents By Reference."
The Unaudited Pro Forma Combined Financial Statements are presented for
comparative purposes only and do not give effect to any potential cost savings
and synergies that could result from the Transaction. The pro forma data are not
intended to be indicative of actual results had the Transaction occurred as of
the dates indicated above, nor do they purport to indicate results which may be
achieved in the future.
52
<PAGE> 58
NEW RES, INC.
PRO FORMA COMBINED BALANCE SHEET
AS OF JUNE 30, 1997
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL PRO FORMA PRO FORMA
EXCEL(1) TELCO(1) ADJUSTMENTS COMBINED
---------- ---------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.......................... $153,249 $ 13,233 $ (18,702)(2) $ 26,409
(121,371)(3)
Accounts receivable, net........................... 201,199 107,640 -- 308,839
Inventories........................................ 12,796 -- -- 12,796
Deferred income tax asset.......................... 4,139 898 (1,225)(4) 3,812
Other current assets............................... 3,557 10,242 -- 13,799
-------- -------- --------- ----------
Total current assets........................ 374,940 132,013 (141,298) 365,655
Property and equipment, net.......................... 99,532 192,768 -- 292,300
Deferred financing costs............................. -- -- 6,329(6) 6,329
Goodwill............................................. -- 42,803 808,591(5) 851,394
Deferred tax asset................................... -- 2,383 (2,383)(4) --
Other assets......................................... 1,235 3,756 4,991
-------- -------- --------- ----------
Total assets................................ $475,707 $373,723 $ 671,239 $1,520,669
======== ======== ========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................... $105,051 $ 51,983 $ -- $ 157,034
Commissions payable................................ 22,901 -- -- 22,901
Accrued liabilities................................ 33,589 17,577 7,100(7) 58,266
Income taxes payable............................... -- 5,584 (7,070)(2) (1,486)
Deferred taxes..................................... -- 1,225 (1,225)(4) --
Deferred revenue................................... -- 3,916 -- 3,916
Current portion of long-term debt.................. -- 6,250 (6,250)(3) --
Current portion of long-term capital lease
obligations...................................... 200 681 -- 881
-------- -------- --------- ----------
Total current liabilities................... 161,741 87,216 (7,445) 241,512
Long-term debt and capital lease obligations......... 70 115,121 513,293(6) 513,363
(115,121)(3)
Deferred management services fees and other
revenue............................................ 4,456 6,522 -- 10,978
Deferred income taxes payable........................ 7,270 2,977 (2,383)(4) 7,864
Commitments and contingencies........................ -- -- -- --
STOCKHOLDERS' EQUITY:
Common stock....................................... 110 111,985 25(10) 133
(111,985)(8)
(2)(9)
Additional paid-in capital......................... 147,691 -- 444,757(10) 557,646
(34,802)(9)
Unrealized gain (loss) on securities available for
sale............................................. -- 61 (61)(8) --
Treasury stock..................................... (34,804) -- 34,804(9) --
Retained earnings.................................. 189,173 49,841 (31,109)(8) 189,173
(7,100)(7)
(11,632)(2)
-------- -------- --------- ----------
Total stockholders' equity.................. 302,170 161,887 282,895 746,952
-------- -------- --------- ----------
Total liabilities and stockholders'
equity.................................... $475,707 $373,723 $ 671,239 $1,520,669
======== ======== ========= ==========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Financial Statements.
53
<PAGE> 59
NEW RES, INC.
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL PRO FORMA PRO FORMA
EXCEL(1) TELCO(1) ADJUSTMENTS COMBINED
---------- ---------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues:
Communication services.................... $596,599 $261,627 $ 11,110(11) $869,336
Marketing services........................ 65,342 -- -- 65,342
-------- -------- -------- --------
Total revenues.................... 661,941 261,627 11,110 934,678
Operating expenses:
Communication............................. 322,485 152,068 -- 474,553
Marketing services........................ 117,959 -- 47,310(12) 165,269
Depreciation and amortization............. 7,930 6,263 9,489(13) 23,682
General & administrative.................. 102,543 76,566 11,110(11) 142,909
(47,310)(12)
-------- -------- -------- --------
Total operating expenses.......... 550,917 234,897 20,599 806,413
Operating income.................. 111,024 26,730 (9,489) 128,265
-------- -------- -------- --------
Interest income (expense)................. 4,215 (3,073) (18,756)(14) (17,614)
Other income (expense).................... (61) 1,168 -- 1,107
-------- -------- -------- --------
Income from continuing operations before
income taxes.............................. 115,178 24,825 (28,245) 111,758
Provision (benefit) for income taxes...... 43,083 9,385 (7,016)(15) 45,452
-------- -------- -------- --------
Net income from continuing operations....... $72,095 $ 15,440 $(21,229) $ 66,306
======== ======== ======== ========
Net income from continuing operations per
common share(16).......................... $ 0.65 $ 0.45 $ 0.48
======== ======== ======== ========
Weighted average shares and share
equivalents outstanding(16)............... 110,371 34,392 (7,984) 136,779
======== ======== ======== ========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Financial Statements.
54
<PAGE> 60
NEW RES, INC.
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL PRO FORMA PRO FORMA
EXCEL(1) TELCO(1) ADJUSTMENTS COMBINED
---------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues:
Communication services.................. $1,090,649 $428,552 $ 23,046(11) $1,542,247
Marketing services...................... 260,653 -- 260,653
---------- -------- -------- ----------
Total revenues.................. 1,351,302 428,552 23,046 1,802,900
Operating expenses:
Communication........................... 596,598 252,036 848,634
Marketing services...................... 362,401 -- 69,034(12) 431,435
Depreciation and amortization........... 6,880 7,967 20,392(13) 35,239
General & administrative................ 167,894 125,575 23,046(11) 247,481
(69,034)(12)
---------- -------- -------- ----------
Total operating expenses........ 1,133,773 385,578 43,438 1,562,789
Operating income................ 217,529 42,974 (20,392) 240,111
---------- -------- -------- ----------
Interest income (expense)............... 6,221 (3,515) (37,512)(14) (34,806)
Other income (expense).................. 6,165 501 6,666
---------- -------- -------- ----------
Net income from continuing operations
before income taxes..................... 229,915 39,960 (57,904) 211,971
Provision (benefit) for income taxes.... 85,488 16,394 (13,948)(15) 87,934
Minority interest......................... -- 689 689
---------- -------- -------- ----------
Net income from continuing operations..... $ 144,427 $ 22,877 $(43,956) $ 123,348
========== ======== ======== ==========
Net income from continuing operations per
common share(16)........................ $ 1.35 $ 0.75 $ 0.92
========== ======== ==========
Weighted average shares and share
equivalents outstanding(16)............. 107,247 30,533 (3,893) 133,887
========== ======== ======== ==========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Financial Statements.
55
<PAGE> 61
NOTES TO UNAUDITED PRO FORMA
COMBINED FINANCIAL STATEMENTS
(1) The historical information as of and for the year ended December 31, 1996
was derived from audited financial statements of EXCEL and Telco. The
historical information as of and for the six months ended June 30, 1997 was
derived from unaudited financial statements of EXCEL and Telco, which, in
the opinion of EXCEL and Telco management, contain all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation thereof. Effective January 1, 1997, EXCEL changed its method
of accounting for subscriber acquisition costs. Previously, EXCEL had
deferred the portions of commissions paid to IRs that directly related to
the acquisition of long distance and paging subscribers. Beginning January
1, 1997, EXCEL began fully expensing subscriber acquisition costs in the
period incurred in order to present its operating results in a manner more
consistent with other telecommunications companies against which its
results are now compared.
(2) Represents Telco's purchase of approximately 730,000 stock options valued
at $18.7 million from executives of Telco immediately prior to the
Effective Time of the Transaction, including the related balance sheet
impact of tax benefits to be realized from the payment. These amounts will
be recorded as compensation expense in the financial statements of Telco
immediately prior to the closing date of the Transaction. As this is a
nonrecurring charge related to the Transaction, it is reflected in the Pro
Forma Combined Balance Sheet, but not in the Pro Forma Combined Statement
of Income.
(3) Represents EXCEL's payment of Telco's outstanding debt as of the Merger
Date.
(4) Represents the reclassification of the net current and noncurrent deferred
income tax balances of EXCEL and Telco.
(5) Represents the excess of cost paid over the net tangible assets acquired
from Telco. The cost of the purchase is calculated as the sum of (i) $15.00
per outstanding share of Telco Common Stock and (ii) the Telco Exchange
Ratio (.7595 shares of Holdings Common Stock per outstanding share of Telco
Common Stock) times $18.75 (the price per share of EXCEL Common Stock as of
June 5, 1997, the date of the Merger Agreement). In the case of (ii) above,
shares of Holdings Common Stock issuable to affiliates have been discounted
by 20% to reflect their lack of liquidity. The adjustment to goodwill is
calculated as follows (amounts in thousands except share and per share
data):
<TABLE>
<S> <C> <C>
PURCHASE PRICE CALCULATION:
Cash paid (33,130,942 shares outstanding times $15)..... $ 496,964
Stock issued (25,162,950 shares issued)................. 400,970
Total value of options granted.......................... 48,534
EXCEL transaction costs................................. 5,278
---------
Total purchase price.......................... 951,746
PURCHASE PRICE ALLOCATION:
Less amounts allocated to the tangible assets and
liabilities of Telco:
Assets (excluding goodwill)............................. (330,920)
Less: Cash paid to option holders..................... 18,702
Net tangible assets............................. (312,218)
Liabilities............................................. 211,836
Add: Telco transaction costs.......................... 7,100
Less: Tax benefit from payment to stock option
holders......................................... (7,070)
--------
Total liabilities............................... 211,866
---------
Total net tangible assets acquired...................... (100,352)
---------
Goodwill................................................ 851,394
Less: Goodwill previously recorded by Telco........... (42,803)
---------
Net Goodwill.................................. $ 808,591
=========
</TABLE>
56
<PAGE> 62
(6) Represents the issuance of long-term debt of $513.3 million required to
finance the cash portion of the purchase price and the payment of debt
issuance costs and legal fees in connection with the New Credit Facility.
(7) Represents the liabilities incurred by Telco, such as investment advisory,
legal, accounting and consulting fees, related to the Transaction that will
be expensed as incurred. As these costs are nonrecurring in nature, they
are included in the Pro Forma Combined Balance Sheet, but not in the Pro
Forma Combined Statement of Income. Costs incurred by EXCEL related to the
Transaction are included in the purchase price and capitalized in the Pro
Forma Combined Balance Sheet in accordance with generally accepted
accounting principles.
(8) Represents the elimination of the net book value of existing Telco
shareholders' equity accounts.
(9) Represents the cancellation of 1,848,379 shares of EXCEL treasury stock.
(10) Represents the recognition of the market value of the new shares of
Holdings Common Stock issued in exchange for Telco Common Stock outstanding
calculated as follows:
<TABLE>
<S> <C>
Value of stock issued....................................... $400,970
Value of options issued..................................... 48,534
--------
Total value of stock and options issued..................... 449,504
Less: Registration Costs.................................... (4,722)
--------
Subtotal.......................................... 444,782
Par value of common stock issued in purchase................ (25)
--------
Adjustment to additional paid-in capital.................... $444,757
========
</TABLE>
(11) Represents the reclassification of Telco's bad debt expense to conform to
EXCEL's accounting policies.
(12) Represents the reclassification of Telco's marketing expense from general
and administrative expense to marketing services expense to conform to
EXCEL's accounting policies.
(13) Represents the incremental amortization of goodwill acquired in the
Transaction over a period of 40 years.
(14) Represents the interest expense on $513.3 million of debt incurred in
connection with the Transaction.
(15) Represents the income tax effect of the pro forma adjustments that are
reflected in the results of operations.
(16) Pro forma per share data are based on the number of shares of Holdings
Common Stock and per share equivalents that would have been outstanding had
the Transaction occurred on the earliest date presented.
57
<PAGE> 63
DIRECTORS AND MANAGEMENT OF HOLDINGS
DIRECTORS
The Holdings Board initially will consist of Kenny A. Troutt, who will be
Chairman of the Board, Donald A. Burns, Henry G. Luken, III, T. Allan McArtor,
John J. McLaine, Ronald A. McDougall and Stephen R. Smith.
COMMITTEES OF THE BOARD OF DIRECTORS
The Holdings Board has established a Compensation Committee consisting of
Ronald A. McDougall and T. Allan McArtor. All members of the Compensation
Committee will be "Non-Employee Directors" within the meaning of Rule 16b-3
under the Exchange Act and, unless otherwise determined by the Holdings Board,
"outside directors" within the meaning of Section 162(m) of the Code. The
Compensation Committee will be responsible for establishing salaries, bonuses,
and other compensation for Holdings' executive officers and for administering
the Stock Option Plan (including granting options and setting the terms thereof
pursuant to such plan) and Holdings' other executive compensation plans and
programs.
The Holdings Board has established an audit committee consisting of Ronald
A. McDougall and T. Allan McArtor. The audit committee will be responsible for
reviewing Holdings' annual audit and meeting with Holdings' independent
accountants to review Holdings' internal controls and financial management
practices.
COMPENSATION OF DIRECTORS AND OFFICERS
Directors who are employees of Holdings or its subsidiaries will not
receive any compensation for service on the Holdings Board, but employee
directors will be reimbursed by Holdings for expenses incurred in attending
meetings of the Holdings Board or any committees thereof. In order to more
closely align the interests of directors and stockholders, non-employee
directors of Holdings will be eligible to participate in the Director Stock
Option Plan, pursuant to which each will be eligible to receive Nonqualified
Options. See "The Plan Proposals -- The Director Stock Option Plan."
The senior management team for Holdings is expected to be comprised of the
following individuals from EXCEL and Telco:
<TABLE>
<S> <C>
Kenny A. Troutt Chairman of the Board and Chief Executive Officer
John J. McLaine President and Chief Operating Officer
Donald A. Burns Executive Vice President
J. Christopher Dance Executive Vice President, Secretary and General Counsel
Henry G. Luken, III Executive Vice President
Thomas Marino Executive Vice President of Network Operations
Nicholas A. Merrick Executive Vice President and Chief Financial Officer
Stephen R. Smith Executive Vice President of Marketing
Paul D. Fletcher Vice President and Treasurer
Craig E. Holmes Vice President and Chief Accounting Officer
</TABLE>
EXECUTIVE COMPENSATION
For information regarding compensation paid to executive officers of EXCEL
and Telco in 1996, including the individuals named above, see the 1997 Notice of
Annual Meeting and Proxy Statement of each of EXCEL and Telco, respectively. The
Holdings Board will rely on its compensation committee, which will be composed
of non-employee directors, to recommend the form and amount of compensation to
be paid to executive officers of Holdings who do not have an employment
agreement with Holdings. For information regarding employment agreements with
certain of the above individuals, see "The Transaction -- Interests of Certain
Persons in the Transaction -- Employment Agreements."
58
<PAGE> 64
OWNERSHIP OF HOLDINGS
There are currently 1,000 shares of Holdings Common Stock outstanding, all
of which are owned by EXCEL and will be canceled in the EXCEL Merger. It is
anticipated that, after giving effect to the Mergers, approximately 132,944,000
shares of Holdings Common Stock will be issued and outstanding, approximately
9,136,000 additional shares will be reserved for issuance upon the exercise of
options assumed by Holdings and approximately 4,264,000 additional shares will
be available for issuance in connection with grants made after the Effective
Time under the Stock Option Plan and the Director Stock Option Plan.
The following table sets forth information concerning the beneficial
ownership of Holdings Common Stock after giving effect to the Mergers by (i)
each person or group of persons known to EXCEL or Telco expected to beneficially
own more than 5% of the outstanding shares of Holdings Common Stock, (ii) each
person who is (or, upon consummation of the Mergers, will be) an executive
officer or director of Holdings and (iii) all such executive officers and
directors of Holdings as a group.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF EXISTING
BENEFICIAL OWNERSHIP
------------------------------------
PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER OF COMMON STOCK(1) OF CLASS(1)(2)
------------------------------------ ------------------ --------------
<S> <C> <C>
Kenny A. Troutt(3).......................................... 64,180,800 48.3%
Troutt Family Trust(3)...................................... 64,180,000 48.3
10595 Strait Lane
Dallas, Texas 75229
Troutt Partners, Ltd.(3)(4)................................. 53,000,000 39.9
10595 Strait Lane
Dallas, Texas 75229
Stephen J. Troutt(4)........................................ 20,225,492 15.2
Kenny Allan Troutt Children's Trust II(4)................... 20,000,000 15.0
10595 Strait Lane
Dallas, Texas 75229
Stephen R. and Sarah H. Smith(5)(6)......................... 9,686,000 7.3
Austex Enterprises, Ltd.(6)................................. 7,932,933 6.0
16004 Chateau Avenue
Austin, Texas 78734
William A. Casner........................................... 9,180,000 6.9
13181 Lakeview
Southlake, Texas 76092
John J. McLaine(7).......................................... 81,594 *
Ronald A. McDougall(8)...................................... 8,667 *
c/o Brinker International, Inc.
6820 LBJ Freeway
Dallas, Texas 75240
T. Allan McArtor............................................ 0 0
Henry G. Luken, III......................................... 4,133,298 3.1
Donald A. Burns............................................. 5,624,940 4.2
Nicholas A. Merrick(9)...................................... 409,239 *
Paul D. Fletcher(10)........................................ 5,629 *
Craig E. Holmes(11)......................................... 21,028 *
J. Christopher Dance(12).................................... 62,312 *
All directors and executive officers as a group (11
persons).................................................. 84,213,507 63.3%
</TABLE>
- ---------------
* less than 1%
(1) Based upon 132,943,782 shares of Holdings Common Stock issued and
outstanding.
59
<PAGE> 65
(2) The term "beneficial owner," which is used as defined in Rule 13d-3 of the
Exchange Act, means generally any person who, directly or indirectly, has
or shares voting power or investment power with respect to a security. All
information with respect to the beneficial ownership of any stockholder has
been furnished by such stockholder and Holdings believes that, except as
otherwise indicated, each stockholder has sole voting and investment power
with respect to shares listed as beneficially owned by such stockholder.
Except as otherwise indicated, the address of each of the persons in this
table is as follows: c/o EXCEL Communications, Inc., 8750 North Central
Expressway, Suite 2000, Dallas, Texas 75231.
(3) Kenny A. Troutt will not own of record any shares of Holdings Common Stock.
The shares that will be beneficially owned by Kenny A. Troutt represent 800
shares held by Mr. Troutt's children, and the 64,180,000 shares to be held
beneficially by the Troutt Family Trust. The Troutt Family Trust is a trust
formed under the laws of the State of Texas, of which Kenny A. Troutt is
the sole trustee. The shares to be held by the Troutt Family Trust
represents 11,180,000 shares that will be held of record directly by the
Troutt Family Trust and 53,000,000 shares that will be held of record
directly by Troutt Partners, Ltd., a Texas limited partnership (the "Troutt
Family Partnership"), of which the Troutt Family Trust is the managing
general partner. Kenny A. Troutt and the Troutt Family Trust will share
voting and investment power with respect to the 11,180,000 shares to be
held of record by the Troutt Family Trust; and Kenny A. Troutt, the Troutt
Family Trust, and the Troutt Family Partnership will share investment power
with respect to all of the 53,000,000 shares to be held of record by the
Troutt Family Partnership. A provision in the partnership agreement of the
Troutt Family Partnership permits, for tax purposes, each partner
(including each limited partner) to direct the voting of shares held by the
Troutt Family Partnership that were contributed to the Troutt Family
Partnership by such partners. As a result, Kenny A. Troutt and the Troutt
Family Trust will share voting power with the Troutt Family Partnership
only with respect to the 32,836,326 shares contributed by the Troutt Family
Trust to the Troutt Family Partnership in exchange for general and limited
partnership interests in the Troutt Family partnership. In addition, Kenny
A. Troutt may be deemed to share voting power with Steven J. Troutt, his
brother, with respect to certain shares over which Steven J. Troutt will
exercise voting control in his capacity as sole trustee of several trusts
established for the benefit of Kenny A. Troutt's children, as described in
footnote (4) below.
(4) Steven J. Troutt will not own of record any shares of Holdings Common
Stock. The shares of Common Stock to be beneficially owned by Steven J.
Troutt represent 12,818 shares held by the Employee Stock Ownership Plan
(the "ESOP") and allocated to Mr. Troutt's account, 81,837 shares
contributed to the Troutt Family Partnership in exchange for a general
partnership interest by the Kenny Allan Children's Trust (the "KAT Trust"),
81,837 shares contributed to the Troutt Family partnership in exchange for
a limited partnership with interest with voting rights by the Lisa Elaine
Troutt Children's Trust (the "LET Trust"), 20,000,000 shares contributed to
the Troutt Family Partnership in exchange for a limited partnership
interest with voting rights by the Kenny Allan Troutt Children's Trust (the
"Kat Trust II"), and 49,000 shares of Common Stock that will be issuable
upon exercise of currently exercisable options. The KAT Trust II will not
own of record any shares of Holdings Common Stock. Steven J. Troutt is the
sole trustee of the KAT Trust, the LET Trust, and the KAT Trust II. Steven
J. Troutt will have shared voting power with respect to the 12,818 shares
allocated to be allocated to his ESOP account. Steven J. Troutt, the KAT
Trust II, and the Troutt Family Partnership will share voting power with
respect to the 20,000,000 shares contributed by the KAT Trust II to the
Troutt Family Partnership. Steven J. Troutt and the Troutt Family
Partnership will share voting power with respect to the 81,837 shares to be
contributed by the KAT Trust and the 81,837 shares to be contributed by the
LET Trust to the Troutt Family Partnership. Neither Steven J. Troutt nor
the KAT Trust II will have investment power with respect to the shares to
be beneficially held by them, except that Steven J. Troutt will have voting
and investment power with respect to the 49,000 shares issuable upon
exercise of currently exercisable options.
(5) Represents 876,821 shares of Holdings Common Stock to be held by Stephen R.
Smith, 876,246 shares to be held by Sarah H. Smith, and 7,932,933 shares to
be held by Austex Enterprises, Ltd. Stephen R.
60
<PAGE> 66
Smith and Sarah H. Smith are married; as a consequence, each may be deemed
to be the beneficial owner of all the shares to be held by each of them.
(6) Austex Enterprises, Ltd., which will be the record owner of 7,932,933
shares of Holdings Common Stock, is a Texas limited partnership of which
Stara Corporation, a Texas corporation, is the general partner. Stephen R.
Smith is the President of Stara Corporation and he and Sarah H. Smith are
each directors of Stara Corporation and each owns 50% of the outstanding
common stock of Stara Corporation; as a result, each of them will have
shared voting, investment, and dispositive power with respect to the
7,932,933 shares to be held by Austex Enterprises, Ltd. The limited partner
interests in Austex Enterprises, Ltd. are either held individually by
Stephen R. Smith or Sarah H. Smith or by trusts of which he or she, as the
case may be, is the trustee. Stephen R. Smith and Sarah H. Smith are
married; as a consequence, each may be deemed to be the beneficial owner of
all the shares held by Austex Enterprises, Ltd.
(7) Includes 17,594 shares held by the ESOP and allocated to Mr. McLaine's
account.
(8) Includes 6,667 shares issuable upon exercise of currently exercisable
options.
(9) Includes 195,020 shares issuable upon exercise of currently exercisable
options and 203,716 shares issuable upon exercise of options exercisable
within 60 days of September 15, 1997. See "The Transaction -- Interests of
Certain Persons in the Transaction -- Telco Shareholders Agreement" for
certain restrictions on the ability of Mr. Merrick to exercise certain of
such options.
(10) Represents 2,629 shares held by the ESOP and allocated to Mr. Fletcher's
account and 3,000 shares issuable upon exercise of options currently
exercisable options.
(11) Includes 8,528 shares held by ESOP and allocated to Mr. Holmes' account.
(12) Represents 11,812 shares held by the ESOP and allocated to Mr. Dance's
account and 39,000 shares issuable upon exercise of currently exercisable
options.
THE SPECIAL MEETINGS
This Joint Proxy Statement/Prospectus is being furnished in connection with
the solicitation of proxies (i) from the holders of EXCEL Common Stock by the
EXCEL Board for use at the EXCEL Meeting and (ii) from the holders of Telco
Common Stock by the Telco Board for use at the Telco Meeting.
GENERAL
EXCEL. This Joint Proxy Statement/Prospectus is being furnished to holders
of EXCEL Common Stock in connection with the solicitation of proxies by the
EXCEL Board for use at the EXCEL Meeting to consider and vote upon the approval
and adoption of the Merger Agreement and the approval of the Plan Proposals, and
to transact such other business as may properly come before the EXCEL Meeting.
THE EXCEL BOARD HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND RATIFIED
THE PLAN PROPOSALS AND UNANIMOUSLY RECOMMENDS THAT THE HOLDERS OF EXCEL COMMON
STOCK VOTE FOR THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND FOR THE
APPROVAL OF THE PLAN PROPOSALS.
Telco. This Joint Proxy Statement/Prospectus is being furnished to holders
of Telco Common Stock in connection with the solicitation of proxies by the
Telco Board for use at the Telco Meeting to consider and vote upon the approval
and adoption of the Merger Agreement and the approval of the Plan Proposals, and
to transact such other business as may properly come before the Telco Meeting.
THE TELCO BOARD HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND RATIFIED
THE PLAN PROPOSALS AND UNANIMOUSLY RECOMMENDS THAT THE HOLDERS OF TELCO COMMON
STOCK VOTE FOR THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND FOR
APPROVAL OF THE PLAN PROPOSALS.
61
<PAGE> 67
RECORD DATES
EXCEL. The EXCEL Board has fixed the close of business on September 3, 1997
as the EXCEL Record Date for the determination of the holders of EXCEL Common
Stock entitled to receive notice of, and to vote at, the EXCEL Meeting.
Telco. The Telco Board has fixed the close of business on August 29, 1997
as the Telco Record Date for the determination of the holders of Telco Common
Stock entitled to receive notice of, and to vote at, the Telco Meeting.
TIMES AND PLACES; PURPOSES
EXCEL. The EXCEL Meeting will be held at Wyndham Anatole Hotel, 2201
Stemmons Freeway, Dallas, Texas on October 11, 1997, starting at 10:00 a.m.
local time. At the EXCEL Meeting, the holders of EXCEL Common Stock will be
asked to consider and vote upon (i) the Merger Agreement, (ii) the Plan
Proposals and (iii) such other matters as may properly come before the EXCEL
Meeting.
Telco. The Telco Meeting will be held at Hyatt Fair Lakes, 12777 Fair Lakes
Circle, Fairfax, Virginia on October 11, 1997, starting at 10:30 a.m. local
time. At the Telco Meeting, the holders of Telco Common Stock will be asked to
consider and vote upon (i) the Merger Agreement, (ii) the Plan Proposals and
(iii) such other matters as may properly come before the Telco Meeting.
VOTING RIGHTS; VOTES REQUIRED FOR APPROVAL
EXCEL. Only holders of record of shares of EXCEL Common Stock on the EXCEL
Record Date are entitled to notice of, and to vote at, the EXCEL Meeting. On the
EXCEL Record Date, there were approximately 107,595,420 shares of EXCEL Common
Stock outstanding and entitled to vote at the EXCEL Meeting held by
approximately 2,923 stockholders of record.
Each holder of record of EXCEL Common Stock, as of the EXCEL Record Date,
is entitled to cast one vote per share. The presence, in person or by proxy, of
the holders of a majority of the outstanding shares of EXCEL Common Stock
entitled to vote is necessary to constitute a quorum at the EXCEL Meeting. Under
the DGCL, the affirmative vote, in person or by proxy, of the holders of a
majority of the shares of EXCEL Common Stock outstanding and entitled to vote is
required to approve and adopt the Merger Agreement. The affirmative vote of a
majority of the votes cast by the holders of EXCEL Common Stock at the EXCEL
Meeting is required to approve all other action proposed, including the Plan
Proposals. The Merger Agreement and the Plan Proposals must also be approved by
the shareholders of Telco as described below.
The Troutt Group beneficially owns, in the aggregate, 64,180,800 shares of
EXCEL Common Stock, which represent approximately 60% (approximately 57% on a
fully diluted basis) of the outstanding shares of EXCEL Common Stock. Each
member of the Troutt Group has agreed to vote all of its respective shares of
EXCEL Common Stock in favor of the approval of the Merger Agreement, subject to
the condition set forth in the EXCEL Shareholders Agreement. Accordingly,
assuming that the condition set forth in the EXCEL Shareholders Agreement is
satisfied, approval of the Merger Agreement by the holders of EXCEL Common Stock
is assured. See "The Transaction -- Interests of Certain Persons in the
Transaction -- EXCEL Shareholders Agreements."
Telco. Only holders of record of shares of Telco Common Stock on the Telco
Record Date are entitled to notice of and to vote at the Telco Meeting. On the
Telco Record Date, there were approximately 33,341,732 shares of Telco Common
Stock outstanding and entitled to vote at the Telco Meeting held by
approximately 60 shareholders of record.
Each holder of record of Telco Common Stock, as of the Telco Record Date,
is entitled to cast one vote per share. The presence, in person or by proxy, of
the holders of a majority of the outstanding shares of Telco Common Stock
entitled to vote is necessary to constitute a quorum at the Telco Meeting. Under
the VSCA, the affirmative vote, in person or by proxy, of the holders of a
majority of the shares of Telco Common Stock outstanding on the Telco Record
Date and entitled to vote is required to approve and adopt the Merger
62
<PAGE> 68
Agreement. The affirmative vote of a majority of the shares of Telco Common
Stock represented at the Telco Meeting and entitled to vote thereon is required
to approve all other action proposed, including the Plan Proposals. The Merger
Agreement and the Plan Proposals must also be approved by the stockholders of
EXCEL as described above.
The Telco Management Group beneficially owns, in the aggregate, 18,638,507
shares of Telco Common Stock, which represent approximately 56% (approximately
50% on a fully diluted basis) of the issued and outstanding shares of Telco
Common Stock. The members of the Telco Management Group have agreed to vote all
of their respective shares of Telco Common Stock in favor of the approval of the
Merger Agreement, subject to the conditions set forth in the Telco Shareholders
Agreement. Accordingly, assuming that the conditions set forth in the Telco
Shareholders Agreement are satisfied, approval of the Merger Agreement by the
holders of Telco Common Stock is assured. See "The Transaction -- Interests of
Certain Persons in the Transaction -- Telco Shareholders Agreement."
PROXIES
All shares of EXCEL Common Stock and Telco Common Stock represented by
properly executed proxies received prior to or at the respective EXCEL Meeting
or Telco Meeting and not subsequently revoked will be voted in accordance with
the instructions indicated on such proxies. If no instructions are indicated on
a properly executed and returned proxy, such proxy will be voted FOR the
approval of the Merger Agreement and FOR the approval of the Plan Proposals. A
properly executed proxy marked "ABSTAIN," although counted for purposes of
determining whether there is a quorum and for purposes of determining the
aggregate voting power and number of shares represented and entitled to vote at
the applicable meeting, will not be voted. Accordingly, as the affirmative vote
of a majority of the outstanding shares is required for the approval of the
Merger Agreement, a proxy marked "ABSTAIN" will have the effect of a vote
against the proposal.
A broker non-vote occurs when an agent holding shares for a beneficial
owner does not vote on a particular proposal because the agent does not have
discretionary voting power with respect to that proposal and has not received
instructions from the beneficial owner. In accordance with NYSE and NMS rules,
brokers and nominees are precluded from exercising their voting discretion with
respect to the approval and adoption of the Merger Agreement and approval of the
Plan Proposals and, therefore, absent specific instructions from the beneficial
owner of such shares, are not empowered to vote such shares with respect to such
proposals. Shares represented by broker non-votes will be counted for purposes
of determining whether there is a quorum at the applicable Special Meeting, but
will not be counted for purposes of determining the number of shares entitled to
vote with respect to a particular proposal for which authorization to vote was
withheld. Consequently, broker non-votes have the practical effect of reducing
the number of affirmative votes required to achieve the requisite vote for such
proposal by reducing the total number of shares of common stock from which the
requisite vote is calculated. Accordingly, broker non-votes with respect to a
proposal will not be considered shares entitled to vote and, therefore, will not
be counted as votes for or against such proposal in determining whether such
proposal is approved. With respect to the Merger Agreement, however, since the
affirmative vote of a majority of the outstanding shares is required for
approval of the Merger Agreement, a broker non-vote with respect to such
proposal will have the effect of a vote against such proposal.
The EXCEL Board and the Telco Board are not currently aware of any business
to be acted upon at their respective Special Meetings other than as described
herein. If, however, other matters are properly brought before either Special
Meeting, or any adjournments or postponements thereof, the persons appointed as
proxies will have discretion to vote or act thereon according to their best
judgment. Such adjournment may be for the purpose of soliciting additional
proxies. Shares represented by proxies voting against the approval and adoption
of the Merger Agreement or against the approval of the Plan Proposals will be
voted against a proposal to adjourn the respective Special Meeting for the
purpose of soliciting additional proxies with respect to such matter.
Holders of EXCEL Common Stock and holders of Telco Common Stock will not be
entitled to present any matter for consideration at either of the Special
Meetings.
63
<PAGE> 69
A holder of EXCEL Common Stock or a holder of Telco Common Stock may revoke
his or her proxy at any time prior to the voting of the proxy by delivering to
the Secretary of EXCEL or Telco, as the case may be, a signed notice of
revocation or a later dated signed proxy or by attending the applicable Special
Meeting and voting in person. Attendance at the EXCEL Meeting or the Telco
Meeting will not in itself constitute the revocation of a proxy.
The cost of solicitation of proxies will be paid by EXCEL for EXCEL proxies
and by Telco for Telco proxies. In addition to solicitation by mail,
arrangements may be made with brokerage houses and other custodians, nominees
and fiduciaries to send proxy material to beneficial owners, and EXCEL or Telco,
as the case may be, will, upon request, reimburse them for their reasonable
expenses in so doing.
HOLDERS OF EXCEL COMMON STOCK AND HOLDERS OF TELCO COMMON STOCK SHOULD NOT
SEND IN ANY STOCK OR SHARE CERTIFICATES WITH THEIR PROXY CARDS. A TRANSMITTAL
FORM WITH INSTRUCTIONS FOR THE SURRENDER OF CERTIFICATES FOR EXCEL COMMON STOCK
AND TELCO COMMON STOCK WILL BE MAILED BY EXCEL AND TELCO TO THEIR RESPECTIVE
HOLDERS OF COMMON STOCK AS SOON AS PRACTICABLE AFTER THE CONSUMMATION OF THE
TRANSACTION.
64
<PAGE> 70
THE MERGER AGREEMENT
GENERAL
The Merger Agreement contemplates the Mergers of E-Sub and T-Sub, two
wholly owned subsidiaries of Holdings, with and into EXCEL and Telco,
respectively, with EXCEL and Telco surviving the Mergers as wholly owned
subsidiaries of Holdings. The Mergers will become effective in accordance with
(a) the Certificate of Merger to be filed with the Secretary of State of
Delaware with respect to the EXCEL Merger and (b) the Articles of Merger to be
filed with the Virginia State Corporation Commission with respect to the Telco
Merger. It is anticipated that such filings will be made immediately after the
Closing under the Merger Agreement, which Closing, in turn, is expected to occur
as soon as practicable after the last of the conditions precedent to the Mergers
set forth in the Merger Agreement has been satisfied or waived. The Merger
Agreement obligates EXCEL to use its best efforts to obtain listing of the
Holdings Common Stock on the NYSE prior to the Effective Time. The following
description of the Merger Agreement is qualified by reference to the complete
text of the Merger Agreement, which is incorporated by reference herein and
attached hereto as Appendix I. Capitalized terms used in the description of the
Merger Agreement and not otherwise defined are used herein as defined in the
Merger Agreement.
CONSIDERATION TO BE RECEIVED IN THE MERGERS
Telco Merger. At the Effective Time, (a) each outstanding share of Telco
Common Stock (excluding those held in the treasury of Telco) and all rights in
respect thereof will be converted into the right to receive (i) 0.7595 shares of
Holdings Common Stock and (ii) $15.00 in cash and (b) each outstanding share of
Telco Common Stock held in the treasury of Telco will be canceled and cease to
exist.
EXCEL Merger. At the Effective Time, (a) each outstanding share of EXCEL
Common Stock (excluding those held in the treasury of EXCEL) and all rights in
respect thereof will be converted into the right to receive one share of
Holdings Common Stock and (b) each outstanding share of EXCEL Common Stock held
in the treasury of EXCEL will be canceled and cease to exist.
Exchange of Shares. Subject to the terms and conditions of the Merger
Agreement, at or prior to the Effective Time, Holdings will appoint an exchange
agent (the "Exchange Agent") to effect the exchange of (a) EXCEL Common Stock
for Holdings Common Stock and (b) Telco Common Stock for Holdings Common Stock
and cash. Holdings will from time to time deposit certificates representing
shares of Holdings Common Stock and cash in the amount required to pay the Cash
Consideration with the Exchange Agent for conversion of Telco Common Stock and
EXCEL Common Stock. Commencing immediately after the Effective Time, holders of
Telco Common Stock or EXCEL Common Stock may surrender their certificates to the
Exchange Agent (or, if at the time of such surrender there is no Exchange Agent,
to Holdings directly). In exchange for such share certificates, holders will
receive (a) Holdings Common Stock certificates representing such number of
shares as described under "-- Consideration to be Received in the Mergers," and
(b) in the case of the surrender of Telco Common Stock, cash in the amount of
the Cash Consideration, together with a cash payment in lieu of fractional
shares, if any. Holders of unexchanged shares of Telco Common Stock or EXCEL
Common Stock will not be entitled to receive any dividends or other
distributions payable by Holdings until their certificates are surrendered. Upon
surrender, however, subject to applicable laws, such holders will receive
accumulated dividends and distributions, without interest.
No fractional shares of Holdings Common Stock will be issued to holders of
Telco Common Stock. For each fractional share that would otherwise be issued to
holders of Telco Common Stock, the Exchange Agent will pay by check an amount
equal to (as elected by Holdings prior to the Effective Time) (a) a pro rata
portion of the proceeds of the sale by the Exchange Agent of shares of Holdings
Common Stock representing the aggregate of all such fractional shares, such sale
to be executed by the Exchange Agent as promptly after the Effective Time as, in
the Exchange Agent's reasonable judgment, is consistent with obtaining the best
execution of such sales in light of prevailing market conditions or (b) the
product obtained by multiplying (i) the fractional share interest to which such
holder would otherwise have been entitled (after taking into account all shares
of Telco Common Stock held at the Effective Time by such holder) by (ii) the
closing
65
<PAGE> 71
price for a share of Holdings Common Stock on the NYSE Composite Transaction
Tape on the first business day immediately following the Effective Time.
TREATMENT OF STOCK OPTIONS
At the Effective Time, (a) each outstanding and unexercised option to
purchase shares of EXCEL Common Stock will be assumed by Holdings (the "Assumed
EXCEL Options") and converted into an option to purchase one share of Holdings
Common Stock and (b) except for certain options as described under "-- Interests
of Certain Persons in the Transaction -- Telco Shareholders Agreement," each
outstanding and unexercised option to purchase shares of Telco Common Stock will
be assumed by Holdings (the "Assumed Telco Options") and converted into an
option to purchase 1.5190 shares of Holdings Common Stock. The exercise price
per share with respect to the Assumed EXCEL Options will be unchanged, and the
new option otherwise will have the same terms and conditions as in effect
immediately prior to the Effective Time. The exercise price per share with
respect to the Assumed Telco Options will equal the exercise price under the
original option divided by 1.5190, and the new option otherwise will have the
same terms and conditions as in effect immediately prior to the Effective Time.
For a further discussion of the treatment of EXCEL and Telco stock options
and other employee benefit plans under the Merger Agreement, see "-- Certain
Benefits Matters" and "The Merger -- Interests of Certain Persons in the
Transaction." For a description of Holdings Common Stock, see "Description of
Holdings Capital Stock -- Common Stock."
HOLDINGS FOLLOWING THE MERGER
Corporate Name. The Merger Agreement provides that at or prior to the
Effective Time, the corporate name of Holdings will be changed to "EXCEL
Communications, Inc."
Board. From and after the Effective Time, the Holdings Board will consist
of the current EXCEL Board, together with Donald A. Burns, the current Vice
Chairman of the Board, President and Chief Executive Officer of Telco and Henry
G. Luken, III, the current Chairman of the Telco Board. See "Management of
Holdings -- Directors."
CERTAIN CONDITIONS
Conditions of Each Party's Obligation to Effect the Mergers. In addition to
stockholder approval, the obligation of each party to the Merger Agreement to
consummate the Mergers is subject to the following: (a) no statute, rule,
regulation, executive order, decree or injunction shall have been enacted,
entered, promulgated or enforced by any court or governmental authority which
makes the Mergers illegal or otherwise prohibits their consummation, (b) any
waiting period applicable to the Mergers under the HSR Act shall have expired or
been terminated, (c) all material authorizations, consents, orders and approvals
of, or declarations and filings with, and all expirations of waiting periods
imposed by, any governmental body, agency or official which are necessary for
the consummation of the Mergers shall have been filed, have occurred or have
been obtained, without imposition of any condition, requirement, restriction or
change of regulation which would reasonably be expected to either (i) have a
Material Adverse Effect on any of Holdings, Telco or EXCEL, or (ii) prevent
Holdings, EXCEL, Telco, E-Sub or T-Sub from realizing in all material respects
the economic benefits of the transactions contemplated by the Merger Agreement
that such parties anticipated receiving therefrom at the time of execution, (d)
no stop order suspending the effectiveness of the Registration Statement shall
be then threatened, initiated or in effect, (e) all required state securities
and blue sky permits or approvals shall have been received, and (f) the Holdings
Common Stock shall have been duly approved for listing on the NYSE.
Additional Conditions to the Obligation of EXCEL. The obligation of EXCEL
to effect the EXCEL Merger is further subject to all of the following
conditions, among others: (a) the representations and warranties of Telco
contained in the Merger Agreement shall be true and correct as of the Closing
Date with the same effect as though made as of the Closing Date (except to the
extent such representations and warranties speak as of an earlier date); (b)
Telco shall have performed or complied in all material respects
66
<PAGE> 72
with all agreements, conditions and covenants required by the Merger Agreement
on or before the Effective Time; (c) (i) each of EXCEL and Telco shall have
received an opinion from its respective tax counsel as to certain tax matters
related to the contemplated transactions and (ii) EXCEL shall have received an
opinion from Telco's regulatory counsel as to certain regulatory matters related
to the contemplated transactions; (d) EXCEL shall have received certain
agreements from Telco's affiliates; (e) there shall not have occurred any event
that has had or could reasonably be expected to have a Material Adverse Effect
on Telco or Holdings; (f) Telco shall have obtained certain required third-party
consents with respect to the transactions contemplated by the Merger Agreement;
and (g) the Employment Agreements and the Non-Competition Agreements shall be in
full force and effect.
Additional Conditions to the Obligation of Telco. The obligation of Telco
to effect the Telco Merger is further subject to all of the following
conditions, among others: (a) the representations and warranties of EXCEL
contained in the Merger Agreement shall be true and correct as of the Closing
Date with the same effect as though made as of the Closing Date (except to the
extent such representations and warranties speak as of an earlier date); (b)
EXCEL shall have performed or complied in all material respects with all
agreements, conditions and covenants required by the Merger Agreement on or
before the Effective Time; (c) each of EXCEL and Telco shall have received an
opinion from its respective tax counsel as to certain tax matters related to the
contemplated transactions; (d) Telco shall have received certain agreements from
EXCEL's affiliates; (e) there shall not have occurred any event that has had or
could reasonably be expected to have a Material Adverse Effect on EXCEL or
Holdings; and (f) EXCEL shall have obtained certain required third-party
consents with respect to the transactions contemplated by the Merger Agreement.
"Material Adverse Effect," as defined in the Merger Agreement, means any
change in or effect on the business of the referenced corporation or any of its
Subsidiaries that is or will be materially adverse to the business, operations
(including the income statement), properties (including intangible properties),
condition (financial or otherwise), assets, liabilities or regulatory status of
such referenced corporation and its Subsidiaries taken as a whole, but shall not
include the effects of changes that are generally applicable in (A) the United
States economy or (B) the United States securities markets if, in either of (A)
or (B), the effect on EXCEL or Telco (as the case may be) and its respective
Subsidiaries, taken as a whole, is not disproportionate relative to the effect
on the other and its Subsidiaries, taken as a whole.
CERTAIN REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains certain representations and warranties of
EXCEL and Telco as to, among other things, due organization and good standing,
authorized capital stock, ownership of subsidiaries and other investments,
corporate authority to enter into the contemplated transactions, recent reports
filed with the Commission, financial statements, tax matters, regulatory
matters, information supplied for use in this Joint Proxy Statement/Prospectus
and the absence of certain undisclosed liabilities relating to contractual
defaults, material changes or events, litigation, violations of law, employee
benefit plans and, with respect to Telco, intellectual property, labor relations
and environmental matters.
CERTAIN COVENANTS
The Merger Agreement provides that prior to the Effective Time, Telco and
its Subsidiaries will each conduct its business in the ordinary course
consistent with past practices. By way of illustration and without limiting the
foregoing, the Merger Agreement places restrictions on the ability of Telco to,
among other things, (a) issue or sell capital stock and related securities, (b)
amend its charter or bylaws, (c) effect a stock split, combination or
reclassification, (d) declare or pay any dividends, (e) repurchase or redeem its
stock, (f) acquire or make any investment in another entity, except for
investments which do not exceed $5 million for any single investment or series
of related investments, or $20 million in the aggregate for all such investments
in any 12-month period, (g) make material dispositions of assets, (h) incur
indebtedness, (i) enter into derivative contracts, (j) adopt a plan of
dissolution, merger or reorganization, (k) increase employee compensation and
severance benefits, (l) make material changes in its tax or accounting policies,
(m) make material capital expenditures, (n) enter into certain agreements for
the leasing of fiber and (o) revalue in any material respect any of its assets.
Furthermore, the Merger Agreement provides that each
67
<PAGE> 73
of Telco, EXCEL and their respective Subsidiaries will use commercially
reasonably efforts to preserve substantially intact its business organization,
to keep available the services of those of its present officers, employees and
consultants who are integral to the operation of its business as presently
conducted, and to preserve its present relationships with significant customers
and suppliers and with other persons and entities with whom it has significant
business relationships.
The Merger Agreement also places restrictions on the ability of EXCEL to
effect a stock split, combination or reclassification, or declare or pay any
dividends. In addition, the Merger Agreement provides that EXCEL will give Telco
prior notice if EXCEL intends to (a) issue capital stock or related securities
for less than fair market value, (b) make acquisitions involving consideration
exceeding $100 million, (c) make dispositions involving consideration exceeding
$100 million, (d) adopt a plan of dissolution or reorganization or (e) enter
into any contract that would prevent or materially delay the migration of "1+
long distance traffic" to Telco's network following the Effective Time. In the
event that Telco objects to any of these proposed activities (each, a "Proposed
Activity") and EXCEL subsequently engages in, or enters into any binding written
agreement or letter of intent with respect to, any Proposed Activity, Telco may,
subject to certain conditions, terminate the Merger Agreement. See
"-- Termination." The Merger Agreement contains certain other covenants,
including covenants relating to the preparation and distribution of this Joint
Proxy Statement/Prospectus, public announcements, mutual notification with
respect to certain matters, access to information and cooperation regarding
certain filings with governmental and other agencies and organizations. In
addition, the Merger Agreement contains a general covenant requiring each of the
parties thereto to use its commercially reasonable efforts to effect the
consummation of the Mergers.
NO SOLICITATION OF TRANSACTIONS
The Merger Agreement provides that neither Telco nor any of its officers,
directors, employees, financial advisors or agents will, without the prior
written consent of EXCEL, directly or indirectly, solicit, initiate, encourage
(including by way of furnishing information) or take any other action to
facilitate any inquiries or proposals which constitute or may reasonably be
expected to lead to an Acquisition Proposal (defined below), engage in any
discussions or negotiations relating thereto, or accept any Acquisition
Proposal. This prohibition does not prevent Telco from complying with applicable
law with respect to tender or exchange offers, nor does it apply, subject to the
observance of certain notice, confidentiality and other requirements, to
discussions and negotiations occurring prior to stockholder approval of the
Merger Agreement relating to Acquisition Proposals if the Telco Board concludes
such action is necessary in order to fulfill its fiduciary duties to the
shareholders of Telco.
As defined in the Merger Agreement, "Acquisition Proposal" means a proposal
or offer for a tender or exchange offer, merger, consolidation or other business
combination involving Telco or any proposal to acquire in any manner a
substantial equity interest in, or all or substantially all the assets of,
Telco.
CERTAIN BENEFITS MATTERS
Except as otherwise set forth in the Merger Agreement or in the Telco
Shareholders Agreement, with respect to Telco's and EXCEL's benefit plans under
which employees' interests are based upon either Telco Common Stock or EXCEL
Common Stock (but which interests do not constitute options), such interests
will, from and after the Effective Time, be based on Holdings Common Stock in
accordance with the Telco Adjusted Exchange Ratio (defined as two times the
Telco Exchange Ratio) or the EXCEL Exchange Ratio, as the case may be.
INDEMNIFICATION AND INSURANCE
For a period of six years following the Effective Time, (i) Holdings and
Telco jointly and severally will indemnify the directors and officers of Telco
who held such positions at any time during the period from the date of the
Merger Agreement through the Effective Time to the fullest extent to which Telco
is permitted to indemnify such officers and directors under its Articles of
Incorporation and Bylaws and applicable law (including, without limitation,
indemnification for actions in the right of Telco) and (ii) Holdings and
68
<PAGE> 74
EXCEL jointly and severally will indemnify the directors and officers of EXCEL
who held such positions at any time during the period from the date of the
Merger Agreement through the Effective Time to the fullest extent to which EXCEL
is permitted to indemnify such officers and directors under its Certificate of
Incorporation and Bylaws and applicable law.
For a period of four years following the Effective Time and subject to
certain limitations, Holdings will cause to be maintained in effect the current
policies (or policies of at least equal coverages and amounts) of directors' and
officers' liability insurance maintained by Telco with respect to claims arising
from facts or events which occurred before the Effective Time.
TERMINATION
Prior to the Effective Time, the Merger Agreement may be terminated as
follows: (a) by Telco and EXCEL by mutual written consent; (b) by either of
Telco or EXCEL if (i) the Mergers have not been consummated on or before
December 31, 1997 (the "Termination Date") (provided that the party wishing to
terminate shall not have prevented such consummation by failing to fulfill any
of its obligations under the Merger Agreement, and provided further that if such
consummation has been prevented solely by the failure to receive certain
regulatory approvals, then the Termination Date shall be extended to May 31,
1998), (ii) a court of competent jurisdiction or governmental, regulatory or
administrative agency or commission has issued an order, decree or ruling which
has become final and nonappealable, or taken any other action permanently to
restrain, enjoin or otherwise prohibit the transactions contemplated by the
Merger Agreement, (iii) the other has breached or failed to comply in any
material respect with any of its obligations under the Merger Agreement, or any
representation or warranty made by the other under the Merger Agreement is
incorrect in any material respect and is not cured within 30 days of notice, and
such breaches, failures or misrepresentations, individually or in the aggregate,
would reasonably be expected to result in a Material Adverse Effect on Holdings,
Telco or EXCEL, (iv) a Material Adverse Effect occurs or an event occurs which
could reasonably be expected to result in a Material Adverse Effect on the other
or Holdings, (v) the board of directors of the other (A) resolves to or does
withdraw or adversely modify its approval or recommendation of the Merger
Agreement or the Mergers, (B) fails to reaffirm such approval or recommendation
upon the request of such party, or (C) approves or recommends any acquisition of
a material portion of its assets or any tender offer for shares of its capital
stock, in either case other than by a party to the Merger Agreement or an
affiliate thereof, or (vi) any of the required approvals of the stockholders of
either have not been obtained at a duly held meeting (including any adjournments
thereof); or (c) by Telco, (i) prior to the approval of the Merger Agreement by
the shareholders of Telco, upon two business days' prior notice to EXCEL, if, as
a result of an Acquisition Proposal received by Telco from a third party, the
Telco Board determines in good faith, after considering applicable provisions of
law and with the advice of counsel, that its fiduciary obligations require that
it accept such Acquisition Proposal (provided that it has and has caused its
financial and legal advisors to negotiate with EXCEL to make such adjustments in
the terms and conditions of the Merger Agreement as would provide the
opportunity for it to proceed with the transactions contemplated thereby) or
(ii) upon five days' prior written notice to EXCEL, if EXCEL takes or engages
in, or enters into any binding written agreement or letter of intent with
respect to, a Proposed Activity with respect to which Telco has delivered a
written notice of objection unless, prior to the expiration of such five-day
notice period, EXCEL has notified Telco in writing that it has terminated or
rescinded the Proposed Activity. See "-- Certain Covenants."
TERMINATION FEE
The Merger Agreement obligates Telco to pay to EXCEL $20 million in cash
(such amount, the "Termination Fee") if (i) EXCEL terminates the Merger
Agreement because the Telco Board or any committee thereof (A) resolves to or
does withdraw or modify in any adverse manner its approval or recommendation of
the Merger Agreement or the Mergers, (B) fails to reaffirm such approval or
recommendation upon EXCEL's request, or (C) approves or recommends any
acquisition of Telco or a material portion of its assets or any tender offer for
shares of its capital stock, in each case, other than by a party to the Merger
Agreement or an affiliate thereof, (ii) EXCEL or Telco terminates due to the
failure to obtain the required approval from the Telco shareholders, (iii) Telco
terminates the Merger Agreement prior to the approval of
69
<PAGE> 75
the Merger Agreement by the Telco shareholders, upon Telco having received an
Acquisition Proposal and the Telco Board having concluded that its fiduciary
obligations under applicable law require that such Acquisition Proposal be
accepted, or (iv) EXCEL terminates as a result of Telco's failure to comply (and
to cure such non-compliance within 30 days' notice of the same) with certain
Merger Agreement covenants relating to the holding of a shareholders meeting,
the solicitation of proxies with respect to the Merger Agreement, and the filing
of certain documents required to effect the Telco Merger with the Virginia State
Corporation Commission, and (b) at the time of such termination or prior to the
meeting of the Telco shareholders there has been an Acquisition Proposal
involving Telco or any of its Subsidiaries (whether or not such offer has been
rejected or withdrawn prior to the time of such termination or of the meeting).
EXPENSES
Each of the parties to the Merger Agreement will bear its own costs and
expenses incurred in connection with the Merger Agreement and the transactions
contemplated thereby, except that the expenses incurred in connection with the
printing of this Joint Proxy Statement/Prospectus, as well as the filing fees
related thereto and any filing fee required in connection with the filing of
premerger notifications under the HSR Act, will be shared equally by Telco and
EXCEL.
MODIFICATION OR AMENDMENT
The Merger Agreement may be amended by action taken by all of the parties
at any time before the Effective Time, but after approval of the Mergers by the
holders of EXCEL Common Stock or Telco Common Stock (whichever shall occur
first), no amendment may be made that would (i) alter or change the amounts or
kinds of consideration to be received by the holders of EXCEL Common Stock or
Telco Common Stock upon consummation of the Mergers, (b) alter or change any
term of the certificate of incorporation of either of the surviving corporations
of the Mergers or Holdings or (c) alter or change any of the terms and
conditions of the Merger Agreement if such alteration or change would adversely
affect the holders of any class or series of securities of EXCEL or Telco.
70
<PAGE> 76
THE PLAN PROPOSALS
THE STOCK OPTION PLAN
The Stock Option Plan was adopted and approved in September, 1997 by the
Compensation Committee of the Holdings Board and approved by each of the EXCEL
Board, the Telco Board and the Holdings Board, in each case subject to the
approval of the holders of the common stock of their respective companies. The
Stock Option Plan is intended to provide a means by which selected employees of
and consultants to Holdings and its subsidiaries may be given an opportunity to
purchase Holdings Common Stock. Holdings, by means of the Stock Option Plan,
will seek to retain the services of persons who are or become employees of or
consultants to Holdings and its subsidiaries, and to provide incentives for such
persons to exert maximum efforts for the success of Holdings and its
subsidiaries.
Options granted under the Stock Option Plan may be either options that are
intended to qualify for treatment as "incentive stock options" under Section 422
of the Code or options that do not so qualify. Options may be granted under the
Stock Option Plan to any person who is an officer or other employee (including
an officer or other employee who is also a director) or consultants of Holdings
or any of its subsidiaries. The exercise price of Incentive Stock Options must
be at least the fair market value of a share of Holdings Common Stock on the
date of grant (and not less than 110% of the fair market value in the case of an
Incentive Stock Option granted to an optionee owning 10% or more of Holdings
Common Stock). The exercise price of Nonqualified Stock Options may be less than
the fair market value of a share of Holdings Common Stock on the date of grant.
A total of 13,000,000 shares of Holdings Common Stock have been reserved for
issuance upon the exercise of options to be granted under the Stock Option Plan
(including approximately 9,136,000 shares issuable upon the exercise of EXCEL
and Telco options that are outstanding and unexercised at the Effective Time and
that will be converted, upon consummation of the Mergers, into options to
purchase shares of Holdings Common Stock) and the maximum number of shares of
Holdings Common Stock for which options may be granted to any participant during
the term of the Stock Option Plan may not exceed 2,000,000.
The Compensation Committee of the Holdings Board, who will be non-employee
directors as such term is used in Rule 16b-3 promulgated under the Exchange Act
and, unless otherwise determined by the Board, outside directors for purposes of
Section 162(m) of the Code, will administer the Stock Option Plan. The
Compensation Committee has full and final authority in their discretion, subject
to the provisions of the Stock Option Plan, to (i) determine the individuals to
whom, and the time or times at which, options shall be granted and the number of
shares of Holdings Common Stock covered by each option, (ii) construe and
interpret the Stock Option Plan and (iii) make all other determinations and take
all other actions deemed necessary or advisable for the proper administration of
the Stock Option Plan. The Stock Option Plan and any option may be amended or
discontinued by the Compensation Committee at any time without the approval of
the stockholders of Holdings, subject to certain exceptions.
The term of an option may not exceed 10 years (five years in the case of an
Incentive Stock Option granted to an optionee owning 10% or more of Holdings
Common Sock). However, options may be granted that provide that at any time
after the Effective Time of the Mergers, in the event of (i) any person or group
of persons becoming for the first time the beneficial owner, directly or
indirectly, of more than 50% of the total voting stock of Holdings, other than
as a result of a transfer or series of related transfers of voting stock from a
person or group of persons who immediately prior to such transfer or transfers
was the beneficial owner, and who after giving effect to such transfer or
transfers continues to be the beneficial owner, of more than 50% of the voting
stock of Holdings; (ii) a merger (other than the Mergers) or consolidation of
Holdings as a result of which the holders of all of the voting stock of Holdings
prior to such event do not continue to hold either directly or indirectly at
least a majority of Holdings voting stock after such event, (iii) a sale of all
or substantially all of the assets of Holdings or (iv) certain changes in the
majority of the Holdings Board during any 12 consecutive month period any
portion of which is after the Effective Time of the Mergers, the options may be
exercised in whole or in part without regard to any provisions thereof. The
accelerated vesting of outstanding options upon the occurrence of such a "change
in control" transaction could have the effect of delaying, deferring, or
preventing a change in control of Holdings.
71
<PAGE> 77
The Employment Agreements of Messrs. Canton, Merrick and Rachlin will
provide that Telco will recommend to the Compensation Committee of the Holdings
Board that Messrs. Canton, Merrick and Rachlin be granted options to purchase
shares of Holdings Common Stock pursuant to the Stock Option Plan as set forth
in the table below, at an exercise price equal to the fair market value of
Holdings Common Stock on the date of grant, which options will vest 50% on the
third anniversary of the date of grant and 50% on the fourth anniversary of the
date of grant (subject to immediate vesting upon the termination of the employee
without Cause (as defined in the Employment Agreements) or upon certain events
constituting a "change of control". The Employment Agreements further provide
that in the event that such options are not granted within 30 days following the
date of the agreement to Messrs. Canton, Merrick or Rachlin, such individual
will be entitled to terminate the Employment Agreement for "Good Reason." Upon
such termination, such individual will be entitled to receive certain
compensation and benefits including, without limitation, (i) severance
compensation equal to his base salary for one year, (ii) a pro rata portion of
the bonus applicable to the year in which such termination occurs and (iii)
continued receipt of certain life insurance benefits and participation in
certain retirement and other benefit plans for the remainder of the term of the
Employment Agreement. See "The Transaction -- Interests of Certain Persons in
the Transaction -- Employment Agreements."
The following table sets forth certain information concerning the initial
options expected to be granted under the Stock Option Plan pursuant to the
Employment Agreements of Messrs. Canton, Merrick and Rachlin, which agreements
provide that Telco will recommend to the Compensation Committee of the Holdings
Board that such options be granted. Holdings has no current plans or proposals
to grant any additional options under the Stock Option Plan.
NEW PLAN BENEFITS
1997 STOCK OPTION PLAN
<TABLE>
<CAPTION>
AGGREGATE VALUE OF NUMBER OF SHARES
NAME AND POSITION OPTIONS(1) UNDERLYING OPTIONS
----------------- ------------------ ------------------
<S> <C> <C>
Stephen G. Canton, $3,170,000 500,000
President -- Consumer and Commercial Sales
Divisions of Telco
Nicholas A. Merrick, $1,268,000 200,000
Executive Vice President and Chief Financial
Officer of Holdings
Bryan K. Rachlin, $1,268,000 200,000
General Counsel and Chief Operating Officer of
Telco
---------- -------
Executive Group Total $5,706,000 900,000
========== =======
Non-Executive Director Group $ 0 0
Non-Executive Officer Employee Group $ 0 0
</TABLE>
- ---------------
(1) The fair value of the options to be granted was estimated to be $6.34 per
option using the Black-Scholes option pricing model.
Holdings will file with the Securities and Exchange Commission a
Registration Statement on Form S-8, which will become effective upon filing,
covering the issuance of shares of Holdings Common Stock upon exercise of
options to be granted under the Stock Option Plan.
The affirmative vote of a majority of the outstanding shares of EXCEL
Common Stock and Telco Common Stock represented at the EXCEL Meeting and the
Telco Meeting, respectively, and entitled to vote is required for approval of
the Stock Option Plan.
EACH OF THE EXCEL BOARD AND THE TELCO BOARD RECOMMENDS A VOTE FOR THE
APPROVAL OF THE STOCK OPTION PLAN. UNLESS INDICATED OTHERWISE BY YOUR PROXY
VOTE, THE SHARES REPRESENTED BY SUCH PROXY WILL BE VOTED FOR THE APPROVAL OF THE
STOCK OPTION PLAN.
72
<PAGE> 78
THE DIRECTOR STOCK OPTION PLAN
The Director Stock Option Plan was approved in August 1997 by the Telco
Board and in September 1997 by the Compensation Committee of the Holdings Board
and by each of the EXCEL Board and the Holdings Board, in each case subject to
the approval of the holders of the common stock of their respective companies.
The purpose of the Director Stock Option Plan is to encourage ownership of
Holdings by eligible non-employee directors of Holdings whose continued services
are considered essential to Holdings' future progress and to provide them with a
further incentive to remain as directors of Holdings. All options to be granted
under the Director Stock Option Plan will be Nonqualified Options. The exercise
price per share of each option granted under the Director Stock Option Plan will
be equal to 100% of the fair market value of Holdings Common Stock on the date
of grant. A total of 400,000 shares of Holdings Common Stock have been reserved
for issuance under the Director Stock Option Plan.
The Director Stock Option Plan will be administered by the Holdings Board.
The Holdings Board will have full and final authority in their discretion,
subject to the provisions of the Director Stock Option Plan, to (i) determine
the individuals to whom, and the time or times at which, options will be granted
and the number of shares of Holdings Common Stock covered by each option and
(ii) construe and interpret the terms of the Director Stock Option Plan and the
options granted thereunder. Holdings expects that each new non-employee director
of Holdings, upon becoming a director, will receive option grants under the
Director Stock Option Plan. The Holdings Board will also have the authority to
make additional option grants to existing non-employee directors.
Each option will expire ten years from the date of grant. Outstanding
options will expire earlier if an optionee terminates service as a director
before the end of the first ten-year term. If an optionee terminates service as
a director for any reason, including disability or death, the option will
automatically expire 12 months after the date of termination (but in no event
later than the expiration of the ten-year term). Options are not assignable and
may not be transferred other than by will or the laws of descent and
distribution or pursuant to a qualified domestic relations order. Upon a
dissolution or liquidation of Holdings, each outstanding option will terminate
unless otherwise provided by the Holdings Board. In the event of a proposed sale
of all or substantially all of the assets of Holdings or upon certain mergers in
which the stockholders of Holdings receive cash or securities of another issuer,
the options will be assumed by the successor entity or substituted with an
equivalent option.
The Director Stock Option Plan provides that the Holdings Board may amend
or terminate the Director Stock Option Plan in any respect whatsoever, provided
that any such amendment or termination will not affect options previously
granted. If required by Rule 16b-3 under the Exchange Act, or any Code or NYSE
requirements, the Holdings Board will not amend or terminate the Director Stock
Option Plan without stockholder approval.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion of the principal federal income tax consequences
of participation in the Stock Option Plan and the Director Stock Option Plan is
based on statutory authority, as well as judicial and administrative
interpretations, as of the date of this Joint Proxy Statement/Prospectus, all of
which are subject to change at any time (possibly with retroactive effect). As
the law is technical and complex, the discussion below necessarily represents
only a general summary.
Incentive Stock Options. Incentive Stock Options granted under the Stock
Option Plan are intended to meet the definitional requirements of Section 422(b)
of the Code for "incentive stock options."
An employee who receives an Incentive Stock Option does not recognize any
taxable income upon the grant of such Incentive Stock Option. Similarly, the
exercise of an Incentive Stock Option generally does not give rise to federal
income tax to the employee, provided that (i) the federal "alternative minimum
tax," which depends on the employee's particular tax situation, does not apply
and (ii) the employee is employed by Holdings from the date of grant of the
option until 3 months prior to the exercise thereof, except where such
employment terminates by reason of disability (where the 3 month period is
extended to 1 year) or death (where this requirement does not apply). If an
employee exercises an Incentive Stock Option after these
73
<PAGE> 79
requisite periods, the Incentive Stock Option will be treated as a Nonqualified
Stock Option and will be subject to the rules set forth below under the caption
"Nonqualified Options."
Further, if after exercising an Incentive Stock Option, an employee
disposes of the shares so acquired more than two years from the date of grant
and more than one year from the date of receipt of the shares upon exercise of
such Incentive Stock Option (the "applicable holding period"), the employee will
normally recognize a capital gain or loss equal to the difference, if any,
between the amount received for the shares and the employee's tax basis in such
shares.
If, however, an employee does not hold the shares so acquired for the
applicable holding period -- thereby making a "disqualifying disposition" -- the
employee would realize ordinary income on the excess of the fair market value of
the shares at the time the Incentive Stock Option was exercised over the
exercise price and the balance, if any, would be capital gain (provided the
holding period for the shares exceeded one year and the employee held such
shares as a capital asset at such time). If the disqualifying disposition is a
sale or exchange that would permit a loss to be recognized under the Code (were
a loss in fact to be realized), and the sales proceeds are less than the fair
market value of the shares on the date of exercise, the employee's ordinary
income therefrom would be limited to the gain (if any) realized on the sale.
An employee who exercises an Incentive Stock Option by delivering shares
previously acquired pursuant to the exercise of an Incentive Stock Option is
treated as making a "disqualifying disposition" of his or her shares if the
employee delivers them before the expiration of their applicable holding period.
Upon the exercise of an Incentive Stock Option with previously-acquired shares
as to which no disqualifying disposition occurs, despite some uncertainty, it
appears that the employee would not recognize gain or loss with respect to such
previously- acquired shares.
Holdings will not be allowed a federal income tax deduction upon the grant
or exercise of an Incentive Stock Option or the disposition, after the
applicable holding period, of the shares acquired upon exercise of an Incentive
Stock Option. In the event of a disqualifying disposition, Holdings generally
will be entitled to a deduction equal to the ordinary income recognized by the
employee, provided that such amount constitutes an ordinary and necessary
business expense to Holdings and is reasonable and the limitations of Sections
280G and 162(m) of the Code do not apply.
Nonqualified Options. Nonqualified Stock Options granted under the Stock
Option Plan or the Director Stock Option Plan are options that do not qualify as
Incentive Stock Options. An individual who receives a Nonqualified Stock Option
generally will not recognize any taxable income upon the grant of such
Nonqualified Stock Option. However, the individual generally will recognize
ordinary income upon exercise of a Nonqualified Stock Option in an amount equal
to the excess of (i) the fair market value of the shares at the time of exercise
over (ii) the exercise price.
As a result of Section 16(b) of the Exchange Act, any individual who is an
officer or director of Holdings or a beneficial owner of more than ten percent
(10%) of any class of equity securities of Holdings should consult with his or
her tax advisor as to whether the timing of income recognition is deferred for
any period following the exercise of a Nonqualified Stock Option (i.e., the
"Deferral Period"). Absent an election pursuant to Section 83(b) of the Code
filed with the Internal Revenue Service within 30 days after the date of
transfer of such shares pursuant to the option (the "Section 83(b) election"),
recognition of income by such an individual will be deferred until the
expiration of the Deferral Period, if any.
The ordinary income recognized with respect to the receipt of shares upon
exercise of a Nonqualified Stock Option will be subject to both wage withholding
and employment taxes.
An individual's tax basis in the shares received on exercise of a
Nonqualified Stock Option will be equal to the amount of any cash paid on
exercise, plus the amount of ordinary income recognized by such individual as a
result of the receipt of such shares. The holding period for such shares would
begin just after the transfer of the shares or, in the case of an officer,
director or beneficial owner of more than 10% of any class of equity securities
of Holdings who does not make a Section 83(b) election, just after the
expiration of the Deferral Period, if any. A federal income tax deduction
generally will be allowed to Holdings in an amount equal to the ordinary income
included by the individual with respect to his or her Nonqualified Stock Option,
provided that
74
<PAGE> 80
such amount constitutes an ordinary and necessary business expense to Holdings
and is reasonable and the limitations of Sections 280G and 162(m) of the Code do
not apply.
If an individual exercises a Nonqualified Stock Option by delivering shares
to Holdings, other than shares previously acquired pursuant to the exercise of
an Incentive Stock Option which is treated as a "disqualifying disposition" as
described above, the individual will not recognize gain or loss with respect to
the exchange of such shares, even if their then fair market value is different
from the individual's tax basis. The individual, however, will be taxed as
described above with respect to the exercise of the Nonqualified Stock Option as
if he or she had paid the exercise price in cash, and Holdings likewise
generally will be entitled to an equivalent tax deduction. So long as the
individual receives a separate identifiable stock certificate therefor, the tax
basis and the holding period for that number of shares received on such exercise
that is equal to the number of shares surrendered on such exercise will be equal
to the tax basis and include the holding period of those shares surrendered. The
individual's tax basis and holding period for the additional shares received on
exercise of a Nonqualified Stock Option paid for, in whole or in part, with
shares will be the same as if the individual had exercised the Nonqualified
Stock Option solely for cash.
Change in Control. As described above, upon a "change in control" of
Holdings, all the then-outstanding stock options will immediately become
exercisable. In general, if the total amount of payments to an individual that
are contingent upon a "change of control" of Holdings (as defined in Section
280G of the Code), including payments under the Stock Option Plan that vest upon
a "change in control," equals or exceeds three times the individual's "base
amount" (generally, such individual's average annual compensation for the five
complete years preceding the change in control), then, subject to certain
exceptions, the payments may be treated as "parachute payments" under the Code,
in which case a portion of such payments would be non-deductible to Holdings and
the individual would be subject to a 20% excise tax on such portion of the
payments.
Certain Limitations on Deductibility of Executive Compensation. With
certain exceptions, Section 162(m) of the Code denies a deduction to
publicly-held corporations for compensation paid to certain executive officers
in excess of $1 million per executive per taxable year (including any deduction
with respect to the exercise of a Nonqualified Stock Option or the disqualifying
disposition of stock purchased pursuant to an Incentive Stock Option). One such
exception applies to certain performance-based compensation that has been
approved by stockholders in a separate vote where certain other requirements are
met. Holdings presently intends that any new Nonqualified Stock Options granted
under the Stock Option Plan with an exercise price of not less than fair market
value at the date of grant will qualify for the performance-based compensation
exception to Section 162(m).
Holdings will file with the Securities and Exchange Commission a
Registration Statement on Form S-8, which will become effective upon filing,
covering the issuance of shares of Holdings Common Stock upon exercise of
options to be granted under the Director Stock Option Plan.
The affirmative vote of a majority of the outstanding shares of EXCEL
Common Stock and Telco Common Stock represented at the EXCEL Meeting and the
Telco Meeting, respectively, and entitled to vote is required for approval of
the Director Stock Option Plan.
EACH OF THE EXCEL BOARD AND THE TELCO BOARD RECOMMENDS A VOTE FOR THE
APPROVAL OF THE DIRECTOR STOCK OPTION PLAN. UNLESS INDICATED OTHERWISE BY YOUR
PROXY VOTE, THE SHARES REPRESENTED BY SUCH PROXY WILL BE VOTED FOR THE APPROVAL
OF THE DIRECTOR STOCK OPTION PLAN.
75
<PAGE> 81
COMPARISON OF STOCKHOLDERS' RIGHTS
At the Effective Time, the shareholders of Telco and the stockholders of
EXCEL will become stockholders of Holdings, and their rights will be governed by
the DGCL and Holdings' certificate of incorporation (the "Holdings Charter") and
bylaws (the "Holdings Bylaws") as in effect at the Effective Time. The following
are summaries of certain differences between (i) the rights of Telco
shareholders and Holdings stockholders, and (ii) the rights of EXCEL
stockholders and Holdings stockholders.
The following discussions are not intended to be complete and are qualified
by reference to the DGCL, the VSCA, the Holdings Charter and Holdings Bylaws,
the articles of incorporation and bylaws of Telco (the "Telco Charter" and the
"Telco Bylaws," respectively), and the certificate of incorporation and bylaws
of EXCEL (the "EXCEL Charter" and the "EXCEL Bylaws," respectively), as
appropriate. Copies of the Holdings Charter, in substantially the form to be
adopted prior to the Effective Time, and the Holdings Bylaws are attached to
this Joint Proxy Statement/Prospectus as Appendix IV and Appendix V,
respectively.
Since Holdings and EXCEL are organized under the laws of the State of
Delaware, and the charter and bylaws of Holdings and EXCEL are similar, there
are no significant differences between the rights of holders of Holdings Common
Stock and holders of EXCEL Common Stock other than as described below with
respect to notices of stockholder proposals.
Telco is organized under the laws of Virginia and, accordingly, differences
in the rights of holders of Holdings Common Stock and Telco Common Stock will
arise both from differences in the DGCL and the VSCA and differences in their
respective charters and bylaws. The Holdings Charter and Holdings Bylaws are
similar to the Telco Charter and Telco Bylaws, except for certain matters as
described below.
CLASSES AND SERIES OF CAPITAL STOCK
Telco
The Telco Charter authorizes Telco to issue 150,000,000 shares of Telco
Common Stock and 15,000,000 shares of preferred stock, no par value ("Telco
Preferred Stock"). As of September 9, 1997, 33,375,065 shares of Telco Common
Stock and no shares of Telco Preferred Stock were issued and outstanding.
Holdings
The Holdings Charter will authorize Holdings to issue 500,000,000 shares of
Holdings Common Stock and 10,000,000 shares of Holdings preferred stock, par
value $.001 per share ("Holdings Preferred Stock"). As of September 9, 1997,
1,000 shares of Holdings Common Stock and no shares of Holdings Preferred Stock
were issued and outstanding.
DIRECTOR AND OFFICER LIABILITY AND INDEMNIFICATION
Telco
The VSCA provides that the articles of incorporation of a Virginia
corporation may limit or eliminate the liability of an officer or director to
the corporation or its shareholders for monetary damages for breach of their
duties as directors or officers, except that the liability of an officer or
director may not be limited if the officer or director is engaged in willful
misconduct or a knowing violation of the criminal law or of any federal or state
securities law, including without limitation, any claim of unlawful insider
trading or manipulation of the market for any security.
The Telco Charter limits the liability of directors (but not officers) to
the maximum extent permitted by the VSCA and provides that any repeal or
modification of such provision by the shareholders of Telco shall not adversely
affect any right or protection of a director of Telco existing at the time of
such repeal or modification.
The Telco Bylaws provide for the indemnification of any person who was or
is a party to any proceeding by reason of the fact that such person is or was a
director or officer of Telco or any subsidiary or affiliate of Telco or is or
was serving at the request of Telco as a director, trustee, partner, officer,
employee, or agent of
76
<PAGE> 82
another foreign or domestic corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise, against any liability incurred by
such person in connection with such proceeding if (a) such person conducted him
or herself in good faith, (b) such person believed, in the case of conduct in
his or her official capacity, that his or her conduct was in the best interests
of Telco, and in all other cases that his or her conduct was at least not
opposed to Telco's best interests, (c) in the case of any criminal proceeding,
such person had no reasonable cause to believe his or her conduct was unlawful
and (d) such person was not grossly negligent or guilty of willful misconduct.
Indemnification under this provision of the Telco Bylaws in connection with a
proceeding by or in the right of Telco is limited to reasonable expenses
incurred in connection with the proceeding. Any indemnification must be
authorized by the Telco Board and no indemnification shall be made in connection
with any proceeding by or in the right of Telco in which the person seeking
indemnification was adjudged liable to Telco or to have improperly received a
personal benefit.
The Telco Bylaws also provide for the advancement of expenses (i.e.,
payment prior to a determination on the merits) to the full extent permitted by
law to any person who is a party to any proceeding by reason of the fact that
such person is or was a director, officer or employee of Telco or of any
subsidiary or affiliate of Telco, or is or was serving at the request of Telco
as a director, trustee, partner, officer, or employee of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise,
upon request of such person and receipt of an undertaking by or on behalf of
such person to repay amounts advanced to the extent that it is ultimately
determined that such person was not eligible for indemnification. The Telco
Bylaws also provide that any modification or repeal of such provision in the
Telco Bylaws or the VSCA shall not diminish any rights or obligations existing
prior to such modification or repeal with respect to any proceeding theretofore
or thereafter brought. In addition, the Telco Bylaws provide that (a) the Telco
Board may approve indemnification of directors, officers, employees or agents to
the full extent permitted by Virginia law and (b) Telco shall enter into
additional contracts providing for indemnification and advancement of expenses
with directors, officers or employees of Telco or its subsidiaries or affiliates
as the Telco Board shall authorize.
Holdings
The DGCL allows a Delaware corporation to include a provision in its
certificate of incorporation limiting or eliminating the liability of directors
for monetary damages for a breach of their fiduciary duty, provided such
directors acted in good faith. However, limitation of liability for (i) breaches
of duty of loyalty, (ii) acts or omissions involving intentional misconduct or
knowing violations of law, (iii) the payment of unlawful dividends, stock
repurchases or redemptions or (iv) any transaction in which the director
received an improper personal benefit, is not allowed. Statutory authority is
granted to Delaware corporations to indemnify directors, officers and agents,
and mandates indemnification under limited circumstances. Indemnification
against expenses incurred by an officer, director or agent in connection with a
proceeding against such person for actions in such capacity is mandatory to the
extent that a person has been successful on the merits. Advancement of such
expenses is permissive only and such person must repay such expenses if it is
ultimately determined that such person is not entitled to indemnification.
The DGCL also permits a corporation to indemnify a director, officer or
agent for fines, judgments or settlements, as well as expenses in the context of
third-party actions, if such person acted in good faith and in or not opposed to
the best interests of the corporation, or in the case of a criminal action, had
no reasonable cause to believe his conduct was unlawful. Indemnification in the
context of derivative actions is restricted to expenses only. Further, if an
officer, director or agent is adjudged liable to the corporation, expenses are
not allowable, subject to limited exceptions where a court deems the award of
expenses appropriate. Determinations regarding permissive indemnification are to
be made by the majority vote of disinterested directors (even if less than a
quorum), or, if there are no such directors, or if such directors so direct, by
independent legal counsel or by the stockholders.
The DGCL grants express authority to a Delaware corporation to purchase
insurance for director and officer liability. Such insurance may be purchased
for any officer, director or agent, regardless of whether that individual is
otherwise eligible for indemnification by the corporation.
77
<PAGE> 83
The Holdings Charter provides that, to the full extent permitted by law, a
director shall not be personally liable to the corporation or its stockholders
for or with respect to any acts or omissions in the performance of his or her
duties as a director, and provides that neither amendment nor repeal, nor the
adoption of any provision inconsistent with, the provisions relating to
limitation on director liability shall adversely affect any right or protection
in respect of any matter, or any cause of action, suit or claim that, but for
the limitation on liability, would accrue or arise prior to such amendment,
repeal or adoption.
The Holdings Charter also provides that the corporation shall indemnify any
person who is or was a party or is threatened to be made a party to, or
testifies in, any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative in nature, 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, employee benefit plan, trust or other enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection with such action,
suit or proceeding to the full extent permitted by law.
SPECIAL MEETINGS OF STOCKHOLDERS
Telco
The VSCA provides that the chairman of the board of directors, the
president, the board of directors or any persons authorized to do so by the
articles of incorporation or bylaws may call a special meeting of shareholders.
The Telco Bylaws provide that a special meeting of shareholders may be called
only by the Telco Board or by the Chairman of the Board or the President of
Telco.
Holdings
Under the DGCL, special meetings of stockholders may be called only by the
board of directors or others as may be authorized by the certificate of
incorporation or bylaws. The Holdings Bylaws provide that a special meeting of
stockholders may be called by the Holdings Board or by the Chairman of the
Board, Chief Executive Officer or President.
ANNUAL MEETING OF STOCKHOLDERS
Telco
Under the VSCA, the circuit court of the city or county where a
corporation's principal office or registered office is located in the
Commonwealth of Virginia, may, after notice to the corporation, order a meeting
to be held on petition of any shareholder of the corporation entitled to
participate in an annual meeting, if an annual meeting was not held within 15
months after its last annual meeting.
Holdings
Under the DGCL, if the annual meeting for the election of directors is not
held on the designated date, the directors are required to cause such meeting to
be held as soon thereafter as may be convenient. If they fail to do so for a
period of 30 days after the designated date, or if no date has been designated,
for a period of 13 months after the organization of the corporation or after its
last annual meeting, the Court of Chancery may summarily order a meeting to be
held upon application of any stockholder or director. However, the DGCL does not
provide for a stockholder to call such meeting other than by application to the
Court of Chancery.
NOTICE OF STOCKHOLDER PROPOSALS
EXCEL
Neither the DGCL nor the EXCEL Bylaws contain any provisions regarding
stockholder proposals.
78
<PAGE> 84
Telco
The VSCA contains no provisions regarding shareholder proposals. Under the
Telco Bylaws, however, for business to be properly brought before a meeting by a
shareholder, notice must generally be received by the company not less than 60
days prior to the meeting and must contain certain specified information
concerning the matter to be brought before the meeting and concerning the
shareholder submitting the proposal.
Holdings
Under the Holdings Bylaws, for business to be properly brought before a
meeting by a stockholder, notice must generally be received by the company not
less than 60 days prior to the meeting and must contain certain specified
information concerning the matter to be brought before the meeting and
concerning the stockholder submitting the proposal.
DIVIDENDS AND DISTRIBUTIONS
Telco
Under the VSCA, a board of directors may authorize, and the corporation may
make, distributions to its shareholders, subject to any restrictions in its
articles of incorporation, except that no distribution may be made if, after
giving it effect, the corporation would not be able to pay its debts as they
become due in the usual course of business or if the corporation's total assets
would be less than the sum of its total liabilities plus (unless the articles of
incorporation permit otherwise) the amount that would be needed, if the
corporation were to be dissolved at the time of the distribution, to satisfy the
preferential rights upon dissolution of shareholders whose preferential rights
are superior to those receiving the distribution.
The Telco Charter does not supplement or alter the provisions of the VSCA.
Holdings
Under the DGCL, subject to any restriction contained in a corporation's
certificate of incorporation, the board of directors may declare, and the
corporation may pay, dividends or other distributions upon the shares of its
capital stock either (i) out of "surplus" or (ii) in the event that there is no
surplus, out of the net profits for the fiscal year in which the dividend is
declared and/or the preceding fiscal year, unless net assets (total assets in
excess of total liabilities) are less than the capital of all outstanding
preferred stock. "Surplus" is defined as the excess of the net assets of the
corporation over the amount determined to be the capital of the corporation by
the board of directors (which amount cannot be less than the aggregate par value
of all issued shares of capital stock).
The Holdings Charter does not supplement or alter the provisions of the
DGCL.
APPRAISAL RIGHTS
Telco
The VSCA provides that shareholders have a right of appraisal (i.e., the
right to dissent and obtain payment of the judicially-determined "fair value" of
their shares) with respect to specified corporate actions, including (i) the
consummation of a plan of merger if the shareholder is entitled to vote on the
merger, (ii) the consummation of a plan of share exchange if the corporation's
shares will be acquired and the shareholder is entitled to vote on the plan,
(iii) most sales or exchanges of all or substantially all of the corporation's
assets and (iv) any other corporate action taken pursuant to a shareholder vote
to the extent that the articles of incorporation, bylaws or a board of
directors' resolution provides that shareholders are entitled to dissent and
obtain payment for their shares. Appraisal rights are not provided to holders of
shares of any class that is either listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. (the "NASD") or
held of record by more than 2,000 shareholders; however, this exception to the
provision of appraisal rights does not apply if (x) the articles of
incorporation provide otherwise, (y) pursuant to a plan of merger or share
exchange, such shares are not converted into cash, or shares or membership
interests of the acquiring or
79
<PAGE> 85
surviving corporation or limited liability company, or shares or membership
interests of any other corporation or limited liability company which at the
record date were either listed subject to notice of issuance on a national
securities exchange or held of record by at least 2,000 record shareholders or
members or (z) the transaction is an "Affiliated Transaction" (as defined in the
VSCA) and is not approved by a majority of "Disinterested Directors" (as defined
in the VSCA).
The Telco Charter and the Telco Bylaws do not contain any additional
provisions relating to dissenters' rights of appraisal.
Holdings
The DGCL provides that a stockholder of a corporation participating in
certain major corporate transactions may, under varying circumstances, be
entitled to appraisal rights pursuant to which such stockholder may receive cash
in the amount of the fair market value of the shares held by such stockholder
(as determined by a court or by agreement of the corporation and the
stockholder) in lieu of the consideration such stockholder may otherwise receive
in the transaction.
Under the DGCL, appraisal rights are not available to (i) stockholders with
respect to a merger or consolidation by a corporation, the shares of which are
either listed on a national securities exchange or designated as a national
market system security on an interdealer quotation system by the NASD or are
held of record by more than 2,000 holders if such stockholders receive only
shares of the surviving corporation or shares of any other corporation which are
either listed on a national securities exchange or designated as a national
market system security on an interdealer quotation system by the NASD or are
held of record by more than 2,000 holders; or (ii) stockholders of a corporation
surviving a merger if no vote of the stockholders of the surviving corporation
is required to approve the merger because, among other things, the number of
shares to be issued in the merger does not exceed 20% of the shares of the
surviving corporation outstanding immediately prior to the merger, and if
certain other conditions are met.
The DGCL also does not provide stockholders of a corporation with appraisal
rights when the corporation acquires another business through the issuance of
its capital stock (i) in exchange for all or substantially all of the assets of
the business to be acquired, (ii) in exchange for more than fifty percent of the
outstanding shares of the corporation to be acquired or (iii) in a merger of the
corporation to be acquired with a subsidiary of the acquiring corporation.
The Holdings Charter and the Holdings Bylaws do not contain any additional
provisions relating to dissenters' rights of appraisal.
STOCK REPURCHASES
Telco
Under the VSCA, a corporation may acquire its own shares. Such acquired
shares constitute authorized but unissued shares of the same class, but
undesignated as to series.
Holdings
Under the DGCL, a corporation may not purchase or redeem its own shares of
capital stock when the capital of the corporation is impaired or when such
purchase or redemption would cause any impairment of the capital of the
corporation. However, a corporation may purchase or redeem out of capital any of
its own preferred shares if such shares will be retired upon the acquisition
thereof and the capital of the corporation will be thereby reduced.
REMOVAL OF DIRECTORS
Telco
Under the VSCA, unless the articles of incorporation provide that directors
may be removed only with cause, the shareholders may remove one or more
directors with or without cause. If a director is elected by a
80
<PAGE> 86
voting group of shareholders, only the shareholders of that voting group may
participate in the vote to remove him. Unless the articles of incorporation
require a greater vote, a director may be removed if the number of votes cast to
remove him constitutes a majority of the votes entitled to be cast at an
election of directors of the voting group or voting groups by which the director
was elected. A director may be removed by the shareholders only at a meeting
called for the purpose of removing him.
The Telco Charter provides that, except with respect to any directors
elected by holders of any one or more series of Telco Preferred Stock voting
separately as a class or classes, the Telco Board is divided into three classes,
each containing one-third of the entire Telco Board and serving staggered
three-year terms.
The Telco Charter also provides that, subject to the terms of any one or
more classes or series of Telco stock, a director may be removed only for cause
and the director's removal must be approved by a majority vote of the entire
Telco Board (not including the director who is the subject of the removal
determination who is not entitled to vote on the matter) or by a majority of
Telco's voting securities entitled to vote at an election for that director,
provided that if an "Interested Person" (as defined in the Telco Charter)
exists, such removal must be approved by (1) a majority vote of the entire Telco
Board, including a majority of the "Continuing Directors" (as defined in the
Telco Charter) or (2) by at least 80% of Telco's voting securities entitled to
vote at an election for that director, including a majority of the votes by
holders of Telco's voting securities entitled to vote at an election for that
director that are not beneficially owned or controlled, directly or indirectly,
by any "Interested Person."
Holdings
Under the DGCL, directors may be removed with or without cause by a
majority of the stockholders entitled to vote at an election of directors,
except (i) unless the certificate of incorporation otherwise provides, if the
board of directors is classified, removal may be for cause only or (ii) where a
corporation has cumulative voting, if less than the entire board of directors is
removed, no director may be removed without cause if the votes cast against his
removal would be sufficient to elect him if then cumulatively voted at an
election of the entire board of directors.
The Holdings Board is not classified and the stockholders of Holdings do
not have the right to cumulate their votes in the election of directors.
Directors are elected by a plurality vote of all of the votes cast at the annual
meeting of stockholders. The Holdings Charter does not alter the provisions of
the DGCL concerning removal for cause only.
CHARTER AMENDMENTS
Telco
Under the VSCA, unless its articles of incorporation or bylaws otherwise
provide or the board of directors requires a greater vote, amendments to a
corporation's articles of incorporation generally require the approval of the
holders of two-thirds of all of the votes entitled to be cast by each voting
group entitled to vote thereon. The articles of incorporation may provide for a
greater or lesser vote, or a vote by separate voting groups, so long as the vote
provided for is not less than a majority of all votes cast on the amendment by
each voting group entitled to vote on the transaction at a meeting at which a
quorum of the voting group exists. If such amendments would affect certain
rights of holders of a particular class of stock, such shares are entitled to
vote as a separate voting group on the proposed amendment.
The Telco Charter provides that the affirmative vote of at least a majority
of the entire Telco Board and a majority of the votes held by the holders of
voting securities is required to amend certain provisions of the Telco Charter,
including provisions relating to the classification of the Telco Board, filling
vacancies on the Telco Board and removal of directors only for cause, except
that, if an "Interested Person" exists, the affirmative vote of a least a
majority of the Telco Board, including a majority of the "Continuing Directors,"
and the affirmative vote of 80% of the votes held by the voting security holders
is required, including a majority of the voting securities that are not
beneficially owned or controlled, directly or indirectly, by any "Interested
Person."
81
<PAGE> 87
Holdings
Under the DGCL, unless its certificate of incorporation or bylaws otherwise
provide, amendments to a corporation's certificate of incorporation generally
require the approval of the holders of a majority of the outstanding stock
entitled to vote thereon and, if such amendments would affect certain rights of
holders of a particular class of stock, the approval of a majority of the
outstanding stock of such class.
The Holdings Charter and Holdings Bylaws do not alter these provisions of
the DGCL.
BYLAW AMENDMENTS
Telco
Under the VSCA, a corporation's board of directors may not amend or repeal
the corporation's bylaws if the articles of incorporation reserve that power
exclusively to the shareholders, or the shareholders, in adopting or amending
particular bylaws, expressly provide that the board of directors may not amend
or repeal such bylaws.
The Telco Charter provides that the Telco Board may adopt, repeal, alter,
amend or rescind the Telco Bylaws by the affirmative vote of at least a majority
of the entire Telco Board, except that if an "Interested Person" exists, the
affirmative vote of at least a majority of the entire Telco Board, including a
majority of the "Continuing Directors," is required. The shareholders may also
adopt, repeal, alter, amend, or rescind the Telco Bylaws by the affirmative vote
of at least 66 2/3% of the votes held by the holders of voting securities. If,
however, an "Interested Person" exists, the vote is increased to 80%, including
a majority of the voting securities that are not beneficially owned or
controlled, directly or indirectly, by any "Interested Person."
Holdings
Under the DGCL, the power to adopt, amend or repeal bylaws is vested in the
voting stockholders. The corporation may, however, in its certificate of
incorporation, confer the power to adopt, amend or repeal bylaws upon the
directors. The conferring of this power to the directors does not divest the
stockholders of the power, nor limit their power to adopt, amend or repeal
bylaws.
The Holdings Charter expressly grants the Holdings Board the power to
adopt, amend and repeal the Holdings Bylaws.
STOCKHOLDER ACTION WITHOUT A MEETING
Telco
Under the VSCA, any action required or permitted to be taken at a
shareholders' meeting may be taken without a meeting and without action by the
board of directors, if the action is taken by all of the shareholders entitled
to vote on the action and one or more written consents describing the action
taken is signed by all of the shareholders entitled to vote on the action and
delivered to the secretary of the corporation.
Holdings
Under the DGCL, unless the certificate of incorporation provides otherwise,
any action to be taken by stockholders may be taken without a meeting, without
prior notice and without a vote, if a consent in writing is signed 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.
The Holdings Charter does not alter these provisions of the DGCL.
82
<PAGE> 88
ANTI-TAKEOVER LAWS
Telco
The VSCA contains provisions governing "Affiliated Transactions." These
provisions, with several exceptions discussed below, apply to Virginia
corporations having more than 300 shareholders of record and require approval of
certain material transactions between a Virginia corporation and any beneficial
owner of more than 10% any class of its outstanding voting shares (an
"Interested Shareholder"), or an affiliate or associate of the corporation that
at any time within the past three years has been an Interested Shareholder, by a
majority of disinterested directors and by the holders of at least two-thirds of
the remaining voting shares. Affiliated Transactions subject to this approval
requirement include mergers, share exchanges, material dispositions of corporate
assets not in the ordinary course of business, any guarantee by the corporation
of a material amount of indebtedness of any Interested Shareholder, certain
dispositions to an Interested Shareholder of voting shares of the corporation,
any dissolution of the corporation proposed by or on behalf of an Interested
Shareholder, or any reclassification, including reverse stock splits,
recapitalization or merger of the corporation with its subsidiaries, which
increases the percentage of voting shares owned beneficially by an Interested
Shareholder by more than 5%.
For a period of three years following the time that an Interested
Shareholder becomes an owner of more than 10% of the outstanding voting shares,
a Virginia corporation cannot engage in any Affiliated Transaction with such
Interested Shareholder without the approval of two-thirds of the voting shares
other than those shares beneficially owned by the Interested Shareholder, and
the approval of a majority of the Disinterested Directors. "Disinterested
Director" means, with respect to a particular Interested Shareholder, a member
of the board who was (1) a member on the date on which an Interested Shareholder
became an Interested Shareholder or (2) recommended for election by, or was
elected to fill a vacancy and received the affirmative vote of, a majority of
the Disinterested Directors then on the board. After the expiration of the
three-year period, the VSCA requires approval of Affiliated Transactions by
two-thirds of the voting shares other than those beneficially owned by the
Interested Shareholder.
The principal exceptions to the special voting requirements apply to
transactions proposed after the three-year period has expired and require either
that the transaction be approved by a majority of Disinterested Directors or
that the transaction satisfy the fair price requirement of the VSCA. In general,
the fair price requirement provides that in a two-step acquisition transaction,
the Interested Shareholder must pay the shareholders in the second step either
the highest amount of cash or the highest amount and same type of consideration
paid to acquire the corporation's shares in the first step.
The VSCA provides that, by affirmative vote of a majority of the voting
shares other than shares owned by any Interested Shareholder, a corporation can
adopt an amendment to its articles of incorporation or bylaws providing that the
Affiliated Transactions provisions shall not apply to the corporation. Telco has
not "opted out" of the Affiliated Transactions provisions.
The VSCA also provides that, with respect to Virginia corporations having
300 or more shareholders of record, shares acquired in a transaction that would
cause the acquiring person's voting strength to meet or exceed any of three
thresholds (20%, 33 1/3% or 50%) have no voting rights with respect to such
shares unless granted by a majority vote of shares not owned by the acquiring
person or any officer or employee-director of the corporation. This provision
empowers an acquiring person to require the Virginia corporation to hold a
special meeting of shareholders to consider the matter within 50 days of its
request. The board of directors of a Virginia corporation can opt out of this
provision at any time before four days after receipt of a control share
acquisition notice. The Telco Charter contains a provision "opting out" of this
provision.
Holdings
Section 203 of the DGCL ("Section 203") restricts the ability of an
"interested stockholder" to merge with or enter into other combinations with a
corporation for a period of three years after becoming an "interested
stockholder." A person is deemed to be an "interested stockholder" upon
acquiring 15% or more of the outstanding voting stock of the target corporation.
However, Section 203 does not apply if (i) prior to the
83
<PAGE> 89
date the person became an interested stockholder, the board of directors of the
target corporation approves the transaction which results in the stockholder
becoming an interested stockholder, (ii) upon consummation of the transaction
which resulted in the stockholder becoming an interested stockholder, the
interested stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced (excluding shares owned by
directors, officers and certain employee stock plans) or (iii) the combination
is approved by the corporation's board of directors and the holders of
two-thirds of the corporation's voting stock at an annual or special meeting of
the stockholders and not by written consent, excluding shares owned by the
interested stockholder.
Section 203 applies to Delaware corporations, the stock of which is (i)
listed on a national securities exchange, (ii) designated as a national market
system security on an interdealer quotation system by the NASD or (iii) held of
record by more than 2,000 stockholders. However, Section 203 does not apply in
certain cases, including (i) if the corporation's original certificate of
incorporation contains a provision expressly electing not to be governed by
Section 203, (ii) the corporation, by action of its board of directors, has
adopted an amendment to its bylaws, expressly electing not to be governed by the
statute, (iii) the corporation, by action of a majority of its stockholders,
adopts an amendment to its certificate of incorporation or bylaws expressly
electing not to be governed by the statute or (iv) the stockholder becomes an
interested stockholder inadvertently and divests itself of sufficient shares so
that the stockholder ceases to be an interested stockholder, provided that the
stockholder would not have been an interested stockholder (but for the
inadvertent acquisition) at any time within the three-year period immediately
prior to a business combination between the corporation and such stockholder.
A Delaware corporation may elect, by amendment to its certificate of
incorporation or bylaws, not to be governed by Section 203. Holdings has not
made such an election.
VOLUNTARY DISSOLUTION
Telco
The VSCA provides that a voluntary dissolution of a corporation must be
proposed by the board of directors adopting a resolution recommending that the
corporation be dissolved voluntarily and submitting the resolution to the
shareholders for their vote. The board of directors may condition its submission
of the proposal for dissolution on any basis. Unless the board of directors, as
a condition to its submission of the proposal for dissolution to the
shareholders, requires a greater vote, the dissolution must be approved by the
holders of more than two-thirds of all votes entitled to be cast on the proposal
to dissolve. The articles of incorporation may provide for a greater or lesser
vote, or a vote by separate voting groups, so long as the vote provided for is
not less than a majority of all of the votes cast on the proposed dissolution by
each voting group entitled to vote on the transaction at a meeting at which a
quorum of the voting group exists.
The Telco Charter provides that any proposal for dissolution shall require
the approval of the holders of a majority of all of the votes cast by each
voting group entitled to vote on the transaction at a meeting at which a quorum
of the voting group exists.
Holdings
The DGCL provides that, unless the board of directors approves a proposal
to dissolve a corporation, the dissolution must be consented to in writing by
stockholders holding 100% of the total voting power of the corporation. If the
dissolution is initiated by the board of directors, it need only be approved by
a majority of the outstanding stock of the corporation entitled to vote thereon.
TRANSACTIONS WITH DIRECTORS
Telco
The VSCA provides that no transaction with the corporation in which a
director of the corporation has a direct or indirect personal interest is void
or voidable by the corporation solely because of the director's interest in the
transaction if (i) the material facts of the transaction and the director's
interest were disclosed or known
84
<PAGE> 90
to the board of directors or a committee thereof and the board of directors or
committee authorized, approved, or ratified the transaction, (ii) the material
facts of the transaction and the director's interest were disclosed to the
shareholders entitled to vote and they authorized, approved, or ratified the
transaction or (iii) the transaction was fair to the corporation.
Holdings
The DGCL provides that no contract or transaction between a corporation and
one or more of its directors or officers, or between a corporation and any other
entity of which one or more of its directors or officers are directors or
officers, or in which one or more of its directors or officers have a financial
interest, is void or voidable if (i) the material facts as to the director's or
officer's relationship or interest and as to the contract or transaction are
disclosed or known to the board of directors or a committee thereof, which
authorizes the contract or transaction in good faith by the affirmative vote of
a majority of the disinterested directors, even though the disinterested
directors are less than a quorum, (ii) the material facts as to the director's
or officer's relationship or interest and as to the contract or transaction are
disclosed or known to the stockholders entitled to vote thereon and the contract
or transaction is specifically approved in good faith by the stockholders or
(iii) the contract or transaction is fair to the corporation as of the time it
is authorized, approved or ratified by the board of directors, a committee
thereof, or the stockholders.
A corporation may make loans to, guarantee the obligations of or otherwise
assist its officers or other employees and those of a subsidiary, including
directors who are also officers or employees of the corporation or a subsidiary,
when such action, in the judgment of the directors, may reasonably be expected
to benefit the corporation.
FILLING VACANCIES ON THE BOARD OF DIRECTORS
Telco
Pursuant to the VSCA, unless the articles of incorporation provide
otherwise, if a vacancy occurs on the board of directors, including a vacancy
resulting from an increase in the number of directors, such vacancy may be
filled by the shareholders, the board of directors or, if the directors
remaining in office constitute less than a quorum, by the affirmative majority
vote of such remaining directors. Unless otherwise provided in the articles of
incorporation, if the vacant office was held by a director elected by a voting
group of shareholders, only the holders of that voting group are entitled to
vote to fill the vacancy if it is filled by the shareholders.
The Telco Charter provides that, except as otherwise provided by the terms
of any one or more classes or series of outstanding capital stock of Telco, any
vacancy occurring on the Telco Board, including any vacancy created by reason of
any increase in the number of directors, shall be filled by the affirmative vote
of at least a majority of the remaining directors, whether or not such remaining
directors constitute a quorum, except that if an "Interested Person" exists,
such majority of the remaining directors must include a majority of the
"Continuing Directors." In addition, the Telco Charter provides that a director
elected to fill a vacancy shall serve for the unexpired term of his or her
predecessor in office.
Holdings
The DGCL provides that vacancies and newly created directorships may be
filled by a majority of the directors then in office, although less than a
quorum, unless otherwise provided in the certificate of incorporation or bylaws.
If the certificate of incorporation directs that a particular class is to elect
such director, however, such vacancy may be filled only by the other directors
elected by such class. If, at the time of filling any vacancy or newly created
directorship, the directors then in office constitute less than a majority of
the entire board (as constituted immediately prior to such increase), the
Delaware Court of Chancery may, upon application of stockholders holding at
least 10% of the total number of shares outstanding and having the right to vote
for such directors, order an election to be held to fill any such vacancy or
newly created directorship or to replace the directors chosen by the directors
then in office.
The Holdings Charter does not alter these provisions of the DGCL.
85
<PAGE> 91
NUMBER AND QUALIFICATION OF DIRECTORS
Telco
The VSCA provides that the minimum number of directors is one. Directors
need not be residents of Virginia or shareholders of the corporation. The number
of directors is fixed by or in the manner specified in, the bylaws. If not so
specified or fixed in accordance with the bylaws, the number of directors is as
specified or fixed in accordance with the articles of incorporation. If the
bylaws fix the number of directors and the board of directors has the right to
amend the bylaws, it may, by amendment to the bylaws, increase or decrease by
30% or less the number of directors last elected by the shareholders or, if the
directors' terms are staggered, the number of directors of all classes
immediately following the most recent election of directors by the shareholders,
but only the shareholders may increase or decrease the number by more than 30%.
The Telco Charter and Telco Bylaws provide that the number of directors of
Telco (exclusive of directors that may be elected by the holders of any one or
more series of Telco Preferred Stock voting separately as a class or classes)
that shall constitute the entire Telco Board shall be not less than three or
more than twelve, such number to be determined from time to time by resolution
adopted by the affirmative vote of a majority of the Telco Board. The Telco
Bylaws establish an advance notice procedure with regard to the nomination,
other than by or at the direction of the Telco Board, of candidates for election
as directors. In general, such notice must be received by Telco not less than 60
days prior to the shareholders meeting and must contain certain specified
information concerning the person to be nominated and the shareholder submitting
the proposal.
Holdings
The DGCL provides that the minimum number of directors is one. The number
of directors is fixed by or in the manner provided in the bylaws, unless the
certificate of incorporation fixes the number of directors, in which case a
change in the number of directors may only be made by amendment to the
certification of incorporation.
The Holdings Bylaws provide that the number of directors initially
constituting the entire Holdings Board shall be two, or such larger or lesser
number (but not less than one) as may be fixed from time to time by action of
the stockholders or the Holdings Board. The Holdings Bylaws provide that none of
the directors must be stockholders of Holdings, residents of the State of
Delaware or citizens of the United States. Each director, however, must be at
least 18 years of age.
PREEMPTIVE RIGHTS
Telco
The VSCA provides that, unless limited or denied in the articles of
incorporation, the shareholders of a corporation generally have a preemptive
right, granted on uniform terms and conditions prescribed by the board of
directors to provide a fair and reasonable opportunity to exercise the right, to
acquire proportional amounts of the corporation's unissued shares upon the
decision of the board of directors to issue them. Unless expressly conferred in
the articles of incorporation, there is no preemptive right with respect to
shares issued to officers or employees of the corporation or its subsidiaries
pursuant to a plan approved by the shareholders, or shares sold other than for
money.
The Telco Charter expressly provides that no holder of shares of capital
stock of Telco shall have any preferential or preemptive right to subscribe for,
purchase or receive any shares of Telco of any class.
Holdings
The DGCL provides that security holders of a corporation only have such
preemptive rights as may be provided in the corporation's certificate of
incorporation.
The Holdings Charter does not provide for preemptive rights.
86
<PAGE> 92
DESCRIPTION OF HOLDINGS CAPITAL STOCK
The summary of the terms of the capital stock of Holdings set forth below
does not purport to be complete and is subject to and qualified in its entirety
by reference to the Holdings Charter and the Holdings Bylaws. Copies of the
Holdings Charter, in substantially the form to be adopted prior to the Effective
Time, and the Holdings Bylaws are attached to this Joint Proxy
Statement/Prospectus as Appendix IV and Appendix V, respectively.
AUTHORIZED CAPITAL STOCK
Under the Holdings Charter, the total number of shares of all classes of
stock that Holdings will have authority to issue is 510,000,000 shares, of which
500,000,000 are shares of Holdings Common Stock and 10,000,000 are shares of
Holdings Preferred Stock.
COMMON STOCK
Each share of Holdings Common Stock has identical rights and privileges in
every respect. The holders of Holdings Common Stock are entitled to vote upon
all matters submitted to a vote of the stockholders of Holdings and are entitled
to one vote for each share of Holdings Common Stock held.
Subject to the prior rights and preferences, if any, applicable to shares
of Holdings Preferred Stock or any series thereof, the holders of Holdings
Common Stock are entitled to receive such dividends (payable in cash, stock or
otherwise) as may be declared thereon by the Holdings Board at any time and from
time to time out of any funds of Holdings legally available therefor.
In the event of any voluntary or involuntary liquidation, dissolution or
winding-up of Holdings, after distribution in full of the preferential amounts,
if any, to be distributed to the holders of Holdings Preferred Stock or any
series thereof, the holders of Holdings Common Stock will be entitled to receive
all of the remaining assets of Holdings available for distribution to its
stockholders, ratably in proportion to the number of shares of Holdings Common
Stock held by them.
The shares of Holdings Common Stock, when issued to holders of outstanding
shares of EXCEL Common Stock or Telco Common Stock in connection with the
Mergers, will be validly issued, fully paid and non-assessable.
Holders of Holdings Common Stock will have no preferences or any
preemptive, conversion or exchange rights.
SERIES PREFERRED STOCK
The Holdings Board is authorized at any time and from time to time to
provide for the issuance of shares of Holdings Preferred Stock in one or more
series, and to fix for each such series such voting powers, full or limited, or
no voting powers, and such designations, preferences and relative,
participating, optional or other special rights and such qualifications,
limitations or restrictions thereof as are set forth in a resolution providing
for the issuance of such series adopted by the Holdings Board. The Holdings
Board could authorize the issuance of shares of Holdings Preferred Stock with
terms and conditions which could discourage a takeover or other transaction that
holders of some or a majority of shares of Holdings Common Stock might believe
to be in their best interests or in which such holders might receive a premium
for their shares of stock over the then market price of such shares. As of the
date hereof, no shares of Holdings Preferred Stock are outstanding and the
Holdings Board has no present intention to issue any shares of Holdings
Preferred Stock after the Effective Time.
PREEMPTIVE RIGHTS
No holder of any shares of any class of stock of Holdings will have any
preemptive or preferential right to acquire or subscribe for any unissued shares
of any class of stock or any authorized securities convertible into or carrying
any right, option or warrant to subscribe for or acquire shares of any class of
stock.
87
<PAGE> 93
TRANSFER AGENT AND REGISTRAR
The principal transfer agent and registrar for Holdings Common Stock will
be designated by EXCEL prior to the consummation of the Mergers.
CERTAIN ANTI-TAKEOVER EFFECTS
DGCL Section 203 prevents an "interested stockholder" (defined generally as
a stockholder owning 15% or more of a corporation's outstanding voting stock)
from engaging in a "business combination" (as defined in the DGCL) with a
Delaware corporation for three years following the date such person became an
interested stockholder, subject to certain exceptions such as transactions done
with the approval of the board of directors and of the holders of at least
two-thirds of the outstanding shares of voting stock not owned by the interested
stockholder. The existence of this provision generally is expected to have an
anti-takeover effect, including possibly discouraging takeover attempts that
might result in a premium over the market price for the shares of Holdings
Common Stock.
In addition, as described above, the Holdings Board is authorized to
provide for the issuance of shares of Holdings Preferred Stock in one or more
series, and to fix for each such series such voting powers, designations,
preferences and other special rights as the Holdings Board determines by
resolution. Furthermore, the Holdings Bylaws provide that only the Chairman of
the Board, President and Chief Executive Officer or the Holdings Board may call
special meetings of the stockholders. These provisions could prevent or delay an
acquisition of Holdings by means of a tender officer, a proxy contest or
otherwise.
CERTAIN TRANSACTIONS
Pursuant to the terms of the Merger Agreement and the Telco Shareholders
Agreement, upon the consummation of the Mergers, Holdings will enter into an
employment agreement with Henry G. Luken, III and Telco will enter into
employment agreements with each of Messrs. Burns, Canton, Merrick and Rachlin.
In addition, upon the consummation of the Mergers, the vesting of certain
outstanding stock options of members of Telco management will be accelerated.
The Merger Agreement also provides that, upon or prior to the consummation of
the Mergers, Holdings will grant registration rights to certain members of Telco
management with respect to the shares of Holdings Common Stock to be issued to
such persons in the Mergers. See "The Transaction -- Interests of Certain
Persons in the Transaction." Pursuant to the Merger Agreement, Holdings also is
required to maintain certain indemnification and insurance coverage with respect
to the directors and officers of Telco for certain specified periods following
the Effective Time. See "The Merger Agreement -- Indemnification and Insurance."
Additional information concerning certain relationships between EXCEL and
Telco and their respective directors and executive officers is included in the
EXCEL Reports and the Telco Reports incorporated by reference in this Joint
Proxy Statement/Prospectus. See "Incorporation of Certain Documents by
Reference" and "Available Information."
LEGAL MATTERS
The validity of the Holdings Common Stock to be issued in connection with
the Mergers will be passed upon by Weil, Gotshal & Manges LLP, New York, New
York.
88
<PAGE> 94
EXPERTS
The consolidated financial statements of EXCEL at December 31, 1996 and
1995 and for each of the three years in the period ended December 31, 1996,
incorporated by reference in this Joint Proxy Statement/ Prospectus, which are
referred to herein and made part of the Registration Statement of which this
Joint Proxy Statement/Prospectus is a part, have been audited by Arthur Andersen
LLP, independent auditors, as set forth in their report thereon also
incorporated herein by reference or included elsewhere herein. Such consolidated
financial statements of EXCEL and the consolidated balance sheet of Holdings are
incorporated herein by reference or included herein in reliance upon such
reports given upon the authority of such firm as experts in accounting and
auditing.
The consolidated financial statements of Telco at December 31, 1996 and
1995 and for each of the three years in the period ended December 31, 1996,
incorporated by reference in this Joint Proxy Statement/ Prospectus, which are
referred to herein and made part of the Registration Statement of which this
Joint Proxy Statement/Prospectus is a part, have been audited by Deloitte &
Touche LLP, independent auditors, as set forth in their report thereon also
incorporated herein by reference or included elsewhere herein. Such consolidated
financial statements of Telco are incorporated herein by reference or included
herein in reliance upon such reports given upon the authority of such firm as
experts in accounting and auditing.
It is expected that representatives of Arthur Andersen LLP, EXCEL's
independent auditors, and Deloitte & Touche LLP, Telco's independent auditors,
will be present at the Special Meetings to respond to appropriate questions of
stockholders and to make a statement if they desire.
FUTURE STOCKHOLDER PROPOSALS
The timing of the first annual meeting of the public stockholders of
Holdings will depend upon when the Mergers are consummated.
If the Mergers are not completed by the first quarter of 1998, Telco and
EXCEL expect to hold annual meetings of stockholders in the second quarter of
1999. Commission rules set forth standards as to what stockholder proposals are
required to be included in a proxy statement.
Any Telco shareholder who intends to submit a proposal for inclusion in the
proxy materials for the 1998 annual meeting of Telco must submit such proposal
to the Secretary of Telco by December 12, 1997. In addition, the Telco Bylaws
provide that any Telco shareholders wishing to make a nomination for director or
wishing to introduce a proposal with respect to other business at the 1998
annual meeting of Telco must give at least 60 days advance notice, and such
notice must meet certain other requirements set forth in the Telco Bylaws. A
copy of the Telco Bylaws may be obtained from the Secretary of Telco.
Any EXCEL stockholder who intends to submit a proposal for inclusion in the
proxy materials for the 1998 annual meeting of EXCEL must submit such proposal
to the Secretary of EXCEL by November 28, 1997.
89
<PAGE> 95
APPENDIX I
AGREEMENT AND PLAN
OF MERGER
DATED AS OF
JUNE 5, 1997
BY AND AMONG
EXCEL COMMUNICATIONS, INC., NEW RES, INC.,
T-SUB, INC., E-SUB, INC.
AND
TELCO COMMUNICATIONS GROUP, INC.
<PAGE> 96
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
ARTICLE I -- THE MERGERS..................................................... I-2
SECTION 1.1 -- The Mergers.............................................. I-2
SECTION 1.2 -- Effective Time........................................... I-2
SECTION 1.3 -- Effect of the Mergers.................................... I-2
SECTION 1.4 -- Subsequent Actions....................................... I-2
SECTION 1.5 -- Certificate of Incorporation; Bylaws; Directors and
Officers of Surviving Corporations....................... I-3
ARTICLE II -- EFFECT ON STOCK OF HOLDINGS, THE SURVIVING CORPORATIONS AND THE
MERGED CORPORATIONS.......................................................... I-3
SECTION 2.1 -- Conversion of Securities................................. I-3
SECTION 2.2 -- Conversion of Shares..................................... I-3
SECTION 2.3 -- Cancellation of Treasury Shares and of Outstanding
Holdings Common Stock.................................... I-4
SECTION 2.4 -- Conversion of Common Stock of the Merged Corporations
into Common Stock of the Surviving Corporations.......... I-4
SECTION 2.5 -- Exchange of Shares Other Than Treasury Shares............ I-4
SECTION 2.6 -- Transfer Books........................................... I-5
SECTION 2.7 -- No Fractional Share Certificates......................... I-5
SECTION 2.8 -- Options to Purchase Company Common Stock................. I-6
SECTION 2.9 -- Certain Adjustments...................................... I-7
ARTICLE III -- CERTAIN MATTERS RELATED TO HOLDINGS........................... I-7
SECTION 3.1 -- Certificate of Incorporation of Holdings................. I-7
SECTION 3.2 -- Corporate Identity....................................... I-7
ARTICLE IV -- REPRESENTATIONS AND WARRANTIES OF Telco........................ I-7
SECTION 4.1 -- Organization and Qualification; Subsidiaries............. I-7
SECTION 4.2 -- Certificate of Incorporation and Bylaws.................. I-7
SECTION 4.3 -- Capitalization........................................... I-8
SECTION 4.4 -- Authority Relative to this Agreement..................... I-8
SECTION 4.5 -- No Conflict; Required Filings and Consents............... I-8
SECTION 4.6 -- SEC Filings; Financial Statements........................ I-9
SECTION 4.7 -- No Undisclosed Liabilities; Absence of Certain Changes or
Events................................................... I-9
SECTION 4.8 -- Litigation............................................... I-10
SECTION 4.9 -- No Violation of Law; Permits............................. I-10
SECTION 4.10 -- Registration Statement; Joint Proxy Statement............ I-10
SECTION 4.11 -- Employee Matters; ERISA.................................. I-11
SECTION 4.12 -- Labor Matters............................................ I-12
SECTION 4.13 -- Environmental Matters.................................... I-12
SECTION 4.14 -- Board Action; Vote Required; Applicability of Article
14....................................................... I-14
SECTION 4.15 -- Opinion of Financial Advisor............................. I-14
SECTION 4.16 -- Brokers.................................................. I-14
SECTION 4.17 -- Tax Matters.............................................. I-15
SECTION 4.18 -- Intellectual Property.................................... I-16
SECTION 4.19 -- Insurance................................................ I-16
SECTION 4.20 -- Ownership of Securities.................................. I-16
SECTION 4.21 -- Certain Contracts........................................ I-16
SECTION 4.22 -- Certain Regulatory Matters............................... I-17
</TABLE>
I-i
<PAGE> 97
<TABLE>
<CAPTION>
<S> <C> <C>
ARTICLE V -- REPRESENTATIONS AND WARRANTIES OF EXCEL AND THE MERGER
SUBSIDIARIES................................................................. I-17
SECTION 5.1 -- Organization and Qualification; Subsidiaries............. I-17
SECTION 5.2 -- Certificate of Incorporation and Bylaws.................. I-18
SECTION 5.3 -- Capitalization........................................... I-18
SECTION 5.4 -- Authority Relative to this Agreement..................... I-19
SECTION 5.5 -- No Conflict; Required Filings and Consents............... I-19
SECTION 5.6 -- SEC Filings; Financial Statements........................ I-19
SECTION 5.7 -- No Undisclosed Liabilities; Absence of Certain Changes or
Events................................................... I-20
SECTION 5.8 -- No Violation of Law; Permits............................. I-20
SECTION 5.9 -- Registration Statement; Joint Proxy Statement............ I-20
SECTION 5.10 -- Board Action; Vote Required.............................. I-21
SECTION 5.11 -- Opinion of Financial Advisor............................. I-21
SECTION 5.12 -- Brokers.................................................. I-21
SECTION 5.13 -- Ownership of Securities.................................. I-21
SECTION 5.14 -- Activities of Merger Subsidiaries........................ I-21
SECTION 5.15 -- Financing................................................ I-21
SECTION 5.16 -- Litigation............................................... I-21
SECTION 5.17 -- Employee Matters; ERISA.................................. I-22
SECTION 5.18 -- Tax Matters.............................................. I-22
SECTION 5.19 -- Intellectual Property.................................... I-23
SECTION 5.20 -- Certain Contracts........................................ I-23
SECTION 5.21 -- Certain Regulatory Matters............................... I-24
ARTICLE VI -- CONDUCT OF BUSINESS PENDING THE MERGERS........................ I-24
SECTION 6.1 -- Conduct of Business of Telco............................. I-24
SECTION 6.2 -- Conduct of Business of EXCEL............................. I-27
SECTION 6.3 -- No Solicitation.......................................... I-28
SECTION 6.4 -- Subsequent Financial Statements.......................... I-29
SECTION 6.5 -- Control of Operations.................................... I-29
ARTICLE VII -- ADDITIONAL AGREEMENTS......................................... I-29
SECTION 7.1 -- Joint Proxy Statement and the Registration Statement..... I-29
SECTION 7.2 -- EXCEL and Telco Stockholders' Meetings and Consummation
of the Mergers........................................... I-30
SECTION 7.3 -- Additional Agreements.................................... I-30
SECTION 7.4 -- Notification of Certain Matters.......................... I-30
SECTION 7.5 -- Access to Information.................................... I-31
SECTION 7.6 -- Public Announcements..................................... I-31
SECTION 7.7 -- Indemnification; Directors' and Officers' Insurance...... I-31
SECTION 7.8 -- Employee Benefit Plans................................... I-32
SECTION 7.9 -- Employment Arrangements.................................. I-32
SECTION 7.10 -- Stock Exchange Listing................................... I-32
SECTION 7.11 -- Post-Merger Holdings Board of Directors.................. I-32
SECTION 7.12 -- Registration Rights...................................... I-32
SECTION 7.13 -- Affiliates............................................... I-32
SECTION 7.14 -- Blue Sky................................................. I-33
SECTION 7.15 -- Compliance............................................... I-33
ARTICLE VIII -- CONDITIONS TO MERGERS........................................ I-33
SECTION 8.1 -- Conditions to Obligations of Each Party to Effect the
Mergers.................................................. I-33
SECTION 8.2 -- Additional Conditions to Obligations of EXCEL............ I-34
SECTION 8.3 -- Additional Conditions to Obligations of Telco............ I-35
</TABLE>
I-ii
<PAGE> 98
<TABLE>
<CAPTION>
<S> <C> <C>
ARTICLE IX -- TERMINATION, AMENDMENT AND WAIVER.............................. I-35
SECTION 9.1 -- Termination.............................................. I-35
SECTION 9.2 -- Effect of Termination.................................... I-37
SECTION 9.3 -- Amendment................................................ I-37
SECTION 9.4 -- Waiver................................................... I-37
ARTICLE X -- GENERAL PROVISIONS.............................................. I-37
SECTION 10.1 -- Non-Survival of Representations, Warranties and
Agreements............................................... I-37
SECTION 10.2 -- Notices.................................................. I-37
SECTION 10.3 -- Expenses................................................. I-38
SECTION 10.4 -- Certain Definitions...................................... I-38
SECTION 10.5 -- Headings................................................. I-39
SECTION 10.6 -- Severability............................................. I-39
SECTION 10.7 -- Entire Agreement; No Third-Party Beneficiaries........... I-39
SECTION 10.8 -- Assignment............................................... I-39
SECTION 10.9 -- Governing Law............................................ I-39
SECTION 10.10 -- Counterparts............................................. I-39
APPENDIX I Form of Holdings Certificate of Incorporation
APPENDIX II Form of Registration Rights Agreement
APPENDIX III Form of Tax Certificate (EXCEL)
APPENDIX IV Form of Opinion re: Regulatory Matters
APPENDIX V Form of Tax Certificate (Telco)
Schedule 4.1 Subsidiaries
Schedule 4.3 Option Plans; Equity Rights; Encumbrances on Capital Stock
of Subsidiaries or Rights with respect thereto; Equity
Interests in Others; Shareholders Agreements
Schedule 4.5 Conflicts; Filings; Consents
Schedule 4.7 Liabilities
Schedule 4.8 Litigation
Schedule 4.9 Investigations; Restrictions on Business
Schedule 4.11 Benefit Plans
Schedule 4.12 Labor Agreements; Union Matters; Labor Proceedings;
Indemnification Agreements
Schedule 4.13 Environmental
Schedule 4.17 Tax Matters
Schedule 4.18 Intellectual Property
Schedule 4.19 Insurance
Schedule 4.20 Ownership of EXCEL Common Stock
Schedule 4.21 Contracts
Schedule 4.22 Regulatory Matters
Schedule 5.3 Option Plans; Issuance of Shares; Equity Rights; Repurchase
of Shares; Shareholders Agreements
Schedule 5.5 Conflicts; Filings; Consents
Schedule 5.7 Liabilities
Schedule 5.8 Investigations; Restrictions on Business
Schedule 5.16 Litigation
Schedule 5.17 Benefit Plans
Schedule 5.18 Tax Matters
Schedule 5.19 Intellectual Property
Schedule 5.20 Certain Contracts
Schedule 5.21 Regulatory Matters
Schedule 6.1 Conduct of Business of Telco
</TABLE>
I-iii
<PAGE> 99
Schedule 6.2 Conduct of Business of EXCEL
Schedule 7.8 EXCEL Stock Plans
Schedule 8.2(g) Consents under Telco Agreements
I-iv
<PAGE> 100
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
DEFINED TERM SECTION
------------ -------
<S> <C>
1933 Act........................................................10.4
Acquisition Proposal.............................................6.3
affiliate.......................................................10.4
Agreement............................................First Paragraph
Bankruptcy Exception.............................................4.4
Cash Consideration...............................................2.3
CERCLIS.........................................................4.13
Closing..........................................................7.2
Closing Date.....................................................7.2
Code........................................................Recitals
Common Shares Trust..............................................2.7
Confidentiality Agreement........................................7.5
Consents.........................................................8.1
Contracts.......................................................4.21
control.........................................................10.4
Delaware Law.....................................................1.1
DLJ.............................................................4.15
Effective Time...................................................1.2
Employment Agreements............................................7.9
Environmental Claim.............................................4.13
Environmental Laws..............................................4.13
Environmental Permits...........................................4.13
ERISA...........................................................4.11
E-Sub................................................First Paragraph
EXCEL................................................First Paragraph
EXCEL Common Stock..........................................Recitals
EXCEL Equity Rights..............................................5.3
EXCEL Exchange Ratio.............................................2.2
EXCEL Merger.....................................................1.1
EXCEL Merger Consideration.......................................1.1
EXCEL Required Permits...........................................5.8
EXCEL SEC Reports................................................5.6
EXCEL Shareholders Agreement................................Recitals
EXCEL Stock Plans................................................7.8
EXCEL Stockholders' Approval....................................5.10
Excess Shares....................................................2.7
Exchange Act....................................................10.4
Exchange Agent...................................................2.5
Exchange Fund....................................................2.5
Exchange Ratios..................................................2.2
Financing.......................................................5.15
GAAP..........................................................4.6(b)
Hazardous Materials.............................................4.13
Holdings.............................................First Paragraph
Holdings Common Stock............................................2.2
Holdings Option..................................................2.8
HSR Act.........................................................10.4
IRS.............................................................4.11
Joint Proxy Statement...........................................4.10
knowledge.......................................................10.4
</TABLE>
I-v
<PAGE> 101
<TABLE>
<CAPTION>
DEFINED TERM SECTION
------------ -------
<S> <C>
Legal Requirements...............................................4.9
Lehman Brothers.................................................5.11
Material Adverse Effect.........................................10.4
Merged Corporation; Merged Corporations..........................1.2
Merger; Mergers..................................................1.2
Merger Subsidiaries..............................................5.1
Non-Competition Agreements.......................................7.9
NPL.............................................................4.13
NYSE.............................................................2.7
Options..........................................................2.8
Party; Parties...................................................1.1
Party Representatives............................................7.5
PBGC............................................................4.11
PCBs............................................................4.13
Permits..........................................................4.9
person..........................................................10.4
Pre-Surrender Dividends..........................................2.5
Registration Statement..........................................4.10
Release.........................................................4.13
Required Permits.................................................4.9
Requisite Regulatory Approvals...................................8.1
SEC..............................................................4.6
Shares...........................................................2.2
Stock Consideration..............................................2.3
Subsidiary......................................................10.4
Surviving Corporation; Surviving Corporations....................1.1
Swidler & Berlin............................................Recitals
Telco................................................First Paragraph
Telco Adjusted Exchange Ratio...................................10.4
Telco Affiliate.............................................Recitals
Telco Affiliate Letter......................................Recitals
Telco Benefit Plans.............................................4.11
Telco Common Stock..........................................Recitals
Telco Contracts.................................................4.21
Telco Exchange Ratio.............................................2.2
Telco Equity Rights..............................................4.3
Telco Merger.....................................................1.1
Telco Merger Consideration.......................................2.3
Telco SEC Reports................................................4.6
Telco Shares.....................................................2.2
Telco Shareholders Agreement................................Recitals
Telco Stockholders' Approval....................................4.14
Termination Date.................................................9.1
Termination Fee..................................................9.2
T-Sub.......................................................Recitals
Virginia Law.....................................................1.1
</TABLE>
I-vi
<PAGE> 102
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of June 5, 1997 (the "Agreement"),
among EXCEL Communications, Inc., a Delaware corporation ("EXCEL"), New RES,
Inc., a Delaware corporation and a wholly-owned subsidiary of EXCEL
("Holdings"), E-Sub, Inc., a Delaware corporation and a wholly-owned subsidiary
of Holdings ("E-Sub"), T-Sub, Inc., a Virginia corporation and a wholly-owned
subsidiary of Holdings ("T-Sub"), and Telco Communications Group, Inc., a
Virginia corporation ("Telco").
WITNESSETH
WHEREAS, the Boards of Directors of Telco and EXCEL have each determined
that it is in the best interests of the stockholders of Telco and EXCEL,
respectively, that each such corporation become a Subsidiary of Holdings
pursuant to the Mergers (as defined in Section 1.1 hereof) and desire to make
certain representations, warranties and agreements in connection with the
Mergers;
WHEREAS, EXCEL is unwilling to enter into this Agreement (and effect the
transactions contemplated hereby) unless, contemporaneously with the execution
and delivery hereof, (a) certain record and beneficial holders of shares of the
common stock, no par value, of Telco ("Telco Common Stock") enter into an
agreement (the "Telco Shareholders Agreement") providing for certain matters
with respect to their shares of Telco Common Stock (including, without
limitation, subject to the express provisions and conditions of that agreement,
to vote such shares in favor of the Telco Merger (as defined in Section 1.1
hereof)) and with respect to the shares of Holdings Common Stock (as defined in
Section 2.2(a) hereof) into which such shares are to be converted pursuant to
Section 2.2(b) hereof and (b) certain members of Telco's management enter into
employment agreements and non-competition agreements as provided in Section 7.9
hereof;
WHEREAS, Telco is unwilling to enter into this Agreement (and effect the
transactions contemplated hereby) unless, contemporaneously with the execution
and delivery hereof, certain record and beneficial holders of shares of the
common stock, par value $0.001 per share, of EXCEL ("EXCEL Common Stock") enter
into an agreement (the "EXCEL Shareholders Agreement") providing for certain
matters with respect to their shares of EXCEL Common Stock (including, without
limitation, subject to the express provisions and conditions of that agreement,
to vote such shares in favor of the EXCEL Merger (as defined in Section 1.1
hereof));
WHEREAS, for federal income tax purposes, it is intended that the formation
of Holdings and the Mergers shall constitute one or more integrated tax-free
transactions under the Internal Revenue Code of 1986, as amended (the "Code");
WHEREAS, Telco has delivered to EXCEL and Holdings a letter identifying all
persons (each, a "Telco Affiliate") who are, at the date hereof, "affiliates" of
Telco for purposes of Rule 145 under the 1933 Act (as defined in Section 10.4
hereof), and each Telco Affiliate has delivered to EXCEL and Holdings a letter
(each, a "Telco Affiliate Letter") relating to (i) the transfer, prior to the
Effective Time (as defined in Section 1.2 hereof), of the shares of Telco Common
Stock beneficially owned by such Telco Affiliate on the date hereof, (ii) the
transfer of the shares of Holdings Common Stock to be received by such Telco
Affiliate in the Telco Merger and (iii) the obligations of each such Telco
Affiliate to deliver to Swidler & Berlin, Chartered, Washington, D.C. ("Swidler
& Berlin"), counsel to Telco, a certificate requested by such firm (if
requested); and
WHEREAS, EXCEL has delivered to Telco and Holdings a letter identifying all
persons (each, an "EXCEL Affiliate") who are, at the date hereof, "affiliates"
of EXCEL for purposes of Rule 145 under the 1933 Act, and each EXCEL Affiliate
has delivered to Telco and Holdings a letter (each, an "EXCEL Affiliate Letter")
relating to (i) the transfer, prior to the Effective Time, of the shares of
EXCEL Common Stock beneficially owned by such EXCEL Affiliate on the date
hereof, (ii) the transfer of the shares of Holdings Common Stock to be received
by such EXCEL Affiliate in the EXCEL Merger and (iii) the obligations of each
such EXCEL Affiliate to deliver to Weil, Gotshal & Manges LLP, counsel to EXCEL,
a certificate requested by such firm (if requested).
I-1
<PAGE> 103
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements herein contained, and intending to be legally bound hereby, the
parties hereto hereby agree as follows:
ARTICLE I
THE MERGERS
SECTION 1.1 -- The Mergers. At the Effective Time and subject to and upon
the terms and conditions of this Agreement, (a) E-Sub shall be merged with and
into EXCEL in accordance with the Delaware General Corporation Law ("Delaware
Law"), the separate corporate existence of E-Sub shall cease, and EXCEL shall
continue as the surviving corporation (the "EXCEL Merger") and (b) T-Sub shall
be merged with and into Telco in accordance with the Virginia Stock Corporation
Act ("Virginia Law"), the separate corporate existence of T-Sub shall cease, and
Telco shall continue as the surviving corporation (the "Telco Merger"). The
EXCEL Merger and the Telco Merger are herein collectively referred to as the
"Mergers" and each individually as a "Merger." EXCEL and Telco as the surviving
corporations after the Mergers are herein sometimes collectively referred to as
the "Surviving Corporations" and each individually as a "Surviving Corporation"
and E-Sub and T-Sub as the non-surviving corporations after the Merger are
herein sometimes collectively referred to as the "Merged Corporations" and each
individually as a "Merged Corporation." Holdings, EXCEL, Telco, E-Sub and T-Sub
are herein referred to collectively as the "Parties" and each individually as a
"Party."
SECTION 1.2 -- Effective Time. As promptly as practicable after the
satisfaction or waiver of the conditions set forth in Article VIII hereof and
the consummation of the Closing referred to in Section 7.2(b) hereof, the
Parties shall cause the Mergers to be consummated concurrently by (a) filing a
Certificate of Merger with the Secretary of State of the State of Delaware with
respect to the EXCEL Merger, in such form as required by, and executed in
accordance with, the relevant provisions of Delaware Law, and (b) filing
Articles of Merger with the Virginia State Corporation Commission with respect
to the Telco Merger, in such form as required by, and executed in accordance
with, the relevant provisions of Virginia Law (the effective time of such
filings being the "Effective Time").
SECTION 1.3 -- Effect of the Mergers. At the Effective Time, the effect of
the EXCEL Merger shall be as provided in the applicable provisions of Delaware
Law and the effect of the Telco Merger shall be as provided in the applicable
provisions of Virginia Law. Without limiting the generality of the foregoing,
and subject thereto, at the Effective Time, (a) all of the property, rights,
privileges, powers and franchises of EXCEL and E-Sub shall continue with, or
vest in, as the case may be, EXCEL as the Surviving Corporation, and all debts,
liabilities and duties of EXCEL and E-Sub shall continue to be, or become, as
the case may be, the debts, liabilities and duties of EXCEL as the Surviving
Corporation and (b) all of the property, rights, privileges, powers and
franchises of Telco and T-Sub shall continue with, or vest in, as the case may
be, Telco as the Surviving Corporation, and all debts, liabilities and duties of
Telco and T-Sub shall continue to be, or become, as the case may be, the debts,
liabilities and duties of Telco as the Surviving Corporation. As of the
Effective Time, each of the Surviving Corporations shall be a direct,
wholly-owned Subsidiary of Holdings.
SECTION 1.4 -- Subsequent Actions. If, at any time after the Effective
Time, either of the Surviving Corporations shall consider or be advised that any
deeds, bills of sale, assignments, assurances or any other actions or things are
necessary or desirable to continue in, vest, perfect or confirm of record or
otherwise in such Surviving Corporation its right, title or interest in, to or
under any of the rights, properties, privileges, franchises or assets of either
of its constituent corporations acquired or to be acquired by such Surviving
Corporation as a result of, or in connection with, one of the Mergers or
otherwise to carry out this Agreement, the officers and directors of such
Surviving Corporation shall be directed and authorized to execute and deliver,
in the name and on behalf of either of such constituent corporations, all such
deeds, bills of sale, assignments and assurances and to take and do, in the name
and on behalf of each of such corporations or otherwise, all such other actions
and things as may be necessary or desirable to vest, perfect or confirm any and
all right, title and interest in, to and under such rights, properties,
privileges, franchises or assets in such Surviving Corporation or otherwise to
carry out this Agreement.
I-2
<PAGE> 104
SECTION 1.5 -- Certificate of Incorporation; Bylaws; Directors and Officers
of Surviving Corporations. At the Effective Time:
(a) the Certificate of Incorporation of EXCEL as a Surviving
Corporation as in effect immediately prior to the Effective Time shall be
the Certificate of Incorporation of EXCEL, and the Articles of
Incorporation of Telco (as such Articles may be amended and restated
pursuant to the Articles of Merger with respect to the Telco Merger) as a
Surviving Corporation shall be the Articles of Incorporation of Telco, in
each case until thereafter amended as provided by law and such Certificate
of Incorporation or Articles of Incorporation;
(b) the respective Bylaws of each of EXCEL and Telco as a Surviving
Corporation shall be the Bylaws of EXCEL and Telco, respectively,
immediately prior to the Effective Time, in each case until thereafter
amended as provided by law and the Certificate of Incorporation or Articles
of Incorporation and such Bylaws of such Surviving Corporation; and
(c) the officers of each of EXCEL and Telco shall be those persons
serving as the officers of EXCEL and Telco, respectively, immediately prior
to the Effective Time, and the directors of each of EXCEL and Telco shall
be those persons designated by EXCEL to serve as the directors of EXCEL and
Telco, respectively, immediately prior to the Effective Time and, in each
case, such persons shall continue to serve in their respective offices of
their respective Surviving Corporation from and after the Effective Time
until their successors are elected or appointed and qualified or until
their resignation or removal.
ARTICLE II
EFFECT ON STOCK OF HOLDINGS, THE SURVIVING
CORPORATIONS AND THE MERGED CORPORATIONS
SECTION 2.1 -- Conversion of Securities. The manner and basis of converting
the shares of common stock of Holdings, the Surviving Corporations and of the
Merged Corporations at the Effective Time, by virtue of the Mergers and without
any action on the part of any of the Parties or the holder of any of such
securities, shall be as hereinafter set forth in this Article II.
SECTION 2.2 -- Conversion of Shares. (a) Each share of EXCEL Common Stock
issued and outstanding immediately before the Effective Time (other than those
held in the treasury of EXCEL) and all rights in respect thereof, shall at the
Effective Time, without any action on the part of any holder thereof, forthwith
cease to exist and be converted into and become exchangeable for, one share of
common stock, par value $0.001 per share ("Holdings Common Stock"), of Holdings
(the "EXCEL Merger Consideration", and such ratio of EXCEL Common Stock to
Holdings Common Stock being herein referred to as the "EXCEL Exchange Ratio").
(b) Each share of Telco Common Stock issued and outstanding immediately
before the Effective Time (other than those held in the treasury of Telco) and
all rights in respect thereof, shall at the Effective Time, without any action
on the part of any holder thereof, forthwith cease to exist and be converted
into and become exchangeable for (i) 0.7595 shares (the "Stock Consideration")
of Holdings Common Stock (such ratio of Telco Common Stock to Holdings Common
Stock being herein referred to as the "Telco Exchange Ratio"; and the EXCEL
Exchange Ratio and the Telco Exchange Ratio being referred to herein
collectively as the "Exchange Ratios") and (ii) $15.00 in cash (the "Cash
Consideration" and, collectively with the Stock Consideration, the "Telco Merger
Consideration").
(c) Commencing immediately after the Effective Time, each certificate
which, immediately prior to the Effective Time, represented issued and
outstanding shares of EXCEL Common Stock ("EXCEL Shares") or Telco Common Stock
("Telco Shares" and, together with the EXCEL Shares, the "Shares"), shall
evidence the right to receive the EXCEL Merger Consideration or the Telco Merger
Consideration, as the case may be, on the basis hereinbefore set forth, but
subject to the limitations set forth in Sections 2.3, 2.5, 2.7, 2.8 and 2.9
hereof.
I-3
<PAGE> 105
SECTION 2.3 -- Cancellation of Treasury Shares and of Outstanding Holdings
Common Stock. (a) At the Effective Time, each share of EXCEL Common Stock held
in the treasury of EXCEL immediately prior to the Effective Time, and each share
of Telco Common Stock held in the treasury of Telco immediately prior to the
Effective Time, shall be canceled and retired and no shares of stock or other
securities of Holdings or either of the Surviving Corporations shall be
issuable, and no payment or other consideration shall be made, with respect
thereto.
(b) At the Effective Time, the shares of Holdings Common Stock held by
EXCEL shall be canceled and retired and no shares of stock or other securities
of Holdings or any other corporation shall be issuable, and no payment or other
consideration shall be made, with respect thereto.
SECTION 2.4 -- Conversion of Common Stock of the Merged Corporations into
Common Stock of the Surviving Corporations. (a) At the Effective Time, each
share of common stock of E-Sub issued and outstanding immediately prior to the
Effective Time, and all rights in respect thereof, shall, without any action on
the part of Holdings, forthwith cease to exist and be converted into 1,000
validly issued, fully paid and nonassessable shares of common stock of EXCEL, as
one of the Surviving Corporations (or such greater number as EXCEL shall
determine prior to the Effective Time). Immediately after the Effective Time and
upon surrender by Holdings of the certificate representing the shares of the
common stock of E-Sub, EXCEL as one of the Surviving Corporations shall deliver
to Holdings an appropriate certificate or certificates representing the common
stock of EXCEL created by conversion of the common stock of E-Sub owned by
Holdings as aforesaid.
(b) At the Effective Time, each share of common stock of T-Sub issued and
outstanding immediately prior to the Effective Time, and all rights in respect
thereof, shall, without any action on the part of Holdings, forthwith cease to
exist and be converted into such number of validly issued, fully paid and
nonassessable shares of common stock of Telco, as one of the Surviving
Corporations, equal to the number of issued and outstanding shares of Telco
Common Stock immediately prior to the Effective Time (or such lesser number as
EXCEL shall determine prior to the Effective Time) divided by the number of
issued and outstanding shares of T-Sub. Immediately after the Effective Time and
upon surrender by Holdings of the certificate representing the shares of the
common stock of T-Sub, Telco as one of the Surviving Corporations shall deliver
to Holdings an appropriate certificate or certificates representing the common
stock of Telco created by conversion of the common stock of T-Sub owned by
Holdings as aforesaid.
SECTION 2.5 -- Exchange of Shares Other Than Treasury Shares. Subject to
the terms and conditions hereof, at or prior to the Effective Time, Holdings
shall appoint an exchange agent to effect the exchange of Shares for Holdings
Common Stock and the Cash Consideration in accordance with the provisions of
this Article II (the "Exchange Agent"). From time to time after the Effective
Time, Holdings shall deposit, or cause to be deposited, (i) certificates
representing Holdings Common Stock for conversion of Shares in accordance with
the provisions of Section 2.2 hereof and (ii) cash in the amount required to pay
the Cash Consideration (such cash and such certificates, together with any
dividends or distributions with respect thereto, being herein referred to
collectively as the "Exchange Fund"). Commencing immediately after the Effective
Time and until the appointment of the Exchange Agent shall be terminated, each
holder of a certificate or certificates theretofore representing Shares may
surrender the same to the Exchange Agent, and, after the appointment of the
Exchange Agent shall be terminated, any such holder may surrender any such
certificate to Holdings. Such holder shall be entitled upon such surrender to
receive in exchange therefor (a) a certificate or certificates representing the
number of full shares of Holdings Common Stock into which the Shares theretofore
represented by the certificate or certificates so surrendered shall have been
converted in accordance with the provisions of Section 2.2 hereof, together with
a cash payment in lieu of fractional shares, if any, in accordance with Section
2.7 hereof, and (b) in the case of the surrender of Telco Shares, cash in the
amount of the Cash Consideration. All such shares of Holdings Common Stock
issued in accordance with the immediately preceding sentence shall be deemed to
have been issued at the Effective Time. Until so surrendered and exchanged, each
outstanding certificate which, prior to the Effective Time, represented issued
and outstanding Shares shall be deemed for all corporate purposes of the
Parties, other than the payment of dividends and other distributions, if any, to
represent the right to receive the EXCEL Merger Consideration or the Telco
Merger Consideration, as the case may be. Unless and until any such certificate
theretofore
I-4
<PAGE> 106
representing Shares is so surrendered, no dividend or other distribution, if
any, payable to the holders of record of Holdings Common Stock as of any date
subsequent to the Effective Time shall be paid to the holder of such certificate
in respect thereof. Upon the surrender of any such certificate theretofore
representing Shares, however, the record holder of the certificate or
certificates representing shares of Holdings Common Stock issued in exchange
therefor shall receive from the Exchange Agent or from Holdings, as the case may
be, payment of the amount of dividends and other distributions, if any, which as
of any date subsequent to the Effective Time and until such surrender shall have
become payable with respect to such number of shares of Holdings Common Stock
("Pre-Surrender Dividends"). No interest shall be payable with respect to the
payment of Pre-Surrender Dividends, Cash Consideration or cash in lieu of
fractional shares, upon the surrender of certificates theretofore representing
Shares. After the appointment of the Exchange Agent shall have been terminated,
such holders of Holdings Common Stock that have not received payment of Pre-
Surrender Dividends, Cash Consideration or cash in lieu of fractional shares,
shall look only to Holdings for payment thereof. Notwithstanding the foregoing
provisions of this Section 2.5, neither the Exchange Agent nor any Party shall
be liable to a holder of Shares for any Holdings Common Stock or dividends or
distributions thereon delivered to a public official pursuant to any applicable
abandoned property, escheat or similar law or to a transferee pursuant to
Section 2.6 hereof.
SECTION 2.6 -- Transfer Books. The stock transfer books of EXCEL with
respect to the EXCEL Shares and the stock transfer books of Telco with respect
to the Telco Shares shall each be closed at the Effective Time and no transfer
of any Shares will thereafter be recorded on any of such stock transfer books.
In the event of a transfer of ownership of Shares that is not registered in the
stock transfer records of EXCEL or Telco, as the case may be, at the Effective
Time, cash and/or a certificate or certificates representing the number of full
shares of Holdings Common Stock into which such Shares shall have been converted
in accordance with Section 2.2 hereof shall be issued to the transferee together
with a cash payment in lieu of fractional shares, if any, in accordance with
Section 2.7 hereof, and a cash payment in the amount of Pre-Surrender Dividends,
if any, in accordance with Section 2.5 hereof, if the certificate or
certificates representing such Shares is or are surrendered as provided in
Section 2.5 hereof, accompanied by all documents required to evidence and effect
such transfer and by evidence of payment of any applicable stock transfer tax.
SECTION 2.7 -- No Fractional Share Certificates. (a) No scrip or fractional
share certificate for Holdings Common Stock will be issued upon the surrender
for exchange of certificates evidencing Shares, and an outstanding fractional
share interest will not entitle the owner thereof to vote, to receive dividends
or to any rights of a stockholder of Holdings or of either of the Surviving
Corporations with respect to such fractional share interest.
(b) As promptly as practicable following the Effective Time, the Exchange
Agent shall determine the excess of (i) the number of full shares of Holdings
Common Stock to be issued and delivered to the Exchange Agent pursuant to
Section 2.5 hereof over (ii) the aggregate number of full shares of Holdings
Common Stock to be distributed to holders of Telco Common Stock pursuant to
Section 2.5 hereof (such excess being herein called the "Excess Shares"). As
soon after the Effective Time as practicable, the Exchange Agent, as agent for
the holders of Telco Common Stock, shall sell the Excess Shares at then
prevailing prices on the New York Stock Exchange, Inc. (the "NYSE"), all in the
manner provided in subsection (c) of this Section 2.7.
(c) The sale of the Excess Shares by the Exchange Agent shall be executed
on the NYSE through one or more member firms of the NYSE and shall be executed
in round lots to the extent practicable. The Exchange Agent shall use all
reasonable efforts to complete the sale of the Excess Shares as promptly
following the Effective Time as, in the Exchange Agent's reasonable judgment, is
practicable consistent with obtaining the best execution of such sales in light
of prevailing market conditions. Until the proceeds of such sale or sales have
been distributed to the holders of Telco Common Stock, the Exchange Agent will
hold such proceeds in trust for the holders of Telco Common Stock (the "Common
Shares Trust"). Holdings shall pay all commissions, transfer taxes and other
out-of-pocket transaction costs, including the expenses and compensation of the
Exchange Agent, incurred in connection with such sale of the Excess Shares. The
Exchange Agent shall determine the portion of the Common Shares Trust to which
each holder of Telco Common Stock shall be entitled, if any, by multiplying the
amount of the aggregate net proceeds comprising
I-5
<PAGE> 107
the Common Shares Trust by a fraction the numerator of which is the amount of
fractional share interests to which such holder of Telco Common Stock is
entitled (after taking into account all shares of Telco Common Stock held at the
Effective Time by such holder) and the denominator of which is the aggregate
amount of fractional share interests to which all holders of Telco Common Stock
are entitled.
(d) Notwithstanding the provisions of subsections (b) and (c) of this
Section 2.7, Holdings may elect at any time prior to the Effective Time, in lieu
of the issuance and sale of Excess Shares and the making of the payments
contemplated in such subsections, to pay to the Exchange Agent an amount
sufficient for the Exchange Agent to pay each holder of Telco Common Stock an
amount in cash equal to the product obtained by multiplying (i) the fractional
share interest to which such holder would otherwise be entitled (after taking
into account all shares of Telco Common Stock held at the Effective Time by such
holder) by (ii) the closing price for a share of Holdings Common Stock on the
NYSE Composite Transaction Tape on the first business day immediately following
the Effective Time, and, in such case, all references herein to the cash
proceeds of the sale of the Excess Shares and similar references shall be deemed
to mean and refer to the payments calculated as set forth in this subsection
(d). In such event, Excess Shares shall not be issued or otherwise transferred
to the Exchange Agent pursuant to Section 2.5 hereof.
(e) As soon as practicable after the determination of the amount of cash,
if any, to be paid to holders of Telco Common Stock with respect to any
fractional share interests, the Exchange Agent shall make available such
amounts, net of any required tax withholding, to such holders, subject to and in
accordance with the terms of Section 2.5 hereof.
(f) Any portion of the Exchange Fund and the Common Shares Trust which
remains undistributed for six months after the Effective Time shall be delivered
to Holdings, upon demand, and any holders of EXCEL Common Stock or Telco Common
Stock who have not theretofore complied with the provisions of this Article II
shall thereafter look only to Holdings for satisfaction of their claims for the
Cash Consideration, Holdings Common Stock or any cash in lieu of fractional
shares of Holdings Common Stock and any Pre-Surrender Dividends.
(g) None of Holdings, EXCEL or Telco shall be liable to any holder of
Shares or Holdings Common Stock, as the case may be, for such shares (or
dividends or distributions with respect thereto) or cash from the Exchange Fund
or Common Shares Trust delivered to a public official pursuant to any applicable
abandoned property, escheat or similar law.
SECTION 2.8 -- Options to Purchase Company Common Stock. (a) Except as
otherwise provided in the Telco Shareholders Agreement, at the Effective Time,
each option granted by EXCEL to purchase shares of EXCEL Common Stock, or by
Telco to purchase shares of Telco Common Stock, which is outstanding and
unexercised immediately prior to the Effective Time (collectively, "Options"),
shall be assumed by Holdings and converted into an option (a "Holdings Option")
to purchase shares of Holdings Common Stock in such amount and at such exercise
price as provided below and otherwise having the same terms and conditions as
are in effect immediately prior to the Effective Time:
(i) the number of shares of Holdings Common Stock to be subject to the
Holdings Option shall be equal to the product of (x) the number of shares
of EXCEL Common Stock or Telco Common Stock subject to the original Option
and (y) the EXCEL Exchange Ratio (if the original Option related to EXCEL
Common Stock) or the Telco Adjusted Exchange Ratio (as defined in Section
10.4 hereof) (if the original Option related to Telco Common Stock),
respectively;
(ii) the exercise price per share of Holdings Common Stock under the
Holdings Option shall be equal to (x) the exercise price per share of the
EXCEL Common Stock or Telco Common Stock under the original Option divided
by (y) the EXCEL Exchange Ratio (if the original Option related to EXCEL
Common Stock) or the Telco Adjusted Exchange Ratio (if the original Option
related to Telco Common Stock); and
(iii) upon each exercise of Holdings Options by a holder thereof, the
aggregate number of shares of Holdings Common Stock deliverable upon such
exercise shall be rounded down, if necessary, to the nearest whole share
and the aggregate exercise price shall be rounded up, if necessary, to the
nearest cent.
I-6
<PAGE> 108
The adjustments provided herein with respect to any Options which are "incentive
stock options" (as defined in Section 422 of the Code) shall be effected in a
manner consistent with Section 424(a) of the Code.
(b) Holdings shall take all corporate action necessary to reserve for
issuance a sufficient number of shares of Holdings Common Stock for delivery
upon exercise of Holdings Options in accordance with this Section 2.8. As soon
as practicable (and in no event later than 30 days) after the Effective Time,
Holdings shall file a registration statement on Form S-8 (or any successor or
other appropriate forms), or another appropriate form with respect to the shares
of Holdings Common Stock subject to the Holdings Options and shall use its best
efforts to maintain the effectiveness of such registration statement or
registration statements (and maintain the current status of the prospectus or
prospectuses contained therein) for so long as the Holdings Options remain
outstanding.
SECTION 2.9 -- Certain Adjustments. Without limiting any other provision of
this Agreement, if, between the date of this Agreement and the Effective Time,
the outstanding shares of EXCEL Common Stock or of Telco Common Stock shall be
changed into a different number of shares by reason of any reclassification,
recapitalization, split-up, combination or exchange of shares, or any dividend
payable in stock or other securities shall be declared thereon with a record
date within such period, the exchange ratio established pursuant to the
provisions of Section 2.2 hereof shall be adjusted accordingly to provide to the
holders of EXCEL Common Stock and Telco Common Stock the same economic effect as
contemplated by this Agreement prior to such reclassification, recapitalization,
split-up, combination, exchange or dividend.
ARTICLE III
CERTAIN MATTERS RELATED TO HOLDINGS
SECTION 3.1 -- Certificate of Incorporation of Holdings. Immediately prior
to the Effective Time, EXCEL shall cause the Certificate of Incorporation of
Holdings to be amended and restated to read as set forth in Appendix I hereto.
SECTION 3.2 -- Corporate Identity. EXCEL and Telco agree that prior to or
at the Effective Time, the corporate name of Holdings shall be changed to "EXCEL
Communications, Inc."
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF TELCO
Telco hereby represents and warrants to EXCEL and Holdings as follows:
SECTION 4.1 -- Organization and Qualification; Subsidiaries. Each of Telco
and its Subsidiaries is a corporation duly organized, validly existing and in
good standing under the laws of its jurisdiction of incorporation or
organization. Each of Telco and its Subsidiaries has the requisite corporate
power and authority and any necessary governmental authority, franchise, license
or permit to own, operate or lease the properties that it purports to own,
operate or lease and to carry on its business as it is now being conducted, and
is duly qualified as a foreign corporation to do business, and is in good
standing, in each jurisdiction where the character of its properties owned,
operated or leased or the nature of its activities makes such qualification
necessary, except for such failure which, when taken together with all other
such failures, would not reasonably be expected to have a Material Adverse
Effect on Telco. Telco's Subsidiaries are listed on Schedule 4.1 hereto.
SECTION 4.2 -- Certificate of Incorporation and Bylaws. Telco has
heretofore furnished, or otherwise made available, to EXCEL a complete and
correct copy of the Articles or Certificate of Incorporation and the Bylaws (or
comparable governing documents), each as amended to the date hereof, of Telco
and each of its Subsidiaries. Such Articles or Certificates of Incorporation and
Bylaws (or comparable governing documents) are in full force and effect. Neither
Telco nor any of its Subsidiaries is in violation of any of the provisions of
its respective Articles of Incorporation or its Bylaws (or comparable governing
documents).
I-7
<PAGE> 109
SECTION 4.3 -- Capitalization. (a) The authorized capital stock of Telco
consists of (i) 15,000,000 shares of preferred stock, no par value, none of
which are outstanding and none of which are reserved for issuance and (ii)
150,000,000 shares of Telco Common Stock, of which, as of May 31, 1997,
33,130,942 shares were issued and outstanding and 3,608,933 shares were issuable
upon the exercise of options outstanding under the Telco option plans listed on
Schedule 4.3 hereto. Since May 31, 1997, no shares of Telco Common Stock have
been issued, except upon the exercise of options described in the immediately
preceding sentence. Except as set forth on Schedule 4.3, there are no
outstanding Telco Equity Rights. For purposes of this Agreement, "Telco Equity
Rights" shall mean subscriptions, options, warrants, calls, commitments,
agreements, conversion rights or other rights of any character (contingent or
otherwise) to purchase or otherwise acquire from Telco or any of Telco's
Subsidiaries at any time, or upon the happening of any stated event, any shares
of the capital stock of Telco. Schedule 4.3 sets forth a complete and accurate
list with respect to all outstanding Telco Equity Rights of the holder thereof,
the date of grant, the number of shares for which each such Telco Equity Right
is exercisable, the respective dates upon which each such Telco Equity Right
vests, becomes exercisable and expires, and the exercise price of each such
Telco Equity Right.
(b) There are no outstanding obligations of Telco or any of Telco's
Subsidiaries to repurchase, redeem or otherwise acquire any shares of capital
stock of Telco.
(c) All of the issued and outstanding shares of Telco Common Stock are
validly issued, fully paid and nonassessable.
(d) All of the outstanding capital stock of each of Telco's Subsidiaries is
duly authorized, validly issued, fully paid and nonassessable, and, except as
set forth on Schedule 4.3, is owned by Telco free and clear of any liens,
security interests, pledges, agreements, claims, charges or encumbrances. Except
as set forth on Schedule 4.3, there are no existing subscriptions, options,
warrants, calls, commitments, agreements, conversion rights or other rights of
any character (contingent or otherwise) to purchase or otherwise acquire from
Telco or any of Telco's Subsidiaries at any time, or upon the happening of any
stated event, any shares of the capital stock of any of Telco's Subsidiaries, or
any securities convertible into or exercisable for shares of the capital stock
of any of Telco's Subsidiaries, whether or not presently issued or outstanding
and there are no outstanding obligations of Telco or any of Telco's Subsidiaries
to repurchase, redeem or otherwise acquire any shares of capital stock of any of
Telco's Subsidiaries. Except for equity interests disclosed on Schedule 4.3
hereto and Subsidiaries listed on Schedule 4.1 hereto, Telco does not directly
or indirectly own any equity interest in any other person. Each of Telco's
Subsidiaries is a wholly-owned Subsidiary.
(e) Except as disclosed on Schedule 4.3 hereto, there are no stockholder
agreements, voting trusts or other agreements or understandings to which Telco
is a party or to which it is bound relating to the voting or registration of any
shares of capital stock of Telco. Telco has not taken any action that would
result in, nor is Telco a party to any agreement, arrangement or understanding
not disclosed on Schedule 4.3 hereto that would result in, any Options to
purchase Telco Common Stock that are unvested becoming vested in connection with
or as a result of the execution and delivery of this Agreement or the
consummation of the transactions contemplated hereby.
SECTION 4.4 -- Authority Relative to this Agreement. Telco has the
necessary corporate power and authority to enter into this Agreement and,
subject to obtaining any necessary stockholder approval of the Merger to which
it is a party, to carry out its obligations hereunder. The execution and
delivery of this Agreement by Telco and the consummation by Telco of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of Telco, subject to the approval of this Agreement
by Telco's stockholders. This Agreement has been duly executed and delivered by
Telco and, assuming the due authorization, execution and delivery thereof by the
other Parties, constitutes a legal, valid and binding obligation of Telco,
enforceable against it in accordance with its terms, subject to applicable
bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and
similar laws affecting creditors' rights and remedies generally, and subject, as
to enforceability, to general principles of equity (the "Bankruptcy Exception").
SECTION 4.5 -- No Conflict; Required Filings and Consents. (a) Except as
listed on Schedule 4.5 hereto, the execution and delivery of this Agreement by
Telco do not, and the performance of this Agreement
I-8
<PAGE> 110
by Telco will not, (i) violate or conflict with the Articles of Incorporation or
Bylaws of Telco, (ii) conflict with or violate any law, regulation, court order,
judgment or decree applicable to Telco or any of its Subsidiaries or by which
any of their respective property is bound or affected, (iii) violate or conflict
with the Articles or Certificate of Incorporation or Bylaws (or comparable
governing documents) of any of Telco's Subsidiaries or (iv) result in any breach
of or constitute a default (or an event which with notice or lapse of time or
both would become a default) under, or give to others any rights of termination
or cancellation of, or result in the creation of a lien or encumbrance on any of
the properties or assets of Telco or any of its Subsidiaries pursuant to, result
in the loss of any material benefit under, or require the consent of any other
party to, any contract, instrument, permit, license or franchise to which Telco
or any of its Subsidiaries is a party or by which Telco, any of such
Subsidiaries or any of their respective property is bound or affected, except,
in the case of clauses (ii), (iii) or (iv) above, for conflicts, violations,
breaches, defaults, results or consents which, individually or in the aggregate,
would not have a Material Adverse Effect on Telco.
(b) Except as listed on Schedule 4.5 and except for applicable
requirements, if any, of the Exchange Act (as defined on Section 10.4 hereof),
the premerger notification requirements of the HSR Act, filing and recordation
of appropriate merger or other documents as required by Virginia Law and any
filings required pursuant to any state securities or "blue sky" laws or the
rules of any applicable stock exchanges, neither Telco nor any of its
Subsidiaries is required to submit any notice, report or other filing with any
governmental authority, domestic or foreign, in connection with the execution,
delivery or performance of this Agreement. Except as set forth in the
immediately preceding sentence, no waiver, consent, approval or authorization of
any governmental or regulatory authority, domestic or foreign, is required to be
obtained by Telco or any of its Subsidiaries in connection with its execution,
delivery or performance of this Agreement.
SECTION 4.6 -- SEC Filings; Financial Statements. (a) Telco has filed all
forms, reports and documents required to be filed with the Securities and
Exchange Commission ("SEC") since August 9, 1996, and has heretofore delivered
or made available to EXCEL, in the form filed with the SEC, together with any
amendments thereto, its (i) Annual Report on Form 10-K for the fiscal year ended
December 31, 1996, (ii) all proxy statements relating to Telco's meetings of
stockholders (whether annual or special) held since August 9, 1996, (iii)
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1997, and
(iv) all other reports or registration statements filed by Telco with the SEC
since August 9, 1996 (collectively, the "Telco SEC Reports"). The Telco SEC
Reports (i) were prepared substantially in accordance with the requirements of
the 1933 Act (as defined in Section 10.4 hereof), or the Exchange Act as the
case may be, and the rules and regulations promulgated under each of such
respective acts, and (ii) did not at the time they were filed contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading.
(b) The financial statements, including all related notes and schedules,
contained in the Telco SEC Reports (or incorporated by reference therein) fairly
present the consolidated financial position of Telco and its Subsidiaries as at
the respective dates thereof and the consolidated results of operations and cash
flows of Telco and its Subsidiaries for the periods indicated in accordance with
United States generally accepted accounting principles ("GAAP") applied on a
consistent basis throughout the periods involved (except for changes in
accounting principles disclosed in the notes thereto) and subject, in the case
of interim financial statements, to normal year-end adjustments.
(c) Telco has heretofore made available to EXCEL a complete and correct
copy of any material amendments or modifications, which have not yet been filed
with the SEC, to agreements, documents or other instruments which previously had
been filed by Telco with the SEC pursuant to the Exchange Act.
SECTION 4.7 -- No Undisclosed Liabilities; Absence of Certain Changes or
Events. Except as and to the extent publicly disclosed by Telco in the Telco SEC
Reports filed prior to the date of this Agreement, as of December 31, 1996, none
of Telco or its Subsidiaries had any material liabilities or obligations of any
nature, whether or not accrued, contingent or otherwise, and whether due or to
become due or asserted or unasserted, which would be required by GAAP to be
reflected in, reserved against or otherwise described in the consolidated
balance sheet of Telco (including the notes thereto) as of such date or which
could reasonably be
I-9
<PAGE> 111
expected to have a Material Adverse Effect on Telco. Except as disclosed on
Schedule 4.7 hereto, since December 31, 1996, Telco and its Subsidiaries have
not incurred any material liability, except in the ordinary course of their
businesses consistent with their past practices, and there has not been any
change, or any event involving a prospective change, in the business, financial
condition or results of operations of Telco or any of its Subsidiaries which has
had, or is reasonably likely to have, a Material Adverse Effect on Telco, and
Telco and its Subsidiaries have conducted their respective businesses in the
ordinary course consistent with their past practices.
SECTION 4.8 -- Litigation. Except as disclosed in Schedule 4.8 hereto,
there are no claims, actions, suits, proceedings or, to Telco's knowledge,
investigations pending or, to Telco's knowledge, threatened against Telco or any
of its Subsidiaries, or any properties or rights of Telco or any of its
Subsidiaries, before any court, administrative, governmental, arbitral,
mediation or regulatory authority or body, domestic or foreign, (a) as of the
date hereof, as to which there is more than a remote possibility of an adverse
judgment or determination against Telco or any of its Subsidiaries or any
properties or rights of Telco or any of its Subsidiaries in excess of $1 million
or which otherwise could have a Material Adverse Effect on Telco, (b) as of the
date hereof, which questions the validity of this Agreement or any action to be
taken by Telco in connection with the consummation of the transactions
contemplated by this Agreement or could otherwise prevent or delay the
consummation of the transactions contemplated by this Agreement, or (c) as to
which there is reasonably likely to be an adverse judgment or determination
against Telco or any of its Subsidiaries or any properties or rights of Telco or
any of its Subsidiaries in excess of $10 million or which otherwise could
reasonably be expected to have a Material Adverse Effect on Telco.
SECTION 4.9 -- No Violation of Law; Permits. The business of Telco and its
Subsidiaries is not being conducted in violation of any statute, law, ordinance,
regulation, judgment, order or decree of any domestic or foreign governmental or
judicial entity (including any stock exchange or other self-regulatory body)
("Legal Requirements"), or in violation of any permits, franchises, licenses,
approvals, tariffs and other authorizations or consents that are granted by any
domestic or foreign government or judicial entity (including any stock exchange
or other self-regulatory body) ("Permits"), except for possible violations of
Legal Requirements or Permits none of which, individually or in the aggregate,
could reasonably be expected to have a Material Adverse Effect on Telco. Telco
and its Subsidiaries have all Permits that are required in connection with the
operation of their businesses (collectively, "Required Permits"), and no
proceedings are pending or, to the knowledge of Telco, threatened to revoke or
limit any Required Permit, except, in each case, those the absence or violation
of which do not and will not have a Material Adverse Effect on Telco. Except as
set forth on Schedule 4.9 hereto, (a) to Telco's knowledge, no investigation or
review by any domestic or foreign governmental or regulatory entity (including
any stock exchange or other self-regulatory body) with respect to Telco or its
Subsidiaries in relation to any alleged violation of law or regulation is
pending or threatened, and (b) no governmental or regulatory entity (including
any stock exchange or other self-regulatory body) has notified Telco of its
intention to conduct the same, except for such investigations which, if they
resulted in adverse findings, would not reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect on Telco. Except as
set forth on Schedule 4.9 hereto, neither Telco nor any of its Subsidiaries is
subject to any cease and desist or other order, judgment, injunction or decree
issued by, or is a party to any written agreement, consent agreement or
memorandum of understanding with, or is a party to any commitment letter or
similar undertaking to, or is subject to any order or directive by, or has
adopted any board resolutions at the request of, any court, governmental entity
or regulatory agency that materially restricts the conduct of its business or
which could reasonably be expected to have a Material Adverse Effect on Telco,
or would prevent or delay the consummation of the transactions contemplated by
this Agreement, nor has Telco or any of its Subsidiaries been advised that any
court, governmental entity or regulatory agency is considering issuing or
requesting any of the foregoing. Telco and each of its Subsidiaries and
affiliates has complied with all material federal and state regulatory reporting
requirements necessary for the lawful provision of the telecommunications
services currently offered by Telco or such Subsidiary or affiliate.
SECTION 4.10 -- Registration Statement; Joint Proxy Statement. None of the
information supplied or to be supplied by or on behalf of Telco for inclusion or
incorporation by reference in the registration statement to be filed with the
SEC by Holdings in connection with the issuance of shares of Holdings Common
Stock in
I-10
<PAGE> 112
the Mergers (the "Registration Statement") will, at the time the Registration
Statement becomes effective under the 1933 Act, contain any untrue statement of
a material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading. None of the information supplied or to be
supplied by or on behalf of Telco for inclusion or incorporation by reference in
the joint proxy statement, in definitive form, relating to the meetings of Telco
and EXCEL stockholders to be held in connection with the Mergers, or in the
related proxy and notice of meeting, or soliciting material used in connection
therewith (referred to herein collectively as the "Joint Proxy Statement") will,
at the dates mailed to stockholders and at the times of the Telco stockholders'
meeting and the EXCEL stockholders' meeting, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading. If at any time prior to
the Effective Time any event with respect to Telco, its officers and directors
or any of its Subsidiaries should occur which is required to be described in an
amendment of, or a supplement to, the Registration Statement or the Joint Proxy
Statement, Telco shall promptly so advise EXCEL and such event shall be so
described, and such amendment or supplement (which EXCEL shall have a reasonable
opportunity to review) shall be promptly filed with the SEC and, as required by
law, disseminated to the shareholders of Telco. The Registration Statement and
the Joint Proxy Statement (except for information relating to EXCEL) will comply
as to form in all material respects with the provisions of the 1933 Act and the
Exchange Act and the rules and regulations promulgated thereunder.
SECTION 4.11 -- Employee Matters; ERISA. (a) Set forth on Schedule 4.11
hereto is a true and complete list of all employee benefit plans within the
meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA"), all deferred compensation, bonus or other incentive
compensation, stock options, restricted stock, stock purchase or other
equity-based, severance or change in control, salary continuation, tuition
assistance, disability, leave of absence plans, policies or agreements, and all
employment, consulting, management or other individual compensation agreements
with respect to any current or former employee (other than employees in Telco's
commercial sales division who are not otherwise executive officers of Telco)
whose annual compensation exceeds $75,000, officer or director of Telco or any
of its Subsidiaries, which in each case Telco or any of its Subsidiaries has any
obligation or liability, contingent or otherwise (collectively, the "Telco
Benefit Plans").
(b) All contributions and other payments required to be made by Telco or
any of its Subsidiaries to or under any Telco Benefit Plan (or to any person
pursuant to the terms thereof) have been timely made, except for failures that
would not reasonably be expected to have, individually or in the aggregate, a
Material Adverse Effect on Telco. No Telco Benefit Plan is subject to Section
412 of the Code.
(c) Each of the Telco Benefit Plans intended to be "qualified" within the
meaning of Section 401(a) of the Code has been determined by the Internal
Revenue Service (the "IRS") to be so qualified, and, to Telco's knowledge, no
circumstances exist that could reasonably be expected by Telco to result in the
revocation of any such determination. Telco is in compliance with, and each of
the Telco Benefit Plans is and has been operated in compliance with, all
applicable Legal Requirements governing such plan, including, without
limitation, ERISA and the Code, except for such non-compliance which
individually or in the aggregate would not have a Material Adverse Effect on
Telco.
(d) Telco has made available to EXCEL with respect to each Telco Benefit
Plan a true, correct and complete copy of each of the following documents where
applicable (i) such plan and summary plan description, (ii) the most recent
annual report filed with the IRS, (iii) each related trust agreement, (iv) the
most recent determination of the IRS with respect to the qualification under any
provision of the Code and (v) the most recent actuarial report or valuation.
(e) Except as set forth on Schedule 4.11 hereto, the consummation or
announcement of any transaction contemplated by this Agreement will not (either
alone or upon the occurrence of any additional or further acts or events) result
in any (i) payment (whether of severance pay or otherwise) becoming due from
Telco or any of its Subsidiaries to any current or former officer, employee,
former employee or director thereof, or to any other person for the benefit of
any such officer, employee or director, or (ii) acceleration, vesting or
I-11
<PAGE> 113
establishment of any benefit under any Telco Benefit Plan, or (iii)
disqualification of any of the Telco Benefit Plans intended to be qualified
under, result in a prohibited transaction or breach of fiduciary duty under, or
otherwise violate, ERISA or the Code.
(f) Neither Telco nor any of its Subsidiaries has incurred, and none of
such entities reasonably expects to incur, any material liability to the PBGC
(other than premiums which are not overdue) or pursuant to Title IV of ERISA
with respect to any Telco Benefit Plan. Neither Telco nor any of its
Subsidiaries is an employer with respect to, and neither has incurred or
reasonably expects to incur, any withdrawal liability with respect to, any
"multiemployer plan" (as defined in Section 3(37) of ERISA).
(g) There are no pending or, to Telco's knowledge, threatened actions,
claims or proceedings against any Telco Benefit Plan or its assets, plan
sponsor, plan administrator or fiduciaries with respect to the operation of such
plan (other than routine benefit claims) which, if determined adversely to
Telco, individually or in the aggregate would have a Material Adverse Effect on
Telco.
SECTION 4.12 -- Labor Matters. Except as disclosed on Schedule 4.12 hereto,
neither Telco nor any of its Subsidiaries is party to any collective bargaining
agreement or other labor agreement with any union or labor organization and no
union or labor organization has been recognized by Telco or any of its
Subsidiaries as an exclusive bargaining representative for employees of Telco or
any of its Subsidiaries. Except as disclosed on Schedule 4.12 hereto, there is
no current union representation question involving employees of Telco or any of
Telco's Subsidiaries, nor does Telco have knowledge of any significant activity
or proceeding of any labor organization (or representative thereof) or employee
group to organize any such employees. Neither Telco nor any of its Subsidiaries
has made any commitment not in collective bargaining agreements listed on
Schedule 4.12 hereto that would require the application of the terms of any
collective bargaining agreements entered into by Telco or any of its
Subsidiaries to EXCEL, Holdings, or any Subsidiary or joint venture of either
EXCEL or Holdings. Except as disclosed on Schedule 4.12 hereto, (i) there is no
material active arbitration under any collective bargaining agreement involving
Telco or any of its Subsidiaries, (ii) there is no material unfair labor
practice, grievance, employment discrimination or other labor or employment
related charge, complaint or claim against Telco or any of its Subsidiaries
pending before any court, arbitrator, mediator or governmental agency or
tribunal, or threatened, (iii) there is no material strike, picketing or work
stoppage by, or any lockout of, employees of Telco or any of its Subsidiaries
pending or, to Telco's knowledge, threatened, against or involving Telco or any
of its Subsidiaries, (iv) there is no significant active arbitration under any
collective bargaining agreement involving Telco or any of its Subsidiaries
regarding the employer's right to move work from one location or entity to
another, or to consolidate work locations, or involving other similar
restrictions on business operations, and (v) there is no material proceeding,
claim, suit, action or, to Telco's knowledge, governmental investigation pending
or, to Telco's knowledge, threatened, in respect of which any director, officer,
employee or agent of Telco or any of its Subsidiaries is or may be entitled to
claim indemnification from Telco or such Telco Subsidiary pursuant to their
respective charters or bylaws or as provided in the indemnification agreements,
if any, listed on Schedule 4.12 hereto. For purposes of this Section 4.12,
"material" refers to any liability which could reasonably be expected to exceed
$1 million. A true, correct and complete copy has been made available to EXCEL
of each current or last, in the case where there is no current, expired
collective bargaining agreement to which Telco or any of its Subsidiaries is a
part or under which Telco or any of its Subsidiaries has obligations.
SECTION 4.13 -- Environmental Matters. Except as set forth on Schedule 4.13
hereto:
(a) Telco and each of its Subsidiaries is in compliance in all
material respects with all applicable Environmental Laws (as defined below)
and neither Telco nor any of its Subsidiaries has received any written or
oral communication from any person or governmental authority that alleges
that Telco or any of its Subsidiaries is not in compliance with applicable
Environmental Laws.
(b) Telco and each of its Subsidiaries has obtained or has applied for
all material environmental, health and safety permits, licenses, variances,
approvals and authorizations (collectively, the "Environmental Permits")
necessary for the construction of their facilities or the conduct of their
operations, and all such material Environmental Permits are effective or,
where applicable, a renewal application has been timely filed and is
pending agency approval, and Telco and its Subsidiaries are in material
I-12
<PAGE> 114
compliance with all terms and conditions of such Environmental Permits.
There are no past or present events, conditions, circumstances, activities,
practices, incidents, actions or plans that may materially interfere with,
or prevent, future continued material compliance on the part of Telco or
any of its Subsidiaries with such Environmental Permits. Neither Telco nor
any of its Subsidiaries has knowledge of matters or conditions that would
preclude reissuance or transfer of any such Environmental Permit, including
amendment of such instrument, to Holdings or one of its Subsidiaries, where
such action is necessary to maintain material compliance with Environmental
Laws.
(c) To Telco's knowledge, there is no currently existing requirement
to be imposed in the future by any Environmental Law or Environmental
Permit which could reasonably be expected to result in the incurrence of a
material cost by Telco or any of its Subsidiaries.
(d) There is no material Environmental Claim (as defined below)
pending or, to Telco's knowledge, threatened (i) against Telco or any of
its Subsidiaries, (ii) against any person whose liability for any
Environmental Claim Telco or any of its Subsidiaries has or may have
retained or assumed either contractually or by operation of law, or (iii)
against any real or personal property or operations which Telco or any of
its Subsidiaries owns, leases or manages, in whole or in part.
(e) There have been no Releases (as defined below) of any Hazardous
Material (as defined below) that would be reasonably likely to form the
basis of any material Environmental Claim against Telco or any of its
Subsidiaries, or against any person whose liability for any material
Environmental Claim Telco or any of its Subsidiaries has or may have
retained or assumed either contractually or by operation of law.
(f) With respect to any predecessor of Telco or any of its
Subsidiaries, there is no material Environmental Claim pending or, to
Telco's knowledge, threatened, or any Release of Hazardous Materials that
would be reasonably likely to form the basis of any material Environmental
Claim against Telco or any of its Subsidiaries.
(g) Telco has disclosed to EXCEL all material facts which Telco
reasonably believes form the basis of a material current or future cost
relating to any environmental matter affecting Telco and its Subsidiaries.
(h) Neither Telco nor any of its Subsidiaries, nor, to Telco's
knowledge, any owner of premises leased or operated by Telco or any of its
Subsidiaries, has filed any notice with respect to such premises under
federal, state, local or foreign law indicating past or present treatment,
storage or disposal of Hazardous Materials, as regulated under 40 C.F.R.
Parts 264-267 or any state, local or foreign equivalent or is engaging or
has engaged in business operations involving the generation,
transportation, treatment, recycle or disposal of any waste (excluding low
level radioactive tubes from central office equipment or typical smoke and
fire alarm components) regulated under Environmental Laws pertaining to
radioactive materials or the nuclear power industry, including, without
limitation, requirements of Volume 10 of the Code of Federal Regulations.
(i) None of the properties owned, leased or operated by Telco, its
Subsidiaries or any predecessor thereof are now, or were in the past,
listed on the National Priorities List of Superfund Sites (the "NPL"), the
Comprehensive Environmental Response, Compensation and Liability
Information System ("CERCLIS"), or any other comparable state or local
environmental database (excluding easements that transgress such Superfund
or CERCLIS sites).
(j) The Telco Merger will not require any governmental approvals under
the Environmental Laws, including those that are triggered by sales or
transfers of businesses or real property.
For purposes of this Section 4.13:
(i) "Environmental Claim" means any and all administrative, regulatory
or judicial actions, suits, demands, demand letters, directives, claims,
liens, investigations, proceedings or notices of noncompliance or violation
(written or oral) by any person (including any federal, state, local or
foreign governmental authority) alleging potential liability (including,
without limitation, potential responsibility for or liability for
enforcement, investigatory costs, cleanup costs, governmental response
costs, removal
I-13
<PAGE> 115
costs, remedial costs, natural resources damages, property damages,
personal injuries or penalties) arising out of, based on or resulting from
(A) the presence, or Release or threatened Release into the environment, of
any Hazardous Materials at any location, whether or not owned, operated,
leased or managed by Telco or any of its Subsidiaries (including but not
limited to obligations to clean up contamination resulting from leaking
underground storage tanks); or (B) circumstances forming the basis of any
violation or alleged violation of any Environmental Law; or (C) any and all
claims by any third party seeking damages, contribution, indemnification,
cost recovery, compensation or injunctive relief resulting from the
presence or Release of any Hazardous Materials.
(ii) "Environmental Laws" means all applicable foreign, federal, state
and local laws (including the common law), rules, requirements and
regulations relating to pollution, the environment (including, without
limitation, ambient air, surface water, groundwater, land surface or
subsurface strata) or protection of human health as it relates to the
environment including, without limitation, laws and regulations relating to
Releases of Hazardous Materials, or otherwise relating to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport or
handling of Hazardous Materials or relating to management of asbestos in
buildings.
(iii) "Hazardous Materials" means (A) any petroleum or any by-products
or fractions thereof, asbestos in any form that is or could become friable,
urea formaldehyde foam insulation, any form of natural gas, explosives, and
polychlorinated biphenyls ("PCBs"); (B) any chemicals, materials or
substances, whether waste materials, raw materials or finished products,
which are now defined as or included in the definition of "hazardous
substances," "hazardous wastes," "hazardous materials," "extremely
hazardous substances," "restricted hazardous wastes," "toxic substances,"
"toxic pollutants," "pollutants," "contaminants," or words of similar
import under any Environmental Law; and (C) any other chemical, material or
substance, whether waste materials, raw materials or finished products,
regulated or forming the basis of liability under any Environmental Law.
(iv) "Release" means any release, spill, emission, leaking, injection,
deposit, disposal, discharge, dispersal, leaching or migration into the
environment (including without limitation ambient air, atmosphere, soil,
surface water, groundwater or property).
SECTION 4.14 -- Board Action; Vote Required; Applicability of Article 14.
(a) The Board of Directors of Telco has unanimously determined that the
transactions contemplated by this Agreement are in the best interests of Telco
and its stockholders and has resolved to recommend to such stockholders that
they vote in favor thereof.
(b) The approval of the Merger of T-Sub into Telco by a majority of the
votes entitled to be cast by all holders of Telco Common Stock (the "Telco
Stockholders' Approval") is the only vote of the holders of any class or series
of the capital stock of Telco required to approve this Agreement, the Mergers
and the other transactions contemplated hereby.
(c) Neither the provisions of Article 14 of Virginia Law (assuming the
accuracy of the representations contained in Section 5.13 hereof (without giving
effect to the knowledge qualification therein)), nor of any other state takeover
statute or similar statute or regulation applies or purports to apply to the
Telco Merger, this Agreement or any of the transactions contemplated hereby.
SECTION 4.15 -- Opinion of Financial Advisor. Telco has received the
written opinion, a copy of which has been provided to EXCEL, of Donaldson,
Lufkin & Jenrette Securities Corporation ("DLJ") on the date hereof, to the
effect that, as of the date hereof, the Telco Merger Consideration is fair from
a financial point of view to the holders of Telco Common Stock.
SECTION 4.16 -- Brokers. Except for DLJ (the arrangements with which have
been disclosed to EXCEL prior to the date hereof), which has been engaged by
Telco, no broker, finder or investment banker is entitled to any brokerage,
finder's, investment banking or other fee or commission in connection with the
transactions contemplated by this Agreement based upon arrangements made by or
on behalf of Telco or any of its Subsidiaries.
I-14
<PAGE> 116
SECTION 4.17 -- Tax Matters. Except as set forth on Schedule 4.17 hereto:
(a) Telco and its Subsidiaries, and each affiliated group (within the
meaning of Section 1504 of the Code) of which Telco or any Subsidiary is or
has been a member, has timely filed all federal and all material state,
local, foreign, income and franchise Tax Returns (as defined below), and
all other material Tax Returns required to be filed by them. All such Tax
Returns are true and correct in all material respects. Except to the extent
adequately reserved for in accordance with GAAP, all material Taxes due and
payable by Telco and its Subsidiaries have been timely paid in full. The
most recent consolidated financial statements contained in the Telco SEC
Reports reflect an adequate reserve in accordance with GAAP for all Taxes
payable by Telco and its Subsidiaries for all taxable periods and portions
thereof through the date of such financial statements.
(b) No material deficiencies for any Taxes have been proposed,
asserted or assessed against Telco or any of its Subsidiaries that have not
been fully paid or adequately provided for in the appropriate financial
statements of Telco and its Subsidiaries, no requests for waivers of the
time to assess any Taxes are pending, and no power of attorney with respect
to any Taxes has been executed or filed with any taxing authority. No
material issues relating to Taxes have been raised in writing by any
governmental authority during any presently pending audit or examination.
(c) There are no material liens or encumbrances for Taxes on any of
the assets of Telco or its Subsidiaries (other than for current taxes not
yet due and payable).
(d) Telco and its Subsidiaries have complied in all material respects
with all applicable laws, rules and regulations relating to the payment and
withholding of Taxes.
(e) None of Telco or its Subsidiaries has filed a consent under
Section 341(f) of the Code or agreed to have Section 341(f)(2) of the Code
apply.
(f) None of Telco or its Subsidiaries has made any payments, nor is
any of them obligated to make any payments, and is not a party to any
agreement that could obligate it to make any payments that would not be
deductible by reason of Sections 280G or 162(m) of the Code.
(g) None of Telco or its Subsidiaries is a party to any tax allocation
agreement, tax sharing agreement, tax indemnity agreement or similar
agreement, arrangement or practice with respect to Taxes (including any
advance pricing agreement, closing agreement or other agreement relating to
Taxes with any taxing authority).
(h) No federal, state, local or foreign audits or other administrative
proceedings or court proceedings are presently pending with regard to any
federal income or material state, local or foreign Taxes or Tax Returns of
Telco or its Subsidiaries and neither Telco nor any of its Subsidiaries has
received a written notice of any pending audit or proceeding, in any such
case involving a material issue with respect to Taxes.
(i) Neither Telco nor any of its Subsidiaries has agreed to or is
required to make any material adjustment under Section 481(a) of the Code.
(j) No property owned by Telco or any of its Subsidiaries (i) is
property required to be treated as being owned by another person pursuant
to the provisions of Section 168(f)(8) of the Internal Revenue Code of
1954, as amended and in effect immediately prior to the enactment of the
Tax Reform Act of 1986; (ii) constitutes "tax exempt use property" within
the meaning of Section 168(h)(1) of the Code; or (iii) is tax exempt bond
financed property within the meaning of Section 168(g) of the Code.
(k) For purpose of the Merger Agreement, (A) the terms "Tax" or
"Taxes" shall mean all taxes, charges, fees, imposts, levies or other
assessments, including, without limitation, all net income, gross receipts,
capital, sales, use, ad valorem, value added, transfer, franchise, profits,
inventory, capital stock, license, withholding, payroll, employment, social
security, unemployment, excise, severance, stamp, occupation, property and
estimated taxes, customs duties, fees, assessments and charges of any kind
whatsoever, together with any interest and any penalties, fines, additions
to tax or additional amounts
I-15
<PAGE> 117
imposed by any taxing authority (domestic or foreign) and shall include any
transferee liability in respect of Taxes, any liability in respect of Taxes
imposed by contract, tax sharing agreement, tax indemnity agreement or any
similar agreement and (B) the term "Tax Return" shall mean any report,
return, document, declaration or any other information or filing required
to be supplied to any taxing authority or jurisdiction (foreign or
domestic) with respect to Taxes, including, without limitation, information
returns, any document with respect to or accompanying payments or estimated
Taxes, or with respect to or accompanying requests for the extension of
time in which to file any such report, return document, declaration or
other information.
SECTION 4.18 -- Intellectual Property. Telco and its Subsidiaries own or
possess all necessary licenses or other valid rights to use all material
computer software and firmware, patents, patent rights, trademarks, trademark
rights, trade names, trade name rights, brand names, copyrights, service marks,
trade secrets, applications for trademarks and for service marks, know-how and
other proprietary rights and information used or held for use in connection with
the business of Telco and its Subsidiaries as currently conducted or as
contemplated to be conducted, and, to the knowledge of Telco, except as
described on Schedule 4.18 hereto, as of the date hereof, there has been no
assertion or claim challenging the ownership or validity of any of the
foregoing. Except as disclosed on Schedule 4.18 hereto, the conduct of the
business of Telco and its Subsidiaries as currently conducted does not, in any
material respect, conflict with or infringe any patent, patent right, license,
trademark, trademark right, trade name, trade name right, service mark,
copyright or any other intellectual property right of any third party. To the
knowledge of Telco, except as described on Schedule 4.18 hereto, there are no
infringements of any proprietary rights owned by or licensed by or to Telco or
any of its Subsidiaries.
SECTION 4.19 -- Insurance. Except as set forth on Schedule 4.19 hereto,
each of Telco and each of its Subsidiaries is, and has been continuously since
January 1, 1996 (or such later date as such Subsidiary was organized or acquired
by Telco), insured with financially responsible insurers in such amounts and
against such risks and losses as are customary for companies conducting the
business as conducted by Telco and its Subsidiaries during such time period.
Except as set forth on such Schedule 4.19, since January 1, 1996 neither Telco
nor any of its Subsidiaries has received notice of cancellation or termination
with respect to any material insurance policy of Telco or its Subsidiaries. The
insurance policies of Telco and its Subsidiaries are valid and enforceable
policies.
SECTION 4.20 -- Ownership of Securities. As of the date hereof, none of
Telco or any of its affiliates or associates (as such terms are defined under
the Exchange Act), (a)(i) beneficially owns, directly or indirectly, or (ii) is
party to any agreement, arrangement or understanding for the purpose of
acquiring, holding, voting or disposing of, in each case, shares of capital
stock of EXCEL, which in the aggregate represent 10% or more of the outstanding
shares of EXCEL Common Stock, or (b) is an "interested stockholder" of EXCEL
within the meaning of Section 203 of the Delaware Law. Except as set forth on
Schedule 4.20 hereto, neither Telco nor any of its Subsidiaries owns any shares
of EXCEL Common Stock.
SECTION 4.21 -- Certain Contracts. (a) Telco has delivered or otherwise
made available to EXCEL true, correct and complete copies of all contracts and
agreements (and all amendments, modifications and supplements thereto and all
side letters to which Telco is a party affecting the obligations of any party
thereunder) to which Telco or any of its Subsidiaries is a party or by which any
of its properties or assets are bound that are material to the business,
properties or assets of Telco and its Subsidiaries taken as a whole, including,
without limitation, all: (i) employment, consulting, non-competition, severance,
golden parachute or indemnification contracts (including, without limitation,
any contract to which Telco is a party involving employees of Telco); (ii)
contracts granting a right of first refusal or first negotiation; (iii)
partnership or joint venture agreements; (iv) agreements for the acquisition,
sale or lease of material properties or assets of Telco (by merger, purchase or
sale of assets or stock or otherwise); (v) contracts or agreements with any
governmental entity; (vi) contracts relating to telecommunications facilities
and/or with facilities-based carriers; (vii) contracts or arrangements limiting
or restraining Holdings, Telco, any of Telco's Subsidiaries or any successor
thereto from engaging or competing in any business; and (viii) all commitments
and agreements to enter into any of the foregoing (collectively, together with
any such contracts entered into in accordance with Section 6.1 hereof, the
"Telco Contracts").
I-16
<PAGE> 118
(b) Except as set forth on Schedule 4.21(b):
(i) There is no default under any Telco Contract either by Telco or
any of its Subsidiaries or, to the knowledge of Telco, by any other party
thereto, and no event has occurred that with the lapse of time or the
giving of notice or both would constitute a default thereunder by Telco or
any of its Subsidiaries or, to the knowledge of Telco, any other party, in
any such case in which such default or event could reasonably be expected
to have a Material Adverse Effect on Telco.
(ii) No party to any such Telco Contract has given notice to Telco of
or made a claim against Telco with respect to any breach or default
thereunder, in any such case in which such breach or default could
reasonably be expected to have a Material Adverse Effect on Telco.
(c) Set forth on Schedule 4.21(c) hereto is a list of each material
contract, agreement or arrangement to which Telco or any of its Subsidiaries is
a party or may be bound and under the terms of which any of the rights or
obligations of a party thereto will be modified or altered (including, without
limitation, any acceleration of rights or obligations thereunder pursuant to the
terms of any such contract, agreement or arrangement) as a result of the
transactions contemplated hereby.
SECTION 4.22 -- Certain Regulatory Matters. (a) Except as disclosed on
Schedule 4.22 hereto and except for billing disputes with customers arising in
the ordinary course of business that in the aggregate involve immaterial
amounts, there are no proceedings or, to Telco's knowledge, investigations
pending or, to Telco's knowledge, threatened, before any domestic or foreign
court, administrative, governmental or regulatory body in which any of the
following matters are being considered which could reasonably be expected to
have a Material Adverse Effect on Telco, nor has Telco or any of its
Subsidiaries received written notice or inquiry from any such body, government
official, consumer advocacy or similar organization or any private party,
indicating that any of such matters should be considered or may become the
object of consideration or investigation which could reasonably be expected to
have a Material Adverse Effect on Telco: (i) reduction of rates charged to
customers; (ii) reduction of earnings; (iii) refunds of amounts previously
charged to customers; or (iv) failure to meet any expense, infrastructure,
service quality or other commitments previously made to or imposed by any
administrative, governmental or regulatory body.
(b) Except as disclosed on Schedule 4.22 hereto, neither Telco nor any of
its Subsidiaries has any outstanding commitments (and no such obligations have
been imposed upon Telco and remain outstanding) regarding (i) reduction of rates
charged to customers; (ii) reduction of earnings; (iii) refunds of amounts
previously charged to customers; or (iv) expenses, infrastructure expenditures,
service quality or other regulatory requirements, to or by any domestic or
foreign court, administrative, governmental or regulatory body, government
official, consumer advocacy or similar organization, in each case which could
reasonably be expected to have a Material Adverse Effect on Telco.
(c) Telco has not transferred, sold any interest in, or otherwise diluted
its control over, any federal or state regulatory licenses, certificates,
approvals or other authorizations under which it operates, and the transfer of
such authorizations, subject to regulatory approval, would not violate the terms
of any agreement to which Telco is a party or by which Telco is bound, or
impinge the rights of any third party.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
OF EXCEL AND THE MERGER SUBSIDIARIES
EXCEL and each Merger Subsidiary (as defined below) hereby represent and
warrant to Telco as follows:
SECTION 5.1 -- Organization and Qualification; Subsidiaries. Each of EXCEL
and each of Holdings, E-Sub and T-Sub (collectively, the "Merger Subsidiaries"
and each individually a "Merger Subsidiary") is a corporation duly organized,
validly existing and in good standing under the laws of its jurisdiction of
incorporation or organization. Each of EXCEL and the Merger Subsidiaries has the
requisite corporate power and authority and any necessary governmental
authority, franchise, license or permit to own, operate or lease
I-17
<PAGE> 119
the properties that it purports to own, operate or lease and to carry on its
business as it is now being conducted, and is duly qualified as a foreign
corporation to do business, and is in good standing, in each jurisdiction where
the character of its properties owned, operated or leased or the nature of its
activities makes such qualification necessary, except for such failure which,
when taken together with all other such failures, would not reasonably be
expected to have a Material Adverse Effect on EXCEL.
SECTION 5.2 -- Certificate of Incorporation and Bylaws. EXCEL has
heretofore furnished, or otherwise made available, to Telco a complete and
correct copy of the Articles or Certificate of Incorporation and the Bylaws (or
comparable governing documents), each as amended to the date hereof, of EXCEL
and each of the Merger Subsidiaries. Such Articles or Certificates of
Incorporation and Bylaws (or comparable governing documents) are in full force
and effect. Neither EXCEL nor any of the Merger Subsidiaries is in violation of
any of the provisions of its respective Articles or Certificate of Incorporation
or its Bylaws (or comparable governing documents).
SECTION 5.3 -- Capitalization. (a) The authorized capital stock of EXCEL
consists of (i) 10,000,000 shares of Preferred Stock, par value $0.001 per
share, none of which are outstanding and none of which are reserved for issuance
and (ii) 500,000,000 shares of EXCEL Common Stock, of which, as of May 31, 1997,
108,159,956 shares were issued and outstanding, 1,429,379 shares were held in
the treasury of EXCEL and 4,402,540 shares were issuable upon the exercise of
options outstanding under the EXCEL option plans listed on Schedule 5.3 hereto.
Except as set forth on Schedule 5.3 hereto, (i) from May 31, 1997 through the
date hereof, no shares of EXCEL Common Stock have been issued, except upon the
exercise of options described in the immediately preceding sentence, and (ii) as
of the date hereof, there are no outstanding "EXCEL Equity Rights". For purposes
of this Agreement, EXCEL Equity Rights shall mean subscriptions, options,
warrants, calls, commitments, agreements, conversion rights or other rights of
any character (contingent or otherwise) to purchase or otherwise acquire from
EXCEL or any of EXCEL's Subsidiaries at any time, or upon the happening of any
stated event, any shares of the capital stock of EXCEL). Schedule 5.3 hereto
sets forth a complete and accurate list with respect to all outstanding EXCEL
Equity Rights as of May 31, 1997 of the holder thereof, the date of grant, the
number of shares for which each such EXCEL Equity Right is exercisable, the
respective dates upon which each such EXCEL Equity Right vests, becomes
exercisable and expires, and the exercise price of each such EXCEL Equity Right.
(b) Except as set forth on Schedule 5.3(b), there are no outstanding
obligations of EXCEL or any of EXCEL's Subsidiaries to repurchase, redeem or
otherwise acquire any shares of capital stock of EXCEL.
(c) All of the issued and outstanding shares of EXCEL Common Stock are
validly issued, fully paid and nonassessable.
(d) The authorized capital stock of Holdings consists of 200,000,000 shares
of Common Stock, par value $.001 per share, of which 1,000 shares are validly
issued and outstanding. All of the issued and outstanding capital stock of
Holdings is, and at the Effective Time will be, owned by EXCEL free and clear of
any liens, security interests, pledges, agreements, claims, charges or
encumbrances, and there are (i) no other shares of capital stock or other voting
securities of Holdings, (ii) no securities of Holdings convertible into or
exchangeable for shares of capital stock or other voting securities of Holdings
and (iii) no options or other rights to acquire from Holdings, and no
obligations of Holdings to issue, any capital stock, other voting securities or
securities convertible into or exchangeable for capital stock or other voting
securities of Holdings. All of the issued and outstanding capital stock of each
of E-Sub and T-Sub is duly authorized, validly issued, fully paid and
nonassessable, and is owned by Holdings free and clear of any liens, security
interests, pledges, agreements, claims, charges or encumbrances.
(e) Except as disclosed on Schedule 5.3 hereto, there are no stockholder
agreements, voting trusts or other agreements or understandings to which EXCEL
is a party or to which it is bound relating to the voting or registration of any
shares of capital stock of EXCEL. EXCEL has not taken any action that would
result in any Options to purchase EXCEL Common Stock that are unvested becoming
vested in connection with or as a result of the execution and delivery of this
Agreement or the consummation of the transactions contemplated hereby.
I-18
<PAGE> 120
SECTION 5.4 -- Authority Relative to this Agreement. Each of EXCEL and each
Merger Subsidiary has the necessary corporate power and authority to enter into
this Agreement and, subject to obtaining any necessary stockholder approval of
the Merger to which it is a party, to carry out its obligations hereunder. The
execution and delivery of this Agreement by each of EXCEL and each Merger
Subsidiary and the consummation by each such Party of the transactions
contemplated hereby have been duly authorized by all necessary corporate action
on the part of each such Party, subject to the approval of this Agreement by
EXCEL's stockholders. This Agreement has been duly executed and delivered by
each of EXCEL and each Merger Subsidiary and, assuming the due authorization,
execution and delivery thereof by the other Parties, constitutes a legal, valid
and binding obligation of each such Party, enforceable against it in accordance
with its terms, subject to the Bankruptcy Exception.
SECTION 5.5 -- No Conflict; Required Filings and Consents. (a) Except as
listed on Schedule 5.5 hereto, the execution and delivery of this Agreement by
each of EXCEL and each Merger Subsidiary do not, and the performance of this
Agreement by each of EXCEL and each Merger Subsidiary will not, (i) violate or
conflict with the Certificate of Incorporation or Bylaws of EXCEL, (ii) conflict
with or violate any law, regulation, court order, judgment or decree applicable
to EXCEL or any of its Subsidiaries or by which any of their respective property
is bound or affected, (iii) violate or conflict with the Articles or Certificate
of Incorporation or Bylaws (or comparable governing documents) of any of EXCEL's
Subsidiaries, or (iv) result in any breach of or constitute a default (or an
event which with notice or lapse of time or both would become a default) under,
or give to others any rights of termination or cancellation of, or result in the
creation of a lien or encumbrance on any of the properties or assets of EXCEL or
any of its Subsidiaries pursuant to, result in the loss of any material benefit
under, or require the consent of any other party to, any contract, instrument,
permit, license or franchise to which EXCEL or any of its Subsidiaries is a
party or by which EXCEL, any of such Subsidiaries or any of their respective
property is bound or affected except, in the case of clauses (ii), (iii) or (iv)
above, for conflicts, violations, breaches, defaults, results or consents which,
individually or in the aggregate, would not have a Material Adverse Effect on
EXCEL.
(b) Except as listed on Schedule 5.5 and except for applicable
requirements, if any, of the Exchange Act, the premerger notification
requirements of the HSR Act, filing and recordation of appropriate merger or
other documents as required by Delaware Law or Virginia Law and any filings
required pursuant to any state securities or "blue sky" laws or the rules of any
applicable stock exchanges, neither EXCEL nor any of its Subsidiaries is
required to submit any notice, report or other filing with any governmental
authority, domestic or foreign, in connection with the execution, delivery or
performance of this Agreement. Except as set forth in the immediately preceding
sentence, no waiver, consent, approval or authorization of any governmental or
regulatory authority, domestic or foreign, is required to be obtained by EXCEL
or any of its Subsidiaries in connection with its execution, delivery or
performance of this Agreement.
SECTION 5.6 -- SEC Filings; Financial Statements. (a) EXCEL has filed all
forms, reports and documents required to be filed with the SEC since May 9,
1996, and has heretofore delivered or made available to Telco, in the form filed
with the SEC, together with any amendments thereto, its (i) Annual Report on
Form 10-K for the fiscal year ended December 31, 1996, (ii) all proxy statements
relating to EXCEL's meetings of stockholders (whether annual or special) held
since May 9, 1996, (iii) Quarterly Report on Form 10-Q for the fiscal quarter
ended March 31, 1997, and (iv) all other reports or registration statements
filed by EXCEL with the SEC since May 9, 1996 (collectively, the "EXCEL SEC
Reports"). The EXCEL SEC Reports (i) were prepared substantially in accordance
with the requirements of the 1933 Act or the Exchange Act, as the case may be,
and the rules and regulations promulgated under each of such respective acts,
and (ii) did not at the time they were filed contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
(b) The financial statements, including all related notes and schedules,
contained in the EXCEL SEC Reports (or incorporated by reference therein) fairly
present the consolidated financial position of EXCEL and its Subsidiaries as at
the respective dates thereof and the consolidated results of operations and cash
flows of EXCEL and its Subsidiaries for the periods indicated in accordance with
GAAP applied on a consistent
I-19
<PAGE> 121
basis throughout the periods involved (except for changes in accounting
principles disclosed in the notes thereto) and subject in the case of interim
financial statements to normal year-end adjustments.
(c) EXCEL has heretofore made available to Telco a complete and correct
copy of any material amendments or modifications, which have not yet been filed
with the SEC, to agreements, documents or other instruments which previously had
been filed by EXCEL with the SEC pursuant to the Exchange Act.
SECTION 5.7 -- No Undisclosed Liabilities; Absence of Certain Changes or
Events. Except as and to the extent publicly disclosed by EXCEL in the EXCEL SEC
Reports filed prior to the date of this Agreement, as of December 31, 1996, none
of EXCEL or its Subsidiaries had any material liabilities or obligations of any
nature, whether or not accrued, contingent or otherwise, and whether due or to
become due or asserted or unasserted, which would be required by GAAP to be
reflected in, reserved against or otherwise described in the consolidated
balance sheet of EXCEL (including the notes thereto) as of such date or which
could reasonably be expected to have a Material Adverse Effect on EXCEL. Except
as disclosed on Schedule 5.7 hereto, since December 31, 1996, there has not been
any change, or any event involving a prospective change, in the business,
financial condition or results of operations of EXCEL or any of its Subsidiaries
which has had, or is reasonably likely to have, a Material Adverse Effect on
EXCEL.
SECTION 5.8 -- No Violation of Law; Permits. The business of EXCEL and its
Subsidiaries is not being conducted in violation of any Legal Requirements, or
in violation of any Permits, except for possible violations none of which,
individually or in the aggregate, could reasonably be expected to have a
Material Adverse Effect on EXCEL. EXCEL and its Subsidiaries have all Permits
that are required in connection with the operation of their businesses
(collectively, "EXCEL Required Permits"), and no proceedings are pending or, to
the knowledge of EXCEL, threatened to revoke or limit any EXCEL Required Permit,
except, in each case, those the absence or violation of which do not and will
not have a Material Adverse Effect on EXCEL. Except as set forth on Schedule 5.8
hereto, (a) to EXCEL's knowledge, no investigation or review by any domestic or
foreign governmental or regulatory entity (including any stock exchange or other
self-regulatory body) with respect to EXCEL or its Subsidiaries in relation to
any alleged violation of law or regulation is pending or threatened, and (b) no
governmental or regulatory entity (including any stock exchange or other
self-regulatory body) has notified EXCEL of its intention to conduct the same,
except for such investigations which, if they resulted in adverse findings,
would not reasonably be expected to have, individually or in the aggregate, a
Material Adverse Effect on EXCEL. Except as set forth on Schedule 5.8 hereto,
neither EXCEL nor any of its Subsidiaries is subject to any cease and desist or
other order, judgment, injunction or decree issued by, or is a party to any
written agreement, consent agreement or memorandum of understanding with, or is
a party to any commitment letter or similar undertaking to, or is subject to any
order or directive by, or has adopted any board resolutions at the request of,
any court, governmental entity or regulatory agency that materially restricts
the conduct of its business or which could reasonably be expected to have a
Material Adverse Effect on EXCEL, or would prevent or delay the consummation of
the transactions contemplated by this Agreement, nor has EXCEL or any of its
Subsidiaries been advised that any court, governmental entity or regulatory
agency is considering issuing or requesting any of the foregoing. EXCEL and each
of its Subsidiaries and affiliates has complied with all material federal and
state regulatory reporting requirements necessary for the lawful provision of
the telecommunications services currently offered by EXCEL or such Subsidiary or
affiliate.
SECTION 5.9 -- Registration Statement; Joint Proxy Statement. None of the
information supplied or to be supplied by or on behalf of EXCEL for inclusion or
incorporation by reference in the Registration Statement will, at the time the
Registration Statement becomes effective under the 1933 Act, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. None of the
information supplied or to be supplied by or on behalf of EXCEL for inclusion or
incorporation by reference in the Joint Proxy Statement will, at the dates
mailed to stockholders and at the times of the Telco stockholders' meeting and
the EXCEL stockholders' meeting, contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they are made, not misleading. If at any time prior to the Effective Time any
event with respect to EXCEL, its officers and directors or any of its
Subsidiaries should
I-20
<PAGE> 122
occur which is required to be described in an amendment of, or a supplement to,
the Registration Statement or the Joint Proxy Statement, EXCEL shall promptly so
advise Telco and such event shall be so described, and such amendment or
supplement (which Telco shall have a reasonable opportunity to review) shall be
promptly filed with the SEC and, as required by law, disseminated to the
shareholders of EXCEL. The Registration Statement and the Joint Proxy Statement
(except for information relating to Telco) will comply as to form in all
material respects with the provisions of the 1933 Act and the Exchange Act and
the rules and regulations promulgated thereunder.
SECTION 5.10 -- Board Action; Vote Required. (a) The Board of Directors of
EXCEL has unanimously determined that the transactions contemplated by this
Agreement are in the best interests of EXCEL and its stockholders and has
resolved to recommend to such stockholders that they vote in favor thereof.
(b) The approval of the Merger of E-Sub into EXCEL by a majority of the
votes entitled to be cast by all holders of EXCEL Common Stock (the "EXCEL
Stockholders' Approval") is the only vote of the holders of any class or series
of the capital stock of EXCEL required to approve this Agreement, the Mergers
and the other transactions contemplated hereby.
SECTION 5.11 -- Opinion of Financial Advisor. EXCEL has received the oral
opinion of Lehman Brothers Inc. ("Lehman Brothers") on the date hereof, to the
effect that, as of the date hereof, the EXCEL Exchange Ratio is fair from a
financial point of view to the stockholders of EXCEL, and the Telco Merger
Consideration is fair from a financial point of view to EXCEL, and will, within
two business days of the date hereof, have received the written opinion of
Lehman Brothers to such effect.
SECTION 5.12 -- Brokers. Except for Lehman Brothers (the arrangements with
which have been disclosed to Telco prior to the date hereof), which has been
engaged by EXCEL, no broker, finder or investment banker is entitled to any
brokerage, finder's, investment banking or other fee or commission in connection
with the transactions contemplated by this Agreement based upon arrangements
made by or on behalf of EXCEL or any of its Subsidiaries.
SECTION 5.13 -- Ownership of Securities. As of the date hereof, neither
EXCEL nor, to EXCEL's knowledge, any of its affiliates or associates (as such
terms are defined under the Exchange Act), (a)(i) beneficially owns, directly or
indirectly, or (ii) is party to any agreement, arrangement or understanding for
the purpose of acquiring, holding, voting or disposing of, in each case, shares
of capital stock of Telco, which in the aggregate represent 10% or more of the
outstanding shares of Telco Common Stock, nor (b) is an "interested shareholder"
of Telco within the meaning of Article 14 of Virginia Law. EXCEL owns no shares
of Telco Common Stock.
SECTION 5.14 -- Activities of Merger Subsidiaries. None of the Merger
Subsidiaries have conducted any activities other than in connection with the
organization thereof, the negotiation and execution of this Agreement and the
consummation of the transactions contemplated hereby.
SECTION 5.15 -- Financing. EXCEL has received an executed commitment
letter, a copy of which has been delivered to Telco, from Lehman Commercial
Paper Inc. to provide, subject to the conditions specified therein, senior loan
financing of up to $1,000,000,000 to finance the Mergers, to refinance existing
indebtedness of the Parties and for general corporate purposes (the
"Financing").
SECTION 5.16 -- Litigation. Except as disclosed in Schedule 5.16 hereto,
there are no claims, actions, suits, proceedings or, to EXCEL's knowledge,
investigations pending or, to EXCEL's knowledge, threatened against EXCEL or any
of its Subsidiaries, or any properties or rights of EXCEL or any of its
Subsidiaries, before any court, administrative, governmental, arbitral,
mediation or regulatory authority or body, domestic or foreign, (a) as of the
date hereof, as to which there is more than a remote possibility of an adverse
judgment or determination against EXCEL or any of its Subsidiaries or any
properties or rights of EXCEL or any of its Subsidiaries in excess of $5 million
or which otherwise could have a Material Adverse Effect on EXCEL, (b) as of the
date hereof, which questions the validity of this Agreement or any action to be
taken by EXCEL in connection with the consummation of the transactions
contemplated by this Agreement or could otherwise prevent or delay the
consummation of the transactions contemplated by this Agreement, or (c) as to
which
I-21
<PAGE> 123
there is reasonably likely to be an adverse judgment or determination against
EXCEL or any of its Subsidiaries which could reasonably be expected to have a
Material Adverse Effect on EXCEL.
SECTION 5.17 -- Employee Matters; ERISA. (i) All contributions and other
payments required to be made by EXCEL or any of its Subsidiaries to or under any
employee benefit plan within the meaning of Section 3(3) of ERISA maintained or
contributed to by EXCEL or its Subsidiaries (collectively, the "EXCEL Benefit
Plans") (or to any person pursuant to the terms thereof) have been timely made,
except for failures that would not reasonably be expected to have, individually
or in the aggregate, a Material Adverse Effect on EXCEL. No EXCEL Benefit Plan
is subject to Section 412 of the Code.
(ii) Each of the EXCEL Benefit Plans intended to be "qualified" within the
meaning of Section 401(a) of the Code has been determined by the IRS to be so
qualified, and, to EXCEL's knowledge, no circumstances exist that could
reasonably be expected by EXCEL to result in the revocation of any such
determination. EXCEL is in compliance with, and each of the EXCEL Benefit Plans
is and has been operated in compliance with, all applicable Legal Requirements
governing such plan, including, without limitation, ERISA and the Code, except
for such non-compliance which individually or in the aggregate would not have a
Material Adverse Effect on EXCEL.
(iii) Except as set forth on Schedule 5.17 hereto, the consummation or
announcement of any transaction contemplated by this Agreement will not (either
alone or upon the occurrence of any additional or further acts or events) result
in any (i) payment (whether of severance pay or otherwise) becoming due from
EXCEL or any of its Subsidiaries to any current or former officer, employee,
former employee or director thereof, or to any other person for the benefit of
any such officer, employee or director, or (ii) acceleration, vesting or
establishment of any benefit under any EXCEL Benefit Plan, or (iii)
disqualification of any of the EXCEL Benefit Plans intended to be qualified
under, result in a prohibited transaction or breach of fiduciary duty under, or
otherwise violate, ERISA or the Code.
(iv) Neither EXCEL nor any of its Subsidiaries has incurred, and none of
such entities reasonably expects to incur, any material liability to the PBGC
(other than premiums which are not overdue) or pursuant to Title IV of ERISA
with respect to any EXCEL Benefit Plan. Neither EXCEL nor any of its
Subsidiaries is an employer with respect to, and neither has incurred or
reasonably expects to incur, any withdrawal liability with respect to any
"multiemployer plan" (as defined in Section 3(37) of ERISA).
(v) There are no pending or, to EXCEL's knowledge, threatened actions,
claims or proceedings against any EXCEL Benefit Plan or its assets, plan
sponsor, plan administrator or fiduciaries with respect to the operation of such
plan (other than routine benefit claims) which, if determined adversely to
EXCEL, individually or in the aggregate would have a Material Adverse Effect on
EXCEL.
SECTION 5.18 -- Tax Matters. Except as set forth on Schedule 5.18 hereto:
(a) EXCEL and its Subsidiaries, and each affiliated group (within the
meaning of Section 1504 of the Code) of which EXCEL or any Subsidiary is or
has been a member, has timely filed all federal and all material state,
local, foreign, income and franchise Tax Returns (as defined below), and
all other material Tax Returns required to be filed by them. All such Tax
Returns are true and correct in all material respects. Except to the extent
adequately reserved for in accordance with GAAP, all material Taxes due and
payable by EXCEL and its Subsidiaries have been timely paid in full. The
most recent consolidated financial statements contained in the EXCEL SEC
Reports reflect an adequate reserve in accordance with GAAP for all Taxes
payable by EXCEL and its Subsidiaries for all taxable periods and portions
thereof through the date of such financial statements.
(b) No material deficiencies for any Taxes have been proposed,
asserted or assessed against EXCEL or any of its Subsidiaries that have not
been fully paid or adequately provided for in the appropriate financial
statements of EXCEL and its Subsidiaries, no requests for waivers of the
time to assess any Taxes are pending, and no power of attorney with respect
to any Taxes has been executed or filed with any taxing authority. No
material issues relating to Taxes have been raised in writing by any
governmental authority during any presently pending audit or examination.
I-22
<PAGE> 124
(c) There are no material liens or encumbrances for Taxes on any of
the assets of EXCEL or its Subsidiaries (other than for current taxes not
yet due and payable).
(d) EXCEL and its Subsidiaries have complied in all material respects
with all applicable laws, rules and regulations relating to the payment and
withholding of Taxes.
(e) None of EXCEL or its Subsidiaries has filed a consent under
Section 341(f) of the Code or agreed to have Section 341(f)(2) of the Code
apply.
(f) No federal, state, local or foreign audits or other administrative
proceedings or court proceedings are presently pending with regard to any
federal income or material state, local or foreign Taxes or Tax Returns of
EXCEL or its Subsidiaries and neither EXCEL nor any of its Subsidiaries has
received a written notice of any pending audit or proceeding, in any such
case involving a material issue with respect to Taxes.
(g) Neither EXCEL nor any of its Subsidiaries has agreed to or is
required to make any material adjustment under Section 481(a) of the Code.
(h) None of EXCEL or its Subsidiaries has made any payments, nor is
any of them obligated to make any payments, and is not party to any
agreement that would obligate it to make any payments that would not be
deductible by reason of Section 162(m) of the Code other than any such
payments that would not result in an increase in EXCEL's tax liabilities in
an amount which is material to Excel and its Subsidiaries, taken as a
whole.
SECTION 5.19 -- Intellectual Property. EXCEL and its Subsidiaries own or
possess all necessary licenses or other valid rights to use all material
computer software and firmware, patents, patent rights, trademarks, trademark
rights, trade names, trade name rights, brand names, copyrights, service marks,
trade secrets, applications for trademarks and for service marks, know-how and
other proprietary rights and information used or held for use in connection with
the business of EXCEL and its Subsidiaries as currently conducted or as
contemplated to be conducted, and, to the knowledge of EXCEL, except as
described on Schedule 5.19 hereto, as of the date hereof, there has been no
assertion or claim challenging the ownership or validity of any of the
foregoing. Except as disclosed on Schedule 5.19 hereto, the conduct of the
business of EXCEL and its Subsidiaries as currently conducted does not, in any
material respect, conflict with or infringe any patent, patent right, license,
trademark, trademark right, trade name, trade name right, service mark,
copyright or any other intellectual property right of any third party. To the
knowledge of EXCEL, except as described on Schedule 5.19 hereto, there are no
infringements of any proprietary rights owned by or licensed by or to EXCEL or
any of its Subsidiaries.
SECTION 5.20 -- Certain Contracts. (a) Except for such contracts as are
filed publicly in the EXCEL SEC Reports, EXCEL has delivered or otherwise made
available to Telco true, correct and complete copies of all contracts and
agreements (and all amendments, modifications and supplements thereto and all
side letters to which EXCEL is a party affecting the obligations of any party
thereunder) to which EXCEL or any of its Subsidiaries is a party or by which any
of its properties or assets are bound that are material to the business,
properties or assets of EXCEL and its Subsidiaries taken as a whole, including,
without limitation, all: (i) employment, consulting, non-competition, severance,
golden parachute or indemnification contracts (including, without limitation,
any contract to which EXCEL is a party involving employees of EXCEL); (ii)
contracts granting a right of first refusal or first negotiation; (iii)
partnership or joint venture agreements; (iv) agreements for the acquisition,
sale or lease of material properties or assets of EXCEL (by merger, purchase or
sale of assets or stock or otherwise); (v) contracts or agreements with any
governmental entity; (vi) contracts relating to telecommunications facilities
and/or with facilities-based carriers; (vii) contracts or arrangements limiting
or restraining Holdings, EXCEL, any of EXCEL's Subsidiaries or any successor
thereto from engaging or competing in any business; and (viii) all commitments
and agreements to enter into any of the foregoing (collectively, together with
any such contracts entered into in accordance with Section 6.2 hereof, the
"EXCEL Contracts").
I-23
<PAGE> 125
(b) Except as set forth on Schedule 5.20(b):
(i) There is no default under any EXCEL Contract either by EXCEL or
any of its Subsidiaries or, to the knowledge of EXCEL, by any other party
thereto, and no event has occurred that with the lapse of time or the
giving of notice or both would constitute a default thereunder by EXCEL or
any of its Subsidiaries or, to the knowledge of EXCEL, any other party, in
any such case in which such default or event could reasonably be expected
to have a Material Adverse Effect on EXCEL.
(ii) No party to any such EXCEL Contract has given notice to EXCEL of
or made a claim against EXCEL with respect to any breach or default
thereunder, in any such case in which such breach or default could
reasonably be expected to have a Material Adverse Effect on EXCEL.
(c) Set forth on Schedule 5.20(c) hereto is a list of each material
contract, agreement or arrangement to which EXCEL or any of its
Subsidiaries is a party or may be bound and under the terms of which any of
the rights or obligations of a party thereto will be modified or altered
(including, without limitation, any acceleration of rights or obligations
thereunder pursuant to the terms of any such contract, agreement or
arrangement) as a result of the transactions contemplated hereby.
SECTION 5.21 -- Certain Regulatory Matters. (a) Except as disclosed on
Schedule 5.21 hereto and except for billing disputes with customers arising in
the ordinary course of business that in the aggregate involve immaterial
amounts, there are no proceedings or, to EXCEL's knowledge, investigations
pending or, to EXCEL's knowledge, threatened, before any domestic or foreign
court, administrative, governmental or regulatory body in which any of the
following matters are being considered which could reasonably be expected to
have a Material Adverse Effect on EXCEL, nor has EXCEL or any of its
Subsidiaries received written notice or inquiry from any such body, government
official, consumer advocacy or similar organization or any private party,
indicating that any of such matters should be considered or may become the
object of consideration or investigation which could reasonably be expected to
have a Material Adverse Effect on EXCEL: (i) reduction of rates charged to
customers; (ii) reduction of earnings; (iii) refunds of amounts previously
charged to customers; or (iv) failure to meet any expense, infrastructure,
service quality or other commitments previously made to or imposed by any
administrative, governmental or regulatory body.
(b) Except as disclosed on Schedule 5.21 hereto, neither EXCEL nor any of
its Subsidiaries has any outstanding commitments (and no such obligations have
been imposed upon EXCEL and remain outstanding) regarding (i) reduction of rates
charged to customers; (ii) reduction of earnings; (iii) refunds of amounts
previously charged to customers; or (iv) expenses, infrastructure expenditures,
service quality or other regulatory requirements, to or by any domestic or
foreign court, administrative, governmental or regulatory body, government
official, consumer advocacy or similar organization, in each case which could
reasonably be expected to have a Material Adverse Effect on EXCEL.
(c) EXCEL has not transferred, sold any interest in, or otherwise diluted
its control over, any federal or state regulatory licenses, certificates,
approvals or other authorizations under which it operates, and the transfer of
such authorizations, subject to regulatory approval, would not violate the terms
of any agreement to which EXCEL is a party or by which EXCEL is bound, or
impinge the rights of any third party.
ARTICLE VI
CONDUCT OF BUSINESS PENDING THE MERGERS
SECTION 6.1 -- Conduct of Business of Telco. Telco covenants and agrees
that, between the date of this Agreement and the Effective Time, unless EXCEL
shall otherwise consent in writing, and except as described on Schedule 6.1
hereto or as otherwise expressly contemplated hereby, the business of Telco and
its Subsidiaries shall be conducted only in, and such entities shall not take
any action except in, the ordinary course of business and in a manner consistent
with past practice; and Telco and its Subsidiaries will use their commercially
reasonable efforts to preserve substantially intact their business
organizations, to keep available the services of those of their present
officers, employees and consultants who are integral to the operation of their
businesses as presently conducted and to preserve their present relationships
with significant customers,
I-24
<PAGE> 126
significant suppliers and with other persons with whom they have significant
business relations. By way of amplification and not limitation, except as set
forth on Schedule 6.1 hereto or as otherwise expressly contemplated by this
Agreement, Telco agrees on behalf of itself and its Subsidiaries that they will
not, between the date of this Agreement and the Effective Time, directly or
indirectly, do any of the following without the prior written consent of EXCEL:
(a) (i) except for (A) the issuance of Telco Common Stock in order to
satisfy obligations under employee benefit plans disclosed in Schedule
4.11; (B) grants of stock options with respect to Telco Common Stock as set
forth in Schedule 6.1; and (C) the issuance of securities by a Subsidiary
to any person which is directly or indirectly wholly-owned by Telco: issue,
sell, pledge, dispose of, encumber, authorize, or propose the issuance,
sale, pledge, disposition, encumbrance or authorization of any shares of
capital stock of any class, or any options, warrants, convertible
securities or other rights of any kind to acquire any shares of capital
stock of, or any other ownership interest in, Telco or any of its
Subsidiaries; (ii) amend or propose to amend the Articles of Incorporation
or Bylaws of Telco or any of its Subsidiaries or adopt any shareholder
rights plan or related rights agreement; (iii) split, combine or reclassify
any outstanding shares of Telco Common Stock, or declare, set aside or pay
any dividend or distribution payable in cash, stock, property or otherwise
with respect to such shares; (iv) redeem, purchase or otherwise acquire or
offer to redeem, purchase or otherwise acquire any shares of its capital
stock; or (v) authorize or propose or enter into any contract, agreement,
commitment or arrangement with respect to any of the matters prohibited by
this Section 6.1(a);
(b) (i) acquire (by merger, consolidation, or acquisition of stock or
assets) any corporation, partnership or other business organization or
division thereof or make any investment in another entity other than an
entity which is a wholly-owned Subsidiary of Telco as of the date hereof,
except for investments which do not exceed $5,000,000 for any single
investment or series of related investments, or $20,000,000 in the
aggregate for all such investments in any 12-month period; (ii) except in
the ordinary course of business and in a manner consistent with past
practice, sell, pledge, dispose of, or encumber or authorize or propose the
sale, pledge, disposition or encumbrance of any assets of Telco or any of
its Subsidiaries; (iii) authorize or make capital expenditures which are in
excess of the amounts shown in Schedule 6.1 hereto; (iv) enter into any
agreement, contract or commitment for the leasing of fiber for a term in
excess of 12 months or which involves payments by Telco or any of its
Subsidiaries in an amount in excess of $5,000,000 individually or as part
of a series of related transactions, except for agreements, contracts and
commitments of a type referred to in another clause of this subsection (b)
and not prohibited thereby because of the amount of such contract; or (v)
authorize, enter into or amend any contract, agreement, commitment or
arrangement with respect to any of the matters prohibited by this Section
6.1(b);
(c) (i) incur any indebtedness for borrowed money or assume,
guarantee, endorse or otherwise become liable or responsible (whether
directly, contingently or otherwise) for the obligations of any other
person or issue or sell any debt securities or warrants or rights to
acquire any debt securities of Telco or any of its Subsidiaries or
guarantee any debt securities of others (other than Telco or any of its
wholly-owned Subsidiaries) or enter into or amend any contract, agreement,
commitment or arrangement with respect to any of the foregoing, other than
(A) in replacement for existing or maturing debt, (B) borrowings by Telco
under its lines of credit existing on the date hereof up to the maximum
amount permitted thereunder (as such maximum amount may be reduced from
time to time in accordance with the terms thereof) or (C) capital leases or
other vendor financing for capital assets the acquisition of which is
otherwise permitted under this Agreement; (ii) make any loans, advances or
capital contributions to, or investments in, any other person (other than
to the wholly-owned subsidiaries of Telco or customary loans or advances to
employees in the ordinary course of business consistent with past practice
and in amounts not material to the maker of such loan or advance); or (iii)
mortgage or pledge any of its material assets, tangible or intangible, or
create or suffer to exist any material lien thereupon;
(d) enter into (i) leveraged derivative contracts (defined as
contracts that use a factor to multiply the underlying index exposure), or
(ii) other derivative contracts except for the purpose of hedging known
interest rate and foreign exchange exposures or otherwise reducing such
Party's cost of financing;
I-25
<PAGE> 127
(e) adopt a plan of complete or partial liquidation, dissolution,
merger, consolidation, restructuring, recapitalization or other
reorganization of Telco or any of its Subsidiaries (other than the Telco
Merger);
(f) alter through merger, liquidation, reorganization, restructuring
or in any other fashion the corporate structure or ownership of any
Subsidiary;
(g) except as may be required by law or as contemplated by this
Agreement, enter into, adopt or amend or terminate any bonus, profit
sharing, compensation, severance, termination, stock option, stock
appreciation right, restricted stock, performance unit, stock equivalent,
stock purchase agreement, pension, retirement, deferred compensation,
employment, severance or other employee benefit agreement, trust, plan,
fund, award or other arrangement (other than the hiring of employees in the
ordinary course of business and not pursuant to any employment contract)
for the benefit or welfare of any director, officer or employee in any
manner, or (except for normal increases in the ordinary course of business
consistent with past practice that, in the aggregate, do not result in a
material increase in benefits or compensation expense to Telco, and as
required under existing agreements or in the ordinary course of business
generally consistent with past practice) increase in any manner the
compensation or fringe benefits of any director, officer or employee or pay
any benefit not required by any plan and arrangement as in effect as of the
date hereof (including, without limitation, the granting of stock
appreciation rights or performance units);
(h) make any payments (except in the ordinary course of business and
in amounts and in a manner consistent with past practice or as otherwise
required by Legal Requirements or the provisions of any Telco Benefit Plan)
under any Telco Benefit Plan to any director or employee of, or independent
contractor or consultant to, Telco or any of its Subsidiaries, adopt or
amend (except for amendments required by Legal Requirements) any Telco
Benefit Plan or enter into or amend any employment or consulting agreement
or grant or establish any new awards under any such existing Telco Benefit
Plan or agreement;
(i) change in any material respect its tax or accounting policies,
methods or procedures except as required by GAAP;
(j) do any act or omit to do any act which would cause a material
breach of any material contract, commitment or obligation;
(k) take any action which could reasonably be expected to adversely
affect or delay the ability of any of the Parties to obtain any approval of
any governmental or regulatory body required to consummate the transactions
contemplated hereby;
(l) other than pursuant to this Agreement, take any action to cause
the Telco Common Stock to cease to be quoted on the Nasdaq Stock Market;
(m) (i) issue SARs, new performance shares, restricted stock, or
similar equity based rights; (ii) materially modify (with materiality to be
determined with respect to the Benefit Plan in question) any actuarial cost
method, assumption or practice used in determining benefit obligations,
annual expense and funding for any Benefit Plan, except to the extent
required by GAAP; (iii) materially modify (with materiality to be
determined with respect to the Benefit Plan trust in question) the
investment philosophy of the Benefit Plan trusts or maintain an asset
allocation which is not consistent with such philosophy, subject to any
ERISA fiduciary obligation; (iv) subject to any ERISA fiduciary obligation,
enter into any outsourcing agreement, or any other material contract
relating to the Benefit Plans or management of the Benefit Plan trusts; (v)
offer any new or extend any existing retirement incentive, "window" or
similar benefit program; (vi) grant any ad hoc pension increase; (vii)
establish any new or fund any existing "rabbi" or similar trust (except in
accordance with the current terms of such trust), or enter into any other
arrangement for the purpose of securing non-qualified benefits or deferred
compensation; (viii) adopt or implement any corporate owned life insurance;
or (ix) adopt, implement or maintain any "split dollar" life insurance
program;
I-26
<PAGE> 128
(n) take any action which would cause its representations and
warranties contained herein to become inaccurate in any material respect;
(o) revalue in any material respect any of its assets, including,
without limitation, writing down the value of inventory or writing-off
notes or accounts receivable other than in the ordinary course of business
or as required by GAAP;
(p) make or revoke any tax election or settle or compromise any tax
liability material to Telco and its Subsidiaries taken as a whole or change
(or make a request to any taxing authority to change) any material aspect
of its method of accounting for tax purposes, other than as required by
applicable Legal Requirements;
(q) pay, discharge or satisfy any claims, liabilities or obligations
(absolute, accrued, asserted or unasserted, contingent or otherwise), other
than the payment, discharge or satisfaction in the ordinary course of
business of liabilities reflected or reserved against in, or contemplated
by, the consolidated financial statements (or the notes thereto) of Telco
and its Subsidiaries or incurred in the ordinary course of business
consistent with past practice; or
(r) settle or compromise any pending or threatened suit, action or
claim relating to the transactions contemplated hereby.
SECTION 6.2 -- Conduct of Business of EXCEL. (a) EXCEL covenants and agrees
that, between the date of this Agreement and the Effective Time, unless Telco
shall otherwise consent in writing, and except as described on Schedule 6.2
hereto or as otherwise expressly contemplated hereby, EXCEL and its Subsidiaries
will use their commercially reasonable efforts to preserve substantially intact
their business organizations, to keep available the services of those of their
present officers, employees and consultants who are integral to the operation of
their businesses as presently conducted and to preserve their present
relationships with significant customers, significant suppliers and with other
persons with whom they have significant business relations. In addition, EXCEL
agrees that it will not split, combine or reclassify any outstanding shares of
EXCEL Common Stock, or declare, set aside or pay any dividend or distribution
payable in cash, stock, property or otherwise with respect to such shares.
(b)(i) EXCEL further covenants and agrees that it shall give Telco not less
than three business days' prior written notice (which notice shall include such
information as, in the reasonable judgment of EXCEL, is reasonably necessary to
evaluate the Proposed Activity) if EXCEL intends to take or engage in any of the
following actions or activities (a "Proposed Activity") between the date of this
Agreement and the Effective Time:
(A) except for the issuance of shares of EXCEL Common Stock in order
to satisfy obligations under the EXCEL Stock Plans, issue any shares of
EXCEL Common Stock for, or any options, warrants, convertible securities or
other rights of any kind to acquire shares of EXCEL Common Stock which have
an exercise or conversion price per share that is, less than the fair
market value of such shares at the date of issuance (which date of issuance
shall, in the case of any convertible security, be the date of the issuance
of such convertible security);
(B)(i) acquire (by merger, consolidation, or acquisition of stock or
assets) any corporation or partnership or any equity interest therein, or
any business, except for acquisitions involving consideration that does not
exceed $100,000,000 for any acquisition or series of related acquisitions;
or (ii) sell or dispose of any assets of EXCEL or any of its Subsidiaries
in a single transaction or group of related transactions for consideration
having a fair market value (as determined by the Board of Directors of
EXCEL in good faith) of more than $100,000,000;
(C) adopt a plan of complete or partial liquidation, dissolution,
restructuring, recapitalization or other reorganization of EXCEL or any of
its Subsidiaries (other than the EXCEL Merger); or
(D) enter into any contract that would prevent or materially delay
migration of "1+ long distance traffic" to Telco's networks following the
Effective Time.
I-27
<PAGE> 129
(ii) If Telco objects to any Proposed Activity of EXCEL set forth in any
notice delivered pursuant to clause (i) above, Telco may, within three business
days of its receipt of any such notice, notify EXCEL in writing of such
objection. If EXCEL shall take or engage in, or enter into any binding written
agreement or letter of intent with respect to, a Proposed Activity with respect
to which Telco shall have delivered a written notice of objection pursuant to
and in accordance with this Section 6.2(b)(ii) (written notice of which shall be
given by EXCEL to Telco within three business days following the consummation of
such Proposed Activity or execution of such agreement or letter), Telco may,
upon five days' prior written notice to EXCEL, terminate this Agreement in
accordance with Section 9.1(i) hereof unless, prior to the expiration of such
five-day period, EXCEL shall have notified Telco in writing that it has
terminated or rescinded the Proposed Activity; provided, however, that Telco
must give the required notice of its election to exercise such termination
right, if at all, within three business days following receipt of written notice
from EXCEL that it has taken or engaged in, or entered into any binding written
agreement or letter of intent with respect to, the Proposed Activity.
Notwithstanding the foregoing, nothing contained in this Section 6.2(b) shall
prohibit or restrict the ability of EXCEL to take or engage in any Proposed
Activity.
SECTION 6.3 -- No Solicitation. From and after the date hereof, Telco,
without the prior written consent of EXCEL, will not, and will not authorize or
permit any of its Party Representatives (as defined in Section 7.5(b) hereof)
to, directly or indirectly, solicit, initiate or encourage (including by way of
furnishing information) or take any other action to facilitate any inquiries or
the making of any proposal which constitutes or may reasonably be expected to
lead to an Acquisition Proposal (as defined below) from any person, or engage in
any discussion or negotiations relating thereto or accept any Acquisition
Proposal; provided, however, that notwithstanding any other provision hereof,
Telco may (i) at any time prior to the time its stockholders shall have voted to
approve this Agreement, respond to, or engage in discussions or negotiations
with, a third party who (without any solicitation, initiation, encouragement,
discussion or negotiation, directly or indirectly, by or with Telco or its Party
Representatives after the date hereof) seeks to initiate such discussions or
negotiations and may furnish such third party information concerning Telco and
its business, properties and assets if, and only to the extent that, (A)(x) the
third party has first made a bona fide Acquisition Proposal and (y) the Board of
Directors of Telco shall conclude in good faith, after considering applicable
law, on the basis of oral or written advice of outside counsel, that such action
is necessary for the Board of Directors of Telco to act in a manner consistent
with its fiduciary duties under applicable law and (B) prior to first furnishing
such information to or entering into discussions or negotiations with such
person, Telco (x) provides prompt notice to EXCEL to the effect that it is
furnishing information to or entering into discussions or negotiations with such
person or entity and (y) receives from such person or entity an executed
confidentiality agreement in reasonably customary form on terms not in the
aggregate materially more favorable to such person or entity than the terms
contained in the Confidentiality Agreement (as defined in Section 7.5(b)
hereof), (ii) comply with Rule 14e-2 promulgated under the Exchange Act with
regard to a tender or exchange offer, and/or (iii) provided Telco terminates
this Agreement pursuant to Section 9.1(h) hereof, accept an Acquisition Proposal
from a third party. Consistent with the foregoing provisions of this Section
6.3, Telco shall immediately cease and terminate any currently existing
solicitation, initiation, encouragement, activity, discussion or negotiation
with any persons conducted heretofore by Telco or its Representatives with
respect to the foregoing. Telco agrees not to release any third party from, or
waive any provision of, any standstill agreement to which it is a party or any
confidentiality agreement between it and another person who has made, or who may
reasonably be considered likely to make, an Acquisition Proposal, unless the
Board of Directors of Telco shall conclude in good faith, after considering
applicable law, on the basis of oral or written advice of outside counsel, that
such action is necessary for the Board of Directors to act in a manner
consistent with its fiduciary duties. Telco shall notify EXCEL orally and in
writing of any such inquiries, offers or proposals (including, without
limitation, the terms and conditions of any such proposal and the identity of
the person making it), within 48 hours of the receipt thereof, shall keep EXCEL
informed of the status and details of any such inquiry, offer or proposal, and
shall give EXCEL two business days' advance notice of any agreement to be
entered into with any person making such inquiry, offer or proposal. As used
herein, "Acquisition Proposal" shall mean a proposal or offer for a tender or
exchange offer, merger, consolidation or other business combination involving
Telco or any proposal to acquire in any manner a substantial equity interest in,
or all or substantially all of the assets of, Telco. Notwithstanding the
foregoing,
I-28
<PAGE> 130
Telco shall not be precluded from informing a credible potential acquiror or its
representative of the requirements of this Section 6.3 upon receipt of an
unsolicited inquiry from such potential acquiror or representative.
SECTION 6.4 -- Subsequent Financial Statements. Prior to the Effective
Time, Telco shall (a) prior to making publicly available its financial results
for any period, provide a copy of such financial results to EXCEL and (b) timely
file with the SEC each Annual Report on Form 10-K, Quarterly Report on Form 10-Q
and Current Report on Form 8-K required to be filed by it under the Exchange Act
and the rules and regulations promulgated thereunder, and, prior to the filing
thereof, provide a copy to EXCEL, and will promptly deliver to EXCEL copies of
each such report filed with the SEC. As of their respective dates, none of such
reports shall contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading. The respective audited financial statements and unaudited interim
financial statements of Telco included in such reports will fairly present the
financial position of Telco and its Subsidiaries as at the dates thereof and the
results of their operations and cash flows for the periods then ended in
accordance with GAAP applied on a consistent basis and, subject, in the case of
unaudited interim financial statements, to normal year-end adjustments and any
other adjustments described therein.
SECTION 6.5 -- Control of Operations. Nothing contained in this Agreement
shall give EXCEL or Telco, directly or indirectly, the right to control or
direct the operations of the other prior to the Effective Time. Prior to the
Effective Time, each of EXCEL and Telco shall exercise, consistent with the
terms and conditions of this Agreement, complete control and supervision over
its respective operations.
ARTICLE VII
ADDITIONAL AGREEMENTS
SECTION 7.1 -- Joint Proxy Statement and the Registration Statement. (a) As
promptly as practicable after the execution and delivery of this Agreement, the
Parties shall prepare and file with the SEC, and shall use all reasonable
efforts to have cleared by the SEC, and promptly thereafter shall mail to the
holders of record of shares of Telco Common Stock and EXCEL Common Stock, the
Joint Proxy Statement, provided, however, that EXCEL and Telco shall not mail or
otherwise furnish the Joint Proxy Statement to their respective stockholders
unless and until:
(i) they have received notice from the SEC that the Registration
Statement is effective under the 1933 Act;
(ii) Telco shall have received a letter from DLJ, dated within two
business days of the date of the first mailing of the Joint Proxy
Statement, to the effect set forth in Section 4.15 hereof;
(iii) EXCEL shall have received a letter from Lehman Brothers, dated
within two business days of the date of the first mailing of the Joint
Proxy Statement, to the effect set forth in Section 5.11 hereof;
(iv) Telco shall have received a letter of Arthur Andersen LLP, dated
a date within two business days prior to the date of the first mailing of
the Joint Proxy Statement, and addressed to Telco, in form and substance
reasonably satisfactory to Telco and customary in scope and substance for
"cold comfort" letters delivered by independent public accountants in
connection with registration statements on Form S-4 with respect to the
financial statements of EXCEL included in the Joint Proxy Statement and the
Registration Statement; and
(v) EXCEL shall have received a letter of Deloitte & Touche, dated a
date within two business days prior to the date of the first mailing of the
Joint Proxy Statement, and addressed to EXCEL, in form and substance
reasonably satisfactory to EXCEL and customary in scope and substance for
"cold comfort" letters delivered by independent public accountants in
connection with registration statements on Form S-4 with respect to the
financial statements of Telco included in the Joint Proxy Statement and the
Registration Statement.
I-29
<PAGE> 131
(b) The Parties will use their respective best efforts to cause the letters
referred to in clauses (iv) and (v) above to be delivered and will cooperate in
the preparation of the Joint Proxy Statement and the Registration Statement and
in having the Registration Statement declared effective as soon as practicable.
SECTION 7.2 -- EXCEL and Telco Stockholders' Meetings and Consummation of
the Mergers. (a) At the earliest reasonably practicable time following the
execution and delivery of this Agreement, each of EXCEL and Telco shall promptly
take all action necessary in accordance with Delaware Law and Virginia Law,
respectively, and its Certificate or Articles of Incorporation and Bylaws, to
convene a meeting of their respective stockholders (each, a "Stockholders
Meeting"). The stockholder vote or consent required for approval of each of the
Mergers will be no greater than that contemplated by Sections 4.14(b) and
5.10(b) hereof. Each of EXCEL and Telco shall use all commercially reasonable
efforts to solicit from its respective stockholders proxies to be voted at its
Stockholders Meeting in favor of this Agreement pursuant to the Joint Proxy
Statement and each of EXCEL and Telco shall include in the Joint Proxy Statement
the recommendation of its Board of Directors in favor of this Agreement and the
Mergers; provided, however, that either Board of Directors may withdraw its
recommendation if such Board of Directors shall conclude in good faith, after
considering applicable law, on the basis of oral or written advice of outside
counsel, that such action is necessary for such Board of Directors to act in a
manner consistent with its fiduciary duties. Each of the Parties shall take all
other action necessary or, in the opinion of the other Parties, reasonably
advisable to promptly and expeditiously secure any vote or consent of
stockholders required by Delaware Law or Virginia Law, as the case may be, and
such Party's Certificate or Articles of Incorporation and Bylaws, to effect the
Mergers.
(b) Upon the terms and subject to the conditions hereof and as soon as
practicable after the conditions set forth in Article VIII hereof have been
fulfilled or waived, each of the Parties shall execute in the manner required by
Delaware Law or Virginia Law, as the case may be, and deliver to and file with
the Secretary of State of the State of Delaware or the Virginia State
Corporation Commission, as the case may be, such instruments and agreements as
may be required by Delaware Law or Virginia Law, as the case may be, and the
Parties shall take all such other and further actions as may be required by law
to make the Mergers effective. Prior to the filings referred to in this Section
7.2(b), a closing (the "Closing") will be held at the offices of Weil, Gotshal &
Manges LLP (or such other place as EXCEL and Telco may mutually agree upon) for
the purpose of confirming all the foregoing. The Closing will take place upon
the fulfillment or waiver of all of the conditions to closing set forth in
Article VIII of this Agreement, or as soon thereafter as practicable (the date
of the Closing being herein referred to as the "Closing Date").
SECTION 7.3 -- Additional Agreements. (a) Each of the Parties will comply
in all material respects with all applicable laws and with all applicable rules
and regulations of any governmental authority in connection with its execution,
delivery and performance of this Agreement and the transactions contemplated
hereby. Each of the Parties agrees to use all commercially reasonable efforts to
obtain in a timely manner all necessary waivers, consents and approvals and to
effect all necessary registrations and filings, and to use all commercially
reasonable efforts to take, or cause to be taken, all other actions and to do,
or cause to be done, all other things necessary, proper or advisable to
consummate and make effective as promptly as practicable the transactions
contemplated by this Agreement. Without limiting the generality of the
foregoing, each of EXCEL and Telco shall promptly prepare and file a Premerger
Notification in accordance with the HSR Act, shall promptly comply with any
requests for additional information, and shall use its commercially reasonable
efforts to obtain termination of the waiting period thereunder as promptly as
practicable. The Parties shall cooperate in responding to inquiries from, and
making presentations to, regulatory authorities.
(b) Upon reasonable advance notice, Telco shall use its best efforts to
cause its senior management to attend (at the expense of EXCEL) and participate
in meetings with prospective members of and participants in any syndicate of
financial institutions being assembled to provide the Financing.
SECTION 7.4 -- Notification of Certain Matters. Each of EXCEL and Telco
shall give prompt notice to the other of the following:
(a) the occurrence or nonoccurrence of any event whose occurrence or
nonoccurrence would be likely to cause either (i) any representation or
warranty of such Party contained in this Agreement to be
I-30
<PAGE> 132
untrue or inaccurate in any material respect at any time from the date
hereof to the Effective Time, or (ii) directly or indirectly, any Material
Adverse Effect with respect to such Party;
(b) any material failure of such Party, or any officer, director,
employee or agent of any thereof, to comply with or satisfy any covenant,
condition or agreement to be complied with or satisfied by it hereunder;
(c) any facts relating to such Party which would make it necessary or
advisable to amend the Joint Proxy Statement or the Registration Statement
in order to make the statements therein not misleading or to comply with
applicable law;
(d) any notice of, or other communication relating to, a default or
event which, with notice or lapse of time or both, would become a default,
received by it or any of its Subsidiaries subsequent to the date of this
Agreement and prior to the Effective Time, under any contract or agreement
material to the financial condition, properties, businesses or results of
operations of it and its Subsidiaries taken as a whole to which it or any
of its Subsidiaries is a party or is subject; and
(e) any notice or other communication from any third party alleging
that the consent of such third party is or may be required in connection
with the transactions contemplated by this Agreement;
provided, however, that the delivery of any notice pursuant to this Section 7.4
shall not limit or otherwise affect the remedies available hereunder to the
Party receiving such notice.
SECTION 7.5 -- Access to Information. (a) From the date hereof to the
Effective Time, each of EXCEL and Telco shall, and shall cause its respective
Subsidiaries, and its and their officers, directors, employees, auditors,
counsel and agents to afford the officers, employees, auditors, counsel and
agents of the other Party complete access at all reasonable times to such
Party's and its Subsidiaries' officers, employees, auditors, counsel agents,
properties, offices and other facilities and to all of their respective books
and records, and shall furnish the other with all financial, operating and other
data and information as such other Party may reasonably request.
(b) Each of EXCEL and Telco agrees that all information so received from
the other Party shall be deemed received pursuant to the confidentiality
agreement, dated May 7, 1997, heretofore executed and delivered by EXCEL and
Telco (the "Confidentiality Agreement") and such Party shall, and shall cause
its Subsidiaries and each of its and their respective officers, directors,
employees, financial advisors and agents ("Party Representatives"), to comply
with the provisions of the Confidentiality Agreement with respect to such
information and the provisions of the Confidentiality Agreement are hereby
incorporated herein by reference with the same effect as if fully set forth
herein.
SECTION 7.6 -- Public Announcements. Except as required by applicable law
or stock exchange requirements, EXCEL and Telco shall provide the other Party
with a reasonable opportunity to review and comment on all press releases and
other public statements with respect to the transactions contemplated hereby.
SECTION 7.7 -- Indemnification; Directors' and Officers' Insurance. (a) For
a period of six years after the Effective Time, (i) Holdings and Telco jointly
and severally shall indemnify the directors and officers of Telco who hold such
positions at any time during the period from the date hereof through the
Effective Time to the fullest extent to which Telco is permitted to indemnify
such officers and directors under its Articles of Incorporation and Bylaws and
applicable law (including, without limitation, indemnification for actions in
the right of Telco) and (ii) Holdings and EXCEL jointly and severally shall
indemnify the directors and officers of EXCEL who hold such positions at any
time during the period from the date hereof through the Effective Time to the
fullest extent to which EXCEL is permitted to indemnify such officers and
directors under its Certificate of Incorporation and Bylaws and applicable law.
(b) For a period of four years after the Effective Time, Holdings shall
cause to be maintained in effect the current policies of directors' and
officers' liability insurance maintained by Telco (provided that Holdings may
substitute therefor policies of at least the same coverage and amounts
containing terms and conditions which are no less advantageous) with respect to
claims arising from facts or events which occurred before the
I-31
<PAGE> 133
Effective Time; provided, however, that Holdings shall not be obligated to make
annual premium payments for such insurance to the extent such premiums exceed
200% of the premiums paid as of the date hereof by Telco for such insurance
(which premium Telco represents and warrants to be $192,500 in the aggregate).
Notwithstanding anything to the contrary contained elsewhere herein, Holdings'
agreement set forth in Section 7.7(a) shall cover claims only to the extent that
those claims are not covered under Telco's directors' and officers' insurance
policies (or any substitute policies permitted by this Section 7.7(b)).
SECTION 7.8 -- Employee Benefit Plans. (a) Except as otherwise set forth in
Section 2.8 hereof or in the Telco Shareholders Agreement, in the case of the
EXCEL Benefit Plans listed on Schedule 7.8 hereto ("EXCEL Stock Plans") and the
Telco Benefit Plans under which the employees' interests are based upon EXCEL
Common Stock and Telco Common Stock, respectively, or the respective market
prices thereof (but which interests do not constitute stock options), EXCEL and
Telco agree that such interests shall, from and after the Effective Time, be
based on Holdings Common Stock in accordance with the EXCEL Exchange Ratio (with
respect to EXCEL Stock Plans) and the Telco Adjusted Exchange Ratio (with
respect to Telco Benefit Plans).
(b) With respect to any EXCEL Stock Plans or Telco Benefit Plans maintained
or contributed to outside the United States for the benefit of non-United States
citizens or residents, the principles set forth in this Section 7.8 and on
Schedule 6.1 shall apply to the extent the application of such principles does
not violate applicable foreign law.
(c) Without limiting the applicability of Sections 2.8 and 2.9 hereof, each
of the Parties shall take all actions as are necessary to ensure that EXCEL and
Telco will not be at the Effective Time bound by any options, SARs, warrants or
other rights or agreements which would entitle any person, other than Holdings,
to own any capital stock of the Surviving Corporations or to receive any payment
in respect thereof, and all EXCEL Stock Plans and Telco Benefit Plans conferring
any rights with respect to Shares or other capital stock of EXCEL or Telco, as
the case may be, shall be deemed hereby to be amended to be in conformity with
this Section 7.8.
SECTION 7.9 -- Employment Arrangements. Each of Henry G. Luken, Donald A.
Burns, Stephen G. Canton, Nicholas A. Merrick and Bryan K. Rachlin
(collectively, the "Principal Officers") shall, as of or prior to the Effective
Time, enter into separate employment agreements with Telco and non-competition
agreements with Holdings in substantially the forms previously agreed by the
Parties (the "Employment Agreements" and the "Non-Competition Agreements",
respectively). None of the Principal Officers shall have any right, remedy or
cause of action under this Section 7.9, nor shall they be third party
beneficiaries of this Section 7.9.
SECTION 7.10 -- Stock Exchange Listing. EXCEL shall use its best efforts to
obtain, prior to the Effective Time, the approval for listing on the NYSE,
effective upon official notice of issuance, of the shares of Holdings Common
Stock into which the Shares will be converted pursuant to Article II hereof and
which will be issuable upon exercise of options pursuant to Section 2.8 hereof.
SECTION 7.11 -- Post-Merger Holdings Board of Directors. Following the
Effective Time, the Board of Directors of Holdings shall consist of the Board of
Directors of EXCEL immediately prior to the Effective Time, together with Henry
G. Luken and Donald A. Burns.
SECTION 7.12 -- Registration Rights. Holdings shall not be required to
amend or maintain the effectiveness of the Registration Statement for the
purpose of permitting resale of the shares of Holdings Common Stock received
pursuant hereto by the persons who may be deemed to be "affiliates" of EXCEL or
Telco within the meaning of Rule 145 promulgated under the 1933 Act.
Notwithstanding the foregoing, at the Effective Time, Holdings will enter into a
Registration Rights Agreement in substantially the form annexed hereto as
Appendix II with the parties listed therein.
SECTION 7.13 -- Affiliates. Each of EXCEL and Telco (i) has disclosed to
the other all persons who are, or may be, at the time this Agreement is executed
its "affiliates" for purposes of Rule 145 under the Securities Act, and (ii) has
delivered, or caused each person who is so identified as an "affiliate" of it to
deliver, to the other as promptly as practicable but in no event later than the
Closing Date, an EXCEL Affiliate Letter or a
I-32
<PAGE> 134
Telco Affiliate Letter, as the case may be. EXCEL and Telco shall notify each
other from time to time of any other persons who then are, or may be, such an
"affiliate" and use all reasonable efforts to cause each additional person who
is identified as an "affiliate" to execute an EXCEL Affiliate Letter or a Telco
Affiliate Letter, as the case may be.
SECTION 7.14 -- Blue Sky. EXCEL and Telco will use their best efforts to
obtain prior to the Effective Time all necessary blue sky permits and approvals
required to permit the distribution of the shares of Holdings Common Stock to be
issued in accordance with the provisions of this Agreement.
SECTION 7.15 -- Compliance. (a) In consummating the Telco Merger and the
transactions contemplated hereby, Telco shall comply in all material respects
with the provisions of the Exchange Act and the 1933 Act and shall comply,
and/or cause its subsidiaries to comply or to be in compliance, in all material
respects, with all other applicable Laws.
(b) In consummating the EXCEL Merger and the transactions contemplated
hereby, EXCEL shall comply in all material respects with the provisions of the
Exchange Act and the 1933 Act and shall comply, and/or cause its subsidiaries to
comply or to be in compliance, in all material respects, with all other
applicable Laws.
ARTICLE VIII
CONDITIONS TO MERGERS
SECTION 8.1 -- Conditions to Obligations of Each Party to Effect the
Mergers. The respective obligations of each Party to effect the Mergers shall be
subject to the following conditions:
(a) Stockholder Approval. The Mergers and this Agreement shall have
been approved and adopted by the requisite vote of the stockholders of each
of EXCEL and Telco in accordance with Delaware Law and Virginia Law,
respectively;
(b) Legality. No federal, state or foreign statute, rule, regulation,
executive order, decree or injunction shall have been enacted, entered,
promulgated or enforced by any court or governmental authority which is in
effect and has the effect of making the Mergers illegal or otherwise
prohibiting the consummation of the Mergers;
(c) HSR Act. Any waiting period applicable to the consummation of the
Mergers under the HSR Act shall have expired or been terminated;
(d) Regulatory Matters. All authorizations, consents, orders or
approvals of, or declarations or filings with, and all expirations of
waiting periods imposed by, any governmental body, agency or official (all
of the foregoing, "Consents") which are necessary for the consummation of
the transactions contemplated hereby, other than immaterial Consents the
failure to obtain which would have no material adverse effect on the
consummation of the transactions contemplated hereby and no Material
Adverse Effect on Holdings or either of the Surviving Corporations, shall
have been filed, have occurred or have been obtained (all such permits,
approvals, filings and consents and the lapse of all such waiting periods
being referred to as the "Requisite Regulatory Approvals") and all such
Requisite Regulatory Approvals shall be in full force and effect, provided,
however, that a Requisite Regulatory Approval shall not be deemed to have
been obtained if in connection with the grant thereof there shall have been
an imposition by any state or federal governmental body, agency or official
of any condition, requirement, restriction or change of regulation, or any
other action directly or indirectly related to such grant taken by such
governmental body, which would reasonably be expected to either (i) have a
Material Adverse Effect on any of Holdings or either of the Surviving
Corporations, or (ii) prevent the Parties from realizing in all material
respects the economic benefits of the transactions contemplated by this
Agreement that such Parties currently anticipate receiving therefrom;
(e) Registration Statement Effective. The Registration Statement shall
have become effective prior to the mailing by each of EXCEL and Telco of
the Joint Proxy Statement to its respective stockholders,
I-33
<PAGE> 135
no stop order suspending the effectiveness of the Registration Statement
shall then be in effect, and no proceedings for that purpose shall then be
threatened by the SEC or shall have been initiated by the SEC and not
concluded or withdrawn;
(f) Blue Sky. All state securities or blue sky permits or approvals
required to carry out the transactions contemplated hereby shall have been
received; and
(g) Stock Exchange Listing. The shares of Holdings Common Stock into
which the Shares will be converted pursuant to Article II hereof and the
shares of Holdings Common Stock issuable upon the exercise of options
pursuant to Section 2.8 hereof shall have been duly approved for listing on
the NYSE, subject to official notice of issuance.
SECTION 8.2 -- Additional Conditions to Obligations of EXCEL. The
obligations of EXCEL to effect the Mergers are also subject to the fulfillment
of the following conditions:
(a) Representations and Warranties. The representations and warranties
of Telco contained in this Agreement shall be true and correct on the date
hereof and (except to the extent such representations and warranties speak
as of an earlier date) shall also be true and correct on and as of the
Closing Date, except for changes expressly contemplated by this Agreement,
with the same force and effect as if made on and as of the Closing Date;
(b) Agreements, Conditions and Covenants. Telco shall have performed
or complied in all material respects with all agreements, conditions and
covenants required by this Agreement to be performed or complied with by
Telco on or before the Effective Time;
(c) Certificates. EXCEL shall have received a certificate of an
executive officer of Telco to the effect set forth in paragraphs (a) and
(b) above;
(d) Opinions. (i) EXCEL shall have received an opinion of Weil,
Gotshal & Manges LLP, special counsel to EXCEL, dated as of the Closing
Date, in form and substance reasonably satisfactory to EXCEL, substantially
to the effect that, on the basis of the facts, representations and
assumptions set forth in such opinion: (A) no gain or loss will be
recognized for federal income tax purposes by Holdings, EXCEL or E-Sub as a
result of the formation of Holdings and E-Sub and the Merger of E-Sub with
and into EXCEL; and (B) no gain or loss will be recognized for federal
income tax purposes by the stockholders of EXCEL upon their exchange of
EXCEL Common Stock solely for Holdings Common Stock pursuant to such
Merger. In rendering such opinion, Weil, Gotshal & Manges LLP may require
and rely upon representations and covenants including those contained in
certificates of officers of Holdings, EXCEL, Telco and others substantially
in the form attached hereto as Appendix III;
(ii) Telco shall have received the opinion described in Section
8.3(d)(i) hereof, in form and substance reasonably satisfactory to EXCEL;
and
(iii) EXCEL shall have received an opinion of Swidler & Berlin,
special counsel to Telco, dated as of the Closing Date, substantially to
the effect set forth in Appendix IV hereto.
(e) Affiliate Agreements. EXCEL shall have received the agreements
required by Section 7.13 hereof to be delivered by the Telco "affiliates,"
duly executed by each "affiliate" of Telco;
(f) No Material Adverse Change. Since December 31, 1996, there shall
not have occurred any event that has had or could reasonably be expected to
have a Material Adverse Effect on Telco or Holdings;
(g) Consents Under Telco Agreements. Telco shall have obtained the
consents listed on Schedule 8.2(g) hereto, as well as the consent or
approval of each other person whose consent or approval shall be required
under any agreement or instrument in order to permit the consummation of
the transactions contemplated hereby except those which the failure to
obtain would not, individually or in the aggregate, have a Material Adverse
Effect on Holdings or either of the Surviving Corporations; and
I-34
<PAGE> 136
(h) Employment and Non-Competition Agreements. The Employment
Agreements and Non-Competition Agreements shall be in full force and
effect.
SECTION 8.3 -- Additional Conditions to Obligations of Telco. The
obligations of Telco to effect the Mergers are also subject to the fulfillment
of the following conditions:
(a) Representations and Warranties. The representations and warranties
of EXCEL contained in this Agreement shall be true and correct on the date
hereof and (except to the extent such representations and warranties speak
as of an earlier date) shall also be true and correct on and as of the
Closing Date, except for changes expressly contemplated by this Agreement,
with the same force and effect as if made on and as of the Closing Date;
(b) Agreements, Conditions and Covenants. EXCEL shall have performed
or complied in all material respects with all agreements, conditions and
covenants required by this Agreement to be performed or complied with by
EXCEL on or before the Effective Time;
(c) Certificates. Telco shall have received a certificate of an
executive officer of EXCEL to the effect set forth in paragraphs (a) and
(b) above;
(d) Tax Opinion. (i) Telco shall have received an opinion of Swidler &
Berlin, special counsel to Telco, dated as of the Closing Date, in form and
substance reasonably satisfactory to Telco, substantially to the effect
that, on the basis of the facts, representations and assumptions set forth
in such opinion: (A) no gain or loss will be recognized for federal income
tax purposes by Holdings, Telco or T-Sub as a result of the formation of
Holdings and T-Sub and the Merger of T-Sub with and into Telco; and (B) no
gain or loss will be recognized for federal income tax purposes by the
stockholders of Telco upon their exchange of Telco Common Stock for the
Telco Merger Consideration pursuant to such Merger, except (i) gain, if
any, shall be recognized to the extent of the Cash Consideration received,
and (ii) with respect to cash received in lieu of a fractional share
interest in Holdings Common Stock. In rendering such opinion, Swidler &
Berlin may require and rely upon representations and covenants including
those contained in certificates of officers of Holdings, Telco and EXCEL
and others substantially in the form attached hereto as Appendix V; and
(ii) EXCEL shall have received the opinion described in Section
8.2(d)(i) hereof, in form and substance reasonably satisfactory to Telco;
(e) Affiliate Agreements. Telco shall have received the agreements
required by Section 7.13 hereof to be delivered by the EXCEL "affiliates,"
duly executed by each "affiliate" of EXCEL;
(f) No Material Adverse Change. Since December 31, 1996, there shall
not have occurred any event that has had or could reasonably be expected to
have a Material Adverse Effect on EXCEL or Holdings; and
(g) Consents Under EXCEL Agreements. EXCEL shall have obtained the
consent or approval of each person whose consent or approval shall be
required under any agreement or instrument in order to permit the
consummation of the transactions contemplated hereby except those which the
failure to obtain would not, individually or in the aggregate, have a
Material Adverse Effect on Holdings or either of the Surviving
Corporations.
ARTICLE IX
TERMINATION, AMENDMENT AND WAIVER
SECTION 9.1 -- Termination. This Agreement may be terminated at any time
before the Effective Time, in each case as authorized by the respective Board of
Directors of EXCEL or Telco:
(a) By mutual written consent of each of EXCEL and Telco;
(b) By either EXCEL or Telco if the Mergers shall not have been
consummated on or before December 31, 1997 (the "Termination Date");
provided, however, that the right to terminate this
I-35
<PAGE> 137
Agreement under this Section 9.1(b) shall not be available to any Party
whose failure to fulfill any obligation under this Agreement has been the
cause of, or resulted in, the failure of the Effective Time to occur on or
before the Termination Date; and provided, further, that if on the
Termination Date the conditions to the Closing set forth in Section 8.1(d)
shall not have been fulfilled, but all other conditions to the Closing
shall be fulfilled or shall be capable of being fulfilled, then the
Termination Date shall be extended to May 31, 1998;
(c) By either EXCEL or Telco if a court of competent jurisdiction or
governmental, regulatory or administrative agency or commission shall have
issued an order, decree or ruling or taken any other action (which order,
decree or ruling the Parties shall use their commercially reasonable
efforts to lift), in each case permanently restraining, enjoining or
otherwise prohibiting the transactions contemplated by this Agreement, and
such order, decree, ruling or other action shall have become final and
nonappealable;
(d) By either EXCEL or Telco if the other shall have breached, or
failed to comply with, in any material respect any of its obligations under
this Agreement or any representation or warranty made by such other Party
shall have been incorrect in any material respect when made or shall have
since ceased to be true and correct in any material respect, and such
breach, failure or misrepresentation is not cured within 30 days after
notice thereof and such breaches, failures or misrepresentations,
individually or in the aggregate and without regard to materiality
qualifiers contained therein, results or would reasonably be expected to
result in a Material Adverse Effect on Holdings, EXCEL or Telco;
(e) By either EXCEL or Telco upon the occurrence of a Material Adverse
Effect on the other or on Holdings or an event which could reasonably be
expected to result in a Material Adverse Effect on the other or on
Holdings;
(f) By either EXCEL or Telco if the Board of Directors of the other or
any committee of the Board of Directors of the other (i) shall withdraw or
modify in any adverse manner its approval or recommendation of this
Agreement or the Mergers, (ii) shall fail to reaffirm such approval or
recommendation upon such Party's request, (iii) approve or recommend any
acquisition of the other or a material portion of its assets or any tender
offer for shares of its capital stock, in each case, other than by a Party
or an affiliate thereof, or (iv) shall resolve to take any of the actions
specified in clause (i) above.
(g) By either EXCEL or Telco if any of the required approvals of the
stockholders of EXCEL or of Telco shall fail to have been obtained at a
duly held stockholders meeting of either of such companies, including any
adjournments thereof;
(h) By Telco, prior to the approval of this Agreement by the
stockholders of Telco, upon two business days' prior notice to EXCEL, if,
as a result of an Acquisition Proposal (as defined in Section 6.3 hereof)
received by Telco from a person other than a Party to this Agreement or any
of its affiliates, the Board of Directors of Telco determines in good
faith, on the basis of oral or written advice of outside counsel, that
their fiduciary obligations under applicable law require that such
Acquisition Proposal be accepted; provided, however, that (i) the Board of
Directors of Telco shall have concluded in good faith, after considering
applicable provisions of law, on the basis of oral or written advice of
outside counsel, that such action is necessary for the Board of Directors
to act in a manner consistent with its fiduciary duties under applicable
law and (ii) prior to any such termination, Telco shall, and shall cause
its respective financial and legal advisors to, negotiate with EXCEL to
adjust the terms and conditions of this Agreement to provide the
opportunity for Telco to proceed with the transactions contemplated hereby;
or
(i) By Telco, under the circumstances and in the manner described in
Section 6.2(b)(ii);
provided, however, that no termination shall be effective pursuant to Sections
9.1(f), (g) or (h) under circumstances in which a Termination Fee is payable by
Telco under Section 9.2(b) unless concurrently with such termination, such
termination fee is paid in full by Telco in accordance with the provisions of
Sections 9.2(b).
I-36
<PAGE> 138
SECTION 9.2 -- Effect of Termination. (a) In the event of termination of
this Agreement as provided in Section 9.1 hereof, and subject to the provisions
of Section 10.1 hereof, this Agreement shall forthwith become void and there
shall be no liability on the part of any of the Parties, except (i) as set forth
in this Section 9.2 and in Sections 4.10, 4.16, 5.9, 5.12 and 10.3 hereof, and
(ii) nothing herein shall relieve any Party from liability for any willful
breach hereof.
(b) If (i) this Agreement (A) is terminated by EXCEL pursuant to Sections
9.1(f) hereof or EXCEL or Telco pursuant to Section 9.1(g) hereof because of the
failure to obtain the required approval from the Telco stockholders or by Telco
pursuant to Section 9.1(h) hereof, or (B) is terminated as a result of Telco's
material breach of Section 7.2 hereof which is not cured within 30 days after
notice thereof to Telco, and (ii) at the time of such termination or prior to
the meeting of Telco's stockholders there shall have been an Acquisition
Proposal involving Telco or any of its Subsidiaries (whether or not such offer
shall have been rejected or shall have been withdrawn prior to the time of such
termination or of the meeting), Telco shall pay to EXCEL a termination fee of
$20 million (the "Termination Fee"). The Termination Fee payable under this
Section 9.2(b) shall be payable in cash at the date of termination.
(c) Telco agrees that the agreements contained in Section 9.2(b) above are
an integral part of the transactions contemplated by this Agreement and
constitute liquidated damages and not a penalty. If Telco fails to promptly pay
to EXCEL any fee due under such Section 9.2(b), Telco shall pay the costs and
expenses (including reasonable legal fees and expenses) in connection with any
action, including the filing of any lawsuit or other legal action, taken to
collect payment, together with interest on the amount of any unpaid fee at the
publicly announced prime rate of Citibank, N.A. from the date such fee was
required to be paid.
SECTION 9.3 -- Amendment. This Agreement may be amended by the Parties
pursuant to a writing adopted by action taken by all of the Parties at any time
before the Effective Time; provided, however, that, after approval of the
Mergers by the stockholders of EXCEL or Telco, whichever shall occur first, no
amendment may be made which would (a) alter or change the amount or kinds of
consideration to be received by the holders of Shares upon consummation of the
Mergers, (b) alter or change any term of the Certificate of Incorporation of
either of the Surviving Corporations or Holdings, or (c) alter or change any of
the terms and conditions of this Agreement if such alteration or change would
adversely affect the holders of any class or series of securities of EXCEL or
Telco. This Agreement may not be amended except by an instrument in writing
signed by the Parties.
SECTION 9.4 -- Waiver. At any time before the Effective Time, any Party may
(a) extend the time for the performance of any of the obligations or other acts
of the other Parties, (b) waive any inaccuracies in the representations and
warranties contained herein or in any document delivered pursuant hereto and (c)
waive compliance with any of the agreements or conditions contained herein. Any
agreement on the part of a Party to any such extension or waiver shall be valid
only as against such Party and only if set forth in an instrument in writing
signed by such Party.
ARTICLE X
GENERAL PROVISIONS
SECTION 10.1 -- Non-Survival of Representations, Warranties and
Agreements. The representations, warranties and agreements in this Agreement
shall terminate at the Effective Time or upon the termination of this Agreement
pursuant to Section 9.1 hereof, as the case may be, except that (a) the
agreements set forth in Article I and Sections 2.4, 2.5, 2.6, 2.7, 7.7, 7.8 and
7.11 hereof and this Section 10.1 shall survive the Effective Time indefinitely,
(b) the agreements and representations set forth in Sections 4.10, 4.16, 5.9,
5.12, 7.5(b), 9.2 and 10.3 hereof and this Section 10.1 shall survive
termination indefinitely and (c) nothing contained herein shall limit any
covenant or agreement of the Parties which by its terms contemplates performance
after the Effective Time.
SECTION 10.2 -- Notices. All notices and other communications given or made
pursuant hereto shall be in writing and shall be deemed to have been duly given
or made as of the date of receipt and shall be delivered personally or mailed by
registered or certified mail (postage prepaid, return receipt requested), sent
by
I-37
<PAGE> 139
overnight courier or sent by telecopy, to the Parties at the following addresses
or telecopy numbers (or at such other address or telecopy number for a Party as
shall be specified by like notice):
(a) if to EXCEL or any Merger Subsidiary:
EXCEL Communications, Inc.
8750 North Central Expressway
Suite 2000
Dallas, Texas 75231
Attention: J. Christopher Dance, Esq.
Telecopy No.: (214) 863-8985
with a copy to:
Weil, Gotshal & Manges LLP
767 Fifth Avenue
New York, New York 10153
Attention: Howard Chatzinoff, Esq. and Frederick S. Green, Esq.
Telecopy No.: (212) 310-8007
(b) if to Telco:
Telco Communications Group, Inc.
4219 Lafayette Center Drive
Chantilly, Virginia 20151-1209
Attention: Bryan K. Rachlin, Esq.
Telecopy No.: (703) 803-3430
with a copy to:
Swidler & Berlin, Chartered, Washington, D.C.
3000 K Street, N.W. Suite 300
Washington, D.C. 20007
Attention: John J. Klusaritz, Esq.
Telecopier No.: (202) 424-7643
SECTION 10.3 -- Expenses. Except as otherwise provided herein, all costs
and expenses incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by the Party incurring such costs and
expenses, except that those expenses incurred in connection with the printing of
the Joint Proxy Statement and the Registration Statement, as well as the filing
fees related thereto and any filing fee required in connection with the filing
of Premerger Notifications under the HSR Act, shall be shared equally by EXCEL
and Telco.
SECTION 10.4 -- Certain Definitions. For purposes of this Agreement, the
following terms shall have the following meanings:
(a) "1933 Act" means the Securities Act of 1933, as the same may be
amended from time to time, and "Exchange Act" means the Securities Exchange
Act of 1934, as the same may be amended from time to time.
(b) "affiliate" of a person means a person that directly or
indirectly, through one or more intermediaries, controls, is controlled by,
or is under common control with, the first mentioned person.
(c) "control" (including the terms "controlled by" and "under common
control with") means the possession, direct or indirect, of the power to
direct or cause the direction of the management and policies of a person,
whether through the ownership of stock, as trustee or executor, by contract
or credit arrangement or otherwise.
(d) "HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as the same may be amended from time to time.
I-38
<PAGE> 140
(e) "knowledge" of any Party shall mean the actual knowledge of the
executive officers of such Party.
(f) "Material Adverse Effect" means any change in or effect on the
business of the referenced corporation or any of its Subsidiaries that is
or will be materially adverse to the business, operations (including the
income statement), properties (including intangible properties), condition
(financial or otherwise), assets, liabilities or regulatory status of such
referenced corporation and its Subsidiaries taken as a whole, but shall not
include the effects of changes that are generally applicable in (A) the
United States economy or (B) the United States securities markets if, in
any of (A) or (B), the effect on EXCEL or Telco (as the case may be) and
its respective Subsidiaries, taken as a whole, is not disproportionate
relative to the effect on the other and its Subsidiaries, taken as a whole.
(g) "person" means an individual, corporation, partnership,
association, trust, unincorporated organization, entity or group (as
defined in the Exchange Act).
(h) "Subsidiary" means any corporation or other legal entity of which
EXCEL or Telco, as the case may be (either alone or through or together
with any other Subsidiary or Subsidiaries), owns, directly or indirectly,
more than 50% of the stock or other equity interests the holders of which
are generally entitled to vote for the election of the board of directors
or other governing body of such corporation or other legal entity.
(i) "Telco Adjusted Exchange Ratio" means two times the Telco Exchange
Ratio.
SECTION 10.5 -- Headings. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
SECTION 10.6 -- Severability. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule of law
or public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby is not affected in any manner
adverse to any Party. Upon such determination that any term or other provision
is invalid, illegal or incapable of being enforced, the Parties shall negotiate
in good faith to modify this Agreement so as to effect the original intent of
the Parties as closely as possible in an acceptable manner to the end that the
transactions contemplated hereby are fulfilled to the maximum extent possible.
SECTION 10.7 -- Entire Agreement; No Third-Party Beneficiaries. This
Agreement constitutes the entire agreement and, except as expressly set forth
herein, supersedes any and all other prior agreements and undertakings, both
written and oral, among the Parties, or any of them, with respect to the subject
matter hereof and, except for Section 7.7 (Indemnification; Directors' and
Officers' Insurance), is not intended to confer upon any person other than
EXCEL, Telco, Holdings, E-Sub and T-Sub and, after the Effective Time, their
respective stockholders, any rights or remedies hereunder.
SECTION 10.8 -- Assignment. This Agreement shall not be assigned by
operation of law or otherwise.
SECTION 10.9 -- Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Delaware applicable to
contracts executed in and to be performed entirely within that State, without
regard to the conflicts of laws provisions thereof.
SECTION 10.10 -- Counterparts. This Agreement may be executed in one or
more counterparts, and by the different Parties in separate counterparts, each
of which when executed shall be deemed to be an original, but all of which shall
constitute one and the same agreement.
I-39
<PAGE> 141
IN WITNESS WHEREOF, the undersigned have caused this Agreement to be
executed as of the date first written above by their respective officers
thereunto duly authorized.
EXCEL COMMUNICATIONS, INC.
By: /s/ JOHN J. MCLAINE
----------------------------------
Name: John J. McLaine
Title: Executive Vice President
and Chief Financial Officer
NEW RES, INC.
By: /s/ JOHN J. MCLAINE
----------------------------------
Name: John J. McLaine
Title: Executive Vice President
TELCO COMMUNICATIONS GROUP, INC.
By: /s/ DONALD A. BURNS
----------------------------------
Name: Donald A. Burns
Title: President and Chief
Executive Officer
T-SUB, INC.
By: /s/ JOHN J. MCLAINE
----------------------------------
Name: John J. McLaine
Title: Executive Vice President
E-SUB, INC.
By: /s/ JOHN J. MCLAINE
----------------------------------
Name: John J. McLaine
Title: Executive Vice President
I-40
<PAGE> 142
APPENDIX II
[LEHMAN BROTHERS LETTERHEAD]
September 15, 1997
Board of Directors
EXCEL Communications, Inc.
8750 North Central Expressway, Suite 2000
Dallas, TX 75231
Members of the Board:
We understand that Excel Communications, Inc. ("EXCEL" or the "Company"),
Telco Communications Group, Inc. ("Telco"), New EXCEL Communications, Inc.
("Holdings") and two wholly-owned subsidiaries of Holdings have entered into an
Agreement and Plan of Merger, dated as of June 5, 1997 (the "Merger Agreement"),
pursuant to which such subsidiaries of Holdings will be merged into each of
EXCEL and Telco (the "Mergers"), with each of EXCEL and Telco thereafter
becoming direct, wholly-owned subsidiaries of Holdings. We further understand
that, pursuant to the Mergers, each outstanding share of common stock ("EXCEL
Common Stock") of EXCEL and all rights in respect thereof will be exchanged for
one share of common stock ("Holdings Common Stock") of Holdings (the "EXCEL
Exchange Ratio") and each outstanding share of common stock ("Telco Common
Stock") of Telco and all rights in respect thereof will be exchanged for 0.7595
shares of Holdings Common Stock (the "Telco Exchange Ratio") and, together with
the EXCEL Exchange Ratio, the "Exchange Ratios") and $15.00 cash (collectively,
the "Proposed Transaction"). As more specifically set forth in the Merger
Agreement, in the Mergers each outstanding EXCEL or Telco option to purchase
shares of common stock will be converted into an option to purchase Holdings
Common Stock, adjusted to reflect the EXCEL Exchange Ratio or twice the Telco
Exchange Ratio, as the case may be. Based on the Exchange Ratios, current
holders of EXCEL Common Stock would hold approximately 78%, and current holders
of Telco Common Stock would hold approximately 22%, of the outstanding shares of
Holdings Common Stock on a fully-diluted basis after consummation of the
Mergers. The terms and conditions of the Proposed Transaction are set forth in
more detail in the Merger Agreement.
We have been requested by the Board of Directors of the Company to render
our opinion with respect to the fairness, from a financial point of view, to the
stockholders of the Company of the EXCEL Exchange Ratio and to the Company of
the consideration to be paid by Holdings to holders of Telco Common Stock in the
Proposed Transaction. We have not been requested to opine as to, and our opinion
does not in any manner address, the Company's underlying business decision to
proceed with or effect the Proposed Transaction.
In arriving at our opinion, we reviewed and analyzed: (1) the Merger
Agreement and the specific terms of the Proposed Transaction, (2) such publicly
available information concerning the Company and Telco which we believe to be
relevant to our analysis, (3) financial and operating information with respect
to the business, operations and prospects of the Company furnished to us by the
Company, (4) financial and operating information with respect to the business,
operations and prospects of Telco furnished to us by Telco and by the Company,
(5) a trading history of the Company's common stock from its initial public
offering date to the present and a comparison of that trading history with those
of other companies that we deemed relevant, (6) a trading history of Telco's
common stock from its initial public offering date to the present and a
comparison of that trading history with those of other companies that we deemed
relevant, (7) a comparison of the historical financial results and present
financial condition of the Company with those of other companies that we deemed
relevant, (8) a comparison of the historical financial results and present
financial condition of Telco with those of other companies that we deemed
relevant, (9) third party research analysts' quarterly and annual earnings
estimates and recommendations for the Company and for Telco, (10) the potential
pro forma financial effects of the Proposed Transaction, including the cost
savings and operating synergies expected by management of the Company to result
from a combination of the businesses of the Company and Telco, and
II-1
<PAGE> 143
(11) a comparison of the financial terms of the Proposed Transaction with the
financial terms of certain other transactions that we deemed relevant. In
addition, we have had discussions with the managements of the Company and of
Telco concerning their respective businesses, operations, assets, financial
conditions and prospects and the potential strategic benefits of the Proposed
Transaction and have undertaken such other studies, analyses and investigations
as we deemed appropriate.
In arriving at our opinion, we have assumed and relied upon the accuracy
and completeness of the financial and other information used by us without
assuming any responsibility for independent verification of such information and
have further relied upon the assurances of management of the Company that they
are not aware of any facts that would make such information inaccurate or
misleading. With respect to the financial projections of the Company, Telco and
Holdings following the consummation of the Proposed Transaction, upon advice of
the Company we have assumed that such projections have been reasonably prepared
on a basis reflecting the best currently available estimates and judgments of
the management of the Company or Telco, as the case may be, as to the future
financial performance of the Company, Telco and Holdings (including, without
limitation, the cost savings and operating synergies expected to result from a
combination of the businesses of the Company and Telco), and that the Company
and Telco would, and following the consummation of the Proposed Transaction
Holdings will, perform substantially in accordance with such projections. In
arriving at our opinion, we have conducted a limited physical inspection of the
properties and facilities of the Company and of Telco and have not made or
obtained any evaluations or appraisals of the assets or liabilities of the
Company or of Telco. Upon advice of the Company, we have assumed that the
Proposed Transaction will qualify as a tax-free transaction to the stockholders
of the Company. Our opinion necessarily is based upon market, economic and other
conditions as they exist on, and can be evaluated as of, the date of this
letter.
Based upon and subject to the foregoing, we are of the opinion as of the
date hereof that, from a financial point of view, the EXCEL Exchange Ratio is
fair to the stockholders of the Company and the consideration to be paid by
Holdings to holders of Telco Common Stock in the Proposed Transaction is fair to
the Company.
We have acted as financial advisor to the Company in connection with the
Proposed Transaction and will receive a fee for our services which is contingent
upon the consummation of the Proposed Transaction. In addition, the Company has
agreed to indemnify us for certain liabilities that may arise out of the
rendering of this opinion. The Company also has requested Lehman Brothers to
arrange the necessary financing for the Proposed Transaction, for which we would
receive customary fees. In the ordinary course of our business, we may trade in
the equity securities of the Company and Telco for our own account and for the
accounts of our customers and, accordingly, may at any time hold a long or short
position in such securities.
This opinion is for the use and benefit of the Board of Directors of the
Company and is rendered to the Board of Directors in connection with its
consideration of the Proposed Transaction. This opinion is not intended to be
and does not constitute a recommendation to any stockholder of the Company as to
how such stockholder should vote with respect to the Proposed Transaction.
Very truly yours,
LEHMAN BROTHERS
II-2
<PAGE> 144
APPENDIX III
LOGO
September 15, 1997
Special Committee of the Board of Directors
Board of Directors
Telco Communications Group, Inc.
4219 Lafayette Center Drive
Chantilly, Virginia 20151-5600
Dear Sirs:
You have requested our opinion as to the fairness from a financial point of
view to the shareholders of Telco Communications Group, Inc., a Virginia
corporation (the "Company"), of the consideration to be received by such
shareholders pursuant to the terms of the Agreement and Plan of Merger, dated as
of June 5, 1997 (the "Agreement"), among Excel Communications, Inc., a Delaware
corporation ("Excel"), New RES, Inc., a Delaware corporation and a wholly owned
subsidiary of Excel ("Holdings"), E-SUB, Inc., a Delaware corporation and a
wholly owned subsidiary of Holdings ("E-Sub"), T-SUB, Inc., a Virginia
corporation and a wholly owned subsidiary of Holdings ("T-Sub"), and the
Company.
The Agreement provides that, upon the terms and subject to the conditions
contained therein, T-Sub will be merged with and into the Company (the "Company
Merger"), and E-SUB will be merged with and into Excel (the "Excel Merger" and
together with the Company Merger, the "Mergers"), as a result of which the
Company and Excel will become wholly owned subsidiaries of Holdings. Pursuant to
the Agreement, in the Company Merger each share of common stock, no par value,
of the Company (the "Company Common Stock") will be converted, subject to
certain exceptions, into the right to receive (i) .7595 share (the "Company
Exchange Ratio") of common stock, par value $0.001 per share, of Holdings (the
"Holdings Common Stock"), and (ii) $15.00 in cash (the "Cash Consideration"). In
addition, the Agreement provides that in the Excel Merger, each share of common
stock, par value $0.001 per share, of Excel (the "Excel Common Stock") will be
converted, subject to certain exceptions, into the right to receive one share
(the "Excel Exchange Ratio") of Holdings Common Stock. The quotient of the
Company Exchange Ratio and the Excel Exchange Ratio are referred to herein as
the "Exchange Ratio," and the Cash Consideration together with the Exchange
Ratio are referred to herein as the "Company Merger Consideration."
In arriving at our opinion, we have reviewed the Agreement and the
Appendices thereto. We also have reviewed certain financial and other
information that was publicly available or furnished to us by the Company and
Excel, including information provided during discussions with their respective
managements. Included in the information provided during discussions with the
respective managements were certain financial projections of the Company for the
period beginning January 1997 and ending December 2002 prepared by the
management of the Company and certain financial projections of Excel for the
period beginning January 1997 and ending December 2001 prepared by the
management of Excel. In addition, we have compared certain financial and
securities data of the Company and Excel with various other companies whose
securities are traded in public markets, reviewed the historical stock prices
and trading volumes of the Company Common Stock and the Excel Common Stock,
reviewed prices and premiums paid in other business combinations and conducted
such other financial studies, analyses and investigations as we deemed
appropriate for purposes of this opinion. We were not requested to, nor did we,
solicit the interest of any other party in acquiring the Company.
In rendering our opinion, we have relied upon and assumed the accuracy and
completeness of all of the financial and other information that was available to
us from public sources, that was provided to us by the Company and Excel or
their respective representatives, or that was otherwise reviewed by us. In
particular, we have relied upon the estimates of the management of the Company
of the operating synergies achievable as a
III-1
<PAGE> 145
result of the Mergers and upon our discussion of such synergies with the
management of the Company. With respect to the financial projections supplied to
us, we have assumed (with your consent) that they have been reasonably prepared
on the basis reflecting the best currently available estimates and judgments of
the respective managements of the Company and Excel as to the future operating
and financial performance of the Company and Excel. We have not assumed any
responsibility for making any independent evaluation of the assets or
liabilities of the Company or Excel or for making any independent verification
of any of the information reviewed by us. We have relied as to certain legal
matters on advice of counsel to the Company, including, without limitation, as
to the tax-free nature of the formation of Holdings and the Mergers under the
Internal Revenue Code of 1986, as amended.
Our opinion is necessarily based on economic, market, financial and other
conditions as they exist on, and on the information made available to us as of,
the date of this letter. It should be understood that, although subsequent
developments may affect this opinion, we do not have any obligation to update,
revise or reaffirm this opinion. We are expressing no opinion herein as to the
price at which the Holdings Common Stock will actually trade at any time. Our
opinion does not address the relative merits of the Company Merger and the other
business strategies being considered by Special Committee of the Board of
Directors of the Company or the Board of Directors of the Company. Also, our
opinion does not constitute a recommendation to any shareholder as to how such
shareholder should vote on the proposed transaction.
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), as part of its
investment banking services, is regularly engaged in the valuation of businesses
and securities in connection with mergers, acquisitions, underwriting, sales and
distributions of listed and unlisted securities, private placements and
valuations for estate, corporate and other purposes. DLJ sole-managed Excel's
$150 million initial public offering in May 1996 for which it received customary
fees for such services.
Based upon the foregoing and such other factors as we deem relevant, we are
of the opinion that the Company Merger Consideration to be received by the
shareholders of the Company is fair to such shareholders from a financial point
of view.
Very truly yours,
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By: /s/ MICHAEL J. CONNELLY
----------------------------------
Michael J. Connelly
Managing Director
III-2
<PAGE> 146
APPENDIX IV
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
NEW RES, INC.
THE UNDERSIGNED, being an authorized officer of New RES, Inc., a
corporation organized under the General Corporation Law of the State of Delaware
(the "Corporation"), hereby certifies that:
FIRST: The name of the Corporation is New RES, Inc. and the original
Certificate of Incorporation of the Corporation was filed with the office
of the Secretary of State of the State of Delaware on May 30, 1997.
SECOND: This Amended and Restated Certificate of Incorporation of the
Corporation has been duly adopted and executed in accordance with the
provisions of Sections 103 and 245 of the General Corporation Law of the
State of Delaware.
THIRD: The address of the registered office of the Corporation in the
State of Delaware is c/o The Corporation Trust Company, Corporation Trust
Center, 1209 Orange Street, City of Wilmington, County of New Castle, State
of Delaware 19801. The name of the registered agent of the Corporation in
the State of Delaware at such address is The Corporation Trust Company.
FOURTH: The purpose of the Corporation is to engage in any lawful act
or activity for which corporations may be organized under the General
Corporation Law of the State of Delaware, as from time to time amended.
FIFTH: The total number of shares of stock which the Corporation shall
have authority to issue is 510,000,000 shares of capital stock, classified
as (i) 10,000,000 shares of preferred stock, par value $0.001 per share
("Preferred Stock"), and (ii) 500,000,000 shares of common stock, par value
$0.001 per share ("Common Stock").
1. Provisions Relating to Preferred Stock.
Shares of Preferred Stock may be issued from time to time in one or
more series, the shares of each series to have such voting powers, full
or limited, or no voting powers, and such designations, preferences and
relative, participating, optional or other special rights, and
qualifications, limitations or restrictions thereof, as shall be stated
and expressed in a resolution or resolutions providing for the issue of
such series adopted by the Board of Directors of the Corporation. The
Board of Directors of the Corporation is hereby expressly authorized to
establish and designate series of Preferred Stock, to fix the number of
shares constituting each series, and to fix the designations and the
powers, rights, preferences, and relative, participating, optional or
other special rights and qualifications, limitations and restrictions of
the shares of each series and the variations of the relative
designations, powers, rights, preferences and relative, participating,
optional or other special rights and qualifications, limitations and
restrictions as between series, and to increase (but not above the total
number of authorized shares of such class) and to decrease (but not
below the number of shares thereof then outstanding) the number of
shares constituting each series.
2. Provisions Relating to Common Stock.
(a) Each share of Common Stock of the Corporation shall have
identical rights and privileges in every respect. The holders of shares
of Common Stock shall be entitled to vote upon all matters submitted to
a vote of the stockholders of the Corporation and shall be entitled to
one vote for each share of Common Stock held.
(b) Subject to the prior rights and preferences, if any, applicable
to shares of Preferred Stock or any series thereof, the holders of
shares of Common Stock shall be entitled to receive such
IV-1
<PAGE> 147
dividends (payable in cash, stock or otherwise) as may be declared
thereon by the Board of Directors at any time and from time to time out
of any funds of the Corporation legally available therefor.
(c) In the event of any voluntary or involuntary liquidation,
dissolution or winding-up of the Corporation, after distribution in full
of the preferential amounts, if any, to be distributed to the holders of
shares of Preferred Stock or any series thereof, the holders of shares
of Common Stock shall be entitled to receive all of the remaining assets
of the Corporation available for distribution to its stockholders,
ratably in proportion to the number of shares of Common Stock held by
them. A liquidation, dissolution or winding-up of the Corporation, as
such terms are used in this Paragraph (c), shall not be deemed to be
occasioned by or to include any consolidation or merger of the
Corporation with or into any other corporation or corporations or other
entity or a sale, lease, exchange or conveyance of all or a part of the
assets of the Corporation.
SIXTH: In furtherance and not in limitation of the powers conferred by
law, subject to any limitations contained elsewhere in this Amended and
Restated Certificate of Incorporation, bylaws of the Corporation may be
adopted, amended or repealed by a majority of the Board of Directors of the
Corporation, but any bylaws adopted by the Board of Directors may be
amended or repealed by the stockholders entitled to vote thereon. Election
of directors need not be by written ballot.
SEVENTH: (a) A director of the Corporation shall not be personally
liable either to the Corporation or to any stockholder for monetary damages
for breach of fiduciary duty as a director, except (i) for any breach of
the director's duty of loyalty to the Corporation or its stockholders, or
(ii) for acts or omissions which are not in good faith or which involve
intentional misconduct or knowing violation of the law, or (iii) for any
matter in respect of which such director shall be liable under Section 174
of Title 8 of the General Corporation Law of the State of Delaware or any
amendment thereto or successor provision thereto, or (iv) for any
transaction from which the director shall have derived an improper personal
benefit. Neither amendment nor repeal of this paragraph (a), nor the
adoption of any provision of this Amended and Restated Certificate of
Incorporation inconsistent with this paragraph (a) shall eliminate or
reduce the effect of this paragraph (a) in respect of any matter occurring,
or any cause of action, suit or claim that, but for this paragraph (a),
would accrue or arise, prior to such amendment, repeal or adoption of an
inconsistent provision.
(b) The Corporation shall indemnify any person who was or is a party
or is threatened to be made a party to, or testifies in, any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative in nature, 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, employee benefit plan, trust or other enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by such person in connection
with such action, suit or proceeding to the full extent permitted by law,
and the Corporation may adopt bylaws or enter into agreements with any such
person for the purpose of providing for such indemnification.
(c) To the extent that a director or officer of the Corporation has
been successful on the merits or otherwise in defense of any action, suit
or proceeding referred to in paragraph (b) of this Article, or in defense
of any claim, issue or matter therein, such person shall be indemnified
against expenses (including attorneys' fees) actually and reasonably
incurred by such person in connection therewith.
(d) Expenses incurred by an officer, director, employee or agent in
defending or testifying in a civil, criminal, administrative or
investigative action, suit or proceeding may be paid by the Corporation in
advance of the final disposition of such action, suit or proceeding upon
receipt of an undertaking by or on behalf of such director or officer to
repay such amount if it shall ultimately be determined that such director
or officer is not entitled to be indemnified by the Corporation against
such expense as authorized by this Article, and the Corporation may adopt
bylaws or enter into agreements with such persons for the purpose of
providing for such advances.
IV-2
<PAGE> 148
IN WITNESS WHEREOF, the undersigned has duly executed this Amended and
Restated Certificate of Incorporation on this day of October, 1997.
NEW RES, Inc.
By:
----------------------------------
Name:
Title:
IV-3
<PAGE> 149
APPENDIX V
BYLAWS
OF
NEW RES, INC.
(A DELAWARE CORPORATION)
ARTICLE I
STOCKHOLDERS
SECTION 1. Annual Meetings. The annual meeting of stockholders for the
election of directors and for the transaction of such other business as may
properly come before the meeting shall be held each year at such date and time,
within or without the State of Delaware, as the Board of Directors shall
determine.
SECTION 2. Special Meetings. Special meetings of stockholders for the
transaction of such business as may properly come before the meeting may be
called by order of the Board of Directors or by Chairman of the Board, Chief
Executive Officer or President of the Corporation, and shall be held at such
date and time, within or without the State of Delaware, as may be specified by
such order.
SECTION 3. Notice of Meetings. Written notice of all meetings of the
stockholders, stating the place, date and hour of the meeting and the place
within the city or other municipality or community at which the list of
stockholders may be examined, shall be mailed or delivered to each stockholder
not less than 10 nor more than 60 days prior to the meeting. Notice of any
special meeting shall state in general terms the purpose or purposes for which
the meeting is to be held.
SECTION 4. Stockholder Lists. The officer who has charge of the stock
ledger of the Corporation shall prepare and make, 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 the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane 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.
The stock ledger shall be the only evidence as to who are the stockholders
entitled to examine the stock ledger, the list required by this section or the
books of the Corporation, or to vote in person or by proxy at any meeting of
stockholders.
SECTION 5. Quorum. Except as otherwise provided by law or the Corporation's
Certificate of Incorporation, a quorum for the transaction of business at any
meeting of stockholders shall consist of the holders of record of a majority of
the issued and outstanding shares of the capital stock of the Corporation
entitled to vote at the meeting, present in person or by proxy. At all meetings
of the stockholders at which a quorum is present, all matters, except as
otherwise provided by law or the Certificate of Incorporation, shall be decided
by the vote of the holders of a majority of the shares entitled to vote thereat
present in person or by proxy. If there be no such quorum, the holders of a
majority of such shares so present or represented may adjourn the meeting from
time to time, without further notice, until a quorum shall have been obtained.
When a quorum is once present it is not broken by the subsequent withdrawal of
any stockholder.
SECTION 6. Organization. Meetings of stockholders shall be presided over by
the Chairman, if any, or if none or in the Chairman's absence the Vice-Chairman,
if any, or if none or in the Vice-Chairman's absence the President, if any, or
if none or in the President's absence a Vice-President, or, if none of the
foregoing is present, by a chairman to be chosen by the stockholders entitled to
vote who are present in person or by proxy at the meeting. The Secretary of the
Corporation, or in the Secretary's absence an Assistant Secretary, shall
V-1
<PAGE> 150
act as secretary of every meeting, but if neither the Secretary nor an Assistant
Secretary is present, the presiding officer of the meeting shall appoint any
person present to act as secretary of the meeting.
SECTION 7. Voting; Proxies; Required Vote. (a) At each meeting of
stockholders, every stockholder shall be entitled to vote in person or by proxy
appointed by instrument in writing, subscribed by such stockholder or by such
stockholder's duly authorized attorney-in-fact and, unless the Certificate of
Incorporation provides otherwise, shall have one vote for each share of stock
entitled to vote registered in the name of such stockholder on the books of the
Corporation on the applicable record date fixed pursuant to these Bylaws. At all
elections of directors the voting may but need not be by ballot and a plurality
of the votes cast there shall elect. Except as otherwise required by law or the
Certificate of Incorporation, any other action shall be authorized by a majority
of the votes cast.
(b) Any action required or permitted to be taken at any meeting of
stockholders may, except as otherwise required by law or the Certificate of
Incorporation, be taken without a meeting, without prior notice and without a
vote, if a consent in writing, setting forth the action so taken, shall be
signed by the holders of record of the issued and outstanding capital stock of
the Corporation having a majority 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, and the writing or writings are filed with the permanent
records of the Corporation. Prompt notice of the taking of corporate action
without a meeting by less than unanimous written consent shall be given to those
stockholders who have not consented in writing.
SECTION 8. Inspectors. The Board of Directors, in advance of any meeting,
may, but need not, appoint one or more inspectors of election to act at the
meeting or any adjournment thereof. If an inspector or inspectors are not so
appointed, the person presiding at the meeting may, but need not, appoint one or
more inspectors. In case any person who may be appointed as an inspector fails
to appear or act, the vacancy may be filled by appointment made by the directors
in advance of the meeting or at the meeting by the person presiding thereat.
Each inspector, if any, before entering upon the discharge of his or her duties,
shall take and sign an oath faithfully to execute the duties of inspector at
such meeting with strict impartiality and according to the best of his ability.
The inspectors, if any, shall determine the number of shares of stock
outstanding and the voting power of each, the shares of stock represented at the
meeting, the existence of a quorum, and the validity and effect of proxies, and
shall receive votes, ballots or consents, hear and determine all challenges and
questions arising in connection with the right to vote, count and tabulate all
votes, ballots or consents, determine the result, and do such acts as are proper
to conduct the election or vote with fairness to all stockholders. On request of
the person presiding at the meeting, the inspector or inspectors, if any, shall
make a report in writing of any challenge, question or matter determined by such
inspector or inspectors and execute a certificate of any fact found by such
inspector or inspectors.
ARTICLE II
BOARD OF DIRECTORS
SECTION 1. General Powers. The business, property and affairs of the
Corporation shall be managed by, or under the direction of, the Board of
Directors.
SECTION 2. Qualification; Number; Term; Remuneration. (a) Each director
shall be at least 18 years of age. A director need not be a stockholder, a
citizen of the United States, or a resident of the State of Delaware. The number
of directors initially constituting the entire Board shall be two, or such
larger or lesser number (but not less than one) as may be fixed from time to
time by action of the stockholders or Board of Directors, one of whom shall be
selected by the Board of Directors to be its Chairman. The use of the phrase
"entire Board" herein refers to the total number of directors which the
Corporation would have if there were no vacancies.
(b) Directors who are elected at an annual meeting of stockholders, and
directors who are elected in the interim to fill vacancies and newly created
directorships, shall hold office until the next annual meeting of stockholders
and until their successors are elected and qualified or until their earlier
resignation or removal.
V-2
<PAGE> 151
(c) Directors may be paid their expenses, if any, of attendance at each
meeting of the Board of Directors and may be paid a fixed sum for attendance at
each meeting of the Board of Directors or a stated salary as director. No such
payment shall preclude any director from serving the Corporation in any other
capacity and receiving compensation therefor. Members of special or standing
committees may be allowed like compensation for attending committee meetings.
SECTION 3. Quorum and Manner of Voting. Except as otherwise provided by
law, a majority of the entire Board shall constitute a quorum. A majority of the
directors present, whether or not a quorum is present, may adjourn a meeting
from time to time to another time and place without notice. The vote of the
majority of the directors present at a meeting at which a quorum is present
shall be the act of the Board of Directors.
SECTION 4. Places of Meetings. Meetings of the Board of Directors may be
held at any place within or without the State of Delaware, as may from time to
time be fixed by resolution of the Board of Directors, or as may be specified in
the notice of meeting.
SECTION 5. Annual Meeting. Following the annual meeting of stockholders,
the newly elected Board of Directors shall meet for the purpose of the election
of officers and the transaction of such other business as may properly come
before the meeting. Such meeting may be held without notice immediately after
the annual meeting of stockholders at the same place at which such stockholders'
meeting is held.
SECTION 6. Regular Meetings. Regular meetings of the Board of Directors
shall be held at such times and places as the Board of Directors shall from time
to time by resolution determine.
SECTION 7. Special Meetings. Special meetings of the Board of Directors
shall be held whenever called by the Chairman of the Board, President, or by a
majority of the directors then in office.
SECTION 8. Notice of Meetings. A notice of the place, date and time and the
purpose or purposes of each meeting of the Board of Directors shall be given to
each director by mailing the same at least two days before the meeting, or by
telegraphing or telephoning the same or by delivering the same personally not
later than the day before the day of the meeting.
SECTION 9. Organization. At all meetings of the Board of Directors, the
Chairman, if any, or if none or in the Chairman's absence or inability to act
the President, or in the President's absence or inability to act any
Vice-President who is a member of the Board of Directors, or in such
Vice-President's absence or inability to act a chairman chosen by the directors,
shall preside.
SECTION 10. Resignation. Any director may resign at any time upon written
notice to the Corporation and such resignation shall take effect upon receipt
thereof by the President unless otherwise specified in the resignation. Any or
all of the directors may be removed, with or without cause, by the holders of a
majority of the shares of stock outstanding and entitled to vote for the
election of directors.
SECTION 11. Vacancies. Unless otherwise provided in these Bylaws, vacancies
on the Board of Directors, whether caused by resignation, death,
disqualification, removal, an increase in the authorized number of directors or
otherwise, may be filled by the affirmative vote of a majority of the remaining
directors, although less than a quorum, or by a sole remaining director, or at a
special meeting of the stockholders, by the holders of shares entitled to vote
for the election of directors.
SECTION 12. Action by Written Consent. Any action required or permitted to
be taken at any meeting of the Board of Directors may be taken without a meeting
if all the directors consent thereto in writing, and the writing or writings are
filed with the minutes of proceedings of the Board of Directors.
V-3
<PAGE> 152
ARTICLE III
COMMITTEES
SECTION 1. Appointment. From time to time the Board of Directors by a
resolution adopted by a majority of the entire Board may appoint any committee
or committees for any purpose or purposes, to the extent lawful, which shall
have powers as shall be determined and specified by the Board of Directors in
the resolution of appointment.
SECTION 2. Procedures, Quorum and Manner of Acting. Each committee shall
fix its own rules of procedure, and shall meet where and as provided by such
rules or by resolution of the Board of Directors. Except as otherwise provided
by law, the presence of a majority of the then appointed members of a committee
shall constitute a quorum for the transaction of business by that committee, and
in every case where a quorum is present the affirmative vote of a majority of
the members of the committee present shall be the act of the committee. Each
committee shall keep minutes of its proceedings, and actions taken by a
committee shall be reported to the Board of Directors.
SECTION 3. Action by Written Consent. Any action required or permitted to
be taken at any meeting of any committee of the Board of Directors may be taken
without a meeting if all the members of the committee consent thereto in
writing, and the writing or writings are filed with the minutes of proceedings
of the committee.
SECTION 4. Term; Termination. If any person shall cease to be a director of
the Corporation, such person shall simultaneously therewith cease to be a member
of any committee appointed by the Board of Directors.
ARTICLE IV
OFFICERS
SECTION 1. Election and Qualifications. The Board of Directors shall elect
the officers of the Corporation, which shall include a President and a
Secretary, and may include, by election or appointment, one or more
Vice-Chairmen, Vice-Presidents (any one or more of whom may be given an
additional designation of rank or function), a Treasurer and such assistant
secretaries, such Assistant Treasurers and such other officers as the Board may
from time to time deem proper. Each officer shall have such powers and duties as
may be prescribed by these Bylaws and as may be assigned by the Board of
Directors or the President.
SECTION 2. Term of Office and Remuneration. The term of office of all
officers shall be one year and until their respective successors have been
elected and qualified, but any officer may be removed from office, either with
or without cause, at any time by the Board of Directors. Any vacancy in any
office arising from any cause may be filled for the unexpired portion of the
term by the Board of Directors. The remuneration of all officers of the
Corporation may be fixed by the Board of Directors or in such manner as the
Board of Directors shall provide.
SECTION 3. Resignation; Removal. Any officer may resign at any time upon
written notice to the Corporation and such resignation shall take effect upon
receipt thereof by the President, unless otherwise specified in the resignation.
Any officer shall be subject to removal, with or without cause, at any time by
vote of a majority of the entire Board.
SECTION 4. Chairman of the Board. The Chairman of the Board of Directors,
if there be one, shall preside at all meetings of the Board of Directors and
shall have such other powers and duties as may from time to time be assigned by
the Board of Directors.
SECTION 5. Chief Executive Officer. The Chief Executive Officer shall be
the chief executive officer of the Corporation, and shall have such duties as
customarily pertain to that office.
SECTION 6. President. The President shall have general management and
supervision of the property, business and affairs of the Corporation and over
its other officers; may appoint and remove assistant officers
V-4
<PAGE> 153
and other agents and employees; and may execute and deliver in the name of the
Corporation powers of attorney, contracts, bonds and other obligations and
instruments.
SECTION 7. Vice-President. A Vice-President may execute and deliver in the
name of the Corporation contracts and other obligations and instruments
pertaining to the regular course of the duties of said office, and shall have
such other authority as from time to time may be assigned by the Board of
Directors or the President.
SECTION 8. Treasurer. The Treasurer shall in general have all duties
incident to the position of Treasurer and such other duties as may be assigned
by the Board of Directors or the President.
SECTION 9. Secretary. The Secretary shall in general have all the duties
incident to the office of Secretary and such other duties as may be assigned by
the Board of Directors or the President.
SECTION 10. Assistant Officers. Any assistant officer shall have such
powers and duties of the officer such assistant officer assists as such officer
or the Board of Directors shall from time to time prescribe.
ARTICLE V
BOOKS AND RECORDS
SECTION 1. Location. The books and records of the Corporation may be kept
at such place or places within or outside the State of Delaware as the Board of
Directors or the respective officers in charge thereof may from time to time
determine. The record books containing the names and addresses of all
stockholders, the number and class of shares of stock held by each and the dates
when they respectively became the owners of record thereof shall be kept by the
Secretary as prescribed in the Bylaws and by such officer or agent as shall be
designated by the Board of Directors.
SECTION 2. Addresses of Stockholders. Notices of meetings and all other
corporate notices may be delivered personally or mailed to each stockholder at
the stockholder's address as it appears on the records of the Corporation.
SECTION 3. Fixing Date for Determination of Stockholders of Record. (a) In
order that the Corporation may determine the stockholders entitled to notice of
or to vote at any meeting of stockholders or any adjournment thereof, 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 of
Directors and which record date shall not be more than 60 nor less than 10 days
before the date of such meeting. If no record date is fixed by the Board of
Directors, the record date for determining stockholders entitled to notice of or
to vote at a meeting of stockholders shall be at the close of business on the
day next preceding the day on which notice is given, or, if notice is waived, at
the close of business on the day next preceding the day on which the meeting is
held. A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.
(b) In order that the Corporation may determine the stockholders entitled
to consent to corporate action in writing without a meeting, the Board of
Directors may fix a record date which date shall not be more than 10 days after
the date upon which the resolution fixing the record date is adopted by the
Board of Directors. If no record date has been fixed by the Board of Directors,
the record date for determining stockholders entitled to consent to corporate
action in writing without a meeting, when no prior action by the Board of
Directors is required, shall be the first date on which a signed written consent
setting forth the action taken or proposed to be taken is delivered to the
Corporation by delivery to its registered office in this State, its principal
place of business, or an officer or agent of the Corporation having custody of
the book in which proceedings of meetings of stockholders are recorded. Delivery
made to the Corporation's registered office shall be by hand or by certified or
registered mail, return receipt requested. If no record date has been fixed by
the Board of Directors and prior action by the Board of Directors is required by
this chapter, the record date for determining stockholders entitled to consent
to corporate action in writing without a meeting shall be at the close of
business on the day on which the Board of Directors adopts the resolution taking
such prior action.
V-5
<PAGE> 154
(c) In order that the Corporation may determine the stockholders entitled
to receive payment of any dividend or other distribution or allotment of any
rights or the stockholders entitled to exercise any rights in respect of any
change, conversion or exchange of stock, or for the purpose of any other lawful
action, the Board of Directors may fix a record date which record date shall be
not more than 60 days prior to such action. If no record date is fixed, the
record date for determining stockholders for any such purpose shall be at the
close of business on the day on which the Board of Directors adopts the
resolution relating thereto.
ARTICLE VI
CERTIFICATES REPRESENTING STOCK
SECTION 1. Certificates; Signatures. The shares of the Corporation shall be
represented by certificates, provided that the Board of Directors of the
Corporation may provide by resolution or resolutions that some or all of any or
all classes or series of its stock shall be uncertificated shares. Any such
resolution shall not apply to shares represented by a certificate until such
certificate is surrendered to the Corporation. Notwithstanding the adoption of
such a resolution by the Board of Directors, every holder of stock represented
by certificates and upon request every holder of uncertificated shares shall be
entitled to have a certificate, signed by or in the name of the Corporation by
the Chairman or Vice-Chairman of the Board of Directors, or the President or
Vice-President, and by the Treasurer or an Assistant Treasurer, or the Secretary
or an Assistant Secretary of the Corporation, representing the number of shares
registered in certificate form. Any and all signatures on any such certificate
may be facsimiles. In case any officer, transfer agent or registrar who has
signed or whose facsimile signature has been placed upon a certificate shall
have ceased to be such officer, transfer agent or registrar before such
certificate is issued, it 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.
The name of the holder of record of the shares represented thereby, with the
number of such shares and the date of issue, shall be entered on the books of
the Corporation.
SECTION 2. Transfers of Stock. Upon compliance with provisions restricting
the transfer or registration of transfer of shares of stock, if any, shares of
capital stock shall be transferable on the books of the Corporation only by the
holder of record thereof in person, or by duly authorized attorney, upon
surrender and cancellation of certificates for a like number of shares, properly
endorsed, and the payment of all taxes due thereon.
SECTION 3. Fractional Shares. The Corporation may, but shall not be
required to, issue certificates for fractions of a share where necessary to
effect authorized transactions, or the Corporation may pay in cash the fair
value of fractions of a share as of the time when those entitled to receive such
fractions are determined, or it may issue scrip in registered or bearer form
over the manual or facsimile signature of an officer of the Corporation or of
its agent, exchangeable as therein provided for full shares, but such scrip
shall not entitle the holder to any rights of a stockholder except as therein
provided.
The Board of Directors shall have power and authority to make all such
rules and regulations as it may deem expedient concerning the issue, transfer
and registration of certificates representing shares of the Corporation.
SECTION 4. Lost, Stolen or Destroyed 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 any lost, stolen or destroyed certificate, or
his legal representative, 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 any such certificate or the issuance of
any such new certificate.
V-6
<PAGE> 155
ARTICLE VII
DIVIDENDS
Subject always to the provisions of law and the Certificate of
Incorporation, the Board of Directors shall have full power to determine whether
any, and, if any, what part of any, funds legally available for the payment of
dividends shall be declared as dividends and paid to stockholders; the division
of the whole or any part of such funds of the Corporation shall rest wholly
within the lawful discretion of the Board of Directors, and it shall not be
required at any time, against such discretion, to divide or pay any part of such
funds among or to the stockholders as dividends or otherwise; and before payment
of any dividend, there may be set aside out of any funds of the Corporation
available for dividends such sum or sums as the Board of Directors from time to
time, in its absolute discretion, thinks proper as a reserve or reserves to meet
contingencies, or for equalizing dividends, or for repairing or maintaining any
property of the Corporation, or for such other purpose as the Board of Directors
shall think conducive to the interest of the Corporation, and the Board of
Directors may modify or abolish any such reserve in the manner in which it was
created.
ARTICLE VIII
RATIFICATION
Any transaction, questioned in any law suit on the ground of lack of
authority, defective or irregular execution, adverse interest of director,
officer or stockholder, non-disclosure, miscomputation, or the application of
improper principles or practices of accounting, may be ratified before or after
judgment, by the Board of Directors or by the stockholders, and if so ratified
shall have the same force and effect as if the questioned transaction had been
originally duly authorized. Such ratification shall be binding upon the
Corporation and its stockholders and shall constitute a bar to any claim or
execution of any judgment in respect of such questioned transaction.
ARTICLE IX
CORPORATE SEAL
The corporate seal shall have inscribed thereon the name of the Corporation
and the year of its incorporation, and shall be in such form and contain such
other words and/or figures as the Board of Directors shall determine. The
corporate seal may be used by printing, engraving, lithographing, stamping or
otherwise making, placing or affixing, or causing to be printed, engraved,
lithographed, stamped or otherwise made, placed or affixed, upon any paper or
document, by any process whatsoever, an impression, facsimile or other
reproduction of said corporate seal.
ARTICLE X
FISCAL YEAR
The fiscal year of the Corporation shall be fixed, and shall be subject to
change, by the Board of Directors. Unless otherwise fixed by the Board of
Directors, the fiscal year of the Corporation shall be the calendar year.
ARTICLE XI
WAIVER OF NOTICE
Whenever notice is required to be given by these Bylaws or by the
Certificate of Incorporation or by law, a written waiver thereof, signed by the
person or persons entitled to said notice, whether before or after the time
stated therein, shall be deemed equivalent to notice.
V-7
<PAGE> 156
ARTICLE XII
BANK ACCOUNTS, DRAFTS, CONTRACTS, ETC.
SECTION 1. Bank Accounts and Drafts. In addition to such bank accounts as
may be authorized by the Board of Directors, the primary financial officer or
any person designated by said primary financial officer, whether or not an
employee of the Corporation, may authorize such bank accounts to be opened or
maintained in the name and on behalf of the Corporation as he may deem necessary
or appropriate, payments from such bank accounts to be made upon and according
to the check of the Corporation in accordance with the written instructions of
said primary financial officer, or other person so designated by the Treasurer.
SECTION 2. Contracts. The Board of Directors may authorize any person or
persons, in the name and on behalf of the Corporation, to enter into or execute
and deliver any and all deeds, bonds, mortgages, contracts and other obligations
or instruments, and such authority may be general or confined to specific
instances.
SECTION 3. Proxies; Powers of Attorney; Other Instruments. The Chairman,
the President or any other person designated by either of them shall have the
power and authority to execute and deliver proxies, powers of attorney and other
instruments on behalf of the Corporation in connection with the rights and
powers incident to the ownership of stock by the Corporation. The Chairman, the
President or any other person authorized by proxy or power of attorney executed
and delivered by either of them on behalf of the Corporation may attend and vote
at any meeting of stockholders of any company in which the Corporation may hold
stock, and may exercise on behalf of the Corporation any and all of the rights
and powers incident to the ownership of such stock at any such meeting, or
otherwise as specified in the proxy or power of attorney so authorizing any such
person. The Board of Directors, from time to time, may confer like powers upon
any other person.
SECTION 4. Financial Reports. The Board of Directors may appoint the
primary financial officer or other fiscal officer to cause to be prepared and
furnished to stockholders entitled thereto any special financial notice and/or
financial statement, as the case may be, which may be required by any provision
of law.
ARTICLE XIII
AMENDMENTS
The Board of Directors shall have power to adopt, amend or repeal Bylaws.
Bylaws adopted by the Board of Directors may be repealed or changed, and new
Bylaws made, by the stockholders, and the stockholders may prescribe that any
Bylaw made by them shall not be altered, amended or repealed by the Board of
Directors.
V-8
<PAGE> 157
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the DGCL permits a corporation to indemnify any of its
directors or officers who was or is a party, or is threatened to be made a party
to any third party proceeding by reason of the fact that such person is or was a
director or officer of the corporation, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such action, suit or proceeding, if
such person 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, with
respect to any criminal action or proceeding, had no reason to believe that such
person's conduct was unlawful. In a derivative action, i.e., one by or in the
right of the corporation, the corporation is permitted to indemnify directors
and officers against expenses (including attorneys' fees) actually and
reasonably incurred by them in connection with the defense or settlement of an
action or suit if they acted in good faith and in a manner that they reasonably
believed to be in or not opposed to the best interests of the corporation,
except that no indemnification shall be made if such person shall have been
adjudged liable to the corporation, unless and only to the extent that the court
in which the action or suit was brought shall determine upon application that
the defendant directors or officers are fairly and reasonably entitled to
indemnity for such expenses despite such adjudication of liability.
Article 7 of the Holdings Charter makes mandatory the indemnification
expressly authorized under the DGCL and permits Holdings to enter into
agreements with any director or officer for the purpose of providing for such
indemnification.
Pursuant to Section 7.7 of the Merger Agreement, (a) for a period of six
years after the Effective Time, (i) Holdings and Telco jointly and severally
shall indemnify the directors and officers of Telco who hold such positions at
any time during the period from the date of the Merger Agreement through the
Effective Time to the fullest extent to which Telco is permitted to indemnify
such officers and directors under the Telco Charter, the Telco Bylaws and
applicable law (including, without limitation, indemnification for actions in
the right of Telco) and (ii) Holdings and EXCEL jointly and severally shall
indemnify the directors and officers of EXCEL who hold such positions at any
time during the period from the date of the Merger Agreement through the
Effective Time to the fullest extent to which EXCEL is permitted to indemnify
such officers and directors under the EXCEL Charter, the EXCEL Bylaws and
applicable law and (b) for a period of four years after the Effective Time,
Holdings shall cause to be maintained in effect the current policies of
directors' and officers' liability insurance maintained by Telco (provided that
Holdings may substitute therefor policies of at least the same coverage and
amounts and containing terms and conditions which are no less advantageous) with
respect to claims arising from facts or events which occurred before the
Effective Time.
II-1
<PAGE> 158
ITEM 21. EXHIBITS
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.1 Agreement and Plan of Merger, dated June 5, 1997, by and
among EXCEL Communications, Inc., New RES, Inc., T-Sub,
Inc., E-Sub, Inc. and Telco Communications Group, Inc. The
schedules to the Agreement and Plan of Merger and the
appendices thereto have been omitted. Holdings will furnish
supplementally to the Commission any of the schedules or
appendices upon request. (Included as Appendix I to the
Joint Proxy Statement/Prospectus.)
3.1 Form of Amended and Restated Certificate of Incorporation of
New RES, Inc. (Included as Appendix IV to the Joint Proxy
Statement/Prospectus.)
3.2 Form of Bylaws of New RES, Inc. (Included as Appendix V to
the Joint Proxy Statement/Prospectus.)
*5.1 Opinion of Weil, Gotshal & Manges LLP regarding validity of
securities being registered.
*8.1 Opinion of Weil, Gotshal & Manges LLP regarding certain
federal income tax matters.
*8.2 Opinion of Swidler & Berlin, Chartered regarding certain
federal income tax matters.
*10.1 Form of Employment Agreement between Donald A. Burns and
Telco.
*10.2 Form of Employment Agreement between Stephen G. Canton and
Telco.
*10.3 Form of Employment Agreement between Henry G. Luken, III and
Holdings.
*10.4 Form of Employment Agreement between Nicholas A. Merrick and
Telco.
*10.5 Form of Employment Agreement between Bryan K. Rachlin and
Telco.
*10.6 Form of Non-Competition Agreement between Donald A. Burns
and Holdings.
*10.7 Form of Non-Competition Agreement between Stephen G. Canton
and Holdings.
*10.8 Form of Non-Competition Agreement between Henry G. Luken,
III and Holdings.
*10.9 Form of Non-Competition Agreement between Nicholas A.
Merrick and Holdings.
*10.10 Form of Non-Competition Agreement between Bryan K. Rachlin
and Holdings.
*10.11 EXCEL Shareholders Agreement, dated as of June 5, 1997, by
and among Telco Communications Group, Inc. and each of the
shareholders party thereto (incorporated by reference to
Form 8-K of EXCEL, dated June 5, 1997, as filed with the
Commission on June 10, 1997).
*10.12 Telco Shareholders Agreement, dated June 5, 1997, by and
among EXCEL Communications, Inc. and each of the
shareholders party thereto (incorporated by reference to
Form 8-K of Telco, dated June 5, 1997, as filed with the
Commission on June 10, 1997).
*10.13 Commitment Letter, dated June 4, 1997, between EXCEL
Communications, Inc. and Lehman Commercial Paper Inc.
*10.14 Form of New RES, Inc. 1997 Stock Option Plan.
*10.15 Form of New RES, Inc. 1997 Director Stock Option Plan.
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of Arthur Andersen LLP.
23.3 Consent of Weil, Gotshal & Manges LLP. (Included in the
opinions filed as Exhibits 5.1 and 8.1 to this Registration
Statement and incorporated herein by reference.)
</TABLE>
II-2
<PAGE> 159
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
23.4 Consent of Swidler & Berlin, Chartered. (Included in the
opinion filed as Exhibit 8.2 to this Registration Statement
and incorporated herein by reference.)
*23.5 Consent of Lehman Brothers Inc.
*23.6 Consent of Donaldson, Lufkin & Jenrette Securities
Corporation.
24 Power of Attorney (included in the signature page hereto).
*99.1 EXCEL Communications, Inc. Proxy/Voting Instruction Card.
*99.2 Telco Communications Group, Inc. Proxy/Voting Instruction
Card.
*99.3 Consent of Donald A. Burns.
*99.4 Consent of Henry G. Luken, III.
</TABLE>
- ---------------
* Previously filed
ITEM 22. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement 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.
(b) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first 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.
(c) The undersigned registrant hereby undertakes to supply by means of a
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.
(d) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-3
<PAGE> 160
(e) The Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registrant 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;
(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.
II-4
<PAGE> 161
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amendment to the registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Dallas, Texas on
September 12, 1997.
NEW RES, INC.
By: /s/ JOHN J. MCLAINE
----------------------------------
John J. McLaine
President, Chief Financial Officer
and Chief Operating Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this amendment to the Registration Statement has been signed by the following
persons in the capacity indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* Chairman of the Board and September 12, 1997
- ----------------------------------------------------- Chief Executive Officer
Kenny A. Troutt (principal executive
officer)
/s/ JOHN J. MCLAINE Director, President, Chief September 12, 1997
- ----------------------------------------------------- Financial Officer and
John J. McLaine Chief Operating Officer
(principal financial
officer)
* Director and Executive Vice September 12, 1997
- ----------------------------------------------------- President of Marketing
Stephen R. Smith
* Vice President and Chief September 12, 1997
- ----------------------------------------------------- Accounting Officer
Craig E. Holmes (principal accounting
officer)
* Director September 12, 1997
- -----------------------------------------------------
T. Allan McArtor
* Director September 12, 1997
- -----------------------------------------------------
Ronald A. McDougall
*By: /s/ JOHN J. MCLAINE
- -----------------------------------------------------
John J. McLaine
Attorney-in-Fact
</TABLE>
II-5
<PAGE> 162
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.1 Agreement and Plan of Merger, dated June 5, 1997, by and
among EXCEL Communications, Inc., New RES, Inc., T-Sub,
Inc., E-Sub, Inc. and Telco Communications Group, Inc. The
schedules to the Agreement and Plan of Merger and the
appendices thereto have been omitted. Holdings will furnish
supplementally to the Commission any of the schedules or
appendices upon request. (Included as Appendix I to the
Joint Proxy Statement/Prospectus.)
3.1 Form of Amended and Restated Certificate of Incorporation of
New RES, Inc. (Included as Appendix IV to the Joint Proxy
Statement/Prospectus.)
3.2 Form of Bylaws of New RES, Inc. (Included as Appendix V to
the Joint Proxy Statement/Prospectus.)
*5.1 Opinion of Weil, Gotshal & Manges LLP regarding validity of
securities being registered.
*8.1 Opinion of Weil, Gotshal & Manges LLP regarding certain
federal income tax matters.
*8.2 Opinion of Swidler & Berlin, Chartered regarding certain
federal income tax matters.
*10.1 Form of Employment Agreement between Donald A. Burns and
Telco.
*10.2 Form of Employment Agreement between Stephen G. Canton and
Telco.
*10.3 Form of Employment Agreement between Henry G. Luken, III and
Holdings.
*10.4 Form of Employment Agreement between Nicholas A. Merrick and
Telco.
*10.5 Form of Employment Agreement between Bryan K. Rachlin and
Telco.
*10.6 Form of Non-Competition Agreement between Donald A. Burns
and Holdings.
*10.7 Form of Non-Competition Agreement between Stephen G. Canton
and Holdings.
*10.8 Form of Non-Competition Agreement between Henry G. Luken,
III and Holdings.
*10.9 Form of Non-Competition Agreement between Nicholas A.
Merrick and Holdings.
*10.10 Form of Non-Competition Agreement between Bryan K. Rachlin
and Holdings.
*10.11 EXCEL Shareholders Agreement, dated as of June 5, 1997, by
and among Telco Communications Group, Inc. and each of the
shareholders party thereto (incorporated by reference to
Form 8-K of EXCEL, dated June 5, 1997, as filed with the
Commission on June 10, 1997).
*10.12 Telco Shareholders Agreement, dated June 5, 1997, by and
among EXCEL Communications, Inc. and each of the
shareholders party thereto (incorporated by reference to
Form 8-K of Telco, dated June 5, 1997, as filed with the
Commission on June 10, 1997).
*10.13 Commitment Letter, dated June 4, 1997, between EXCEL
Communications, Inc. and Lehman Commercial Paper Inc.
*10.14 Form of New RES, Inc. 1997 Stock Option Plan.
*10.15 Form of New RES, Inc. 1997 Director Stock Option Plan.
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of Arthur Andersen LLP.
23.3 Consent of Weil, Gotshal & Manges LLP. (Included in the
opinions filed as Exhibits 5.1 and 8.1 to this Registration
Statement and incorporated herein by reference.)
23.4 Consent of Swidler & Berlin, Chartered. (Included in the
opinion filed as Exhibit 8.2 to this Registration Statement
and incorporated herein by reference.)
</TABLE>
<PAGE> 163
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
*23.5 Consent of Lehman Brothers Inc.
*23.6 Consent of Donaldson, Lufkin & Jenrette Securities
Corporation.
24 Power of Attorney (included in the signature page hereto).
*99.1 EXCEL Communications, Inc. Proxy/Voting Instruction Card.
*99.2 Telco Communications Group, Inc. Proxy/Voting Instruction
Card.
*99.3 Consent of Donald A. Burns.
*99.4 Consent of Henry G. Luken, III.
</TABLE>
- ---------------
* Previously filed
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in the Registration Statement on Form S-4 dated
September 11, 1997 of New RES, Inc., as amended by Pre-Effective Amendment No.
1 dated September 12, 1997, of our report dated February 7, 1997 (related to
the financial statements of Telco Communications Group, Inc.), incorporated by
reference in the Prospectus, which is a part of this Registration Statement and
to the reference to us under the heading "Experts" in such Prospectus.
DELOITTE & TOUCHE LLP
Richmond, Virginia
September 12, 1997
<PAGE> 1
EXHIBIT 23.2
[Letterhead of Arthur Andersen, LLP]
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this amendment to the registration statement of our reports dated
January 24, 1997, included in EXCEL Communications, Inc.'s Form 10-K for the
year ended December 31, 1996, and to all references to our Firm included in
this Amendment No. 1 to the Registration Statement on Form S-4.
/s/ Arthur Andersen, LLP
ARTHUR ANDERSEN, LLP
Dallas, Texas
September 12, 1997
