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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 18, 1998
REGISTRATION NO. 333-53953
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2 TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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CONVERGENT COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
COLORADO 4813 84-1337265
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
incorporation or organization) No.)
</TABLE>
400 INVERNESS DRIVE SOUTH, SUITE 400
ENGLEWOOD, COLORADO 80112
(303) 749-3000
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
MARTIN E. FREIDEL, ESQ.
EXECUTIVE VICE PRESIDENT AND GENERAL COUNSEL
CONVERGENT COMMUNICATIONS, INC.
400 INVERNESS DRIVE SOUTH, SUITE 400
ENGLEWOOD, COLORADO 80112
303-749-3016
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------
WITH A COPY TO:
RICHARD M. RUSSO, ESQ.
GIBSON, DUNN & CRUTCHER LLP
1801 CALIFORNIA STREET, SUITE 4100
DENVER, COLORADO 80202
303-298-5715
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
------------------------
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. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
------------------------
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 SECURITIES AND EXCHANGE COMMISSION
(THE "COMMISSION"), ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION--PRELIMINARY PROSPECTUS DATED SEPTEMBER 18, 1998
CONVERGENT COMMUNICATIONS, INC.
OFFER TO EXCHANGE ALL OUTSTANDING
13% SENIOR NOTES DUE 2008
FOR 13% SERIES B SENIOR NOTES DUE 2008
---------------------
Convergent Communications, Inc. ("Convergent Communications" or the
"Company") hereby offers, upon the terms and conditions set forth in this
Prospectus and the accompanying letter of transmittal (the "Letter of
Transmittal," which, together with this Prospectus, constitutes the "Exchange
Offer") to exchange up to $160,000,000 aggregate principal amount of its 13%
Series B Senior Notes Due 2008 (the "New Notes") for a like aggregate principal
amount of the issued and outstanding 13% Senior Notes Due 2008 (the "Old Notes,"
and collectively with the New Notes, the "Notes") of which $160,000,000
aggregate principal amount is outstanding. See "The Exchange Offer."
The Company will accept for exchange any and all Old Notes that are properly
tendered in the Exchange Offer and not withdrawn on or prior to 5:00 p.m., New
York City time, on , 1998 (the "Expiration Date"), unless the
Exchange Offer is extended by the Company. Tenders of Old Notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the Expiration Date. The
Exchange Offer is not conditioned upon any minimum principal amount of Old Notes
being tendered for exchange. However, the Exchange Offer is subject to the terms
and provisions of the Notes Registration Rights Agreement. The Company has
agreed to pay the expenses of the Exchange Offer. See "The Exchange Offer."
There will be no cash proceeds to the Company from the Exchange Offer. See "Use
of Proceeds."
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. See "The Exchange Offer--Resales
of the New Notes" and "Plan of Distribution." The Letter of Transmittal states
that by so acknowledging and delivering a prospectus, such broker-dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act of 1933, as amended (the "Securities Act"). This Prospectus, as
it may be amended or supplemented from time to time, may be used by a
broker-dealer in connection with resales of New Notes received in exchange for
Old Notes where such Old Notes were acquired by such broker-dealer as a result
of market-making activities or other trading activities. The Company has agreed
that, starting on the Expiration Date and ending on the close of business on the
180th day following the Expiration Date, it will make this Prospectus available
to any broker-dealer for use in connection with any such resale. See "Plan of
Distribution."
The Old Notes were originally issued and sold on April 2, 1998 (the "Initial
Offering") to Merrill Lynch, Pierce, Fenner & Smith Incorporated, Bear, Stearns
& Co. Inc., and BT Alex. Brown Incorporated (collectively, the "Initial
Purchasers") pursuant to a Purchase Agreement dated March 26, 1998 (the
"Purchase Agreement"), among the Company and the Initial Purchasers, pursuant to
which the Company sold 160,000 Units consisting of the Old Notes and Warrants to
purchase 1,728,000 shares of the Company's Common Stock (the "Units"). The
Initial Purchasers subsequently resold the Old Notes in reliance on Rule 144A
under the Securities Act. The Company and the Initial Purchasers also entered
into a Notes Registration Rights Agreement, dated April 2, 1998 (the
"Registration Rights Agreement"), pursuant to which the Company granted certain
registration rights for the benefit of the holders of the Old Notes. The New
Notes are being offered for exchange in order to satisfy certain obligations of
the Company under such Registration Rights Agreement. The New Notes will be the
obligations of the Company evidencing the same indebtedness as the Old Notes and
will be issued under and entitled to the benefits of the Indenture, dated as of
April 2, 1998 (the "Indenture"), between the Company and Norwest Bank Colorado,
N.A., as trustee (in such capacity, the "Trustee"). The form and terms of the
New Notes are identical in all material respects to the Old Notes, except that
the offer and exchange of the New Notes will be registered under the Securities
Act, and therefore such New Notes will not be subject to certain transfer
restrictions and registration rights provisions applicable to the Old Notes. See
"The Exchange Offer--Purpose and Effect."
The Notes will mature on April 1, 2008. Interest on the Notes will be
payable semiannually in arrears on April 1 and October 1 of each year,
commencing October 1, 1998. Concurrently with the closing of the Offering, the
Company deposited in the Collateral Account (as defined) an amount of cash or
U.S. Government Securities (as defined) or a combination thereof that, together
with the interest received thereon, will be sufficient to pay when due the first
six interest payments on the Notes. Holders whose Old Notes are accepted for
exchange will have the right to receive interest accrued thereon from the date
of original issuance to the date of issuance of the New Notes, such interest to
be payable with the first interest payment on the New Notes. Interest on the Old
Notes accepted for exchange will cease to accrue on the day prior to the
issuance of the New Notes. See "Description of the Notes." The New Notes are
collateralized by a first priority security interest in the Collateral Account.
The Notes are redeemable at the option of the Company, in whole or in part, at
any time on or after April 1, 2003 at the redemption prices set forth herein,
together with accrued interest, if any, to the date of redemption. In addition,
at any time prior to April 1, 2001, the Company may redeem Notes in which an
aggregate principal amount up to 35% of the Notes with the net proceeds of one
or more Public Equity Offerings (as defined) or one or more sales of Common
Stock to a Strategic Equity Investor (as defined) at a redemption price equal to
113% of the principal amount thereof, together with accrued and unpaid interest
to the date of redemption; PROVIDED that immediately after giving effect to such
redemption, at least 65% of the original aggregate principal amount of the Old
Notes originally issued remain outstanding. Upon the occurrence of a Change of
Control (as defined), each holder of Notes may require the Company to purchase
all or a portion of such holder's Notes at a purchase price in cash equal to
101% of the principal amount thereof, together with accrued and unpaid interest
thereon, if any, to the date of purchase. In the event of a Change of Control,
there can be no assurance that the Company would have sufficient assets to
satisfy all of its obligations under the Notes. In addition, the repurchase
requirement in connection with a Change of Control would not necessarily afford
holders of the Notes protection in the event of a highly leveraged
reorganization, merger or similar transaction. See "Risk Factors--Limitations on
Repurchase Upon a Change of Control" and "Description of the Notes--Optional
Redemption", "--Change of Control" and "--Certain Covenants." Since the Old
Notes were issued as part of an investment unit, the New Notes are considered to
be issued with "original issue discount" for United States Federal Income Tax
purposes. See "United States Federal Income Tax Considerations."
The New Notes are senior unsecured obligations of the Company, ranking PARI
PASSU in right of payment with all future unsecured senior indebtedness of the
Company, senior in right of payment to all future obligations of the Company
expressly subordinated in right of payment to the Notes and subordinate or PARI
PASSU in right of payment to all of the indebtedness of the Company outstanding
as of the issuance of the Old Notes. The Company has no current plans to issue
any indebtedness junior to the Notes. As of June 30, 1998, on an unconsolidated
basis there was $0.1 million of indebtedness of the Company outstanding in
addition to the $160.0 million of Indebtedness represented by the Notes. Because
the Company is a holding company that conducts its business through its
subsidiaries, all existing and future indebtedness and other liabilities and
commitments of the Company's subsidiaries, including trade payables, will be
effectively senior to the Notes. The Company's subsidiaries will not be
guarantors of the Notes. As of June 30, 1998, the subsidiaries had aggregate
liabilities of $15.8 million. See "Description of the Notes." The Notes have not
been assigned a rating by any rating agency.
SEE "RISK FACTORS," BEGINNING ON PAGE 16, FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY HOLDERS OF OLD NOTES IN CONNECTION WITH THE
EXCHANGE OFFER.
---------------------
The date of this Prospectus is , 1998
<PAGE>
THE NEW NOTES HAVE NOT BEEN RECOMMENDED, APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
NOTICE TO NEW HAMPSHIRE RESIDENTS
NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A
LICENSE HAS BEEN FILED UNDER CHAPTER 421-B OF THE NEW HAMPSHIRE REVISED STATUTES
WITH THE STATE OF NEW HAMPSHIRE NOR THE FACT THAT A SECURITY IS EFFECTIVELY
REGISTERED OR A PERSON IS LICENSED IN THE STATE OF NEW HAMPSHIRE CONSTITUTES A
FINDING BY THE SECRETARY OF STATE THAT ANY DOCUMENT FILED UNDER RSA 421-B IS
TRUE, COMPLETE AND NOT MISLEADING. NEITHER ANY SUCH FACT NOR THE FACT THAT AN
EXEMPTION OR EXCEPTION IS AVAILABLE FOR A SECURITY OR A TRANSACTION MEANS THAT
THE SECRETARY OF STATE HAS PASSED IN ANY WAY UPON THE MERITS OR QUALIFICATIONS
OF, OR RECOMMENDED OR GIVEN APPROVAL TO, ANY PERSON, SECURITY OR TRANSACTION. IT
IS UNLAWFUL TO MAKE, OR CAUSE TO BE MADE, TO ANY PROSPECTIVE PURCHASER,
SUBSCRIBER OR CLIENT, ANY REPRESENTATION INCONSISTENT WITH THE PROVISIONS OF
THIS PARAGRAPH.
AVAILABLE INFORMATION
THE COMPANY HAS FILED A REGISTRATION STATEMENT ON FORM S-4 (TOGETHER WITH
ANY AMENDMENTS THERETO, THE "REGISTRATION STATEMENT") WITH THE COMMISSION UNDER
THE SECURITIES ACT WITH RESPECT TO THE NEW NOTES. THIS PROSPECTUS, WHICH
CONSTITUTES A PART OF THE REGISTRATION STATEMENT, OMITS CERTAIN INFORMATION
CONTAINED IN THE REGISTRATION STATEMENT AND REFERENCE IS MADE TO THE
REGISTRATION STATEMENT AND THE EXHIBITS AND SCHEDULES THERETO FOR FURTHER
INFORMATION WITH RESPECT TO THE COMPANY AND THE NEW NOTES OFFERED FOR EXCHANGE
HEREBY. THIS PROSPECTUS CONTAINS SUMMARIES OF THE MATERIAL TERMS AND PROVISIONS
OF CERTAIN DOCUMENTS AND IN EACH INSTANCE REFERENCE IS MADE TO THE COPY OF SUCH
DOCUMENT FILED AS AN EXHIBIT TO THE REGISTRATION STATEMENT. EACH SUCH SUMMARY IS
QUALIFIED IN ITS ENTIRETY BY SUCH REFERENCE.
THE REGISTRATION STATEMENT MAY BE INSPECTED WITHOUT CHARGE AT THE OFFICE OF
THE COMMISSION AT 450 FIFTH STREET, N.W., WASHINGTON, D.C. 20549. COPIES OF THE
REGISTRATION STATEMENT MAY BE OBTAINED FROM THE COMMISSION AT PRESCRIBED RATES
FROM THE PUBLIC REFERENCE SECTION OF THE COMMISSION AT SUCH ADDRESS, AND AT THE
COMMISSION'S REGIONAL OFFICES LOCATED AT 7 WORLD TRADE CENTER, 13TH FLOOR, NEW
YORK, NEW YORK 10048, AND AT NORTHWESTERN ATRIUM CENTER, 500 WEST MADISON
STREET, SUITE 1400, CHICAGO, ILLINOIS 60661. IN ADDITION, REGISTRATION
STATEMENTS AND CERTAIN OTHER FILINGS MADE WITH THE COMMISSION THROUGH ITS
ELECTRONIC DATA GATHERING, ANALYSIS AND RETRIEVAL ("EDGAR") SYSTEM ARE PUBLICLY
AVAILABLE THROUGH THE COMMISSION'S SITE ON THE INTERNET'S WORLD WIDE WEB,
LOCATED AT HTTP://WWW.SEC.GOV.
THE COMPANY HAS AGREED TO FURNISH TO HOLDERS OF THE NOTES, UPON THEIR
REQUEST, THE INFORMATION REQUIRED TO BE DISCLOSED PURSUANT TO RULE 144A(D)(4)
UNDER THE SECURITIES ACT.
------------------------
SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus contains certain forward-looking statements and information
relating to the Company that are based on the beliefs of management as well as
assumptions made by and information currently available to management. Such
forward-looking statements are principally contained in the sections "Summary,"
"Risk Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business" and include without limitation the
Company's expectation and estimates as to its business following the Exchange
Offer, including the marketing of its Enterprise Network Services
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(as defined), the introduction of new products and services, expansion into new
markets and future financial performance, including growth in net sales and
earnings and cash flows from operations. In addition, in those and other
portions of this Prospectus the words "anticipates," "believes," "estimates,"
"expects," "plans," "intends" and similar expressions, as they relate to the
Company or its management, are intended to specifically identify forward looking
statements. Such statements reflect the current views of the Company with
respect to future events and are subject to certain risks, uncertainties and
assumptions, including the risk factors described in this Prospectus. In
addition to factors that may be described elsewhere in this Prospectus, the
Company specifically wishes to advise readers that the factors listed under the
caption "Risk Factors" could cause actual results to differ materially from
those expressed in any forward-looking statement. Should one or more of these
risks or uncertainties materialize, or should any underlying assumptions prove
incorrect (including the assumptions used in connection with the preparation of
the Pro Forma Combined Statements of Operations), actual results may vary
materially from those described herein as anticipated, believed, estimated or
expected. The Company does not intend to update these forward-looking
statements.
------------------------
The Company has registered, applied to register or has otherwise sought
legal protection for the following trademarks, tradenames and servicemarks which
appear in this Prospectus: Convergent Communications-TM-, E-POP-TM-, Enterprise
Network Carrier-TM- and Computer-Telephony Integrated Support System-TM-. All
other trademarks, tradenames and services marks appearing in this Prospectus are
the property of their respective holders.
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SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and related notes appearing elsewhere in
this Prospectus. Unless the context otherwise requires, references to the
"Company" or to "Convergent Communications-TM-" are to Convergent
Communications, Inc., a Colorado corporation and its wholly owned subsidiaries.
See "Glossary" for the definition of certain other terms used in this
Prospectus.
THE COMPANY
Convergent Communications, Inc. is an Enterprise Network Carrier-TM-
offering comprehensive, single-source communications services primarily to small
and medium-sized businesses.
As an Enterprise Network Carrier-TM-, the Company integrates its data and
telephony products and services into a single product offering, enabling the
Company to act as a single-source, one-stop provider of its customer's total
communications requirements. Unlike traditional telecommunications companies
that provide services from outside a customer's premise, in providing Enterprise
Network Services ("ENS"), the Company designs, buys and builds its OWN network
within the customer's premise, enabling the Company to act as an outsource
provider of any or all of the customer's communications requirements. For the
six months ended June 30, 1998, the Company had $14.5 million in revenues and a
net loss of $16.3 million. The Company began offering ENS services in December
1997 and as of June 30, 1998, had entered into long-term ENS contracts with 13
customers with an aggregate of approximately 970 desktops. The contracts are
expected to provide the Company with approximately $2.5 million in annual
contract revenues and over their terms are expected to produce total revenues of
approximately $12.3 million.
The Company's business plan is designed to address the large and growing
market for the provision of single-source communications services to small and
medium-sized businesses. The Company believes it is the only provider of ENS
solutions, or a comparable range of outsourced communications services, to such
businesses in its target markets. The Company's ENS solution is provided under
long-term contracts (typically three to five years) which position the Company
to be the customer's exclusive provider of data networking, data transport and
telephony services. The Company believes its ENS solution provides it with
unique competitive advantages by creating the opportunity to (i) capture
virtually all of the customer's expenditures for communications services, (ii)
create long-term relationships with its customers by increasing their reliance
on and sense of partnership with the Company, (iii) capitalize on the growing
trend of outsourcing of networking services and the increasing demand for data
services, (iv) differentiate itself from providers of communications services
that do not offer integrated solutions to small and medium-sized businesses, (v)
secure stable sources of long-term, recurring revenue and (vi) achieve
significantly reduced customer turnover compared to traditional providers of
communications services.
Effective August 1, 1998, the Company acquired substantially all the assets
of Tie Communications, Inc. ("Tie") for a total purchase price (including
expenses and assumed liabilities) of approximately $51.4 million (the "Tie
Acquisition"). Tie was a telecommunications equipment provider and a nationwide
reseller of long-distance services which had filed for protection under Chapter
11 of the U.S. Bankruptcy Code on April 10, 1998. Tie's business concentrated on
the sale of voice products and services, all of which were of the type already
being marketed by the Company.
Tie was the fourth largest independent distributor of business telephone
systems in the United States. It is anticipated that the Tie Acquisition will
accelerate the Company's growth by adding approximately 55,000 customers and 24
new markets, providing the Company with extensive experience in telephony
services including digital telephone systems, larger telephone systems (PBXs),
computer-telephony integration hardware and software and video teleconferencing
equipment and offering the Company the opportunity to cross-market its data and
ENS products and services to Tie's predominately telephony customers. For the
year ended December 31, 1997 and the seven months ended July 31, 1998, Tie had
total revenues of approximately $95.4 million and $46.5 million, respectively
and net losses of approximately
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$19.1 million and $9.4 million, respectively. For additional information
regarding the Tie Acquisition, see "The Tie Acquisition."
The Company provides the following products and services:
DATA:
- DATA NETWORKING SERVICES--including the planning, design, installation and
management of networks, from simple LANs to complex WANs.
- DATA PRODUCTS--including the sale and integration of servers, routers,
data switches and desk top computers.
- DATA TRANSPORT SERVICES--including frame relay and ATM services.
- INTERNET SERVICES--including web applications, web hosting and Internet
access.
TELEPHONY:
- VOICE SERVICES--including local and long distance services.
- VOICE PRODUCTS--including the sale and integration of key systems and
PBXs.
ENTERPRISE NETWORK SERVICES:
- ENS--the delivery under long-term contract of one or more of the Company's
data and telephony services utilizing the Company's owned network inside
the customer's premise.
As of June 30, 1998, the Company provided communications services to
approximately 4,000 customers in eight markets and its business plan anticipated
the rollout of services in additional markets through acquisition and marketing
efforts. The Tie Acquisition provided the Company with offices in 24 new markets
and access to approximately 55,000 telephony product and service customers of
Tie. The Company anticipates a tiered phase-in of the new markets to its data
products and services and ENS solution over the next 12 to 24 months. Although a
significant portion of the Company's previously planned geographic expansion has
been implemented as a result of the Tie Acquisition, the Company continues to
anticipate additional expansion into new markets which it deems to be
attractive.
The Company was founded in 1995 by an experienced team of three
telecommunications executives with a combined 61 years of experience in the
industry. The Company's senior management team includes John R. Evans, Chairman
and Chief Executive Officer, formerly the Executive Vice President and Chief
Financial Officer of ICG Communications, Inc. ("ICG") from 1991 until December
1995; Keith V. Burge, President and Chief Operating Officer, who was the
founder, Chief Executive Officer and Chief Operating Officer of Fiber Optic
Technologies, Inc., a leading national network services integrator; and Philip
G. Allen, Executive Vice President, and former Vice President of Investor
Relations and Corporate Communications of ICG. The Company's senior management
team also includes many additional telecommunications professionals, each with
substantial expertise, leading the sales, customer care, engineering, operations
and financial divisions of the Company. As of August 31, 1998, the Company had
736 employees, 436 of whom were added in connection with the Tie Acquisition.
THE ENTERPRISE NETWORK OPPORTUNITY
According to the Company's market research, small and medium-sized
businesses (typically with 25 to 500 desktops) are increasingly seeking
single-source solutions to their communications requirements as a result of (i)
the bewildering array and increasing complexity of network configurations and
telephony service offerings, (ii) the need to focus on their core operations
rather than network and communications issues, (iii) rapid changes in
technology, (iv) the growing importance of the Internet in business and
commerce, (v) the cost and difficulty of maintaining in-house technical
expertise, and (vi) the potential
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savings associated with outsourcing their data and communications requirements.
The Company believes that the aggregate addressable market for ENS in the cities
in which it operates will grow to approximately $105 billion over the next four
years, which includes $80 billion for data networking and transport services and
products and $25 billion for telephony services. The Company believes that the
size and anticipated growth of the market for ENS, continued deregulation in the
market for telecommunication services and the absence of regulation of the
market for data networking services and certain data transport services such as
Internet access have created enormous opportunities for smaller, highly focused,
innovative communications providers like Convergent Communications-TM- to
compete successfully against ILECs, CLECs, IXCs, data integrators and other
traditional providers of communications services.
THE ENTERPRISE NETWORK
INSIDE NETWORK. The Enterprise Network is a Company-designed, owned and
managed data and telephony network located inside the customer's premise and
linked to the Company's external network through a single digital facility. The
provision of an ENS solution begins with an assessment of a customer's near and
long-term communications requirements emphasizing how the implementation of an
enterprise network will allow the customer to focus on core business functions
while reducing its total cost of network ownership, and culminates in the design
and implementation of a completely outsourced network solution.
OUTSIDE NETWORK. The Company's business plan includes the rapid deployment
of its Enterprise Point-of-Presence ("E-POP-TM-"). The E-POP-TM-, a
third-generation CLEC switching platform, consists of existing switching and
transmission equipment and software uniquely configured by the Company to act as
a service aggregation point for its customers and a dissemination point to
backbone providers of local, long distance, data transport and Internet
services. The Company's E-POP-TM- is designed as a scaleable, distributed
network that integrates voice and local switching platforms, enabling the
Company to add specific data and voice services as required by the customer. By
integrating voice and data through a single digital facility, using
best-in-class network components, and creating a distributed network
architecture, the E-POP-TM- results in lower costs in relation to other CLEC
networks. The Company has deployed its E-POPs-TM- in Des Moines, Denver and San
Francisco and is currently routing its internal voice and data traffic through
them. The Company anticipates that it will begin routing customer traffic over
these platforms by the end of the year.
BUSINESS STRATEGY
The goal of Convergent Communications-TM- is to become the premier
Enterprise Network Carrier-TM- in its target markets by providing single-source
communications services, superior customer care and cost effective
communications solutions to its customer's requirements. The Company's business
strategy is designed to enable it to achieve rapid market penetration, strong
growth and stable, long-term sources of recurring revenues. The Company's
strategy includes the following key elements:
SINGLE-SOURCE PROVIDER. The Company believes that its ability to allow its
customers to outsource their entire communications requirements to a
single-source provider that delivers a full range of efficient and
cost-effective solutions provides significant advantages by reducing the
complexity and administrative costs associated with integrating, implementing,
coordinating and maintaining diverse networks and technologies obtained from and
serviced by multiple vendors.
OWN THE ENTERPRISE NETWORK. Unlike traditional telecommunications providers
which "look in" to the customer's premise, terminating their networks outside of
the customer's building, the Company designs, builds and owns the network within
the customer's premise, managing and controlling the customer's communications
infrastructure under long-term service agreements (typically three to five years
in duration). The Company believes its ownership of the communications equipment
installed on the customer's premise, and its ability to provide services from
within the customer's premise will provide it
6
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with significant competitive advantages over non-enterprise based service
providers, including the ability to (i) capture virtually all of the customer's
expenditure for communications services, (ii) offer superior customer care,
(iii) continually offer and provide new value-added product and service
enhancements, and (iv) achieve significantly less customer turnover than
traditional communications providers.
"LEAD WITH DATA; FOLLOW WITH TELEPHONY; CLOSE WITH ENS." The Company
believes its strategy of leading with data, following with telephony and closing
with ENS will enable it to rapidly penetrate its existing markets, increase the
range of communications services provided to its customers and secure a greater
percentage of its customers' expenditures on communications services earlier in
the sales cycle. This belief is based on a perception that while businesses are
accustomed to reliable voice services, customers place paramount importance on
data networking and transport services because of the impact inadequate data
services can have on a customer's operating efficiency and profitability. As
such, the Company's strategy for new customers is to "Lead with Data; Follow
with Telephony; and Close with ENS." Once the Company gains the confidence of
new customers through the provision of data services, the Company believes that
those customers are more likely to purchase its telephone services and
ultimately its complete ENS solution.
TARGET SMALL AND MEDIUM-SIZED BUSINESSES. The Company believes it can
achieve rapid market penetration by focusing its sales efforts on small and
medium-sized businesses (25 to 500 desktops) with high data usage requirements.
The Company believes that these businesses are highly attractive customers for
ENS because management of such companies typically lacks the time, expertise and
financial resources to adequately fulfill their own data and telephony
requirements.
E-POP-TM- DEPLOYMENT. The Company's business plan includes the deployment
of its E-POPs-TM- in its target markets. The E-POP-TM- is a scaleable,
distributed network that integrates voice and data over a single digital
facility and common switching platform. The Company believes the deployment of
E-POPs-TM- will enable it to more quickly achieve improved margins by reducing
the cost to the Company of data and voice switching and transmission.
GROWTH THROUGH STRATEGIC ACQUISITIONS. In each of the Company's target
markets, a large number of small private companies provide local and
long-distance resale, telecommunications equipment and network integration
services. This creates numerous opportunities to acquire industry participants
that can provide key technical support personnel and management talent, customer
bases for potential expansion to full ENS solutions, accretions to cash flows,
and product line extensions. In addition to the Tie Acquisition, the Company has
completed 11 acquisitions in 4 markets.
COMPETITIVE ADVANTAGES
The Company believes its business strategy provides it with the following
competitive advantages:
"ONE-STOP SHOPPING." The Company believes that its ability to deliver the
entire range of communications services, including its ENS solution,
distinguishes it from traditional providers of networking and telecommunications
services and is attractive because it (i) reduces the complexity associated with
integrating diverse networks and technologies obtained from multiple vendors,
(ii) reduces the administrative expense of network implementation, coordination,
maintenance and monitoring and (iii) allows customers to coordinate all of their
service needs through a single point of contact.
LONG-TERM EXCLUSIVE RELATIONSHIPS. The Company's ENS solution is designed
to enable it to establish long-term exclusive relationships with its customers.
As its customer's ENS provider, the Company seeks to own the network on the
customer's premise, acting as the single-source provider of the customer's
communications equipment and services, and as the primary consultant for the
customer's communications requirements. The Company believes that this ongoing
relationship fosters a greater sense of partnership and provides it with (i) the
ability to offer additional services to the customer, (ii) a number of
competitive
7
<PAGE>
advantages over CLECs, ILECs and other service providers, including
significantly lower customer turnover, and (iii) stable, long-term sources of
recurring revenue.
REDUCE CUSTOMER'S TOTAL COST OF NETWORK OWNERSHIP. The Company in most
cases will reduce the customer's total cost of network ownership by (i)
purchasing the customer's existing premise network equipment, (ii) offering
bundled communication services at a lower overall cost than existing services,
and (iii) minimizing or eliminating the customer's reliance on on-site
networking expertise. As a result, the Company expects to provide its customers
with higher quality service than they currently receive, while reducing their
overall cost of network ownership and operation.
SOLUTIONS-ORIENTED SALES AND CUSTOMER CARE ORGANIZATION. The Company
believes that the primary elements of superior customer care are the
establishment of a local sales and service presence and the availability of a
single customer interface to handle all customer care requirements. To achieve a
cohesive, solutions-oriented sales and customer care approach, and to allow the
effective use of a single customer interface, the Company trains its employees
to operate in each local market as a member of a team in devising customer
solutions and facilitating customer care, and has developed its proprietary
operating support system platform called the Computer-Telephony Integrated
Support System-TM- ("CTISS"). CTISS is an Oracle-based software system that
integrates all internal support services on a single platform, permitting all of
the Company's customer care, sales engineering, service management, service
delivery, accounting and inventory management personnel to provide input to and
work from a single data source.
EFFICIENT CAPITAL DEPLOYMENT. The Company expects to realize significant
capital deployment efficiencies using the E-POP-TM-, a unique third-generation
CLEC switching platform designed by the Company. By integrating voice and data
through the use of a single digital facility and creating a distributed network
architecture, the Company estimates that the E-POP-TM- is approximately 29% less
costly than the traditional CLEC switching platform and will become up to 65%
less costly as the E-POP-TM- architecture is further refined. In addition, the
Company believes its E-POP-TM- platform will provide the Company with
substantially greater operating flexibility and higher returns on deployed
capital on a market-by-market basis than is achievable by traditional CLECs or
ILECs.
FINANCING PLAN
The net proceeds from the sale of the Units (after funding the Collateral
Account) are being used to fund the Tie Acquisition, for expenditures incurred
in the continuing development and deployment of the Company's services in its
target markets, including funding the deployment of its ENS networks, deployment
of E-POP-TM-, continuing enhancement of its CTISS System, other strategic
acquisitions, creating local customer care and sales organizations and for
general corporate purposes, including working capital and the funding of
operating losses and debt service requirements. The Company believes that the
remaining net proceeds will be sufficient to fund the Company's aggregate
capital expenditure and working capital requirements, including operating
losses, associated with its expansion of product and service offerings into its
new markets, for the next 9 to 15 months depending on the extent of exercise of
the Company's outstanding warrants expiring in July 1999. The amounts actually
expended by the Company for these purposes will vary significantly depending
upon a number of factors, including future revenue growth, if any, capital
expenditures and the amount of cash generated by the Company's operations. The
Company will continue to require additional capital for planned increases in
network development, capital expenditures, working capital, debt service, and
continued anticipated operating losses. Sources of funding for such additional
required capital may include vendor financing, bank loans and public offerings
or private placements of equity and/or debt securities.
------------------------
The principal executive offices of the Company are located at 400 Inverness
Drive South, Suite 400, Englewood, Colorado 80112, its telephone number is
(303)749-3000, and its Internet website address on the world wide web is
www.converg.com.
8
<PAGE>
THE EXCHANGE OFFER
<TABLE>
<S> <C>
Securities Offered................ Up to $160.0 million principal amount of 13% Series B
Senior Notes Due 2008, which will be registered under
the Securities Act. The form and term of the New Notes
are substantially identical to the Old Notes in all
material respects, except that the New Notes will be
registered under the Securities Act, and therefore will
not be subject to certain transfer restrictions or
entitled to certain registration rights provisions
applicable to the Old Notes.
The Exchange Offer................ $1,000 principal amount of New Notes in exchange for
each $1,000 principal amount of Old Notes. The New Notes
are being offered in exchange for up to $160.0 million
principal amount of Old Notes. The issuance of the New
Notes is intended to satisfy certain obligations of the
Company contained in the Registration Rights Agreement.
See "The Exchange Offer-- Terms of the Exchange Offer."
Expiration Date................... The Exchange Offer will expire at 5:00 p.m., New York
City time, on , 1998, or such later date and time
to which it is extended. See "The Exchange
Offer--Expiration Date; Extensions; Amendments."
Withdrawal........................ Tenders of Old Notes pursuant to the Exchange Offer may
be withdrawn at any time prior to 5:00 p.m., New York
City time, on the Expiration Date. See "The Exchange
Offer--Expiration Date; Extensions; Amendments."
Conditions of the Exchange The Exchange Offer is not conditioned upon any minimum
Offer........................... principal amount of Old Notes being tendered for
exchange. However, the Exchange Offer is subject to the
terms and provisions of the Registration Rights
Agreement. See "The Exchange Offer--Conditions of the
Exchange Offer."
Procedures for Tendering Old Each holder of Old Notes desiring to accept the Exchange
Notes........................... Offer must complete, sign and date the Letter of
Transmittal according to the instructions contained
herein and therein, and deliver (by mail or otherwise)
the Letter of Transmittal, together with the Old Notes
and any other required documents, to the Exchange Agent
(as defined herein) at the address set forth herein
prior to 5:00 p.m., New York City time, on the
Expiration Date. Any beneficial owner whose Old Notes
are registered in the name of a broker, dealer,
commercial bank trust company or other nominee and who
wishes to tender such Old Notes in the Exchange Offer
should instruct such entity or person to promptly tender
on such beneficial owner's behalf.
Guaranteed Delivery Procedures.... Holders of Old Notes who wish to tender their Old Notes
and (i) whose Old Notes are not immediately available,
or (ii) who cannot deliver their Old Notes together with
the Letter of Transmittal to the Exchange Agent prior to
the Expiration Date may tender their Old Notes according
to the guaranteed delivery procedures set forth in the
Letter of Transmittal. See "The Exchange
Offer--Guaranteed Delivery Procedures."
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
Acceptance of Old Notes and Upon effectiveness of the Registration Statement of
Delivery of New Notes........... which this Prospectus constitutes a part and
consummation of the Exchange Offer, the Company will
accept any and all Old Notes that are properly tendered
in the Exchange Offer prior to 5:00 p.m., New York City
time on the Expiration Date. The New Notes issued
pursuant to the Exchange Offer will be delivered
promptly after acceptance of the Old Notes. See "The
Exchange Offer--Acceptance of Old Notes for Exchange;
Delivery of New Notes."
The Exchange Agent................ Norwest Bank Colorado, N.A. has agreed to serve as the
exchange agent (in such capacity, the "Exchange Agent")
in connection with the Exchange Offer. See "The Exchange
Offer--Acceptance of Old Notes for Exchange; Delivery of
New Notes."
Certain Federal Income Tax In the opinion of Gibson, Dunn & Crutcher LLP, the
Considerations.................. exchange of Old Notes for New Notes in the Exchange
Offer will have no material federal income tax
consequences to the holders of Old Notes. See "Certain
Federal Income Tax Considerations."
Use of Proceeds................... There will be no proceeds to the Company from the
exchange pursuant to the Exchange Offer. See "Use of
Proceeds."
Fees and Expenses................. All expenses incident to the Company's consummation of
the Exchange Offer and compliance with the Registration
Rights Agreement will be borne by the Company. The
Company will also pay certain transfer taxes, which may
be applicable to the Exchange Offer. See "The Exchange
Offer--Fees and Expenses."
Accrued Interest.................. The New Notes will bear interest at a rate of 13% per
annum from April 1, 1998. Holders whose Old Notes are
accepted for exchange will forego accrued but unpaid
interest on such Old Notes for the period from October
1, 1998, to the date of exchange, and will receive such
interest under the New Notes. Pursuant to the terms of
the Old Notes, additional interest will accrue at a rate
of 0.5% per annum from August 31, 1998 until the
consummation of the Exchange Offer because the
Registration Statement with respect to the Exchange
Offer was not declared effective by August 30, 1998. See
"Description of the Notes--Maturity, Interest and
Principal."
Resales of New Notes.............. Based on the position of the staff of the Commission as
set forth in certain interpretive letters issued to
third parties in other transactions, the Company
believes that the New Notes issued pursuant to the
Exchange Offer to any holder of Old Notes in exchange
for Old Notes may be offered for resale, resold and
otherwise transferred by a holder (other than (i) a
broker-dealer who purchased the Old Notes directly from
the Company for resale pursuant to Rule 144A under the
Securities Act or (ii) a person that is an affiliate of
the Company within the meaning of Rule 405 under the
Securities Act), without further compliance with the
registration and prospectus delivery provisions of the
Securities Act, provided that such holder is acquiring
the New
</TABLE>
10
<PAGE>
<TABLE>
<S> <C>
Notes in the ordinary course of business and is not
participating, and has no arrangement or understanding
with any person to participate, in a distribution of the
New Notes. Each broker-dealer that receives New Notes
for its own account in exchange for Old Notes, where
such Old Notes were acquired by such broker as a result
of market-making or other trading activities, must
acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. See "The
Exchange Offer-- Resales of the New Notes" and "Plan of
Distribution."
Effect of Not Tendering Old Notes Old Notes that are not tendered or that are not properly
for Exchange.................... tendered will, following the expiration of the Exchange
Offer, continue to be subject to the existing
restrictions upon transfer thereof. The Company will
have no further obligations to provide for the
registration under the Securities Act of such Old Notes.
</TABLE>
DESCRIPTION OF NEW NOTES
The form and terms of the New Notes will be identical in all material
respects to the form and terms of the Old Notes, except that the New Notes will
be registered under the Securities Act, and therefore will not be subject to
certain transfer restrictions or entitled to certain registration rights
provisions applicable to the Old Notes. The Exchange Offer shall be deemed
consummated upon the occurrence of the delivery by the Company to the Exchange
Agent of New Notes in the same aggregate principal amount as the aggregate
principal amount of Old Notes that are validly tendered by holders thereof
pursuant to the Exchange Offer. See "The Exchange Offer--Procedures for
Tendering Old Notes" and "Description of the Notes."
<TABLE>
<S> <C>
Notes Offered..................... $160.0 million aggregate principal amount of 13% Series
B Senior Notes Due 2008.
Maturity Date..................... April 1, 2008.
Interest.......................... Interest will accrue on the New Notes at a rate of 13%
per annum payable semiannually in arrears on April 1 and
October 1 of each year. For the period from October 1,
1998, through the date of the consummation of the
Exchange Offer, additional interest will accrue at a
rate of 0.5% per annum because the Exchange Offer will
not have been consummated prior to September 29, 1998.
Collateral Account................ Concurrently with the closing of the sale of the Old
Notes, the Company deposited in the Collateral Account
(as defined) an amount of U.S. Government Securities
(approximately $56.8 million), that, together with the
proceeds from the investment thereof, will be sufficient
to pay when due each of the first six scheduled interest
payments on the New Notes, with any balance to be
retained by the Company. The New Notes will be
collateralized by a first priority security interest in
the Collateral Account. See "Description of the Notes--
Disbursement of Funds; Collateral Account."
Ranking........................... The New Notes will be senior unsecured obligations of
the Company (except for the security interest in the
Collateral Account) ranking PARI PASSU in right of
payment with all future
</TABLE>
11
<PAGE>
<TABLE>
<S> <C>
unsecured senior indebtedness of the Company and senior
in right of payment to all future subordinated
indebtedness of the Company. As of June 30, 1998, which
reflects the effect of the sale of the Units (and thus
the $160 million of Indebtedness represented by the New
Notes) and the application of the proceeds from the sale
of the Units, there was approximately $0.1 million of
indebtedness of the Company on an unconsolidated basis
outstanding to which holders of New Notes were
effectively subordinated in right of payment. At such
time, the subsidiaries had aggregate liabilities of
approximately $15.8 million to which holders of New
Notes were structurally subordinated. Because the
Company is a holding company that conducts its business
through its subsidiaries, all existing and future
indebtedness and other liabilities and commitments of
the Company's subsidiaries, including trade payables,
will be effectively senior to the New Notes. Subject to
certain limitations, the Company and its Restricted
Subsidiaries (as defined) may incur additional
indebtedness in the future, including secured
indebtedness. The Company has granted a security
interest to the Trustee (as defined) for the benefit of
the holders of the New Notes in the Collateral Account
and all amounts deposited therein as required under the
Indenture (as defined). The holders of the New Notes
will have a claim on the amounts on deposit in the
Collateral Account that is prior to the claims of other
creditors of the Company. See "Risk Factors--
Substantial Indebtedness; Insufficiency of "Restrictive
Covenants;" "--Holding Company Structure; Structural
Subordination;" "--Effect of Substantial Additional
Indebtedness on Company's Ability to Repay the Notes;"
and "Description of the Notes--Ranking."
Sinking Fund...................... None.
Optional Redemption............... The New Notes will be redeemable at the option of the
Company, in whole or in part, at any time on or after
April 1, 2003, at the redemption prices set forth
herein, plus accrued interest to the date of redemption.
In addition, on or prior to April 1, 2001, the Company
may redeem up to 35% of the New Notes with the net
proceeds of one or more Public Equity Offerings (as
defined) or one or more sales of Common Stock to a
Strategic Equity Investor (as defined) at a redemption
price of 113% of the principal amount, together with
accrued and unpaid interest to the date of redemption;
provided that at least 65% of the aggregate principal
amount of the New Notes are outstanding immediately
after giving effect to such redemption. See "Description
of the Notes--Optional Redemption."
Change of Control................. Following the occurrence of a Change of Control (as
defined), each holder of New Notes may require the
Company to make an offer to purchase all outstanding New
Notes at a purchase price equal to 101% of the principal
amount thereof, together with accrued and unpaid
interest, if any, to the date of purchase. See
"Description of the Notes--Certain Covenants."
</TABLE>
12
<PAGE>
<TABLE>
<S> <C>
Certain Covenants................. The indenture pursuant to which the New Notes will be
issued (the "Indenture") contains certain covenants that
restrict, among other things, the ability of the Company
and its Restricted Subsidiaries to (i) incur certain
indebtedness, (ii) pay dividends and make certain other
restricted payments, (iii) create liens, (iv) permit
other restrictions on dividends and other payments by
Restricted Subsidiaries and make certain investments in
Unrestricted Subsidiaries, (v) issue and sell capital
stock of Restricted Subsidiaries, (vi) guarantee certain
indebtedness, (vii) sell assets, (viii) enter into
transactions with Affiliates (as defined) and (ix)
merge, consolidate or transfer substantially all of the
assets of the Company. The covenants require the Company
to make an offer to purchase specified amounts of New
Notes in the event of certain asset sales. There can be
no assurance that the Company will have sufficient funds
to complete any purchase of New Notes upon such a sale
of assets. See "Description of the Notes--Certain
Covenants."
Exchange Rights................... Holders of the New Notes will not be entitled to any
exchange or registration rights with respect to the New
Notes. Holders of the Old Notes are entitled to certain
exchange rights pursuant to the Registration Rights
Agreement which this Exchange Offer is intended to
satisfy. Once the Exchange Offer is consummated, the
Company will have no further obligations to register any
of the Old Notes not tendered by the holders for
exchange.
</TABLE>
DESCRIPTION OF WARRANTS
The Units issued in the Initial Offering each consisted of one Old Note and
four warrants, with each warrant entitling the holder thereof to purchase 2.7
shares of the Company's common stock, no par value (subject to adjustment from
time to time) at an exercise price of $0.01 per share. The Warrants expire on
April 1, 2008. The Old Notes and Warrants became separably transferable on
October 2, 1998.
As of June 30, 1998, there were 19 holders of record of Warrants consisting
solely of institutional investors. The New Notes will not be issued with
Warrants, and the Exchange Offer does not involve the exchange of the Warrants.
ABSENCE OF PUBLIC MARKET
There has been no public market for the Old Notes. The Company has been
advised by the Initial Purchasers that they presently intend to make a market in
the New Notes; however, they are not obligated to do so and any market making
may be discontinued at any time. Therefore, there can be no assurance that an
active market for the New Notes will develop or as to the liquidity of any such
market.
RISK FACTORS
See "Risk Factors" beginning on page 16 for a discussion of certain factors
that should be considered in connection with the Exchange Offer.
13
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
The following summary financial data should be read in conjunction with the
Company's Consolidated Financial Statements and Notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
appearing elsewhere in the Prospectus. The selected financial data, except the
information as of June 30, 1998 and for the six months ended June 30, 1998 and
1997 and for the year ended December 31, 1993, are derived from the financial
statements of the Company and its predecessor, which have been audited by
PricewaterhouseCoopers LLP, independent accountants. The data presented below
for the year ended December 31, 1993 has been derived from the unaudited
financial statements of the Company's predecessor. The data presented below as
of June 30, 1998 and for the six months ended June 30, 1998 and 1997 are derived
from unaudited financial statements of the Company included in the Registration
Statement. Operating results for the six months ended June 30, 1998 are not
necessarily indicative of results that may be expected for the full year. These
unaudited financial statements have been prepared on the same basis as the
audited financial statements and, in the opinion of management, contain all
adjustments, consisting of only normal recurring adjustments, necessary for a
fair presentation of the financial position and results of operations for these
periods.
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR FOR THE YEAR FOR THE YEAR FOR THE PERIOD FROM INCEPTION FOR THE YEAR
ENDED ENDED ENDED JANUARY 1, 1996 THROUGH ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, THROUGH DECEMBER 31, DECEMBER 31,
1993 1994 1995 DECEMBER 16, 1996 1996 1997
(PREDECESSOR) (PREDECESSOR) (PREDECESSOR) (PREDECESSOR) (SUCCESSOR) (SUCCESSOR)
----------------- --------------- --------------- ----------------- --------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE NUMBERS)
<S> <C> <C> <C> <C> <C> <C>
OPERATING STATEMENT
DATA(1):
Total revenues.......... $ 476 $ 988 $ 1,434 $ 1,496 $ 98 $ 10,210
Operating costs......... 292 729 964 1,018 79 7,368
Selling, general and
administrative........ 202 477 405 554 552 10,983
Depreciation and
amortization.......... 3 106 127 124 41 1,453
----- ------- ------- ------- ------- -------------
497 1,312 1,496 1,696 672 19,804
Interest income
(expense) and other... (1) (64) (17) (21) (1) (61)
----- ------- ------- ------- ------- -------------
Net loss before
extraordinary item.... (22) (388) (79) (221) (575) (9,655)
Extraordinary Item...... (34) -- -- -- -- --
Net loss................ $ (56) $ (388) $ (79) $ (221) $ (575) $ (9,655)
Net loss per share
(basic)(2)............ $ (0.07) $ (0.46)
------- -------------
------- -------------
Net loss per share
(diluted)(2).......... $ (0.07) $ (0.46)
------- -------------
------- -------------
Weighted average shares
outstanding
(basic)(2)............ 7,775 20,922
------- -------------
------- -------------
Weighted average shares
outstanding
(diluted)(2).......... 7,775 20,922
------- -------------
------- -------------
<CAPTION>
FOR THE SIX MONTHS ENDED
------------------------
JUNE 30, JUNE 30
1997 1998
(SUCCESSOR) (SUCCESSOR)
----------- -----------
<S> <C> <C>
OPERATING STATEMENT
DATA(1):
Total revenues.......... $ 2,618 $ 14,505
Operating costs......... 1,737 10,570
Selling, general and
administrative........ 3,161 13,772
Depreciation and
amortization.......... 456 1,953
----------- -----------
5,354 26,295
Interest income
(expense) and other... 66 (4,489)
----------- -----------
Net loss before
extraordinary item.... (2,670) (16,279)
Extraordinary Item...... -- --
Net loss................ $ (2,670) $ (16,279)
Net loss per share
(basic)(2)............ (0.15) (0.60)
----------- -----------
----------- -----------
Net loss per share
(diluted)(2).......... (0.15) (0.60)
----------- -----------
----------- -----------
Weighted average shares
outstanding
(basic)(2)............ 18,263 27,131
----------- -----------
----------- -----------
Weighted average shares
outstanding
(diluted)(2).......... 18,263 27,131
----------- -----------
----------- -----------
</TABLE>
<TABLE>
<CAPTION>
AS OF
JUNE 30, 1998
-------------
<S> <C>
BALANCE SHEET:(1)
Working capital.................................................................................................... $ 95,696
Property and equipment, net........................................................................................ 12,722
Total assets....................................................................................................... 185,879
Total liabilities.................................................................................................. 174,634
Shareholders' equity............................................................................................... 11,245
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR FOR THE YEAR FOR THE YEAR FOR THE PERIOD FROM INCEPTION FOR THE YEAR
ENDED ENDED ENDED JANUARY 1, 1996 THROUGH ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, THROUGH DECEMBER 31, DECEMBER 31,
1993 1994 1995 DECEMBER 16, 1996 1996 1997
(PREDECESSOR) (PREDECESSOR) (PREDECESSOR) (PREDECESSOR) (SUCCESSOR) (SUCCESSOR)
--------------- --------------- ----------------- ------------------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
OTHER OPERATING DATA:
Net cash provided by
(used in) operating
activities.......... $ (45) $ (217) $ 60 $ (31) $ (283) $ (7,104)
Net cash used in
investing
activities.......... (74) (200) (8) (36) (1,446) (11,242)
Net cash provided by
(used in) financing
activities.......... 124 427 (61) 91 4,890 15,852
EBITDA(3)............. (18) (218) 65 (76) (533) (8,141)
Capital expenditures.. 66 140 23 36 29 2,042
<CAPTION>
FOR THE SIX MONTHS ENDED
------------------------
JUNE 30, JUNE 30
1997 1998
(SUCCESSOR) (SUCCESSOR)
----------- -----------
<S> <C> <C>
OTHER OPERATING DATA:
Net cash provided by
(used in) operating
activities.......... (1,619) (8,836)
Net cash used in
investing
activities.......... (641) (140,660)
Net cash provided by
(used in) financing
activities.......... 965 153,132
EBITDA(3)............. (2,280) (9,837)
Capital expenditures.. 1,037 9,018
</TABLE>
- ------------------------------
(1) Effective December 17, 1996, the Company acquired Integrated Communication
Networks, L.C. ("ICN"). ICN is referred to as the "predecessor" for the
period prior to the acquisition. The Company, since inception, and ICN,
since December 17, 1996, are referred to as the "successor."
(2) Per share data is not relevant for the Company's predecessor due to its
different capital structure and therefore is not included.
(3) As used herein, EBITDA consists of earnings before interest (net), income
taxes, depreciation, amortization and other income (expense). EBITDA is a
measure commonly used in the telecommunications industry to analyze
companies on the basis of operating performance. It is not a measure of
financial performance under GAAP and should not be considered as an
alternative to net income as a measure of performance or as an alternative
to cash flow as a measure of liquidity. As definitions of EBITDA may vary,
the Company's measure of EBITDA may not be comparable to similarly titled
measures used by other companies.
15
<PAGE>
RISK FACTORS
HOLDERS OF THE OLD NOTES SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK
FACTORS, AS WELL AS OTHER INFORMATION SET FORTH ELSEWHERE IN THIS PROSPECTUS, IN
CONNECTION WITH THE EXCHANGE OFFER.
LIMITED OPERATING HISTORY, OPERATING LOSSES AND NEGATIVE CASH FLOWS. The
Company commenced active operations in January 1997. As a result, the Company is
subject to many of the risks common to developing enterprises, including
undercapitalization, cash shortages, limitations with respect to personnel,
financial and other resources and lack of sufficient customers and revenues to
be self-sustaining. The Company had revenues of $10.2 million and $14.5 million
for the year ended December 31, 1997 and six months ended June 30, 1998,
respectively ($105.6 million and $55.9 million, respectively, on a pro forma
basis to reflect the Tie Acquisition), and net losses of $9.7 million and $16.3
million, respectively ($47.2 million and $31.6 million, respectively, on a pro
forma basis to reflect the Tie Acquisition and issuance of the Old Notes as of
January 1, 1997), for the same periods. The Company expects to incur significant
operating losses and to generate negative cash flows during the next several
years. There can be no assurance that the Company will achieve or sustain
profitability or positive cash flows from operating activities in the future. If
the Company cannot achieve operating profitability or positive cash flows from
operating activities, it may not be able to meet its working capital
requirements, which could have a material adverse effect on the Company. In
addition, the Company may not be able to make payments on the Notes. See
"--Substantial Capital Requirements" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
LIMITED OPERATION OF CERTAIN SERVICES. Historically, substantially all of
the Company's revenues have been derived from data integration equipment sales
and services and voice product sales and services. Although these sources of
revenues are components of ENS, revenues from the provision of a full line of
integrated ENS solutions to individual customers have been limited and did not
commence until late 1997. In 1997, revenues from ENS were approximately $6,200,
or 0.1% of total 1997 revenues. As of June 30, 1998, the Company had entered
into long-term ENS contracts with 13 customers. These contracts are expected to
provide the Company with approximately $2.5 million in annual contract revenues.
Although the Company intends to substantially increase its revenues from its ENS
operations, holders of the Notes have limited historical information about these
operations upon which to base an evaluation of the Company's past or future
performance. Furthermore, it cannot be predicted whether the demand for ENS
services, particularly owning, installing and maintaining communications
networking equipment at the customer's premise, is as significant as the Company
anticipates, whether the Company can achieve its anticipated penetration of
these markets and whether it will meet its margin estimates for ENS service.
Were any of these objectives not achieved, the performance of the Company would
be materially adversely affected, and the Company could be unable to repay its
indebtedness, including the Notes.
The Company anticipates significant margin enhancement will result from
deployment of its E-POP-TM- switching platform, which incorporates a number of
independent components manufactured by other companies. The Company has only
recently deployed E-POP-TM- in three of its markets for internal use. While all
of the components of the E-POP-TM- switching platform have established histories
of successful performance as individual products, the E-POP-TM- configuration
does not have a significant operating history. In particular, the E-POP-TM- and
future enhancements or adaptations may contain undetected design faults and
"bugs" that, despite testing by the Company, are discovered only after the
E-POP-TM- has been deployed in the Company's target markets. The failure of any
component of the E-POP-TM- could result in the interruption of service to the
customers serviced by that E-POP-TM- until necessary repairs are effected or
replacement equipment is installed. Extensive testing and performance
evaluations are being conducted and production deployment for customer traffic
is expected in late 1998. While the Company expects these switches to improve
the Company's financial performance and service ability, there can be no
assurance that the E-POP-TM- platforms will deliver the expected results or that
the Company will be successful in deploying these switches in all its targeted
markets.
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RECENT SIGNIFICANT ACQUISITION. On July 31, 1998, the Company acquired
substantially all the assets of Tie, the fourth largest independent distributor
of business telephone systems in the United States. Tie was a substantially
larger business than the Company (1997 revenues of $95.4 million versus $10.2
million for the Company; 463 employees at June 30, 1998 versus 274 employees of
the Company at that date) and no assurance can be given that the Company will be
able to successfully integrate, operate or manage the business acquired from
Tie.
At the time of the acquisition, Tie was a debtor-in-possession operating
under Chapter 11 of the United States Bankruptcy Code having filed for
protection thereunder in April 1998. Although the Company believes that Tie's
previous financial difficulties were the result of under capitalization, a weak
strategic plan put in place by now departed managers and a very high level of
corporate overhead, no assurance can be given that the Company will be able to
remedy all of the matters which led to Tie's bankruptcy filing. Furthermore, the
Company's plans to expand its data and ENS products and services into the
existing Tie markets will require significant additional expenditures in the
areas of capital and direct operating costs, increasing the previously
anticipated net losses of the Company. It should also be noted that in 1991, Tie
(then predominately a manufacturer of voice products) was reorganized under
Chapter 11 of the United States Bankruptcy Code, primarily as a result of an
inability to service its indebtedness.
SUBSTANTIAL CAPITAL REQUIREMENTS. Although the Company estimates that the
remaining net proceeds of the Initial Offering will enable it to meet its
operating capital requirements for approximately the next 9 to 15 months,
depending on the extent to which the Company's outstanding warrants to purchase
Common Stock are exercised prior to their expiration in July 1999, many factors
could cause the Company to require additional capital sooner, including, for
example, if the Company pursues a greater number of acquisitions of companies
providing communications services than is currently planned or if it chooses to
enter additional markets, enters markets earlier than currently anticipated, or
substantially exceeds its penetration estimates. Material shortfalls with regard
to the Company's estimated operating and financial performance could also cause
the Company to require such additional capital. There can be no assurance that
following the expenditure of the proceeds of the Initial Offering the Company
will be successful in raising sufficient debt or equity capital to fund its
operations or that such funds, if available, will be available on a timely basis
or on terms that are acceptable to the Company. In addition, capital leasing
facilities, including equipment leasing arrangements, may be unavailable to the
Company or may be offered on unacceptable terms. The Company's business plan
contemplates the need for additional financing from other sources. In the event
such financing is unavailable in the amount and on terms acceptable to the
Company, the Company could be compelled to alter its business strategy, or delay
or abandon some of its future plans or expenditures which could have a material
adverse effect on the Company's financial condition and results of operations,
which in turn could adversely affect the ability of the Company to repay its
indebtedness, including the Notes. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
SUBSTANTIAL INDEBTEDNESS; RESTRICTIVE COVENANTS. As a result of the sale of
the Units, the Company is highly leveraged. At June 30, 1998, which includes the
effect of the sale of the Units and the application of the net proceeds
therefrom, the Company had total consolidated indebtedness of $158.5 million (or
93% of the total capitalization of the Company), net of approximately $6.6
million of unaccreted discount resulting from the value ascribed to the Warrants
and the total liabilities of the Company (including trade accounts payables and
accrued liabilities) were approximately $174.6 million. See "Capitalization."
The degree to which the Company is leveraged may adversely affect the Company's
ability to finance its future operations, to compete effectively against better
capitalized companies, to withstand downturns in its business or the economy
generally, and to pursue business opportunities that may be in the best
interests of the Company and its security holders.
The Indenture imposes operating and financial restrictions on the Company
and its subsidiaries. These restrictions affect, and in certain cases
significantly limit or prohibit, among other things, the ability
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of the Company and its subsidiaries to incur additional indebtedness, create
liens upon assets, apply the proceeds from the disposal of assets, make
investments, make dividend payments and other distributions on capital stock and
redeem capital stock. See "Description of the Notes." There can be no assurance
that such covenants will not adversely affect the Company's ability to finance
its future operations or capital needs or to engage in other business activities
that may be in the interest of the Company.
HOLDING COMPANY STRUCTURE; STRUCTURAL SUBORDINATION. The Company is a
holding company with no direct operations and no assets other than cash and the
capital stock of its two subsidiaries, Convergent Communications Services, Inc.
("CCSI") and Convergent Capital Corporation ("C3"). The Company will be
dependent on the cash flow of CCSI and C3 to meet its obligations, including the
payment of interest and principal on the Notes. Each of the Company's
subsidiaries is a separate legal entity that has no obligation to pay any
amounts due pursuant to the Notes or to make any funds available therefor,
whether by dividends, loans or other payments. In addition, the Company's
subsidiaries are restricted from making payments to the Company if the Company
or any of the subsidiaries is in default under the terms of the instruments
governing certain of its existing indebtedness. Because neither of the Company's
subsidiaries will guarantee the payment of the principal or interest on the
Notes, any right of the Company to receive assets of the Company's subsidiaries
upon their liquidation or reorganization (and the consequent right of holders of
the Notes to participate in the distribution or realize proceeds from those
assets) will be effectively subordinated to the claims of the creditors of the
Company's subsidiaries (including trade creditors and holders of indebtedness of
such subsidiary), except if and to the extent the Company is itself a creditor
of the Company's subsidiaries, in which case the claims of the Company would
still be effectively subordinated to any security interest in the assets of the
Company's subsidiaries held by other creditors. As of June 30, 1998, the
Company's subsidiaries had aggregate liabilities of $15.8 million and the
Company had total consolidated indebtedness of $158.5.
The Notes will be unsecured and will be effectively subordinated to any
future secured indebtedness of the Company to the extent of the value of the
assets securing such indebtedness. As of June 30, 1998, the Company had $0.1
million of secured indebtedness on an unconsolidated basis. The Indenture
permits the Company or the Company's subsidiaries to incur additional unsecured
and secured indebtedness. See "Description of the Notes." The Company expects
that indebtedness under any bank credit facility will be secured by a pledge by
the Company of 100% of the capital stock of the Company's subsidiaries and
future subsidiaries of the Company's subsidiaries and all assets held directly
by the Company's subsidiaries and their respective future subsidiaries, and will
be guaranteed by such subsidiaries. Consequently, in the event of a bankruptcy,
liquidation, dissolution, reorganization or similar proceeding with respect to
the Company, such assets will be available to satisfy obligations of such
secured debt before any payment can be made on the Notes. In addition, to the
extent such assets would not satisfy in full such secured indebtedness, the
holders of such indebtedness will have a claim for any shortfall that is PARI
PASSU (or effectively senior if the indebtedness were issued by the Company's
subsidiaries) with the Notes. Accordingly, there may only be a limited amount of
assets available to satisfy any claims of the holders of the Notes upon an
acceleration of the Notes. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
EFFECT OF SUBSTANTIAL ADDITIONAL INDEBTEDNESS ON THE COMPANY'S ABILITY TO
REPAY THE NOTES. The Indenture limits, but does not prohibit, the incurrence of
additional indebtedness by the Company and its subsidiaries, and the Company and
one or more of its subsidiaries are likely to incur substantial additional
indebtedness during the next few years in order to expand the Company's
business. Also, in addition to the current equipment leasing facilities which
are secured by certain equipment and portions of the revenue streams from its
subsidiaries, the Company or one or more of its subsidiaries may establish
additional bank credit facilities which may be secured by a substantial portion
of its assets. See "Certain Indebtedness." Although the Company is having
discussions with several financial institutions regarding the possible
establishment of such a facility, such discussions have not progressed past the
preliminary stage. Additional indebtedness, including any indebtedness under a
bank credit facility, may rank PARI PASSU with the Notes,
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or effectively senior to the Notes, if issued by a subsidiary of the Company or
if issued on a secured basis by the Company. See "Description of the Notes." The
debt service requirements of any additional indebtedness could make it more
difficult for the Company to make principal and interest payments on the Notes.
Earnings generated by any of the Company's subsidiaries, as well as the existing
assets of such subsidiaries, will have to be used first by such subsidiaries to
fulfill their debt service requirements. See "--Holding Company Structure;
Structural Subordination."
RISK ASSOCIATED WITH IMPLEMENTATION OF GROWTH STRATEGY. Since its
inception, the Company's growth has been dependent upon successful
implementation of its business plan, including the acquisition of providers of
various data and telephony services. The expansion and development of the
Company's operations (including the acquisition of additional businesses) will
depend on, among other things, the Company's ability to assess markets,
identify, finance and complete suitable acquisitions, obtain any required
government authorizations, franchises and permits, and develop and sell new
products and services, all in a timely manner, at reasonable costs and on
satisfactory terms and conditions. The failure to quickly integrate operations
of newly acquired businesses with the Company's business and to effectively
manage the Company's anticipated rapid growth may adversely impact operating
results. The Company believes its ability to offer, market and sell these
products and services will be important to the Company's ability to meet its
long term strategic growth objectives, but that this ability is dependent on the
Company's ability to obtain the needed capital, continued favorable regulatory
and legislative environments and the acceptance of such products and services by
the Company's customers. No assurance can be given that the Company will be able
to effectively manage all aspects of the Company's expected growth.
The Company is experiencing a period of rapid expansion which management
expects will continue for the foreseeable future. This growth has increased the
operating complexity of the Company as well as the level of responsibility for
both existing and new management personnel. The Company's ability to manage its
expansion effectively will require it to continue to implement and improve its
operational and financial systems and to expand, train and manage its employee
base. The Company's inability to effectively manage its expansion could have a
material adverse effect on its business.
DEPENDENCE UPON NETWORK INFRASTRUCTURE AND PRODUCTS AND SERVICES OF
OTHERS. The Company's success in marketing its services requires that the
Company provide superior reliability, capacity and service. Although the Company
can exercise direct control of the customer care and support it provides, many
of the services and products offered are provided by others. Such services and
products are subject to physical damage, power loss, capacity limitations,
software defects, breaches of security (by computer virus, break-ins or
otherwise) and other factors, certain of which have caused, and will continue to
cause, interruptions in service or reduced capacity for the Company's customers.
Such problems, although not the result of failures by the Company, can result in
dissatisfaction among its customers with the products and services provided by
the Company.
In addition, the Company's initial ability to provide complete
telecommunications services to its customers will be dependent to a large extent
upon the availability of unbundled telecommunications services from others on
terms and conditions that are acceptable to the Company and its customers. There
can be no assurance that government regulations will continue to mandate the
availability of some or all of such services or that the quality or terms on
which such services are available will be acceptable to the Company or its
customers.
OBSOLESCENCE AND REMARKETING; RAPID TECHNOLOGICAL CHANGES. The Company's
ENS strategy includes purchasing customer premise equipment, including PBXs,
hardware and other data and telephony equipment, from the customer and from
third party suppliers for the benefit of the Company's customers. While some of
the equipment purchased from the Company's customers may be leased back to the
customer, much of the equipment will likely be replaced by more technologically
advanced equipment. As a result, the Company may own, or assume lease
obligations related to, equipment which may no longer be
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the most advanced technological equipment available. In order to recoup costs
and maintain the Company's margins for ENS, the Company will need to remarket
this equipment. The Company believes that it can remarket the equipment to (i)
other customers of the Company not requesting the most technologically advanced
equipment, (ii) the Company's leasing vendors, which have established
remarketing channels and (iii) third parties through remarketing channels which
the Company expects to develop. However, the Company can give no assurance that
it will be able to successfully remarket obsolete or technologically less
advanced equipment, and failure to do so could have a material and adverse
effect on the financial condition of the Company.
LIMITATIONS ON REPURCHASE UPON A CHANGE OF CONTROL. In the event of a
Change of Control (as defined), each holder of the Notes will have the right, at
such holder's option, to require the Company to repurchase all or a portion of
such holder's Notes at a purchase price equal to 101% of the principal amount
thereof plus accrued and unpaid interest to the date of purchase. The ability of
the Company to repurchase the Notes upon a Change of Control will be dependent
on the availability of sufficient funds and compliance with applicable
securities laws. A Change of Control may cause an acceleration of other
indebtedness, if any, of the Company, in which case such indebtedness may be
required to be repaid in full before redemption or repurchase of the Notes.
Accordingly, there can be no assurance that the Company will be able to
repurchase the Notes upon the occurrence of such events. The requirement that
the Company offer to repurchase the Notes would not necessarily afford holders
of the Notes protection in the event of a highly leveraged reorganization,
merger or similar transaction involving the Company. See "Description of the
Notes--Change of Control."
DEPENDENCE ON KEY PERSONNEL. The Company's business is managed by a small
number of key management and operating personnel, including without limitation
John R. Evans, Keith V. Burge and Philip G. Allen, the loss of whom could have a
material adverse impact on the Company's business. The Company believes that its
future success also will depend in large part on its continued ability to
attract and retain highly skilled and qualified personnel in its sales and
service areas as well as in its executive and planning functions.
IMPACT OF THE YEAR 2000 ISSUE. The year 2000 issue is the result of
computer programs having been written using two digits rather than four to
define the applicable year, resulting in date-sensitive software having the
potential to recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities. The Company is in the process of assessing its systems and the
systems of third parties with whom the Company does business. If the Company's
systems or the systems of other companies on whose services the Company depends
or with whom the Company's systems interface are not year 2000 ready when they
need to be, there could be a material adverse effect on the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
CONTROL BY PRINCIPAL SHAREHOLDERS. The officers and directors of the
Company beneficially own approximately 27.2% of the outstanding shares of the
Common Stock. The three founding shareholders, Messrs. Evans, Burge and Allen,
beneficially own 6,370,703 of the outstanding shares of the Common Stock
(approximately 22.9% of outstanding shares of Common Stock), and are parties to
a voting agreement pursuant to which they have agreed, along with their
respective spouses who are also beneficial owners of shares of Common Stock, to
vote their shares of Common Stock as a group. Accordingly, the Company's
officers and directors are likely to continue to exercise control or substantial
influence over the Company's affairs, business and election of members of the
Company's Board of Directors. See "Principal Shareholders."
BANKRUPTCY RISKS RELATED TO COLLATERAL ACCOUNT. The right of the Trustee
under the Indenture to foreclose upon and sell the assets in the Collateral
Account upon the occurrence of an Event of Default
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with respect to the Notes is likely to be significantly impaired by applicable
bankruptcy law if a bankruptcy or reorganization case were to be commenced by or
against the Company. Under applicable bankruptcy law, secured creditors such as
the holders of the Notes are prohibited from foreclosing upon or disposing of a
debtor's property without prior bankruptcy court approval. See "Description of
the Notes--Disbursement of Funds; Collateral Account."
ABSENCE OF A PUBLIC MARKET. The New Notes are a new issue of securities.
The Company does not intend to apply for listing of the New Notes on any
securities exchange or on Nasdaq. Although the Initial Purchasers have informed
the Company that they currently intend to make a market in the New Notes, they
are not obligated to do so and any such market-making may be discontinued at any
time without notice. Accordingly, there can be no assurance as to the liquidity
or continuation of any market for the New Notes. If an active public market does
not develop, the market price and liquidity of the New Notes may be adversely
affected. In addition, the New Notes may trade at prices that may be higher or
lower than the respective initial offering price of the Old Notes depending upon
many factors, including prevailing debt interest rates, the Company's operating
results and the market for similar securities. Historically, the market for
securities such as the New Notes has been subject to disruptions that have
caused substantial volatility in the prices of similar securities. There can be
no assurance that the market for the New Notes would not be subject to similar
disruptions.
FRAUDULENT CONVEYANCE RISKS; PREFERENTIAL TRANSFER. Under applicable
provisions of the federal bankruptcy law or comparable provisions of state
fraudulent transfer law, if the Company, at the time of issuance of, or making
any payment in respect of, the Notes, (a)(i) was or was rendered insolvent
thereby, was engaged or about to engage in a business or transaction for which
its assets constituted unreasonably small capital, or intended to incur, or
believed that it would incur, debts beyond its ability to pay such debts as they
matured, and (ii) received less than reasonably equivalent value or fair
consideration for such issuance, or (b) issued the Notes or made any payment
thereunder with intent to hinder, defraud or delay any of its creditors, the
obligations of the Company under some or all of the Notes could be voided or
held to be unenforceable by a court, the obligations of the Company under the
Notes could be subordinated to claims of other creditors or the holders would be
required to return payments already received. In particular, if the Company were
to cause a subsidiary to pay a dividend in order to enable the Company to make
payments in respect of the Notes, and such transfer were deemed a fraudulent
transfer, the holders could be required to return the payment. In any of the
foregoing cases, there could be no assurance that the holders would ultimately
recover the amounts owing under the Notes.
The measure of insolvency for purposes of the foregoing will vary depending
upon the law applied in any such case. Generally, however, the Company or its
subsidiaries would be considered insolvent if the sum of its or their debts,
including contingent liabilities, was greater than all of its assets at a fair
valuation, if it had unreasonably small capital to conduct its business, or if
the present fair salable value of its assets were less than the amount that
would be required to pay the probable liability on its existing debts, including
contingent liabilities, as they become absolute and matured. The Company
believes that it was not insolvent at the time of or as a result of the Initial
Offering, that it will not be insolvent at the time of or as a result of the
Exchange Offer and that it has not engaged in a business or transaction for
which its remaining assets would constitute unreasonably small capital. The
Company did not incur, does not intend to incur and believes that it will not
incur debts beyond its ability to pay as they mature. There can be no assurance,
however, that a court passing on such questions would agree with the Company's
analysis.
COMPETITION. The data networking, data transport and telephony industries
are highly competitive, and the 1996 Act (as defined) has opened the local
telephone market to competition in all states. Although the Company does not
believe that a significant number of other companies are providing single-source
solutions for the data networking, data transport, and telephony requirements of
the Company's target customers, numerous competitors are attempting to fulfill
one or more of such requirements. Most of the Company's competitors have
financial and other resources greater than those of the Company. Many of
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these competitors also have long-standing relationships with their customers and
greater name recognition than the Company. With respect to many individual
products or services it offers, the Company does not necessarily enjoy any
particular competitive advantage over other industry participants. The degree of
competition in its target markets may prevent the Company from fully realizing
its proposed business plans. In addition, the current trend toward deregulation
of the provision of telecommunications services makes it more likely that the
Company will face more intense competition in the future.
The various individual product and service components of the Company's ENS
offering are subject to substantial competition. In addition to competition from
ILECs, including the RBOCs and GTE, the Company faces competition, or
prospective competition, from new entrants to all these individual product and
service markets. These new competitors include CLECs, long distance carriers
offering local telecommunications services, fixed wireless services, and
commercial mobile radio service providers offering wireless local loop services.
In addition, the Company faces competition, and prospective competition, in the
provision of data networking and customer premises equipment (as defined). Some
of these competitors or potential competitors are or will be able to bundle the
product and service components offered by the Company, including integrating
data networking, data transport, and telephony. In particular, US West and other
RBOCs have filed petitions seeking to have the FCC deregulate immediately the
provision of packet-switched transport services, including frame relay and ATM.
See "Regulatory Environment." In addition, a continuing trend toward business
combinations and alliances in the telecommunications industry may create
significant new competitors to the Company with resources far greater than those
of the Company. See "Business--Competition."
In particular, any telecommunications carrier that offers both some local
and long-distance telecommunications services, including any RBOC permitted to
offer in-region long-distance services, will be able to offer, as a
single-source provider, both local exchange and long-distance service to
customers. Indeed, some of the companies described herein under the heading
"Business--Competition," offer facilities-based and/or resale local and
long-distance data and voice transmission services. However, to the Company's
knowledge, these companies are not offering the total one-source solution of
Enterprise Network Services, including data networking. At the current time, no
RBOC is permitted to offer in-region long-distance service. Under Section 271 of
the 1996 Act, an RBOC is prohibited from providing long-distance service that
originates in one of its in-region states until the RBOC has satisfied certain
statutory conditions in that state and has received the approval of the FCC. The
FCC has denied all such applications to date. The Company anticipates that a
number of RBOCs will file additional applications for in-region long distance
authority in 1998, and it is possible that one or more may be granted.
REGULATION. The Company's data networking services are not currently
subject to federal or state regulation, but may be subject to certain local
governmental license fees. The Company's local and long-distance telephony
services, and to a lesser extent its data transport services, are subject to
federal, state, and, to some extent, local regulation. The public telephone
services provided by the Company, while expected to become a diminishing part of
the business of the Company, are also subject to federal, state, and, to some
extent, local regulation.
The FCC exercises jurisdiction over all telecommunications common carriers,
including the Company, to the extent that they provide interstate or
international communications. Each state regulatory commission retains
jurisdiction over the same carriers to the extent they provide intrastate
communications in the state. Local governments sometimes impose franchise or
licensing requirements on telecommunications carriers and regulate construction
activities involving public right-of-way. Changes to the regulations imposed by
any of these regulators could affect the Company.
While the Company believes that the current trend toward relaxed regulatory
oversight and competition will benefit the Company, the Company cannot predict
the manner in which all aspects of the 1996 Act will be implemented by the FCC
and by state regulators or the impact that such regulation will have on its
business. The FCC has issued regulations (1) limiting the ability of states to
enact prohibitions
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on resale of ILEC service to customers to whom an ILEC does not offer that
service at retail; (2) establishing interim default wholesale rates for local
telecommunications services; and (3) setting standards governing the terms and
prices of interconnection and access to unbundled ILEC network elements. Many of
these regulations, including the FCC's promulgation of pricing standards, have
been vacated by reviewing courts and these and other regulations are currently
the subject of judicial appeals and FCC petitions for reconsideration. The
Company's business plan depends upon LECs providing interconnection and
unbundled network elements and/or resale of local telecommunications services.
The Company cannot predict the outcome of various rulemakings being conducted by
the FCC, or of the judicial appeals therefrom, establishing the terms upon which
ILECs must offer resale of wholesale local telecommunications services, resale
of network elements, and interconnection. The outcome of these rulemakings,
judicial appeals, and subsequent FCC action may make it more difficult or
expensive for the Company or competitors to use and combine network elements, or
to resell ILEC services. Such developments could have a material adverse effect
on the Company. The Company also cannot predict whether other regulatory
decisions and changes will enhance or lessen the competitiveness of the Company
relative to other providers of the products and services offered by the Company.
In particular, the Company cannot predict when federal and state regulators will
allow RBOCs to offer in-region long-distance services. See "Business--Regulatory
Environment." In addition, the Company cannot predict what other costs or
requirements might be imposed on the Company by state or local governmental
authorities and whether or not any additional costs or requirements will have a
material adverse effect on the Company.
POTENTIAL LIABILITY FOR INFORMATION DISSEMINATED THROUGH NETWORK. The law
relating to the liability of online service providers, private network operators
and Internet service providers for information carried on or disseminated
through the facilities of their networks is currently unsettled. The imposition
upon the Company of potential liability for materials carried on or disseminated
through its systems could require the Company to implement measures to reduce
its exposure to such liability, which may require the expenditure of substantial
resources or the discontinuation of certain product for service offerings.
Further, the costs incurred in defending against any such claims and the
potential adverse outcomes of such claims could have a material adverse effect
on the Company's financial condition and results of operations.
CLASSIFICATION AS AN INVESTMENT COMPANY. Pending deployment of the proceeds
of the Offering in the Company's business, the assets it will have invested in
interest bearing obligations will exceed the assets it has invested in its
operating activities. While the Company believes it should not be classified as
an investment company under the Investment Company Act of 1940, as amended, and
should be able to structure its activities to avoid such a classification, if it
were to be so classified, it would be subject to significant regulation and
restrictions on its activities which could have a material adverse effect on the
Company.
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THE EXCHANGE OFFER
Although the discussion below summarizes all material provisions of the
Notes Registration Rights Agreement, it does not purport to be complete and
reference is made to the provisions of the Notes Registration Rights Agreement,
which has been filed as an exhibit to the Registration Statement of which this
Prospectus constitutes a part, and a copy of which is available upon request to
the Company.
PURPOSE AND EFFECT
The Old Notes were sold by the Company to the Initial Purchasers on April 2,
1998. The Initial Purchasers subsequently resold the Old Notes in reliance on
Rule 144A under the Securities Act. The Company and the Initial Purchasers
entered into the Notes Registration Rights Agreement, pursuant to which the
Company agreed, with respect to the Old Notes and subject to the Company's
determination that the Exchange Offer is permitted under applicable law, to (i)
cause to be filed, on or prior to July 1, 1998, a registration statement with
the Commission under the Securities Act concerning the Exchange Offer, and, (ii)
use its best efforts (a) to cause such registration statement to be declared
effective by the Commission on or prior to August 30, 1998, and (b) to
consummate the Exchange Offer on or prior to September 29, 1998. The deadlines
referred to in clauses (a) and (b) in the prior sentence were not satisfied
because of the delay resulting from the need to incorporate audited financial
information relating to Tie (which was not readily available) into the
Registration Statement covering the New Notes. As a result, the Company is
required to pay additional interest to the holders of Notes as required by the
Indenture. See "Description of the Notes--Maturity, Interest and Principal." The
Company will keep the Exchange Offer open for a period of not less than 20 days
(or longer if required by applicable law) after the date the notice of the
Exchange Offer is mailed to the holders of the Old Notes. This Exchange Offer is
intended to satisfy the Company's exchange offer obligations under the
Registration Rights Agreement.
CONSEQUENCES OF FAILURE TO EXCHANGE OLD NOTES
Following the expiration of the Exchange Offer, holders of Old Notes not
tendered, or not properly tendered, will not have any further registration
rights and such Old Notes will continue to be subject to the existing
restrictions on transfer thereof. Accordingly, the liquidity of the market for a
holder's Old Notes could be adversely affected upon expiration of the Exchange
Offer.
TERMS OF THE EXCHANGE OFFER
The Company hereby offers, upon the terms and subject to the conditions set
forth herein and in the accompanying Letter of Transmittal, to exchange up to
$160 million aggregate principal amount of New Notes for up to $160 million
aggregate principal amount of the outstanding Old Notes. The Company will accept
for exchange any and all Old Notes that are validly tendered on or prior to 5:00
p.m., New York City time, on the Expiration Date. The Company will issue $1,000
principal amount of New Notes in exchange of each $1,000 principal amount of
outstanding Old Notes accepted in the Exchange Offer. Holders may tender some or
all of their Old Notes pursuant to the Exchange Offer. However, Old Notes may be
tendered only in integral multiples of $1,000. Tenders of the Old Notes may be
withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration
Date. The Exchange Offer is not conditioned upon any minimum principal amount of
Old Notes being tendered for exchange. However, the Exchange Offer is subject to
the terms and provisions of the Notes Registration Rights Agreement. See
"Conditions of the Exchange Offer."
The Exchange Offer does not apply to the warrants issued in the Initial
Offering.
As of the date of this Prospectus, $160 million in aggregate principal
amount of the Old Notes is outstanding, the maximum amount authorized by the
Indenture for all Notes. As of June 30, 1998, there were 19 registered holders
of the Old Notes. Only a holder of the Old Notes (or such holder's legal
representative or attorney-in-fact) may participate in the Exchange Offer. There
will be no fixed record
24
<PAGE>
date for determining holders of the Old Notes entitled to participate in the
Exchange Offer. The Company believes that, as of the date of this Prospectus, no
holder of Old Notes is an affiliate (as defined in Rule 405 under the Securities
Act) of the Company.
The Company shall be deemed to have accepted validly tendered Old Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
of Old Notes and for the purposes of receiving the New Notes from the Company.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, certificates for any such unaccepted Old Notes will be returned,
without expense, to the tendering holder thereof as promptly as practicable
after the Expiration Date.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The Expiration Date shall be , 1998 at 5:00 p.m., New York City
time, unless the Company, in its sole discretion, extends the Exchange Offer, in
which case, the Expiration Date shall be the latest date and time to which the
Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will notify the Exchange
Agent of any extension by oral or written notice and will make a public
announcement thereof, each prior to 9:00 a.m., New York City time, on the next
business day after the previously scheduled Expiration Date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Old Notes, (ii) to extend the Exchange Offer, in which event the
term "Expiration Date" shall mean the latest time and date to which the Exchange
Offer is extended, and (iii) to amend the terms of the Exchange Offer in any
manner. If the Exchange Offer is amended in a manner determined by the Company
to constitute a material change, the Company will promptly disclose such
amendments by means of a prospectus supplement that will be distributed to the
registered holders of the Old Notes. Certain modifications of the Exchange
Offer, including but not limited to extension of the period during which the
Exchange Offer is open, may require that at least five business days remain in
the Exchange Offer.
CONDITIONS OF THE EXCHANGE OFFER
The Exchange Offer shall not be subject to any conditions, other than (i)
that the Exchange Offer, or the making of any exchange by a holder of Old Notes,
does not violate applicable law or any applicable interpretation of the staff of
the Commission and (ii) the tendering of Old Notes in accordance with the
Exchange Offer.
ACCRUED INTEREST
The New Notes will bear interest at a rate of 13% per annum from October 1,
1998. Holders whose Old Notes are accepted for exchange will forego accrued but
unpaid interest on such Old Notes for the period from October 1, 1998, to the
date of exchange, but will receive such interest under the New Notes. See
"Description of the Notes--Maturity, Interest and Principal." Pursuant to the
terms of the Old Notes, additional interest will accrue at a rate of 0.5% per
annum from August 31, 1998, until the consummation of the Exchange Offer because
the Registration Statement relating to the Exchange Offer was not declared
effective by August 30, 1998.
PROCEDURES FOR TENDERING OLD NOTES
The tender of a holder's Old Notes as set forth below and the acceptance
thereof by the Company will constitute a binding agreement between the tendering
holder and the Company upon the terms and subject to the conditions set forth in
this Prospectus and in the accompanying Letter of Transmittal. Except
25
<PAGE>
as set forth below, a holder who wishes to tender Old Notes for exchange
pursuant to the Exchange Offer must transmit such Old Notes, together with a
properly completed and duly executed Letter of Transmittal, including all other
documents required by such Letter of Transmittal, to the Exchange Agent at the
address set forth on the back cover page of this Prospectus prior to 5:00 p.m.,
New York City time, on the Expiration Date. THE METHOD OF DELIVERY OF OLD NOTES,
LETTERS OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND
RISK OF THE HOLDER. IF SUCH DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT
REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED, BE USED.
INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT THE HOLDER USE AN OVERNIGHT
OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO
ENSURE TIMELY DELIVERY.
Any financial institution that is a participant in DTC's Book-Entry Transfer
Facility system may make book-entry delivery of the Old Notes by causing DTC to
transfer such Old Notes into the Exchange Agent's account in accordance with
DTC's procedures for such transfer. In connection with a book-entry transfer, a
Letter of Transmittal need not be transmitted to the Exchange Agent, provided
that the book-entry transfer procedure is made in accordance with DTC's ATOP (as
defined below) procedures for transfer and such procedures are complied with
prior to 5:00 p.m., New York City time, on the Expiration Date.
DTC's Automated Tender Offer Program ("ATOP") is the only method of
processing exchange offers through DTC. To accept the Exchange Offer through
ATOP, participants in DTC must send electronic instructions to DTC through DTC's
communication system, prior to 5:00 p.m., New York City time, on the Expiration
Date, in place of sending a signed, hard copy Letter of Transmittal. DTC is
obligated to communicate those electronic instructions to the Exchange Agent by
an "Agent's Message." To tender Old Notes through ATOP, the electronic
instructions sent to DTC and transmitted by DTC to the Exchange Agent must
contain the participant's acknowledgment of its receipt of and agreement to be
bound by the Letter of Transmittal for such Old Notes.
Each signature on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed unless the Old Notes surrendered for exchange
pursuant hereto are tendered (i) by a registered holder of the Old Notes who has
not completed either the box entitled "Special Exchange Instructions" or the box
entitled "Special Delivery Instructions" in the Letter of Transmittal, or (ii)
by an Eligible Institution (as defined below). In the event that a signature on
a Letter of Transmittal or a notice of withdrawal, as the case may be, is
required to be guaranteed, such guarantee must be by a firm which is a member of
a registered national securities exchange or the National Association of
Securities Dealers, Inc., a commercial bank or trust company having an office or
correspondent in the United States or otherwise be an "eligible guarantor
institution" within the meaning of Rule 17Ad-15 under the Exchange Act
(collectively, "Eligible Institutions"). If the Letter of Transmittal is signed
by a person other than the registered holder of the Old Notes, the Old Notes
surrendered for exchange must either (i) be endorsed by the registered holder,
with the signature thereon guaranteed by an Eligible Institution or (ii) be
accompanied by a bond power, in satisfactory form as determined by the Company
in its sole discretion, duly executed by the registered holder, with the
signature thereon guaranteed by an Eligible Institution. The term "registered
holder" as used herein with respect to the Old Notes means any person in whose
name the Old Notes are registered on the books of the Registrar.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of Old Notes tendered for exchange will be
determined by the Company in its sole discretion, which determination shall be
final and binding. The Company reserves the absolute right to reject any and all
Old Notes not properly tendered and to reject any Old Notes the Company's
acceptance of which might, in the judgment of the Company or its counsel, be
unlawful. The Company also reserves the absolute right to waive any defects or
irregularities or conditions of the Exchange Offer as to particular Old Notes
either before or after the Expiration Date (including the right to waive the
ineligibility of any holder who seeks to
26
<PAGE>
tender Old Notes in the Exchange Offer). The interpretation of the terms and
conditions of the Exchange Offer (including the Letter of Transmittal and the
instructions thereto) by the Company shall be final and binding on all parties.
Unless waived, any defects or irregularities in connection with tenders of Old
Notes for exchange must be cured within such period of time as the Company shall
determine. The Company will use reasonable efforts to give notification of
defects or irregularities with respect to tenders of Old Notes for exchange but
shall not incur any liability for failure to give such notification. Tenders of
the Old Notes will not be deemed to have been made until such irregularities
have been cured or waived.
If any Letter of Transmittal, endorsement, bond power, power of attorney or
any other document required by the Letter of Transmittal is signed by a trustee,
executor, corporation or other person acting in a fiduciary or representative
capacity, such person should so indicate when signing, and, unless waived by the
Company, proper evidence satisfactory to the Company, in its sole discretion, of
such person's authority to so act must be submitted.
Any beneficial owner of the Old Notes (a "Beneficial Owner") whose Old Notes
are registered in the name of a broker, dealer, commercial bank, trust company
or other nominee and who wishes to tender Old Notes in the Exchange Offer should
contact such registered holder promptly and instruct such registered holder to
tender on such Beneficial Owner's behalf. If such Beneficial Owner wishes to
tender directly, such Beneficial Owner must, prior to completing and executing
the Letter of Transmittal and tendering Old Notes, make appropriate arrangements
to register ownership of the Old Notes in such Beneficial Owner's name.
Beneficial Owners should be aware that the transfer of registered ownership may
take considerable time.
By tendering, each registered holder will represent to the Company that,
among other things, (i) the New Notes to be acquired in connection with the
Exchange Offer by the holder and each Beneficial Owner of the Old Notes are
being acquired by the holder and each Beneficial Owner in the ordinary course of
business of the holder and each Beneficial Owner, (ii) the holder and each
Beneficial Owner are not participating, do not intend to participate, and have
no arrangement or understanding with any person to participate, in a
distribution of the New Notes, (iii) the holder and each Beneficial Owner
acknowledge and agree that any person participating in the Exchange Offer for
the purpose of distributing the New Notes must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with a
secondary resale transaction of the New Notes acquired by such person and cannot
rely on the position of the staff of the Commission set forth in no-action
letters that are discussed herein under "Resales of the New Notes," (iv) that if
the holder is a broker-dealer that acquired Old Notes as a result of
market-making or other trading activities, it will deliver a prospectus in
connection with any resale of New Notes acquired in the Exchange Offer, (v) the
holder and each Beneficial Owner understand that a secondary resale transaction
described in clause (iii) above should be covered by an effective registration
statement containing the selling security holder information required by item
507 of Regulation S-K of the Commission, and (vi) neither the holder nor any
Beneficial Owner is an "affiliate," as defined under Rule 405 of the Securities
Act, of the Company except as otherwise disclosed to the Company in writing. In
connection with a book-entry transfer, each participant will confirm that it
makes the representations and warranties contained in the Letter of Transmittal.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available or (ii) who cannot deliver their Old Notes or any other
documents required by the Letter of Transmittal to the Exchange Agent prior to
the Expiration Date (or complete the procedure for book-entry transfer on a
timely basis), may tender their Old Notes according to the guaranteed delivery
procedures set forth in the Letter of Transmittal. Pursuant to such procedures,
(i) such tender must be made by or through an Eligible Institution and a Notice
of Guaranteed Delivery (as defined in the Letter of Transmittal) must be signed
by such Holder, (ii) on or prior to the Expiration Date, the Exchange Agent must
have received from the Holder and the Eligible Institution a properly completed
and duly executed Notice of Guaranteed Delivery
27
<PAGE>
(by facsimile transmission, mail or hand delivery) setting forth the name and
address of the Holder, the certificate number or numbers of the tendered Old
Notes, and the principal amount of tendered Old Notes, stating that the tender
is being made thereby and guaranteeing that, within five New York Stock Exchange
trading days after the date of delivery of the Notice of Guaranteed Delivery,
the tendered Old Notes, a duly executed Letter of Transmittal and any other
required documents will be deposited by the Eligible Institution with the
Exchange Agent; and (iii) such properly completed and executed documents
required by the Letter of Transmittal and the tendered Old Notes in proper form
for transfer (or confirmation of a book-entry transfer of such Old Notes into
the Exchange Agent's account at DTC) must be received by the Exchange Agent
within five New York Stock Exchange trading days after the Expiration Date. Any
Holder who wishes to tender Old Notes pursuant to the guaranteed delivery
procedures described above must ensure that the Exchange Agent receives the
Notice of Guaranteed Delivery and Letter of Transmittal relating to such Old
Notes prior to 5:00 p.m., New York City time, on the Expiration Date. DTC
participants may also submit the Notice of Guaranteed Delivery through ATOP.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Upon satisfaction or waiver of all the conditions to the Exchange Offer, the
Company will accept any and all Old Notes that are properly tendered in the
Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration Date.
The New Notes issued pursuant to the Exchange Offer will be delivered promptly
after acceptance of the Old Notes. For purposes of the Exchange Offer, the
Company shall be deemed to have accepted validly tendered Old Notes, when, as,
and if the Company has given oral or written notice thereof to the Exchange
Agent.
In all cases, issuances of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of such Old Notes, a properly completed and duly executed
Letter of Transmittal and all other required documents (or of confirmation of a
book-entry transfer of such Old Notes into the Exchange Agent's account at DTC);
provided, however, that the Company reserves the absolute right to waive any
defects or irregularities in the tender or conditions of the Exchange Offer. If
any tendered Old Notes are not accepted for any reason, such unaccepted Old
Notes will be returned without expense to the tendering Holder thereof as
promptly as practicable after the expiration or termination of the Exchange
Offer.
WITHDRAWAL RIGHTS
Tenders of the Old Notes may be withdrawn by delivery of a written notice
(or for DTC participants, transmission of notice through ATOP) to the Exchange
Agent, at its address set forth on the back cover page of this Prospectus, at
any time prior to 5:00 p.m., New York City time, on the Expiration Date. Any
such notice of withdrawal must (i) specify the name of the person having
deposited the Old Notes to be withdrawn (the "Depositor"), (ii) identify the Old
Notes to be withdrawn including the certificate number or numbers, if any, and
principal amount of such Old Notes, as applicable), (iii) be signed by the
Holder in the same manner as the original signature on the Letter of Transmittal
by which such Old Notes were tendered (including any required signature
guarantees) or be accompanied by a bond power in the name of the person
withdrawing the tender, in satisfactory form as determined by the Company in its
sole discretion, duly executed by the registered holder, with the signature
thereon guaranteed by an Eligible Institution together with the other documents
required upon transfer by the Indenture, and (iv) specify the name in which such
Old Notes are to be re-registered, if different from the Depositor, pursuant to
such documents of transfer. Any questions as to the validity, form and
eligibility (including time of receipt) of such notices will be determined by
the Company, in its sole discretion. The Old Notes so withdrawn will be deemed
not to have been validly tendered for exchange for purposes of the Exchange
Offer. Any Old Notes which have been tendered for exchange but which are
withdrawn will be returned to the Holder thereof without cost to such Holder as
soon as practicable after withdrawal. Properly withdrawn Old Notes
28
<PAGE>
may be retendered by following one of the procedures described under "The
Exchange Offer--Procedures for Tendering Old Notes" at any time on or prior to
the Expiration Date.
THE EXCHANGE AGENT; ASSISTANCE
Norwest Bank Colorado N.A. is the Exchange Agent. All tendered Old Notes,
executed Letters of Transmittal and other related documents should be directed
to the Exchange Agent. Questions and requests for assistance and requests for
additional copies of the Prospectus, the Letter of Transmittal and other related
documents should be addressed to the Exchange Agent as follows:
BY REGISTERED MAIL OR CERTIFIED MAIL:
Norwest Banks
Corporate Trust Section
P.O. Box 1517
Minneapolis, MN 55480-1517
BY OVERNIGHT COURIER:
Norwest Banks
Corporate Trust Section
NorthStar East Building
Sixth and Marquette Avenues
Minneapolis, MN 55479-0113
BY FACSIMILE (ELIGIBLE INSTITUTIONS ONLY):
(612) 667-4972
TO CONFIRM BY TELEPHONE OR FOR INFORMATION CALL:
AMY E. BUCK
VICE PRESIDENT
(303) 863-6477
FEES AND EXPENSES
All expenses incident to the Company's consummation of the Exchange Offer
and compliance with the Registration Rights Agreement will be borne by the
Company, including, without limitation: (i) all applicable Securities and
Exchange Commission, stock exchange or National Association of Securities
Dealers, Inc. ("NASD") registration and filing fees; (ii) all fees and expenses
incurred in connection with compliance with state securities or blue sky laws
(including reasonable fees and disbursements of one counsel for holders that are
Initial Purchasers in connection with blue sky qualifications of any of the New
Notes) and compliance with the rules of the NASD; (iii) all applicable expenses
incurred by the Company preparing or assisting in preparing, word processing,
printing and distributing any registration statement, any prospectus and any
amendments or supplements thereto, and in preparing or assisting in preparing
any other documents relating to the performance of and compliance with the
Registration Rights Agreement; (iv) all rating agency fees, if any; and (v) the
fees and disbursements of counsel for the Company. The total of all such fees
and expenses is estimated to be approximately $0.8 million.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers or dealers of others
soliciting acceptance of the Exchange Offer. The
29
<PAGE>
Company, however, will pay the Exchange Agent reasonable and customary fees for
its services and will reimburse it for its reasonable out-of-pocket expenses in
connection therewith.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Old Notes pursuant to the Exchange Offer. If, however, a transfer tax is
imposed for any reason other than the exchange of Old Notes pursuant to the
Exchange Offer, then the amount of any such transfer taxes (whether imposed on
the registered holder or any other persons) will be payable by the tendering
holder. If satisfactory evidence of payment of such taxes or exemption is not
submitted with the Letter of Transmittal, the amount of such transfer taxes will
be billed directly to such tendering holder.
ACCOUNTING TREATMENT
The New Notes will be recorded at the same carrying value as the Old Notes,
as reflected in the Company's accounting records on the date of the exchange.
Accordingly, no gain or loss will be recognized by the Company for accounting
purposes. The expenses of the Exchange Offer will be amortized over the term of
the New Notes.
RESALES OF THE NEW NOTES
Based on the position of the staff of the Commission as set forth in certain
interpretive letters issued to third parties in other transactions, the Company
believes that the New Notes issued pursuant to the Exchange Offer to any holder
of Old Notes in exchange for Old Notes may be offered for resale, resold and
otherwise transferred by such holder (other than (i) a broker-dealer who
purchased Old Notes directly from the Company for resale pursuant to Rule 144A
under the Securities Act or any other available exemption under the Securities
Act, or (ii) a person that is an affiliate of the Company within the meaning of
Rule 405 under the Securities Act) without further compliance with the
registration and prospectus delivery provisions of the Securities Act, provided
that such holder is acquiring the New Notes in the ordinary course of business
and is not participating, and has no arrangement or understanding with any
person to participate, in the distribution of the New Notes. However, the
Company has not sought its own interpretive letter and there can be no assurance
that the Commission would make a similar determination with respect to the
Exchange Offer. The Company and holders of Old Notes are not entitled to rely on
interpretive advice provided by the staff of other persons, which advice was
based on the facts and conditions represented in such letters. However, the
Exchange Offer is being conducted in a manner intended to be consistent with the
facts and conditions represented in such letters. If any holder acquires New
Notes in the Exchange Offer for the purpose of distributing or participating in
a distribution of the New Notes, such holder cannot rely on the position of the
staff of the Commission enunciated in Morgan Stanley & Co. Incorporated
(available June 5, 1991) and Exxon Capital Holdings Corporation (available May
13, 1989), or interpreted in the Commission's letter to Shearman and Sterling
(available July 2, 1993), or similar no-action or interpretive letters and must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with a secondary resale transaction, unless an
exemption from registration is otherwise available. Each broker-dealer that
receives New Notes for its own account in exchange for Old Notes, where such Old
Notes were acquired by such broker-dealer as a result of market-making or other
trading activities, must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. See "Plan of Distribution."
It is expected that the New Notes will be freely transferable by the holders
thereof, subject to the limitations described in the immediately preceding
paragraph. Sales of New Notes acquired in the Exchange Offer by holders who are
"affiliates" of the Company within the meaning of the Securities Act will be
subject to certain limitations on resale under Rule 144 of the Securities Act
(if applicable). Such persons will only be entitled to sell New Notes in
compliance with the volume limitations set forth in Rule 144, and sales of New
Notes by affiliates will be subject to certain Rule 144 requirements as to the
manner of sale, notice and the availability of current public information
regarding the Company. The foregoing is a summary only of Rule 144 as it may
apply to affiliates of the Company. Any such persons must consult their own
legal counsel for advice as to any restrictions that might apply to the resale
of their New Notes.
30
<PAGE>
USE OF PROCEEDS
There will be no cash proceeds payable to the Company from the issuance of
the New Notes pursuant to the Exchange Offer. The net proceeds to the Company
from the initial sale of the Units were approximately $154.0 million, net of the
Initial Purchasers' discount and other offering costs incurred of approximately
$6.0 million. Approximately $56.8 million of such net proceeds were used to
purchase U.S. Government Securities, which are being held in a Collateral
Account for the benefit of the holders of the Notes and will be used to fund
when due the first six scheduled interest payments on the Notes. Approximately
$0.3 million of the net proceeds have been used for repayment of indebtedness.
In July, 1998, the Company utilized a significant portion of the net proceeds to
acquire substantially all of the assets and certain liabilities of Tie. The
purchase price consisted of approximately $40.0 million in cash and the
assumption of certain liabilities, which, with legal and professional and other
costs resulted in a total purchase price of approximately $51.4 million. The
Company also expects to incur substantial costs in integrating the two
businesses.
The balance of the remaining net proceeds from the sale of the Units has and
will continue to be used to fund the expenditures incurred in the continuing
development and deployment of the Company's services in its target markets,
including deployment of its ENS networks and E-POPs-TM-, continuing enhancement
of its CTISS System, strategic acquisitions, creating local customer care and
sales organizations and for general corporate purposes, including working
capital, and the funding of operating losses and debt service requirements. The
Company believes that these remaining net proceeds will be sufficient to fund
the Company's aggregate capital expenditures and working capital requirements,
including operating losses associated with its expansion into new markets, for
the next 9 to 15 months (depending on the extent to which the Company's
outstanding warrants expiring in July 1999 are exercised). The amounts actually
expended by the Company for these purposes will vary significantly depending
upon a number of factors, including future revenue growth, if any, capital
expenditures and the amount of cash generated by the Company's operations.
Additionally, if the Company determines it would be in its best interest, the
Company may modify the number, selection and timing of entry of its targeted
markets. Accordingly, the Company's management will retain broad discretion in
the allocation of the remaining net proceeds. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
31
<PAGE>
CAPITALIZATION
The following table sets forth the total capitalization of the Company as of
June 30, 1998. The information set forth below should be read in conjunction
with the Company's Consolidated Financial Statements and Notes thereto included
elsewhere in the Prospectus.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1998
--------------------
(DOLLARS IN
THOUSANDS)
<S> <C>
Cash and Short-term Investments............................................................. $ 85,714
--------
--------
Restricted Cash(1).......................................................................... 59,884
--------
--------
Long-term Debt:
Current Portion of Long-term Debt(2)...................................................... 2,930
Long-term Debt, net of Current Portion(2)................................................. 155,606
--------
Total Debt.................................................................................. 158,536
Shareholders' Equity:
Preferred Stock, no par value
1,000,000 shares authorized; no shares issued............................................. --
Common Stock, no par value
100,000,000 shares authorized; 27,473,507 shares issued(3)................................ 25,595
Warrants(4)................................................................................. 11,660
Treasury Stock(5)........................................................................... (502)
Deferred Compensation Obligation(5)......................................................... 502
Unrealized Gain (Loss) on Investments....................................................... 275
Unearned Compensation....................................................................... (177)
Accumulated Deficit......................................................................... (26,108)
--------
Total Shareholders' Equity.................................................................. 11,245
--------
Total Capitalization........................................................................ $ 169,781
--------
--------
</TABLE>
- ------------------------
(1) Approximately $56.8 million of this amount represents that portion of the
proceeds from the issuance of the Units deposited in the Collateral Account.
(2) Approximately $285,000 of proceeds of the sale of the Units was used to pay
a note payable.
(3) Does not include: (i) 5,199,500 shares of Common Stock issuable upon
exercise of outstanding stock options as of June 30, 1998, at exercise
prices between $1.00 per share and $5.50 per share; (ii) 8,661,064 shares of
Common Stock issuable upon exercise of outstanding warrants as of June 30,
1998 at exercise prices between $1.20 and $7.50 per share; or (iii)
1,728,000 shares of Common Stock issuable upon exercise of the Warrants
which were part of the Units.
(4) The value ascribed to the Warrants of $6.9 million results in additional
debt discount that will be amortized to interest expense using the effective
interest method over the period that the Notes are outstanding.
(5) Represents shares held in trust by the Company in connection with a deferred
compensation obligation of the Company. The shares are designated "treasury
stock" for accounting purposes.
32
<PAGE>
SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS)
The following summary financial data should be read in conjunction with the
Company's Consolidated Financial Statements and Notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
appearing elsewhere in the Prospectus. The selected financial data, except the
information as of June 30, 1998 and December 31, 1993 and for the six months
ended June 30, 1998 and 1997 and the year ended December 31, 1993, are derived
from the financial statements of the Company and its predecessor, which have
been audited by PricewaterhouseCoopers LLP, independent accountants. The Balance
Sheet and Results of Operations data as of December 31, 1993, and for the year
then ended have been derived from the unaudited financial statements of the
Company's predecessor. The data presented below as of June 30, 1998 and for the
six months ended June 30, 1998 and 1997 are derived from unaudited financial
statements of the Company included in the Registration Statement. Operating
results for the six months ended June 30, 1998 are not necessarily indicative of
results that may be expected for the full year. These unaudited financial
statements have been prepared on the same basis as the audited financial
statements and, in the opinion of management, contain all adjustments,
consisting of only normal recurring adjustments, necessary for a fair
presentation of the financial position and results of operations for these
periods.
<TABLE>
<CAPTION>
FOR THE PERIOD
JANUARY 1, 1996 FOR THE PERIOD
FOR THE YEAR FOR THE YEAR FOR THE YEAR THROUGH FROM INCEPTION
ENDED DECEMBER ENDED DECEMBER ENDED DECEMBER DECEMBER 16, THROUGH DECEMBER
31, 1993 31, 1994 31, 1995 1996 31, 1996
(PREDECESSOR) (PREDECESSOR) (PREDECESSOR) (PREDECESSOR) (SUCCESSOR)
--------------- --------------- --------------- ----------------- -----------------
(IN THOUSANDS, EXCEPT PER SHARE NUMBERS)
<S> <C> <C> <C> <C> <C>
OPERATING STATEMENT
DATA(3):
Revenues.......................... 476 988 1,434 1,496 98
Operating costs................... 292 729 964 1,018 79
Selling, general and
administrative.................. 202 477 405 554 552
Other operating expense(4)........ -- -- -- -- --
Depreciation and amortization..... 3 106 127 124 41
----- ------ ------ ------ ------
Total operating expenses........ 497 1,312 1,496 1,696 672
Interest income (expense) and
other........................... (1) (64) (17) (21) (1)
Restructuring..................... -- -- -- -- --
----- ------ ------ ------ ------
Net loss before income tax expense
and extraordinary item.......... (22) (388) (79) (221) (575)
Income tax expense................ -- -- -- -- --
Extraordinary Item................ (34) -- -- -- --
----- ------ ------ ------ ------
Net loss.......................... $ (56) $ (388) $ (79) $ (221) $ (575)
----- ------ ------ ------ ------
----- ------ ------ ------ ------
Net loss per share (basic)(5)..... $ (0.07)
------
------
Net loss per share (diluted)(5)... $ (0.07)
------
------
Weighted average shares
outstanding (basic)(5).......... 7,775
------
------
Weighted average shares
outstanding (diluted)(5)........ 7,775
------
------
<CAPTION>
FOR THE
FOR THE YEAR PRO FORMA FOR SIX MONTHS ENDED
ENDED THE YEAR ------------------------ PRO FORMA
DECEMBER 31, ENDED JUNE 30, JUNE 30 SIX MONTHS
1997 DECEMBER 31, 1997 1998 ENDED JUNE
(SUCCESSOR)(1) 1997(2) (SUCCESSOR) (SUCCESSOR) 30, 1998(2)
------------- -------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
OPERATING STATEMENT
DATA(3):
Revenues.......................... 10,210 105,584 2,618 14,505 55,888
Operating costs................... 7,368 76,727 1,737 10,570 42,546
Selling, general and
administrative.................. 10,983 44,650 3,161 13,772 27,528
Other operating expense(4)........ -- 893 -- -- 1,000
Depreciation and amortization..... 1,453 6,637 456 1,953 4,618
------------- -------------- ----------- ----------- -----------
Total operating expenses........ 19,804 128,907 5,354 26,295 75,692
Interest income (expense) and
other........................... (61) (23,323) 66 (4,489) (10,649)
Restructuring..................... -- -- -- -- (1,082)
------------- -------------- ----------- ----------- -----------
Net loss before income tax expense
and extraordinary item.......... (9,655) (47,158) (2,670) (16,279) (31,535)
Income tax expense................ -- (35) -- -- (18)
Extraordinary Item................ -- -- -- -- --
------------- -------------- ----------- ----------- -----------
Net loss.......................... $ (9,655) $ (47,193) $ (2,670) $ (16,279) $ (31,553)
------------- -------------- ----------- ----------- -----------
------------- -------------- ----------- ----------- -----------
Net loss per share (basic)(5)..... $ (0.46) $ (2.26) (0.15) (0.60) (1.16)
------------- -------------- ----------- ----------- -----------
------------- -------------- ----------- ----------- -----------
Net loss per share (diluted)(5)... $ (0.46) $ (2.26) (0.15) (0.60) (1.16)
------------- -------------- ----------- ----------- -----------
------------- -------------- ----------- ----------- -----------
Weighted average shares
outstanding (basic)(5).......... 20,922 20,922 18,263 27,131 27,131
------------- -------------- ----------- ----------- -----------
------------- -------------- ----------- ----------- -----------
Weighted average shares
outstanding (diluted)(5)........ 20,922 20,922 18,263 27,131 27,131
------------- -------------- ----------- ----------- -----------
------------- -------------- ----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER AS OF DECEMBER AS OF DECEMBER AS OF
31, 1993 31, 1994 31, 1995 DECEMBER 31, 1996
(PREDECESSOR) (PREDECESSOR) (PREDECESSOR) (SUCCESSOR)
--------------- --------------- --------------- -----------------
<S> <C> <C> <C> <C>
BALANCE SHEET:
Working capital.............................................. $ 246 $ 219 $ (10) 1,890
Property and equipment, net.................................. 315 414 553 1,923
Total assets................................................. 866 1,012 797 9,887
Total liabilities............................................ 91 529 580 1,902
Shareholders' equity......................................... 775 483 217 7,985
<CAPTION>
AS OF AS OF PRO FORMA AS
DECEMBER 31, 1997 JUNE 30, 1998 OF JUNE 30,
(SUCCESSOR) (SUCCESSOR) 1998(2)
----------------- ------------- -------------
<S> <C> <C> <C>
BALANCE SHEET:
Working capital.............................................. 5,334 95,696 61,100
Property and equipment, net.................................. 4,838 12,722 16,150
Total assets................................................. 24,922 185,879 194,955
Total liabilities............................................ 6,194 174,634 183,710
Shareholders' equity......................................... 18,728 11,245 11,245
</TABLE>
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE PERIOD FROM INCEPTION
FOR THE YEAR FOR THE YEAR FOR THE YEAR JANUARY 1, 1996 THROUGH
ENDED DECEMBER ENDED DECEMBER ENDED DECEMBER THROUGH DECEMBER 31,
31, 1993 31, 1994 31, 1995 DECEMBER 16, 1996 1996
(PREDECESSOR) (PREDECESSOR) (PREDECESSOR) (PREDECESSOR) (SUCCESSOR)
----------------- --------------- ----------------- ------------------- ---------------
(IN THOUSANDS, EXCEPT PER SHARE NUMBERS)
<S> <C> <C> <C> <C> <C>
OTHER OPERATING DATA:
Net cash provided by (used
in)
operating activities....... $ (45) $ (217) $ 60 $ (31) $ (283)
Net cash used in investing
activities................. (74) (200) (8) (36) (1,446)
Net cash provided by (used
in)
financing activities....... 124 427 (61) 91 4,890
EBITDA(6).................... (18) (218) 65 (76) (534)
Capital expenditures......... 66 140 23 36 29
Ratio of Earnings to fixed
charges(7)................. -- -- -- -- --
<CAPTION>
FOR THE
FOR THE YEAR PRO FORMA FOR SIX MONTHS ENDED
ENDED THE YEAR -------------------------- PRO FORMA
DECEMBER 31, ENDED JUNE 30 SIX MONTHS
1997 DECEMBER 31, JUNE 30, 1997 1998 ENDED JUNE
(SUCCESSOR)(1) 1997(2) (SUCCESSOR) (SUCCESSOR) 30, 1998(2)
------------- --------------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
OTHER OPERATING DATA:
Net cash provided by (used
in)
operating activities....... $ (7,104) N/A (1,619) (8,836) N/A
Net cash used in investing
activities................. (11,242) N/A (641) (140,660) N/A
Net cash provided by (used
in)
financing activities....... 15,852 N/A 965 153,132 N/A
EBITDA(6).................... (8,141) (16,686) (2,280) (9,837) (15,186)
Capital expenditures......... 2,042 N/A 1,037 9,018 N/A
Ratio of Earnings to fixed
charges(7)................. -- -- -- -- --
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
33
<PAGE>
- ------------------------------
(1) Effective December 17, 1996, the Company acquired Integrated Communication
Networks, L.C. (ICN). ICN is referred to as the "predecessor" for the period
prior to the acquisition. The Company since inception and ICN since December
17, 1996 are referred to as the "successor."
(2) Pro Forma selected financial data presented as of June 30, 1998 reflects the
acquisition of Tie as if it had occurred on June 30, 1998. Pro forma data
for the year ended December 31, 1997 and six months ended June 30, 1998
reflects the sale of the Units and the acquisition of Tie as if they
occurred at the beginning of each period presented. For additional
information regarding the basis of presenting the pro forma data, see "Notes
to Pro Forma Combining Statements--Basis of Presentation."
(3) The Company has made a number of acquisitions during 1997 which contributed
to the significant increase in Results of Operations from the year ended
December 31, 1996 to the year ended December 31, 1997.
(4) Other operating expense represents severance and relocation amounts during
the year ended December 31, 1997 related to the centralization of certain
operations and represents retention amounts incurred by Tie for certain key
employees during the period from its bankruptcy filing through the
consumation of the purchase of Tie by the Company.
(5) Per share data is not relevant for the Company's predecessor due to its
different capital structure and therefore is not included.
(6) As used herein, EBITDA consists of earnings before interest (net), income
taxes, depreciation, amortization and other income (expense) and
restructuring charges. EBITDA is a measure commonly used in the
telecommunications industry to analyze companies on the basis of operating
performance. It is not a measure of financial performance under GAAP and
should not be considered as an alternative to net income as a measure of
performance or as an alternative to cash flow as a measure of liquidity. The
Company's measure of EBITDA may not be comparable to similarly titled
measures by other companies.
(7) In calculating the ratio of earnings to fixed charges, "earnings" consist of
net loss before income tax expense and fixed charges. Fixed charges consist
of net interest expense, including such portion of rental expense that is
attributed to interest. For the year ended December 31, 1993, 1994 and 1995
earnings were inadequate to cover fixed charges by $0.05 million, $0.3
million and $0.08 million, respectively. For the period from January 1, 1996
through December 16, 1996, the period ended December 31, 1996, the year
ended December 31, 1997 and the six months ended June 30, 1997 and 1998,
earnings were inadequate to cover fixed charges by $0.2 million, $0.6
million, $9.7 million, $2.7 million and $16.3 million, respectively. For the
year ended December 31, 1997 and the six months ended June 30, 1998,
earnings were inadequate to cover fixed charges by $47.2 million and $31.6
million, respectively on a pro forma basis assuming the Notes were issued at
the beginning of each of the periods presented.
34
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED
FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS PROSPECTUS.
THE RESULTS HEREIN ARE NOT NECESSARILY INDICATIVE OF THE RESULTS TO BE EXPECTED
IN ANY FUTURE PERIODS. THIS DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS BASED
ON CURRENT EXPECTATIONS WHICH INVOLVE RISKS AND UNCERTAINTIES. ACTUAL RESULTS
AND THE TIMING OF CERTAIN EVENTS MAY DIFFER SIGNIFICANTLY FROM THOSE PROJECTED
IN SUCH FORWARD-LOOKING STATEMENTS DUE TO A NUMBER OF FACTORS, INCLUDING THOSE
SET FORTH IN THE SECTION ENTITLED "RISK FACTORS" AND ELSEWHERE IN THIS
PROSPECTUS.
UNLESS OTHERWISE INDICATED, THE FOLLOWING DISCUSSION REFLECTS THE OPERATIONS
OF THE COMPANY AS OF JUNE 30, 1998, WHICH WAS PRIOR TO THE CLOSING OF THE TIE
ACQUISITION. FINANCIAL INFORMATION REGARDING THE BUSINESS ACQUIRED FROM TIE AND
A DISCUSSION OF SUCH INFORMATION APPEARS HEREIN UNDER THE HEADING "THE TIE
ACQUISITION."
OVERVIEW
The Company was founded in 1995 by an experienced team of three data and
telephony executives with 61 combined years of experience in the industry. The
Company had 274 employees at June 30, 1998 and operated in eight
markets--Atlanta, Dallas, Denver, Des Moines, Omaha, Portland, Salt Lake City,
and San Francisco. The Company has taken a number of steps since inception to
implement its business plan, including: (i) establishing fully operational
offices, providing direct sales, technical support and customer care in its
eight markets; (ii) developing and testing its Enterprise Point-of-Presence
("E-POP-TM-") switching architecture for 1998 deployment; (iii) completing
twelve acquisitions, adding sales and technical personnel, new products and
services and increasing the customer base in the Company's target markets; (iv)
assembling a support services management team of telecommunications experts; (v)
developing and implementing its Computer-Telephony Integrated Support System-TM-
("CTISS") customer support software platform; and (vi) developing and testing
its Englewood, Colorado customer care center, which provides additional support
to local distributed customer care centers in each of the Company's markets. The
Company is authorized to provide resold international telecommunications
services and interstate long-distance and operator services. The Company is also
authorized to provide intra-state long distance services in Arizona, Arkansas,
California, Colorado, Iowa, Indiana, Kansas, Michigan, Missouri, Nebraska, Ohio,
Oregon, Texas, Utah, Virginia and Washington, and is certified to provide local
exchange services in California, Colorado, Oregon, Iowa and Utah.
Prior to the Tie Acquisition, the Company provided one or more of its array
of communications services to more than 4,000 customers. The Company's primary
sources of revenue were sales of data products and services. For the six months
ended June 30, 1998, the Company had approximately $14.5 million in revenues and
a net loss of approximately $16.3 million. In December 1997, the Company entered
into contracts with its first ENS customers. As of June 30, 1998, the Company
had entered into multi-year contracts with 13 ENS customers with an aggregate of
approximately 970 desktops (voice and/or data communications devices). The
contracts are expected to provide the Company with approximately $2.5 million in
annual contract revenue and are expected to produce and aggregate of
approximately $12.3 million in revenue over their terms. Although these
contracts may be canceled by the customer, cancellation requires payment of a
fee designed to reimburse the Company for all or substantially all of its costs
incurred in entering into the contract.
During the first six months of 1998, the Company made several strategic
business acquisitions. In February 1998, the Company acquired Telephone
Communications Corporation of Vail, Colorado, a long distance switchless
reseller providing 1+, 0+, 800/888, and calling card services. Also in February
1998, the Company acquired the data network integration assets of Network
Computer Solutions, L.L.C. of Denver, Colorado. In May 1998, the Company
acquired Communications Services of Colorado, a long distance switchless
reseller providing 1+, 0+, 800, and Calling Card services and HH&H
Communications
35
<PAGE>
Technologies, Inc. a voice equipment provider. In June 1998, the Company
purchased CMB Holdings, Inc. d/b/a Independent Equipment Company, an equipment
remarketer.
In July 1998, the Company completed the Tie Acquisition, which added
approximately 55,000 customers in 32 markets, 24 of which markets were not yet
served by the Company. Tie was a provider of telecommunications equipment and
nationwide reseller of long distance service. See "The Tie Acquisition." With
the Tie Acquisition, the Company intends to increase its market share of
telecommunications equipment sales. In addition, the Company will begin offering
all of its existing data services and products and ENS services to these newly
acquired customers and markets over the next 12 to 24 months. This expansion is
expected to require additional capital expenditures and direct operating costs
such as salaries, sales commissions, marketing, management information systems
and other general and administrative expenses. The amounts and timing of these
expenditures and costs are subject to a variety of factors that may vary greatly
by geographic market. The Company expects its net losses to increase as it
continues to establish and expand its services and product offerings to all its
existing and newly acquired markets. As the customer base grows, however, the
Company believes that revenue will increase at a higher rate than operating
expenses, which should result in positive contributions to cash flow.
REVENUES. The Company's revenues are derived from data services (including
frame relay, data network support, monitoring, design, implementation and
consulting, Internet access, web hosting, and data network implementation,
design and consulting); voice services (including local, long distance, public
telephones, voice network support, monitoring, design, implementation and
consulting); ENS services (including one or more of the foregoing together with
the Company's ownership of network assets); data products (value added resale of
data network equipment) and voice products (value added resale of voice network
equipment). The Company records revenues from ENS customers only in situations
in which the Company owns any of the related data or telephony equipment at the
customer's location and provides services under long term contracts.
For the six months ended June 30, 1998, revenues were approximately $14.5
million of which data and voice products contributed approximately $10.3
million, or 71% of revenues; data and voice services which includes ENS revenues
added approximately $4.2 million, or 29% of revenues; ENS revenues were
approximately $750,000 or 5% of revenues. For a discussion of Tie's revenues,
see--"The Tie Acquisition."
OPERATING COSTS. The Company's principal component of operating costs for
the period ended June 30, 1998, was the cost of data and voice equipment
purchased by the Company for value-added resale. Data and voice services
operating costs include labor, leased line facilities charges (which include
charges for connecting a customer to a local or long distance network) and
related capacity charges (which are charges local and long distance carriers,
Internet providers and others impose to use their switches, ports, servers and
other equipment). ENS operating costs include all of the foregoing costs
associated with data and voice services. As the Company begins to offer local
exchange services, leased line capacity costs and access charges are expected to
increase because the Company plans to obtain access to a greater number of ILEC
facilities through leased lines in order to reach end users who cannot otherwise
be connected to the Company's network on economically attractive terms. As the
Company expands its long distance offerings, additional costs for wholesale
access on third-party networks will continue to grow. For a discussion of Tie's
operating costs, see--"The Tie Acquisition."
With respect to ENS sales, the Company's strategy is to own all of the
communications assets deployed at a customer's premise. These assets are
expected to be financed through a combination of the use of the proceeds of the
Initial Offering and capital leasing facilities.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. These expenses include
corporate expenses and management salaries, sales and marketing expenses,
benefits, occupancy costs, and administrative expenses. Selling expenses include
commissions paid in connection with the Company's sales programs. The Company
plans to add additional sales personnel as it expands the product and service
mix in its existing
36
<PAGE>
markets, including those recently entered through acquisition. Marketing and
advertising expenses are expected to increase as the Company further implements
its business plan. Marketing expenses consist of the costs of marketing the
Company's products and services and include marketing salaries, travel expenses,
trade show expenses, consulting fees and promotional costs. In addition, the
Company's marketing expenses include direct costs related to customer
acquisition, such as telemarketing, brochures, and targeted advertising and
promotional campaigns.
General and administrative expenses consist primarily of salaries and
related expenses of management and support services personnel, professional fees
and general corporate and administrative expenses. General and administrative
expenses cover a broad range of the Company's operations, including corporate
functions such as executive administration, finance, legal, human resources and
facilities as well as significant costs associated with the development, support
and expected growth of the Company's CTISS software platform. Selling, general
and administrative expenses will increase significantly as a result of the Tie
Acquisition and as the Company continues to recruit experienced personnel to
implement its business strategy and add management personnel to support
expansion of its business operations.
DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization
expenses include depreciation of property and equipment, including both assets
deployed at customer sites and for the Company's internal use. Generally,
depreciation and amortization expenses are computed using the straight-line
method over the estimated useful lives of the assets, which for property, plant
and equipment range from two to five years, and for other assets, including
intangibles, range from three to ten years. The Company expects depreciation and
amortization expenses to increase substantially as capital expenditures increase
in connection with capital deployment strategies and as a result of increased
amortization of intangibles resulting from recent and future acquisitions.
RESULTS OF OPERATIONS
The table below summarizes the Company's revenues by source:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30
------------------------------------------ -------------------------------
1996 1997 1997 1998
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Data products(1)................................. $ 40 41% $ 6,657 65% $ 1,175 45% $ 9,850
Voice products(2)................................ -- -- 758 7 460 18 425
Data services(3)................................. -- -- 585 6 104 4 1,430
Voice services(4)................................ 58 59 2,203 22 879 33 2,049
ENS(5)........................................... -- -- 6 -- -- -- 751
--- --- --------- --- --------- --- ---------
Total revenue.................................. 98 100% 10,210 100% 2,618 100% 14,505
--- --- --------- --- --------- --- ---------
--- --- --------- --- --------- --- ---------
<CAPTION>
<S> <C>
Data products(1)................................. 68%
Voice products(2)................................ 3
Data services(3)................................. 10
Voice services(4)................................ 14
ENS(5)........................................... 5
---
Total revenue.................................. 100%
---
---
</TABLE>
- ------------------------
(1) Data products include the value-added resale of data network equipment.
(2) Voice products include the value-added resale of voice network equipment.
(3) Data services include frame relay, Internet access and hosting, data network
monitoring and support, and data network planning, design and installation.
(4) Voice services include local telephone service, long distance service,
public telephone service, voice network monitoring and support, and voice
network planning, design and installation.
(5) Enterprise Network Services include all the previously mentioned services
and the use of the Company-owned data network and voice network equipment.
37
<PAGE>
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
REVENUES. Revenues increased to $14.5 million for the six months ended June
30, 1998, from $2.6 million for the six months ended June 30, 1997. Revenue for
the first half of 1998 consisted of $10.3 million in sales of data systems
integration products and voice products and $4.2 million in service revenues
which included $0.8 million in ENS contract revenue. Revenues for the first half
of 1997 consisted of $1.6 million in sales of data systems integration products
and voice products and $1.0 million in data and voice services revenues. The
increase in revenues is primarily due to the expansion from four to eight
markets, the completion of nine acquisitions, continued expansion of existing
markets through the rollout of services and the addition of ENS to the suite of
products and services offered.
OPERATING COSTS. Operating costs increased to $10.6 million for the six
months ended June 30, 1998 from $1.7 million for the six months ended June 30,
1997. Operating costs as a percentage of revenues were 73% for the six months
ended June 30, 1998, compared to 66% for the six months ended June 30, 1997. The
increase in operating costs as a percentage of revenues is due to an increase in
sales of data and voice products as a percentage of total sales, which have a
higher related operating cost than service revenues. The increase is also due to
the Company offering more competitive prices on voice and data products in
certain significant and strategic transactions. The overall increase in
operating costs is attributable to costs associated with increased sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general, and
administrative expenses increased to $13.8 million for the six months ended June
30, 1998 from $3.2 million for the six months ended June 30, 1997. This increase
was primarily attributable to the additional assets purchased as a result of the
Company expanding its operations from four to eight markets, completing nine
acquisitions, and building a support services organization required to support
field operations over the last 12 months. The support services organization
accounted for approximately $7.2 million, or 52% of the current year-to-date
expenses. The number of employees at June 30, 1998 was 274 compared to 59 at
June 30, 1997.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization
expense increased to $2.0 million for the six months ended June 30, 1998 from
$0.5 million for the six months ended June 30 , 1997. This increase was
attributable to the acquisition of additional assets in connection with the
Company expanding its operations from four to eight markets, increased
amortization of intangible assets as a result of nine acquisitions completed
over the last 12 months, and the expansion of the Company's network to support
ENS customers.
INTEREST EXPENSE. Interest expense increased to approximately $5.9 million
for the six months ended June 30, 1998 from approximately $8,475 for the six
months ended June 30, 1997. This significant increase is primarily attributable
to interest expense related to the sale of $160.0 million of 13% Notes which
closed on April 2, 1998. In addition, the Company has incurred additional
indebtedness under various equipment leasing facilities and acquisition related
notes payable.
INTEREST INCOME. Interest income increased from $43,930 for the six months
ended June 30, 1997 to approximately $1.4 million for the six months ended June
30, 1998. This increase is attributable to the temporary investment of the
proceeds of the 13% Notes Offering, which closed on April 2, 1998, pending their
deployment in the Company's business.
OTHER, NET. Other income or expense changed only nominally from net other
income of $30,514 for the three months ended June 30, 1997 to net other income
of $13,340 for the six months ended June 30, 1998, and is expected to remain an
insignificant amount in relation to the net operating results.
INCOME TAXES. The Company incurred net losses of $16.3 million and $2.7
million for the six months ended June 30, 1998 and 1997, respectively.
Accordingly, no provision for current federal or state income taxes has been
made to the financial statements. At December 31, 1997, the Company and its
subsidiaries had net operating loss carry-forwards for federal income tax
purposes of approximately $9.1 million. These
38
<PAGE>
losses begin to expire in 2011 for federal income tax purposes. A full valuation
allowance has been recorded against the deferred tax assets at December 31, 1997
and June 30, 1998 as the recoverability of such deferred tax assets is not
considered to be more likely than not due to the Company's continuing losses.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO PERIOD ENDED DECEMBER 31, 1996
REVENUES. Revenues increased to $10.2 million for 1997 from $97,741 in 1996
as a result of a full year of operations compared to 15 days of revenue
generating operations in 1996 subsequent to the ICN acquisition and as a result
of several additional acquisitions during 1997. Revenues in 1996 were the result
of the acquisition of ICN in December of that year. Revenues in 1997 consisted
of $7.4 million in sales of data systems integration products and voice
products, and an additional $2.8 million in data and voice service revenues,
while 1996 revenues consisted solely of voice services from ICN's public
telephone operations. Revenues from companies acquired in 1997 were $2.9
million. During 1997, the Company expanded its operations from one to eight
markets and completed five acquisitions.
OPERATING COSTS. Operating costs increased to $7.4 million for 1997, from
$79,459 in 1996. Operating costs as a percentage of revenues were 72% in 1997,
compared to 81% in 1996. Operating costs as a percentage of revenues declined in
1997 as a result of a change in the Company's service and product offerings from
public telephone services in 1996 to sales of other data and voice products and
services in 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general, and
administrative expenses increased to $11.0 million for 1997 from $552,092 in
1996. This increase was primarily attributable to the Company expanding its
operations from one to eight markets, completing five acquisitions, and building
a support services organization required to support field operations. This
increase was also attributable to stock compensation expense of approximately
$200,000 related to restricted stock granted upon the hiring of certain key
employees and the repurchase of employee stock options for cash. The support
services organization accounted for approximately $7.3 million, or 68% of the
total 1997 increase in selling, general and administrative expenses. The number
of employees at December 31, 1996 was 22 and increased to 165 employees at
December 31, 1997.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization
expense increased to $1.5 million for 1997 from $40,698 in 1996. This increase
was attributable to the Company expanding its operations from one to eight
markets, implementation of the CTISS system, and increased amortization of
goodwill as a result of five acquisitions completed in 1997.
INTEREST AND OTHER EXPENSE. Interest and other expense increased to $60,506
for 1997 from $884 in 1996. This increase was attributable to the additional
indebtedness of the equipment leasing facility with Sun Financial Group, Inc.
PERIOD ENDED DECEMBER 31, 1996 COMPARED TO PERIOD ENDED DECEMBER 31, 1995
Management believes comparison of financial data for the periods ended
December 31, 1996 and December 31, 1995 is not meaningful because the Company,
prior to the acquisition of ICN in December 1996, had no revenues or operations
and was in a developmental stage. The Company also believes that the comparison
of financial data from such prior periods would not be indicative of the future
performance or results of operations of the Company.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has funded its operations primarily through
cash from the private placement of units consisting of common stock and warrants
to purchase common stock and debt, most recently the sale of the Units. The
Company's private placements generated net proceeds of $154.0 million,
39
<PAGE>
$17.3 million and $4.4 million for the six months ended June 30, 1998 and years
ended December 31, 1997 and 1996, respectively. The Company's principal uses of
cash are to fund working capital requirements, capital expenditures, business
acquisitions, and the operating losses incurred during the start up phase in
each new market established or acquired by the Company.
As of June 30, 1998, the Company had current assets of $114.7 million,
including cash, cash equivalents and short-term investments of $85.7 million,
and working capital of $95.7 million. In addition to cash, cash equivalents and
short-term investments, the Company had $59.9 million in restricted cash which,
along with the earnings thereon, will be used to make the interest payments on
the Notes through a portion of April 2001. The Company invests excess funds in
short-term investments until such funds are needed for capital investments,
acquisitions and operations of the Company's business.
CASH FLOWS FROM OPERATING ACTIVITIES:
The Company's operating activities utilized cash of approximately $8.8
million and $1.6 million for the six months ended June 30, 1998 and 1997,
respectively, and $6.7 million for the year ended December 31, 1997. The
majority of the increase from the six months ended June 30, 1997 to the six
months ended June 30, 1998 was due to a $13.6 million increase in the operating
loss which was partially offset by $5.2 million of accrued interest expense.
Cash used by operating activities during the year ended December 31, 1997 was
primarily due to the Company's net loss of $9.7 million, partially offset by
non-cash expenses such as depreciation and amortization and changes in working
capital.
CASH FLOWS FROM INVESTING ACTIVITIES:
During the six months ended June 30, 1998 and 1997 and year ended December
31, 1997, cash used by investing activities was $140.7 million, $0.6 million and
$11.6 million, respectively. Cash used by investing activities during the six
months ended June 30, 1998 primarily consisted of cash used for capital
expenditures of $5.6 million, cash used in business combinations of $1.6 million
and cash invested in short-term investments and restricted cash of $133.2
million. Cash used for investing activities during the year ended December 31,
1997 primarily consisted of $7.4 million used for short term investments, $2.0
million in capital expenditures and $1.5 million for business combinations.
In July 1998, the Company completed the Tie Acquisition. The purchase price
consisted of $40.0 million in cash and the assumption of certain liabilities,
which, with legal and professional and other costs resulted in a total purchase
price of approximately $51.4 million. In addition, the Company expects to incur
substantial costs in integrating the two businesses.
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash flows from financing activities provided $153.1 million, $1.0 million
and $15.9 million, for the six months ended June 30, 1998 and 1997 and year
ended December 31, 1997, respectively. Cash provided during the six months ended
June 30, 1998 was primarily attributable to net cash flows of approximately
$154.2 million in net proceeds from the 13% Notes Offering and outflows of
approximately $1.3 million in payments on long-term borrowings. Cash flows from
financing activities consisted of $17.3 million in net proceeds from the sale of
Common Stock which was partially offset by approximately $1.4 million in debt
repayments.
On April 2, 1998, the Company completed a private offering of $160.0 million
of Old Notes and 640,000 warrants to purchase 1,728,000 shares of Common Stock
of the Company. Concurrent with the closing of the sale of the Old Notes, the
Company deposited in a collateral account U.S. Government Securities, which,
together with the interest received thereon, will be sufficient to pay, the
first six interest payments on the Notes. Each Warrant entitles the holder to
purchase 2.7 shares of Common Stock of the Company at an exercise price of $.01
per share. Proceeds available to the Company, net of offering costs of
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approximately $6.0 million and the deposit into the collateral account of $56.8
million, were approximately $97.2 million.
In November 1997, the Company entered into a three year Program Agreement
with Comdisco, Inc. ("Comdisco") which provides for up to $50 million of
equipment lease financing. At June 30, 1998, $10 million of financing was
available to the Company under this facility of which approximately $1.8 million
was being utilized as of June 30, 1998. The availability of additional amounts
depends on whether the Company meets certain financial criteria. The Program
Agreement expires on June 30, 2000.
The Company has an agreement with Sun Financial Group, Inc. under which the
Company has borrowed $3.1 million to finance the Company's development of the
CTISS system and other internal capital needs. The Company also has a $0.8
million inventory credit facility with NationsCredit Commercial Corporation.
GENERAL:
The Company's business plans will continue to require a substantial amount
of capital to fund its expansion of existing and recently acquired markets,
including funding the development of its ENS networks (which includes providing
its customers with all necessary hardware, software, transmission facilities and
management services), deploying E-POPs-TM-, creating local customer care and
sales organizations, continuing to develop its CTISS system and funding
operating losses and debt service requirements. The Company also continues to
evaluate acquisitions and investments in light of the Company's long range
plans. Such acquisitions and investments, if realized, could require expenditure
of a material portion of the Company's financial resources and would accelerate
the need for raising additional capital in the future.
The Company's cash and short-term investments are expected to provide
sufficient liquidity to meet the Company's capital requirements for
approximately 12 to 18 months, depending on the extent to which previously
issued warrants to purchase the Company's Common Stock, expiring in July 1999,
are exercised. Sources of funding for the Company's financing requirements may
include vendor financing, bank loans and public offerings or private placements
of equity and/or debt securities. There can be no assurance that additional
financing will be available to the Company or, if available, that financing can
be obtained on a timely basis and on acceptable terms. The failure to obtain
such financing on acceptable terms could have a material adverse effect on the
Company.
IMPACT OF THE YEAR 2000
The "year 2000 issue" generally describes the various problems that may
result from the improper processing of dates and date-sensitive calculations by
computers and other equipment as a result of computer hardware and software
using two digits to identify the year in a date. If a computer program or other
piece of equipment fails to properly process dates including and after the year
2000, date-sensitive calculations may be inaccurate as a result of those
computers and software failing to distinguish dates in the 2000's from dates in
the 1900's. The failure to process dates could result in system failures or
miscalculations causing disruptions in operations including, among other things,
a temporary inability to process transactions, send invoices or engage in
similar normal business activities.
STATE OF READINESS. The Company has created a Year 2000 Task Force to
evaluate its year 2000 readiness as it may affect the Company's operations. The
Task Force has identified two areas for review: (i) internal issues (including
the Company's information technology ("IT") assets and non-IT systems); and (ii)
external issues (including third-party manufactured products sold by the
Company, and issues with customers, vendors and suppliers). The Company is in
the process of contacting manufacturers and suppliers of IT and non-IT assets
used internally by the Company for services such as customer billing, customer
service and financial reporting, including manufacturers and suppliers of
computer equipment, software programs, telephone systems, data systems, systems
comprising the Company's enterprise networks and equipment used to provide
services to customers. These contacts will help the Company
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determine the extent to which these systems could cause a material adverse
effect on the Company's operations in the event that the systems fail to
properly process date-sensitive calculations following the year 2000. The
Company is also actively identifying potential external issues which could have
an impact on the operations of the Company. These include issues with (i) the
functioning of third-party manufactured products sold by the Company to its
customers; (ii) significant customer systems, including customer-owned and
operated systems and systems that are connected to the Company's networks; (iii)
vendors and suppliers such as credit facility providers, third-party service
providers (e.g., local and long distance wholesale providers and interconnection
providers) and employee benefit plan providers (e.g., 401(k) plan
administrators).
The Company's evaluation of its state of year 2000 readiness is not
complete. As a result, the Company may in the future identify a significant
internal or external year 2000 issue which, if not remediated in a timely
manner, could have a material adverse effect on the Company's business,
financial condition and results of operations.
The Task Force has developed four phases for the implementation of its
review and response to year 2000 issues. The phases will, to a great extent, be
completed simultaneously as issues are identified in Phase I. While the Company
anticipates it will complete all Phases described below by mid-1999, this may
not be possible if the Company discovers a significant, previously unrecognized
year 2000 issue in the course of completing its assessment of its year 2000
readiness.
PHASE I --Phase I involves identifying all potential internal and
external IT and non-IT systems that may have a material adverse effect on
the operations of the Company in the event that they fail to process
date-sensitive information correctly. The Company believes that it has
identified substantially all significant internal IT systems the failure
of which could have a material adverse effect. The Company has only begun
to identify external IT systems and internal and external non-IT systems
the failure of which could have a material adverse effect on operations.
PHASE II --Phase II involves determining the extent of readiness of each
IT and non-IT system identified in Phase I. The Company is currently
contacting manufacturers, suppliers and vendors to determine the extent
of readiness of systems it has identified to date. With respect to the
vendors and suppliers of the systems identified to date in Phase I, the
Company has received a number of statements regarding year 2000
readiness. The Company is in the process of evaluating these statements.
To date, the Company has not positively identified any year 2000 issues
with its own systems. The Company does not yet have enough information to
determine whether there are any year 2000 issues with third-parties which
could have a material adverse effect on operations.
PHASE III --Phase III involves the implementation of any corrective
action necessary for any problems in the systems identified in Phase II.
The Company anticipates that any corrective action will require use of
the Company's internal resources, third-party manufacturers, suppliers
and vendors and potentially additional third-party consultants, as
necessary.
PHASE IV --Phase IV involves determining alternatives and contingency
plans for any system the failure of which could have a material adverse
effect on the Company's business, financial condition or results of
operations if the corrective action implemented in Phase III is partially
or wholly ineffective. The Company has begun identifying alternatives to
systems in the event that existing systems are determined to not be year
2000 ready. Because the Company has not identified any year 2000 issues
in Phase II which have not already been remediated, the Company has no
finalized contingency plans. The Company will continue to develop such
plans as additional information is received from manufacturers, suppliers
and vendors.
COSTS. Other than time spent by the Company's internal IT and legal
personnel which could be spent on other matters, the Company has not incurred
any significant costs in identifying year 2000 issues. The
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Company does not anticipate any significant further costs in Phase I or Phase
II. Because no material year 2000 issues have yet been identified in Phase II,
and therefore no contingency plans have been finalized, the Company cannot
reasonably estimate further costs relating to Phase III remediation of any year
2000 issues at this time, or costs of contingency plans which might be
implemented under Phase IV. As the Company continues to gather information
regarding its year 2000 issues, the Company will re-evaluate its ability to
estimate costs associated with the year 2000 issue. There can be no assurance
that as additional year 2000 issues are addressed, the Company's costs to
correct such issues will be consistent with historical costs.
RISKS OF YEAR 2000 ISSUES. Because no material year 2000 issues have yet
been identified in Phase II, the Company cannot reasonably ascertain the extent
of the risks involved in the event that any one system fails to process
date-sensitive calculations accurately. Potential risks include the inability to
process customer billing accurately or in a timely manner, the inability to
provide accurate financial reporting to management, auditors, investors and
others, litigation costs associated with potential suits from customers and
investors, delays in implementing other IT projects as a result of work by
internal personnel on year 2000 issues, and delays in receiving payment or
equipment from customers or suppliers as a result of their systems' failure. Any
one of these risks, if they materialize, could individually have a material
adverse effect on the Company's business, financial condition or results of
operations.
As almost all of the Company's IT and non-IT systems and products relating
to the Company's internal and external issues are manufactured or supplied by
third parties which are outside of the Company's control, there can be no
assurance that all of those third parties' systems will be year 2000 ready. If
some or all of the Company's internal and external systems fail, or if any
critical IT or non-IT systems are overlooked or are not year 2000 ready in a
timely manner, there could be a material adverse effect on the Company's
business, financial condition or results of operations.
CONTINGENCY PLANS. Because no material year 2000 issues have yet been
identified in Phase II, no contingency plans have yet been finalized under Phase
IV.
EFFECTS OF RECENTLY ISSUED ACCOUNTING STANDARDS
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." This
statement establishes standards for reporting and display of comprehensive
income and its components. Comprehensive income generally includes changes in
separately reported components of equity along with net income.
The Company will adopt SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information " for the year ended December 31, 1998. The
Company is currently evaluating the financial information used by senior
management in making strategic operating decisions to determine the operating
segments to be disclosed and discussed in management's discussion and analysis
of the business. The Company is certain there will be more than one operating
segment, however, the total number is undetermined at this time. This statement
will not affect the results of operations, financial position or cash flows of
the Company and has no effect on the financial statements as previously
presented.
In March 1998, the AICPA issued Statement of Position No. 98-1 ("SOP 98-1"),
"Accounting for the Cost of Computer Software Developed or Obtained for Internal
Use." SOP 98-1 provides guidance regarding the conditions under which the costs
of internal-use software should be capitalized, and is effective for financial
statements for years beginning after December 15, 1998. The Company does not
expect the adoption of SOP 98-1 to have a material effect on its financial
statements.
EFFECTS OF INFLATION
Management does not believe that its business is impacted by inflation to a
significantly different extent than is the general economy. However, there can
be no assurances that inflation will not have a material effect on the Company's
operations in the future.
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BUSINESS
INTRODUCTION
Convergent Communications-TM- is an Enterprise Network Carrier-TM- offering
comprehensive, single-source communications services primarily to small and
medium-sized businesses.
As an Enterprise Network Carrier,-TM- the Company integrates its data and
telephony products and services into a single product offering, enabling the
Company to act as a single-source, one-stop provider of its customer's total
communications requirements. Unlike traditional telecommunications companies
that provide services from outside a customer's premise, in providing Enterprise
Network Services ("ENS"), the Company designs, buys and builds its own network
within the customer's premise, enabling the Company to act as an outsource
provider of any or all of the customer's communications requirements. For the
six months ended June 30, 1998, the Company had approximately $14.5 million in
revenues and a net loss of approximately $16.3 million. The Company began
offering ENS services in December 1997 and as of June 30, 1998, had entered into
long-term ENS contracts with 13 customers with an aggregate of approximately 970
desktops. The contracts are expected to provide the Company with approximately
$2.5 million in annual contract revenues, and over their terms are expected to
produce total revenues of approximately $12.3 million. Although these contracts
may be canceled by the customer, cancellation requires payment of a fee designed
to reimburse the Company for all or substantially all of its costs incurred in
entering into the contract.
The Company's business plan is designed to address the large and growing
market for the provision of single-source communications services to small and
medium-sized businesses. The Company believes it is the only provider of ENS
solutions, or a comparable range of outsourced communications services, to such
businesses in its target markets. The Company's ENS solution is provided under
long-term contracts (typically three to five years) which position the Company
to be the customer's exclusive provider of data networking, data transport and
telephony services. The Company believes its ENS solution provides it with
unique competitive advantages by creating the opportunity to (i) capture
virtually all of the customer's expenditures for communications services, (ii)
create long-term relationships with its customers by increasing their reliance
on and sense of partnership with the Company, (iii) capitalize on the growing
trend of outsourcing of networking services and the increasing demand for data
services, (iv) differentiate itself from providers of communications services
that do not offer integrated solutions to small and medium-sized businesses, (v)
secure stable sources of long-term, recurring revenue and (vi) achieve
significantly reduced customer turnover compared to traditional providers of
communications services.
Effective August 1, 1998, the Company completed the Tie Acquisition for a
total purchase price (including expenses and assumed liabilities) of
approximately $51.4 million. Tie was a telecommunications equipment provider and
a nationwide reseller of long-distance services which had filed for protection
under Chapter 11 of the U.S. Bankruptcy Code on April 10, 1998. Tie's business
concentrated on the sale of voice products and services, all of which were of
the type already being marketed by the Company.
Tie was the fourth largest independent distributor of business telephone
systems in the United States. It is anticipated that the acquisition will
accelerate the Company's growth by adding approximately 55,000 customers in 24
new markets, providing the Company with extensive experience in telephony
services including digital telephone systems, larger telephone systems (PBXs),
computer-telephony integration hardware and software and video teleconferencing
equipment and offering the Company the opportunity to cross-market its data and
ENS products and services to Tie's predominately telephony customers. For the
year ended December 31, 1997 and the seven months ended July 31, 1998, Tie had
total revenues of approximately $95.4 million and $46.5 million, respectively
and net losses of approximately $19.1 million and $9.4 million, respectively.
See "The Tie Acquisition."
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The Company provides the following products and services:
DATA:
- Data networking services--including the planning, design, installation and
management of networks, from simple LANs to complex WANs.
- Data products--including the sale and integration of servers, routers,
data switches and desk top computers.
- Data transport services--including frame relay and ATM services.
- Internet services--including web applications, web hosting and Internet
access.
TELEPHONY:
- Voice services--including local and long distance services.
- Voice products--including the sale and integration of key systems and
PBXs.
ENTERPRISE NETWORK SERVICES:
- ENS--the delivery under long-term contract of one or more of the Company's
data and telephony services utilizing the Company's owned network inside
the customer's premise.
As of June 30, 1998, the Company provided communications services to
approximately 4,000 customers in eight markets, Atlanta, Dallas, Denver, Des
Moines, Omaha, Portland, Salt Lake City, and San Francisco and its business plan
anticipated the rollout of services in additional markets through acquisition
and marketing efforts. The Tie Acquisition provided the Company with offices in
24 new markets and access to the approximately 55,000 telephony product and
service customers of Tie. The Company anticipates a tiered phase-in of the new
markets to its data products and services and ENS solution over the next 12 to
24 months. Although a significant portion of the Company's previously planned
geographic expansion has been implemented as a result of the Tie Acquisition,
the Company continues to anticipate additional expansion into new markets which
it deems to be attractive.
The Company owns or will own switching equipment, desktop equipment, and
public phone equipment as its network in providing telephony services. The
Company does not own, nor does it have any plans to own, telephony
infrastructure such as fiber, cable or other access facilities, which it leases
from providers pursuant to either tariff or negotiated arrangements.
The Company was founded in 1995 by an experienced team of three
telecommunications executives with a combined 61 years of experience in the
industry. The Company's senior management team includes John R. Evans, Chairman
and Chief Executive Officer, formerly the Executive Vice President and Chief
Financial Officer of ICG Communications, Inc. ("ICG") from 1991 until December
1995; Keith V. Burge, President and Chief Operating Officer, who was the
founder, Chief Executive Officer and Chief Operating Officer of Fiber Optic
Technologies, Inc., a leading national network services integrator; and Philip
G. Allen, Executive Vice President, and former Vice President of Investor
Relations and Corporate Communications of ICG. The Company's senior management
team also includes many additional telecommunications professionals, each with
substantial expertise, leading the sales, customer care, engineering, operations
and financial divisions of the Company. As of August 31, 1998, the Company had
736 employees, of which 436 were added in connection with the Tie Acquisition.
THE ENTERPRISE NETWORK OPPORTUNITY
According to the Company's market research, small and medium-sized
businesses (typically with 25 to 500 desktops) are increasingly seeking
single-source solutions to their communications requirements as a
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result of (i) the bewildering array and increasing complexity of network
configurations and telephony service offerings, (ii) the need to focus on their
core operations rather than network and communications issues, (iii) rapid
changes in technology, (iv) the growing importance of the Internet in business
and commerce, (v) the cost and difficulty of maintaining in-house technical
expertise, and (vi) the potential savings associated with outsourcing their data
and communications requirements. The Company believes that the aggregate
addressable market for ENS in the cities in which it operates will grow to
approximately $105 billion over the next four years, which includes $80 billion
for data networking and transport services and products and $25 billion for
telephony services. The Company believes that the size and anticipated growth of
the market for ENS, continued deregulation in the market for telecommunication
services and the absence of regulation of the market for data networking
services and certain data transport services such as Internet access have
created enormous opportunities for smaller, highly focused, innovative
communications providers like the Company to compete successfully against ILECs,
CLECs, IXCs, data integrators and other traditional providers of communications
services.
BUSINESS STRATEGY
The goal of Convergent Communications-TM- is to become the premier
Enterprise Network Carrier-TM- in its target markets by providing single-source
communications services, superior customer care and cost effective
communications solutions to its customer's data and telephony requirements. The
Company's business strategy is designed to enable it to achieve rapid market
penetration, strong growth and stable, long-term sources of recurring revenues.
The Company's strategy includes the following key elements:
SINGLE-SOURCE PROVIDER. The Company's market research indicates that there
is significant demand from small and medium-sized businesses to outsource their
entire communications requirements to a single-source provider that delivers a
full range of efficient and cost-effective solutions. While the Company's sales
efforts are directed towards its ENS solution, the Company believes that its
ability to deliver an entire range of products and services provides significant
advantages to its customers by reducing (i) the complexity and confusion
associated with integrating diverse networks and technologies obtained from and
serviced by multiple vendors and deployed at multiple locations, and (ii) the
administrative costs of network implementation, coordination, maintenance and
monitoring.
OWN THE ENTERPRISE NETWORK. Unlike traditional telecommunications providers
which "look in" to the customer's premise, terminating their networks outside of
the customer's building, the Company designs, builds and owns the network within
the customer's premise, managing and controlling the customer's communications
infrastructure under long-term service agreements (typically three to five years
in duration). As a component of its ENS solution, the Company will either buy a
customer's existing communications equipment or install its own new equipment,
enabling the customer to redeploy its capital for use in its core business
activities. During the term of an ENS agreement, the Company effectively acts as
its customer's communications department, providing complete outsourcing for its
customer's communications requirements and increasing the customer's reliance on
and sense of partnership with the Company. The customer pays one fee for all
services included in the ENS solution, including its use of the Company-owned
infrastructure on the customer premise and the maintenance of this
infrastructure. The Company believes its ownership of the communications
equipment installed on the customer's premise, and its ability to provide
services from within the customer's premise will provide it with significant
competitive advantages over non-enterprise based service providers, including
the ability to (i) capture virtually all of the customer's expenditure for
communications services, (ii) offer superior customer care, (iii) continually
offer and provide new value-added product and service enhancements, and (iv)
achieve significantly less customer turnover than traditional communications
providers.
"LEAD WITH DATA; FOLLOW WITH TELEPHONY; CLOSE WITH ENS." The Company
believes its strategy of leading with data, following with telephony and closing
with ENS will enable it to rapidly penetrate its existing markets, increase the
range of communications services provided to its existing customers and secure a
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greater percentage of its existing customers' expenditures on communications
services earlier in the sales cycle. This belief is based on a perception that
while businesses are accustomed to reliable voice services, customers place
paramount importance on data networking and transport services because of the
impact inadequate data services can have on a customer's operating efficiency
and profitability. As such, the Company's strategy for new customers is to "Lead
with Data; Follow with Telephony; and Close with ENS." Once the Company gains
the confidence of new customers through the provision of data services, the
Company believes that those customers are more likely to purchase its telephone
services and ultimately its complete ENS solution.
TARGET SMALL AND MEDIUM-SIZED BUSINESSES. The Company believes it can
achieve rapid market penetration by focusing its sales efforts on small and
medium-sized businesses (25 to 500 desktops) with high data usage requirements.
The Company believes that these businesses are highly attractive customers for
ENS because management of such companies typically lacks the time, expertise and
financial resources to adequately fulfill their own data and telephony
requirements. Geographically, the Company's target markets have been selected on
the basis of a number of factors, including the number and concentration of
small businesses, the potential for rapid market penetration and sustained
growth, and the availability of local management personnel and talent with key
technical and marketing skills. Pursuant to this strategy, the Company has
compiled demographic research on 26,000 small and medium-sized businesses
located in highly concentrated business parks in these target markets.
E-POP-TM- DEPLOYMENT. The Company's business plan includes the deployment
of E-POPs-TM- in its target markets. The E-POP-TM- is a scaleable, distributed
network that integrates voice and data over a single digital facility and common
switching platform, which is a platform using high speed connections between a
single industry standard switching platform and an industry standard database,
with the ability to provide local, long distance and enhanced services to the
Company's customer base. The Company believes the deployment of E-POPs-TM- will
enable it to more quickly achieve improved margins by reducing the cost to the
Company of data and voice switching and transmission. Based on its current cost
estimates, the Company believes that the use of its E-POP-TM- switching platform
will result in its ability to provide services similar to those provided by a
traditional CLEC switching platform at cost levels which are initially
approximately 29% lower than those associated with such traditional switching
platforms. The Company has deployed E-POPs-TM- in three of its markets and is
currently routing its internal voice and data traffic through them. The Company
anticipates that it will begin routing customer traffic over these platforms by
the end of the year.
GROWTH THROUGH STRATEGIC ACQUISITIONS. In each of the Company's target
markets, a large number of small private companies provide local and
long-distance resale, telecommunications equipment and network integration
services. This creates numerous opportunities to acquire industry participants
that can provide key technical support personnel and management talent, customer
bases for potential expansion to full ENS solutions, accretions to cash flows,
and product line extensions. In addition, the Company's acquisition strategy
allows the Company to enter new markets more quickly than would otherwise be
possible. In addition to the Tie Acquisition, the Company has completed 11
acquisitions in four markets.
COMPETITIVE ADVANTAGES
The Company believes its business strategy provides it with the following
competitive advantages:
"ONE-STOP SHOPPING." The Company's market research indicates there is
significant unmet demand among its target customers for single-source
communications solutions. The Company's "one-stop shopping" enables its
customers to (i) reduce the complexity and confusion associated with integrating
diverse networks and technologies obtained from multiple vendors and deployed at
multiple locations, (ii) reduce the administrative expense of network
implementation, coordination, maintenance and monitoring and (iii) receive
customer care through a single point of contact. The Company believes that its
ability to
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deliver the entire range of communications services, including its ENS solution,
distinguishes it from traditional providers of networking and telecommunications
services.
LONG-TERM EXCLUSIVE RELATIONSHIPS. The Company's ENS solution is designed
to enable it to establish long-term exclusive relationships with its customers.
As its customer's ENS provider, the Company seeks to own the network on the
customer's premise, acting as the single-source provider of the customer's
communications equipment and services, and as the primary consultant for the
customer's communications requirements. The Company believes that this ongoing
relationship fosters a greater sense of partnership between the Company and the
customer and provides the Company with the ability to offer additional services
to the customer, culminating in an ENS sale. The Company's Enterprise Network
Services are provided pursuant to long-term contracts (typically three to five
years in duration) which will provide it with a number of competitive advantages
over CLECs, ILECs and other service providers, including, among other things,
significantly lower customer turnover than traditional providers of
telecommunications services, as well as stable, long-term sources of recurring
revenue.
REDUCE CUSTOMER'S TOTAL COST OF NETWORK OWNERSHIP. The Company will reduce
the customer's total cost of network ownership by (i) purchasing the customer's
existing premise network equipment, enabling the customer to redeploy its
capital for use in its core business activities and eliminating the customer's
need for further capital expenditures on equipment, (ii) offering bundled
communication services at a lower overall cost than existing services, and (iii)
minimizing and in some cases eliminating the customer's reliance on on-site
networking expertise through the utilization of the Company's localized network
management capabilities. As a result, the Company expects to provide its
customers with higher quality service than they currently receive, while
reducing their overall cost of network ownership and operation.
SOLUTIONS-ORIENTED SALES AND CUSTOMER CARE ORGANIZATION. Based on the
results of its market research, the Company believes that providing superior
customer care requires (i) the establishment of a local sales and service
presence, (ii) the availability of a single customer interface to handle all
customer care requirements, and (iii) a highly trained, solutions-oriented sales
and customer care organization. Each employee of the Company, from its sales
executives and project managers to its engineers and field service technicians,
is trained to operate in each local market as a member of a team in devising
customer solutions and facilitating customer care. To achieve a cohesive,
solutions-oriented sales and customer care approach, and to allow the effective
use of a single customer interface, the Company has developed its proprietary
operating support system platform called the Computer-Telephony Integrated
Support System-TM- ("CTISS"). CTISS is an Oracle-based software system that
integrates all internal support services on a single platform, permitting all of
the Company's customer care, sales engineering, service management, service
delivery, accounting and inventory management personnel to provide input to and
work from a single data source. See "--Computer-Telephony Integrated Support
System-TM- ("CTISS")."
EFFICIENT CAPITAL DEPLOYMENT. The Company expects to realize significant
capital deployment efficiencies using the E-POP-TM-, a unique third-generation
CLEC switching platform. The Company has elected to integrate "best-in-class"
network components into its E-POP-TM- for quality of service and reliability
purposes. This means that it has selected equipment from industry leaders with
proven technologies to deliver services to its customers. By integrating voice
and data through the use of a single digital facility, using best-in-class
network components and creating a distributed network architecture, the
E-POP-TM- results in lower costs in relation to other CLEC networks. The Company
estimates that the E-POP-TM- is approximately 29% less costly than the
traditional CLEC switching platform and will become up to 65% less costly as the
E-POP-TM- architecture is further refined. In addition, the Company believes its
E-POP-TM- platform will provide the Company with substantially greater operating
flexibility and higher returns on deployed capital on a market-by-market basis
than is achievable by traditional CLECs or ILECs. The Company expects to
recapture the capital cost of an E-POP-TM- in as short as 12 to 24 months after
deployment, with the initial break-even point attainable with as few as
approximately ten ENS customers with 50 desktops each. The smart elements of the
E-POP's-TM- distributed network architecture are
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structured to allow each of them to be periodically "refreshed" by the Company,
enabling a continual, cost-effective and seamless expansion and upgrade of
network equipment in response to expected increases in data traffic and advances
in technology.
THE ENTERPRISE NETWORK
INSIDE NETWORK. The Enterprise Network is a Company-designed, owned and
managed data and telephony network located inside the customer's premise and
linked to the Company's external network through a single digital facility. The
provision of an ENS solution begins with an assessment of a customer's near and
long-term communications requirements emphasizing how the implementation of an
enterprise network will allow the customer to focus on core business functions
while reducing its total cost of network ownership, and culminates in the design
and implementation of a completely outsourced network solution.
OUTSIDE NETWORK. The Company's business plan includes the rapid deployment
of its E-POP-TM-. The E-POP-TM-, a third-generation CLEC switching platform,
consists of existing switching and transmission equipment and software uniquely
configured by the Company to act as a service aggregation point for its
customers and a dissemination point to facilities-based providers of local, long
distance, data transport and Internet services. The Company seeks to establish
relationships with local, long distance, Internet, and data transport companies
to provide connection from the Company's switches and customers to the network.
The Company's E-POP-TM- is designed as a scaleable, distributed data network
that integrates voice and local switching platforms, enabling the Company to add
specific data and voice services as required by the customer. By integrating
voice and data through a single digital facility, using best-in-class network
components, and creating a distributed network architecture, the E-POP-TM-
results in lower costs in relation to other CLEC networks. The Company has
deployed its E-POPs-TM- in Des Moines, Denver and San Francisco, through which
the Company is currently routing its own internal voice and data traffic, and
anticipates routing customer traffic over these platforms by the end of the
year.
Following is a graphic representation of the E-POP-TM-:
[GRAPHIC]
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PRODUCTS AND SERVICES
The Company offers a complete range of communications equipment and
services, both on a bundled and on an unbundled basis. The Company's products
and services are designed to: (i) address the broad range of its customer's
communications requirements, and (ii) support the Company's ultimate sales
objective of providing a complete ENS solution.
DATA NETWORKING AND TRANSPORT
CUSTOMER PREMISE EQUIPMENT (DATA AND VOICE). The Company supplies a wide
range of data communications equipment and software, including servers, bridges,
routers, multiplexers, switches and other equipment used to support premise
networks, and to connect those networks to the WAN and to the Company's
E-POP-TM-. Data equipment is generally sold as a part of a systems integration
contract, or installed as part of the Company's enterprise network, in which
case the customer pays a service fee, a portion of which is for the use of the
equipment, through its ENS service agreement. The Company also supplies PBX and
key systems and support to its customers. This equipment includes phones, call
management software and switching systems. In addition, the Company provides
voice processing including unified messaging systems and the integration of
voice with electronic mail (e-mail) and facsimile services, and designs,
installs, maintains and upgrades voice networks.
WIDE AREA DATA NETWORKING. The Company provides frame relay transmission
and switching for computer data (including digitized voice) for customers with
local or national needs. The provision of frame relay services, supported by ATM
technology, enhances the business strategy of the Company by allowing the
Company to anticipate increasing customer demand. Frame relay is a shared
networking service where customers share the costs of the Company's networking
facilities, but have their own privately defined networks which are customized
and secure. This enables a reduction in cost of up to 40% over private line
networks, with a comparable level of service quality. The customer buys access
to the Company's network and pays a fixed rate for transport over the network.
ATM is a high bandwidth switching and multiplexing technique with usable
capacity allocated to services on demand. Frame relay and ATM technology also
require the installation of new equipment at the customer's premise, which
provides the Company with an opportunity to introduce its other products and
services, including data equipment sales, network management and monitoring
services and ultimately ENS.
SYSTEM INTEGRATION AND CONSULTING. The Company designs, installs, maintains
and upgrades data and voice networks, as well as providing consulting and
network integration services. The Company analyzes a customer's requirements,
designs a network, and purchases, installs, certifies, maintains, monitors and
upgrades such networks on behalf of a customer. In addition, the Company charges
a fee for designing a customer's enterprise network and for developing a
long-range technology plan which identifies the present and future tools the
customer will need to meet profitability targets and other business objectives,
including a reduction in total cost of network ownership and operation.
NETWORK MONITORING. The Company offers remote monitoring of both its
customers' networks and its enterprise network from a local facility 9 hours a
day, 5 days a week, and backup monitoring from the Company's network operations
center in Englewood, Colorado 24 hours a day, 7 days a week. Such network
monitoring facilitates regular reports on the network, early detection of
possible problems, and provides valuable information to the Company's sales
organization which is used to anticipate its customers' future communications
service requirements.
INTERNET SERVICES. The Company currently offers Internet access under fixed
monthly fee arrangements through third-party Internet service providers
(providers which offer a centralized location providing consumers with services
such as access to the Internet, email services, customized newsgroups, web page
design and web hosting). In addition, the Company offers web hosting on its own
servers, providing the hardware necessary for its customers to establish
Internet and Intranet web pages, as well as web
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application development which customers can use to develop high-level strategic
applications such as e-commerce. The Company anticipates ultimately offering
Internet and Intranet access to ENS customers through dedicated access to the
Company's E-POP-TM-.
TELEPHONY
LOCAL TELEPHONE SERVICES. These services include establishing connections
between the customer's telephone equipment and the local telephone network in a
given city and the operation of public telephones in Iowa. In addition to
providing standard dial tone (access), the Company provides associated call
processing features, such as caller identification, call waiting, call
forwarding, call screening or voice mail, as well as other special services,
such as higher-speed data connections.
LONG DISTANCE. The Company offers long-distance as a reseller of services
from nationally recognized long distance carriers. Services offered include
basic 1+ long distance access, 0+, 800/888 and calling card services, as well as
ancillary services such as operator access and directory assistance. The Company
is currently operating as a switchless reseller, but anticipates eventually
moving a portion of the resold long distance traffic onto its own E-POP-TM-
switching infrastructure through its single digital facility between the
E-POP-TM- and its customers.
ENS
ENS involves the delivery under long-term contract by the Company of one or
more of its data and telephony services utilizing the Company's owned network
inside the customer's premise. In a complete ENS solution, the Company provides
a comprehensive single-source solution to all of its customer's communications
requirements. See "--Introduction," "--Business Strategy--Own the Enterprise
Network," and "--The Enterprise Network Opportunity."
SALES AND MARKETING
The Company's marketing strategy emphasizes the provision of single-source
communications services primarily to small and medium-sized businesses. The
Company's direct sales force is trained in the methodology of solution-based
selling, with the sale of ENS solutions as the primary goal of the sale process.
Sales leads are provided by an internal lead-generation process that coordinates
local market data and identifies key executives, partners and owners of small
and medium-sized businesses for direct local contact. The Company's local
presence is enhanced by advertising and publicity. The Company has also
developed a CD-ROM designed to describe and help sell its ENS directly to chief
executive officers and chief information officers. The Company's marketing
efforts focus on "leading with data and telephony" and "closing with ENS."
Consequently, the Company often establishes its expertise with customers as a
data networking or telephony specialist, and then attempts to expand its
relationship into the provision of a full ENS solution.
The Company's local sales force in each market is managed by a Director of
Sales. A significant portion of the compensation of the sales force is tied to
annual goal and quota programs that are developed as part of the Company's
annual budgeting process. Sales force incentives are based on gross margin
targets rather than pure revenue, and the local sales force can earn more than
their goals and quotas by selling bundled offerings and ENS solutions at
combined higher-than-average targeted margins.
Once a potential ENS customer is identified either from existing or newly
acquired limited service customers or from leads developed by the Company's
sales force, the Company offers to perform a "total cost of ownership" analysis.
This evaluation, while designed to culminate in the sale of a full ENS solution
and, even if not successful in securing an ENS contract, may result in the sale
to customers of components of ENS, including equipment or systems, long distance
and/or local services and other fee generating activities and services.
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The total cost of ownership analysis requires an extensive, quantitative
evaluation of all direct and indirect costs incurred by a business in supporting
its communications systems. As part of this consultation, the Company's sales
staff helps the customer quantify the real costs of owning and operating its
voice and data communications systems, taking into account such factors as
equipment depreciation, personnel costs, wide area networking costs, maintenance
and upgrade costs, software costs, hardware costs and connectivity requirements.
This analysis also focuses on the ability of a customer's subsystems to support
its stated business objectives.
Once this evaluation is completed, using data supplied by the customer and
decision support software developed by the Company, the potential ENS purchaser
receives a written analysis. This analysis details the amount of money the
customer spends in support of its data networking and telephony systems and
illustrates how the Company can help the customer, by either reducing or
reallocating the customer's costs, improving the quality of services, upgrading
technology and enhancing its ability to realize its business objectives.
Upon completion of a sale, the Company's local support group will begin
providing direct, local customer care and support from the Company's local
operations office. Migration to a full, outsourced ENS solution is not only the
goal of each sale, but also is the goal of each interaction with the customer.
Thus, a record of all contacts with the customer and all opportunities for
additional sales is intended to be maintained via CTISS with additional sales
opportunities coming from the tracking of various service offerings that are
either due for renewal or thought to be attractive to the customer as add-ons.
CTISS is intended to act as a bridge between the technical and sales groups,
allowing the customer's changing communications needs to be monitored by the
sales group which generates continuing sales leads.
CUSTOMER CARE
Based on the results of its market research, the Company believes that
providing superior customer care requires (i) the establishment of a local sales
and service presence, (ii) the availability of a single customer interface to
handle all customer care requirements and (iii) a highly trained,
solutions-oriented sales and customer care organization. The Company maintains
highly integrated sales and customer care support functions, with customer care
specialists trained in all aspects of the Company's service and support
offerings working in fully functional local sales and customer care centers in
each city where the Company has operations. Each employee of the Company, from
the Company's sales executives and project managers to its engineers and field
service technicians, is trained to operate in each local market as a member of a
team in devising customer solutions and facilitating customer care.
The Company differentiates its customer care program from those of other
providers of data and telephony services in the following manner:
IMMEDIATE ACTION. Unlike other data providers that utilize help desks and
frequently advise customers that someone will call them back within a specified
amount of time, the Company's employees are specialists who will begin trouble
shooting immediately to resolve the problem and, if possible, resolution will
occur while the specialist is on the phone with the customer. The local customer
care centers are staffed 9 hours a day, 5 days a week to handle the anticipated
workload, and the Englewood, Colorado customer care center provides rollover
support during peak usage and off hours.
SINGLE POINT OF CONTACT. Customers of other data and telephone providers
are often required to call two or more separate companies or trouble reporting
offices to receive adequate assistance. The Company's customers call a single
1-800 trouble reporting number for assistance in solving the full range of
potential problems. In addition, while other providers of telecommunications
services are forced to staff help lines with separate specialists who often have
limited, specific training in areas such as data, voice or Internet, the
Company's trained specialists are trained in all aspects of communication
services, enabling them to assist customers in solving multiple problems across
multiple services.
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The Company not only provides the training required for each customer care
specialist to become technically proficient, but provides extensive customer
care training to each employee of the Company who has customer contact as well,
allowing the Company to provide premier customer care in every aspect of its
operations. This integrated approach allows the Company to pursue its goal of
best-in-care service starting with the initial customer contact and continuing
throughout the life of the account. The Company's customer care procedures are
extensively documented so that the level of care is consistent in each market.
COMPUTER-TELEPHONY INTEGRATED SUPPORT SYSTEM-TM- ("CTISS")
The Company has developed its proprietary Computer-Telephony Integrated
Support System-TM- ("CTISS"), a software system designed to support the
Company's customer care program and internal support platforms. CTISS is an
Oracle-based platform of commercial software applications. Software modules are
seamlessly integrated through Oracle's object-oriented and relational databases,
allowing the Company's sales engineering, service management, service delivery,
accounting and inventory management personnel to all work from the same core set
of customer data points: the "customer record." CTISS is tightly integrated with
the Company's financial information system which enables detailed management
data for project and line-of-business profitability analyses. CTISS also lends
itself to Web-enabled applications which the Company anticipates will make CTISS
accessible by Company personnel through the Company's intranet, and through the
Internet.
The primary function for CTISS is the automated support of internal business
processes. It is a collection of operations support systems for ordering,
fulfillment, billing and customer care. The CTISS Network Management System
monitors all E-POPs-TM- and connecting facilities for delivering services to the
customer. CTISS consists of seven functional models: customer record, sales
engineering, service delivery, inventory management, service management, billing
and financials. CTISS also will include a data exchange gateway with strategic
partners and will permit interfacing with network elements.
ACQUISITIONS
There are a large number of small private companies providing local and
long-distance resale, telecommunications equipment, telecommunications service
and data system integration services in the Company's target markets. The
Company believes the acquisition of certain of these companies can provide it
with additional end-user customer accounts, potential candidates for expansion
to full ENS offerings, new products and services, as well as local sales,
service and technical support, enabling the Company to execute its business plan
more rapidly. Acquisitions have been the primary means by which the Company has
entered new markets and introduced new products. The Tie Acquisition is
discussed separately under the heading "THE TIE ACQUISITION." The Company's
other acquisitions to date are as follows:
INTEGRATED COMMUNICATION NETWORKS, L.C. In December 1996, the Company
acquired Integrated Communication Networks, L.C. ("ICN"), a public telephone
service provider in Des Moines, Iowa. The purchase price consisted of $1,232,300
in cash, the issuance of a $1,000,000 promissory note and the issuance of
3,500,000 shares of Common Stock. ICN was the Company's first strategic
acquisition which established it in the marketplace, provided a telephony
offering platform, initiated a strategic relationship with Iowa Network Services
("INS"), and established a launching platform for additional acquisitions in the
Iowa area, specifically CSI, A.T.T.ex, and Vital.
COMMUNICATION SERVICES OF IOWA, INC. In April 1997, the Company acquired
Communication Services of Iowa, Inc. ("CSI"), an Iowa reseller of telephony
keyboard PBX telephone equipment to businesses. The purchase price consisted of
$100,000 cash, the issuance of a $100,000 one-year note at 8% and the issuance
of 50,000 shares of Common Stock. Through the CSI acquisition, the Company
established a strategic vendor relationship with Intertel Integrated Systems,
Inc. ("Intertel"), a major PBX and key-system
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manufacturer for small to medium-sized businesses. CSI's relationship with
Intertel and other manufacturers such as Lucent and Nortel have helped the
Company develop its telephony product and services offering, which will be
mirrored in other markets.
A.T.T.EX CORPORATION. In September 1997, the Company acquired A.T.T.ex
Corporation ("A.T.T.ex") of Des Moines, Iowa, a telecommunications service
company providing direct telephony service support to corporate customers. The
purchase price consisted of $450,000 in cash and the issuance of 75,000 shares
of Common Stock.
VITAL INTEGRATION SOLUTIONS, INC. In September 1997, the Company acquired
Vital Integration Solutions, Inc. ("Vital") of Des Moines, Iowa and Omaha,
Nebraska, a full service integration solutions provider, specializing in
comprehensive information management and networking solutions. Vital provides
its customers with the hardware, software, and integration services necessary to
build information systems and networks. The purchase price consisted of $500,000
in cash and the issuance of 750,000 shares of Common Stock.
TELEPHONE COMMUNICATIONS CORPORATION. In February 1998, the Company
acquired the assets and certain liabilities of Telephone Communications
Corporation ("TCC") of Vail, Colorado. TCC is a long distance switchless
reseller providing 1+, 0+, 800/888, and calling card services to several
Colorado cities. The purchase price consisted of $400,000 in cash and the
issuance of a $200,000 one-year note at 8% and 10,000 shares of Common Stock.
The Company also assumed debt in the amount of approximately $287,000 which will
be paid down in equal monthly installments through December 31, 1998. This
acquisition immediately launched the Company's long distance product offering by
providing it with necessary carrier identification codes and a calling card
platform capability to enhance the Company's full suite of telephony products.
NETWORK COMPUTER SOLUTIONS, L.L.C. In February 1998, the Company acquired
the assets and certain liabilities of Network Computer Solutions ("NCS") of
Greenwood Village, Colorado. NCS provides network integration services. The
purchase price consisted of $500,000 in cash, and the issuance of 100,000 shares
of Common Stock. The NCS acquisition added additional technicians and technical
sales people to the Denver market. NCS had an established systems integration
and data communications business which was integrated directly into the
Company's Denver operations.
COMMUNICATION SERVICES OF COLORADO, INC. In May 1998, the Company completed
a merger with Communication Services of Colorado ("CSC") of Englewood, Colorado.
CSC is a long distance switchless reseller providing 1+, 0+, 800/888, and
calling card services. The purchase price consisted of $475,000 cash and the
issuance of a $530,000 one-year note at 8%. The acquisition of CSC, combined
with the acquisition of TCC, is designed to further enhance the Company's long
distance product offering.
H,H & H COMMUNICATIONS TECHNOLOGIES, INC. In May 1998, the Company
completed the acquisition of the assets of H,H & H Communications Technologies,
Inc. ("CTI"), a voice equipment provider in Texas. The purchase price consisted
of $200,000 in cash and the issuance of 30,000 shares of Common Stock. Through
the CTI acquisition, the Company further developed its vendor relationship with
Lucent Technologies, Inc. CTI's relationship with Lucent has helped the Company
develop its voice product and service offerings in the Dallas market.
CMB HOLDINGS, INC. D/B/A INDEPENDENT EQUIPMENT COMPANY. In June 1998, the
Company completed the acquisition of substantially all of the assets of CMB
Holdings, Inc. d/b/a Independent Equipment Company ("IEC"), an equipment
remarketer in Florida. The purchase price consisted of the issuance of 340,000
shares of Common Stock. Through the IEC acquisition, the Company enhanced the
ability of its wholly owned subsidiary, C3, to remarket less technologically
advanced equipment obtained from new customers when their existing equipment is
updated.
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In addition to the above business acquisitions, the Company has also
completed purchases of certain assets of other companies as follows:
BIG PLANET, INC. In October 1997, the Company acquired certain assets of
Big Planet, Inc., ("Big Planet") of Portland, Oregon, which provides Internet
services, including Internet access, Web hosting, maintenance, and site design.
The purchase price for such assets consisted of $250,000 in cash and the
assumption by the Company of certain trade payables of Big Planet. This
acquisition accelerated the Company's Internet product offering and brought a
talent base to the Company which can be deployed in other markets.
SIGMACOM CORPORATION. In December 1997, the Company acquired certain data
integration assets of Sigmacom Corporation ("Sigmacom") of Denver, Colorado, a
leading systems integrator for corporate audio, video and data communications
providing state-of-the-art systems that combine telecommunications and computer
network technologies. Sigmacom is also developing Internet application software
for financial institutions such as credit unions. In addition to the data
integration assets, the Company received a 17.9% investment position in
Sigmacom's software development business. The purchase price consisted of
$875,000 in cash and a warrant to purchase 50,000 shares of Common Stock. The
Sigmacom acquisition added additional technicians and technical sales people to
the Denver market.
STRATEGIC RELATIONSHIP
The Company has an exclusive engineering and consulting agreement with
Services-oriented Open Network Technologies, Inc. ("SONeTech") for engineering
services to the Company's internal engineering staff relating solely to the
initial configuration of the architecture of the E-POP-TM- network strategy and
the development of service logic for the Company's call processing design. The
Company issued 375,000 shares of Common Stock in exchange for a 10% equity
interest in SONeTech and an exclusive engineering and consulting agreement. The
Company will be entitled to reacquire a portion of the Common Stock if SONeTech
terminates the agreement. The Company has a right to acquire an additional 35%
equity interest in SONeTech.
COMPETITION
The telecommunications industry is highly competitive, and with the passage
of the 1996 Act (as defined), which has opened the local telephone market to
competition in all states, the Company expects that it will face substantial and
growing competition from a number of providers of data networking, data
transport, and telephony services. Although the Company does not believe that a
significant number of other companies are providing ENS solutions, or a
comparable range of integrated data networking, data transport, and telephony
outsourcing services, to small and medium-sized businesses in its target
markets, the Company faces intense competition in each individual service
element of its ENS solution. These competitors include ILECs (including the
RBOCs and GTE), CLECs, long distance carriers (such as AT&T Corporation, MCI
Communications, Inc., and Sprint), fixed wireless services (such as WinStar
Communications, Inc., Advanced Radio Telecommunications, Inc., and BizTel,
Inc.), commercial mobile radio service providers offering wireless local loop
services, and data integrators and providers of network services and customer
premise data equipment. The major competitors in the telephony customer premise
equipment sector are Williams Telecommunications, Inter-Tel, Claricom (formerly
Executive Business Systems) and the RBOCs. With respect to many individual
products and services it offers, the Company does not necessarily enjoy any
particular competitive advantage over other industry participants. Such
competition may prevent the Company from fully realizing its proposed business
operations and plans.
Some of these competitors or potential competitors are or will be able to
bundle the same types of product and service components offered by the Company.
In particular, any telecommunications carrier that offers both some local and
long-distance telecommunications services, including any RBOC permitted to offer
in-region long-distance services, will be able to offer, as a single source
provider, both local
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exchange and long-distance service to customers. At the current time, no RBOC is
permitted to offer in-region long-distance services. Under Section 271 of the
1996 Act, an RBOC is prohibited from providing long-distance service that
originates in one of its in-region states until the RBOC has satisfied certain
statutory conditions in that state and has received the approval of the FCC. The
FCC has denied all such applications to date. The Company anticipates that a
number of RBOCs will file additional applications for in-region long-distance
authority in 1998, and it is possible that one or more may be granted. In
addition, US West and other RBOCs have filed petitions seeking to have the FCC
deregulate immediately the provision of packet-switched transport services,
including frame relay and ATM. See "Regulatory Environment."
AT&T and Tele-Communications Inc. have proposed a merger that would allow
bundling of their combined networks and thereby provide AT&T with a coaxial
cable network reaching one third of U.S. homes. On June 2, 1998, Sprint
announced its development of an "Integrated on-Demand Network"-- "ION"--which if
viable will allow customers to simultaneously use the Internet, telephone and
fax machine through use of the same phone line. The service is intended to
provide ready accessibility to high-speed online interactive services, video
calls and telecommuting. The AT&T-TCI merger and the Sprint ION service will
allow these companies to provide a single-source solution in competition with
the Company's product offerings. It is scheduled for roll-out for large
businesses later this year and mid-1999 for smaller businesses.
To the extent that competitors begin bundling components of the Enterprise
Network Services (including data networking and the provision of customer
premises equipment) into their own product offerings, the Company will face
additional competition as a "one-source" provider of services. Most of the
Company's existing and potential competitors with respect to elements of the
Company's ENS solution have financial and other resources far greater than those
of the Company, have long-standing relationships with their customers and have
greater name recognition than the Company. In addition, a continuing trend
toward business combinations and alliances in the telecommunications industry
may create significant new competitors with resources far greater than those of
the Company. The Company cannot predict whether or not any such additional
competition will have a material adverse effect on the Company's business and
operations.
REGULATORY ENVIRONMENT
Various components of the Company's Enterprise Network Services are subject
to varying degrees of federal, state, and local regulation.
The Company's provision of data networking services is not currently subject
to federal or state regulation. The Company's local and long-distance telephony
services, and to a lesser extent its data transport services, are subject to
federal, state and, to some extent, local regulation.
The FCC exercises jurisdiction over all telecommunications common carriers,
including the Company, to the extent that they provide interstate or
international communications. Each state regulatory commission retains
jurisdiction over the same carriers to the extent they provide intrastate
communications in that state. Local governments sometimes impose franchise or
licensing requirements on telecommunications carriers and regulate construction
activities involving public rights of way.
FEDERAL LEGISLATION. The 1996 Act became law on February 8, 1996, a
comprehensive federal telecommunications statute affecting all aspects of the
telecommunications industry. The 1996 Act establishes a national policy that
promotes competition in telecommunications services, including local exchange
service. The 1996 Act did not change the regulatory environment governing the
Company's provision of data products and networking services, which are still
not subject to federal or state government regulation.
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The 1996 Act requires that local and state barriers to entry into the local
exchange market be removed and establishes broad uniform standards under which
the FCC and the state commissions are to implement local competition and
co-carrier arrangements in the local exchange market. The 1996 Act also imposes
significant obligations on the RBOCs and other ILECs, including the obligation
to interconnect their networks with the networks of competitors. Each ILEC is
required not only to open its network but also to "unbundle" the network. The
FCC issued regulations in August 1996 defining a minimum set of elements which
must be unbundled, and each state may augment this list. States have begun and,
in a number of cases, completed regulatory proceedings to determine the pricing
of these unbundled network elements and services, and the results of these
proceedings (and any ensuing judicial appeals) will determine whether it is
economically attractive for the Company to use these elements.
The RBOCs have an added incentive to open their local exchange networks to
facilities-based competition because Section 271 of the 1996 Act provides for
the removal of the current ban on RBOC provision of in-region interLATA toll
service. This ban will be removed only after the RBOC demonstrates to the FCC,
which must consult with the Department of Justice and the relevant state
commissions, that the RBOC has (1) met the requirements of the 1996 Act's 14-
point competitive checklist and (2) entered into an approved interconnection
agreement with one or more unaffiliated, facilities-based competitors in some
portion of the state pursuant to which such competitors provide both business
and residential service (or that by a date certain no such competitors have
"requested" interconnection as defined in the 1996 Act). To date the FCC has
denied each such application filed. The Company anticipates that a number of
RBOCs will file additional applications in 1998.
The 1996 Act permits the Company, as a telecommunications carrier with less
than 5% of nationwide presubscribed access lines, to offer single-source
combined packages of local and long distance services on an unrestricted basis.
In contrast, AT&T, MCI, and Sprint may not bundle their long distance services
with local services resold from the incumbent RBOC in any state until the
earlier of (i) February 8, 1999 or (ii) the date the RBOC is authorized under
Section 271 to enter the interLATA long-distance market in that state.
Notwithstanding the Section 271 application procedure, Ameritech (an RBOC)
and Qwest launched a marketing alliance on May 14, 1998. Under the terms of that
agreement, Ameritech and Qwest had been offering customers a package consisting
of Ameritech's local and enhanced services and Qwest's long distance services.
The agreement met with immediate opposition from major long-distance carriers
such as AT&T and MCI that maintained in a complaint filed in federal District
Court in Illinois that the agreement violates sections 271 and 251(g) of the
Communications Act. A similar suit had previously been filed in federal District
Court in Washington challenging a similar business agreement between US WEST and
Qwest. U.S. District Court judges in both Chicago and Seattle ruled in June that
the legality of the agreement should be reviewed by the FCC. However, while the
judge in Washington issued an injunction pending FCC approval of the marketing
venture, the Illinois judge took no action to suspend marketing of the plan. On
June 30, 1998 the FCC issued a standstill order requiring Ameritech to stop
enrolling additional customers in its teaming arrangement with Qwest and to
cease further marketing of the Complete Access program pending further
evaluation of the agreement. Although the FCC order prohibits Ameritech and
Qwest from enrolling new customers for ninety days, it does not require either
company to discontinue service to customers enrolled in the plan prior to the
issuance of the stand-by order. If the Qwest-Ameritech and Qwest-US WEST
marketing alliances are ultimately permitted by the FCC, these companies will be
able to offer a single-source local and long distance service designed to
compete with certain of the Company's product offerings.
Section 706 of the 1996 Act gives the FCC the right to forebear from
regulating a market if the FCC concludes that such forbearance is necessary to
encourage the rapid deployment of advanced telecommunications capability.
Section 706 has not been used to date, but in January 1998 Bell Atlantic filed a
petition under Section 706 seeking to have the FCC deregulate entirely the
provision of packet-switched telecommunications services. Similar petitions were
filed later by the Alliance for Public Technology and
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US West, and other ILECs are expected to file similar petitions in the near
future. If these petitions are granted, RBOCs would be free to provide a bundled
package of intrastate and interstate data and Internet services similar to what
the Company presently offers. The effect of such an FCC decision on the
Company's finances and competitive position could be material.
The 1996 Act also prohibits state and local statutory and regulatory
barriers to entry to the provision of telecommunications services, thus
accelerating the process of creating a competitive environment in all markets.
Such preemption of state laws barring local competition and the relaxation of
regulatory restraints should enhance the Company's ability to expand its service
offerings. At the same time, the 1996 Act will also substantially increase the
competition the Company will face in its various markets.
FEDERAL REGULATION. The FCC has issued regulations implementing the changes
prescribed by the 1996 Act. These regulations affect the cost and availability
of certain services offered by the Company as part of its one-source ENS
solution.
The FCC has issued various regulations affecting local exchange service,
which is one component of the Company's Enterprise Network Services. The FCC has
issued regulations (1) limiting the ability of states to enact prohibitions on
resale of ILEC service to customers to whom an ILEC does not offer that service
at retail; (2) establishing interim default wholesale rates for local
telecommunications services; and (3) setting standards governing the terms and
prices of interconnection and access to unbundled ILEC network elements. These
regulations are currently the subject of judicial appeals and FCC petitions for
reconsideration. In particular, the U.S. Court of Appeals for the Eighth Circuit
has vacated FCC rules that (1) govern the pricing of local telecommunications
services and unbundled network elements, (2) permit a telecommunications carrier
to demand any term of an ILEC's interconnection contract with another carrier,
and (3) obligate ILECs to provide combinations of network elements, rather than
provide them individually. The U.S. Supreme Court has accepted these decisions
of the Eighth Circuit for review. The Company cannot predict the outcome of the
various court proceedings or any subsequent action by the FCC, although the
outcome of such proceedings could favorably or unfavorably materially affect the
Company's operations. Indeed, the outcome of these judicial appeals may
comparatively advantage the Company.
PUBLIC TELEPHONES. Public telephone service providers are subject to
federal, state and, to some extent, local regulation. Section 276 of the 1996
Act, and the regulations promulgated thereunder and in related proceedings,
impose requirements that public telephone service providers be compensated by
long-distance carriers for 800/888 and access code calls and that ILECs
eliminate subsidies to their public telephone operations. The per-call
compensation rate to be paid by long-distance carriers for 800/888 and access
code calls remains the subject of judicial appeals and reconsideration by the
FCC, and the amount of compensation that the Company will be paid for 800/888
and access code calls that were made after November 7, 1996, is uncertain.
OPERATOR SERVICE PROVIDER. As part of its Enterprise Network Services, the
Company offers 0+ services to callers from public telephones and other
locations. In addition to federal and state regulations governing common
carriers and long-distance services, the Company, as a provider of 0+ calling,
is regulated at the federal and state level as an operator service provider.
Operator service providers are required to disclose their prices to callers and
must file with the FCC informational tariffs containing detailed and specific
information concerning their rates.
STATE REGULATION. Certain of the Company's resold local and long-distance
services are classified as intrastate and therefore subject to state regulation.
In most states in which the Company plans to do business, the Company will be
required to obtain a certificate of public convenience and necessity and
operating authority for the provision of local telephony services. In addition,
the Company may be required to file tariffs setting forth the terms, conditions,
and prices for services which are classified as intrastate, particularly local
exchange service. In some states, the Company's tariff can list a range of
prices
58
<PAGE>
for particular services, and in others, such prices can be set on an individual
customer basis. The Company will not be subject to price caps or to rate of
return regulation in any state in which it currently provides services, or in
those states in which the Company intends to provide services.
All states in which the Company has filed applications for local authority
have rules and regulations in place allowing local competition. In addition to
certification by various state commissions, the Company needs interconnection
arrangements with the ILEC in each service area. In some states (for example,
California), these arrangements are tariffed. In others, the Company must enter
into an interconnection agreement with the ILEC. These agreements are negotiated
by the parties, subject to arbitration by the state commission if agreement
cannot be reached. If one or more such agreements have been negotiated by other
parties and approved by the state commission, a new entrant can elect to opt
into an existing agreement in whole. The Company has elected to do this in every
case, and expects to be able to continue to do so as it enters new markets. This
reduces regulatory costs and expedites the procedure.
LOCAL AUTHORIZATIONS AND FEES. In certain locations, the Company may be
required to obtain local franchises, licenses, or other operating rights. In
some of the areas where the Company will provide networking services, the
Company may pay license or franchise fees based on a percentage of gross
revenues or on a per linear foot basis. The Company has no immediate plans for
any construction which would entail local permits, right-of-way agreements, or
fees. Some local governments do impose usage taxes on long-distance or other
telecommunications services. To the extent that such taxes are imposed on the
Company, they are also imposed on all competitors, and are passed through to the
customer.
REGULATORY STATUS OF THE COMPANY
The Company is authorized by the FCC to provide resold international
services pursuant to Section 214 of the Communications Act of 1934, as amended.
In addition, the Company is authorized to provide interstate long-distance and
operator services.
The Company is certified to provide local exchange services in California,
Colorado, Oregon, Iowa and Utah, and intends to pursue certification in each of
its other markets. This certification will allow the Company to purchase
unbundled network elements from the ILEC in these markets and to combine these
elements with Company-owned or leased facilities to provide full-service
telecommunications services to the Company's customers.
The Company is also authorized to provide intrastate long distance service
in Arizona, Arkansas, California, Colorado, Indiana, Iowa, Kansas, Mississippi,
Missouri, Nebraska, Ohio, Oregon, Texas, Utah, Virginia and Washington.
In addition, the Company has interconnection agreements in place in Iowa,
Utah and Colorado, and an agreement is pending in Oregon. No agreement is
required in California.
EMPLOYEES
As of August 31, 1998, the Company had 736 full-time employees, of which 436
were added as a result of the Tie Acquisition. Of the 436 former Tie employees
who were hired by the Company, a total of 53 at locations in California,
Minnesota and New York were represented by the Communications Workers of America
("CWA") labor union while employed by Tie. The local chapters of the CWA have
now asked the Company to enter into collective bargaining negotiations as a
result of the hiring of these employees at these locations. The Company has
agreed to do so where it believes such collective bargaining is appropriate. The
CWA, Local 7200, AFL-CIO has filed a complaint with the National Labor Relations
Board alleging the Company has engaged in unfair labor practices at its facility
in Eden Prairie, Minnesota (approximately 15 employees) by bargaining in bad
faith by failing to recognize the union following the Tie Acquisition (Case
18-CA-14978). The Company intends to dispute the union's claim.
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<PAGE>
OFFICE FACILITIES
The Company leases sales and support facilities in each of its 32 markets.
The principal corporate and support facilities are also leased, and are located
as follows:
<TABLE>
<CAPTION>
SIZE (SQ.
LOCATION FT) LEASE EXPIRATION
- --------------------------------------------------------------------------- ----------- ------------------------
<S> <C> <C>
Englewood, Colorado........................................................ 28,488 April 30, 2003
Englewood, Colorado........................................................ 16,700 February 28, 2002
Overland Park, Kansas...................................................... 32,044 November 30, 1999
</TABLE>
- ------------------------
LEGAL PROCEEDINGS
The Company is involved in legal proceedings from time to time, none of
which management believes, if decided adversely to the Company, would have a
material adverse effect on the business, financial condition or results of
operations of the Company. See also "--Employees"
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<PAGE>
THE TIE ACQUISITION
GENERAL
At the time of the Tie Acquisition, Tie was the fourth largest independent
distributor of business telephone systems in the United States, had an active
customer base of approximately 55,000 accounts and had 32 offices. Tie's
principal equipment products were multi-featured, digitally controlled, hybrid
and private branch exchange ("PBX") systems. In addition, Tie provided voice
response and processing products with computer telephone integration hardware
and software, and network services. Tie's business mix consisted of new system
sales, service and maintenance, moves, adds, changes and upgrades to existing
customers, national account sales, and resale of long distance services. By
acquiring virtually all of Tie's assets, including its customer service
contracts, the Company was able to obtain substantially all the benefits
associated with Tie's operations and recent restructuring and an attractive
platform upon which to expand the Company's existing business.
REASONS FOR THE ACQUISITION
COMPLEMENTARY STRENGTHS. The Company's expertise in data networking and
data transport, which is often used as a first step in winning clients and
expanding client relationships into telephony and ENS services, is complemented
by Tie's strength in telephony sales and service. Tie's position as the largest
domestic independent distributor for the Norstar product line of Nortel
(formerly Northern Telecom), and for Mitel and Nitsuko products, has contributed
to its ability to establish a customer base of approximately 55,000 accounts.
CROSS-SELLING OPPORTUNITIES. Access to Tie's 55,000 accounts (which are
predominately telephone sales and service based) provides very attractive
cross-selling opportunities for the Company's data products and services and its
ENS solution. In addition, the Company expects to be able to take advantage of
cross-selling opportunities for such items as long distance service, local
exchange services and other network service offerings, which were not
effectively pursued by Tie due to its lack of capital resources and failure to
execute its business plan.
ACCELERATED GEOGRAPHIC GROWTH. The Company's business plan had anticipated
the rollout of its services in a total of 25 cities by the end of 2001. The Tie
Acquisition, by providing immediate access to 24 new cities, many of which had
already been targeted for expansion by the Company, will permit the immediate
refocusing of the Company's resources on the exploitation of the newly acquired
markets and customers without the delays which would have been incurred.
ADDITION TO SALES FORCE. Tie's strong consultative sales organization
remains substantially intact, and is trained in marketing approaches with the
prospective customer similar to those of the Company, including total cost of
ownership analysis, creating customized solutions and emphasizing the advantages
of a single source provider.
CUSTOMER DATABASE. Tie's customer database accounted for more than 100,000
former and current customers. Each of the customers in the database had been or
is being sold services by Tie. Utilization of this database decreases the amount
of time needed to identify potential customers. In addition, the database
provides the sales teams with the opportunity to contact customers without
making a "cold call."
HISTORY
Tie was founded in 1971 as a manufacturer and supplier of telephone system
products used by businesses. Tie was one of the first non-Bell companies to
manufacture and distribute commercial telephone systems on a national basis. As
a manufacturer and distributor, Tie built and established a strong position in
the industry with the caliber of its equipment and service. While Tie has not
manufactured telephone equipment since 1991, when it was first reorganized under
Chapter 11 of the United States Bankruptcy Code, the Company believes that Tie's
name recognition and reputation for quality continue to be valuable assets.
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<PAGE>
RESTRUCTURING PLAN
As a result of under capitalization and a weak strategic plan put in place
by the now departed management team, Tie had in recent years been unable to
generate operating profits. The Company believes that the primary problems were
the high level of corporate overhead associated with a flawed centralization
effort, unnecessary capital lease expenditures and the high fixed cost of
maintaining a field technician force staffed for peak demand levels. Through a
bankruptcy filing under Chapter 11 of the United States Bankruptcy Code on April
10, 1998, Tie was able to effect numerous changes to its previous operating
model including refocusing its sales organization on the existing customer base,
elimination of underutilized field technicians, closure of two unprofitable
branch office locations, and rejection of certain unattractive contracts with
vendors.
PRODUCTS AND SERVICES
Virtually all of the types of products and services offered by Tie were
already being offered by the Company but to a much lesser extent. Tie placed
greater emphasis, however, on the sale and service of telephony equipment which
historically constituted a smaller portion of the Company's revenues. Tie's
target customers consisted of small and medium-sized corporate, government and
multi-location national accounts to which Tie provided sales, installation,
service and support for telephone systems. Although the discussion which follows
is written so as to describe the products and services historically provided by
the Tie corporate entity, which was not acquired by the Company, the Company
will continue to be able to offer all of these products and services by virtue
of its acquisition of substantially all the assets used by Tie to offer these
products and services.
NEW EQUIPMENT SALES. The services offered by Tie began with consulting with
clients to determine their business flow and the interrelation of business
functions and telecommunications; helping clients select the appropriate
communications system for their business from hardware to telephone/data
locations, control software and actual site cable installation and termination;
and network services.
Tie marketed a broad range of fully electronic and digital, multi-featured
"key" telephone systems, hybrid switching systems, and PBX systems, together
with voice response and processing products incorporating integrated hardware
and software and related business products for commercial distribution. A "key"
telephone system provides each telephone with direct access to multiple outside
trunk lines and internal communications through intercom lines. A PBX system,
through a central switching device, permits the connection of internal and
external lines. A hybrid switching system provides, in a single system, both key
telephone and PBX features. Voice response systems and processing products
include voice-mail and inter-active voice response systems, which allow access
to computerized information via a single line instrument. Tie also provided
computer telephone integration and network services, resale of long distance
service and network design with related commercial and proprietary software.
All of Tie's fully electronic systems were microprocessor based, digitally
controlled systems. This enabled Tie to readily incorporate a variety of
additional features, as well as the ability to expand a system's capacity
through software enhancements. A number of Tie's advanced systems provided
integrated voice and data communications in a single system, and Tie's PBX
systems utilize digital switching technology which allowed them to be an
integral part of data processing and communications networks.
SERVICES. Once a client was operational, Tie provided on-going maintenance
(often through a long-term maintenance arrangement) and would make any necessary
additions and modifications to the system, referred to as moves, adds and
changes ("MAC"). Tie offered a complete array of service and maintenance options
which kept Tie involved in future aspects of client communications requirements
and provided an on-going revenue source for Tie. MAC work typically includes
installing new telephones, moving extensions, adding telephone lines, or
modifying software and services. Tie's MAC and services business was very stable
over recent years, generating in excess of approximately $43 million in 1997
revenues. In addition to MAC, Tie offered service and maintenance contracts on
installed equipment.
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Customer service was provided to customers through a dedicated team of
customer service representatives ("CSRs"), dispatchers and managers. The CSRs
answered incoming calls and managed the customer relationship including sales of
additional products, while the dispatchers managed work flow to the field
service technicians. The CSR and dispatchers worked with the customer to
determine the appropriate course of action and coordinated the Tie service
staff.
Installations and service were carried out through the installation work
force. Tie utilized its fleet of vehicles which were scheduled from the local
branches by dispatchers and provided service at all hours of the day based on
demand and emergency situations.
NATIONAL ACCOUNTS. Business in the national accounts segment included
providing the full range of Tie's products and services on a national basis to
large corporate customers with multiple locations. For these accounts, Tie
provided full service from installation design and execution to ongoing
maintenance and MAC execution. When a national corporate office selected a new
location, blue-prints were sent to Tie, which would, based on the customer's
specifications, plan both telecommunications and data layout for the location.
Tie would then send a team to the new location to cable, test and install client
specified equipment. Upon completion of work at the location, Tie would
coordinate the cut over with the local telephone company and make sure that data
and communications between the new location and home office were working
according to plan. On an on-going basis, many locations had maintenance
agreements which provided an on-going revenue stream for Tie.
LONG DISTANCE. Tie had marketing and/or distribution agreements with long
distance providers that complemented Tie's equipment and service offering and
allowed Tie to offer long distance service to customers as part of an integrated
communication services package. The Company is able to continue to provide these
services under its own resale agreements.
TIE HISTORICAL RESULTS OF OPERATIONS
Set forth below is summarized historical financial information for Tie
derived from the audited financial statements of Tie included elsewhere herein
which have been audited by PricewaterhouseCoopers LLP, independent accountants.
It should be noted that in the Tie Acquisition, although the Company acquired
substantially all of the assets of Tie, it only assumed selected liabilities of
Tie. See "Convergent Communications, Inc. Pro Forma Combined Financial
Statements" for additional information as to the assets acquired and liabilities
assumed in the Tie Acquisition.
<TABLE>
<CAPTION>
SEVEN MONTHS ENDED
YEAR ENDED DECEMBER 31, JULY 31, 1998
----------------------------------------------- ----------------------
1996 1997 1998
---------------------- ----------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
STATEMENT OF OPERATIONS DATA
Revenues:
Equipment(1)....................................... $ 45,114 47% $ 40,338 42% $ 17,258 37%
Services(2)........................................ 45,111 47% 43,390 46% 21,334 46%
Other(5)........................................... 6,332 6% 11,646 12% 7,880 17%
--------- --- ---------- --- --------- ---
Total revenue.................................... 96,557 100% 95,374 100% 46,472 100%
Operating costs: 63,691 69,359 36,616
Selling, general and administrative.................. 28,944 33,667 15,775
Depreciation and amortization........................ 4,632 4,851 2,909
Other charges........................................ 706 893 1,000
--------- ---------- ---------
Operating costs and expenses....................... 97,973 108,770 56,300
Operating loss..................................... $ (1,416) $ (13,396) $ (9,828)
</TABLE>
- ------------------------------
(1) "Equipment" includes new installations and upgrades.
(2) "Services" include MACs and service maintenance.
(3) "Other" represents agency commissions for long distance services, virtual
PBX services, rentals, royalties and other miscellaneous revenue.
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<PAGE>
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997 AND FOR THE
SEVEN MONTHS ENDED JULY 31, 1998
REVENUES. Revenues for the year ended December 31, 1997 were $95.4 million,
a reduction of $1.2 million from $96.6 million for the year ended December 31,
1996. The 1.2% decrease from 1996 to 1997 was largely attributable to a decline
in equipment sales due to working capital constraints in the third and fourth
quarters of 1997 which hindered Tie's ability to purchase equipment for resale.
Service revenues, which include moves, adds, and changes of telephone equipment
and technical support, also declined 3.8% due to a shift away from services to
larger cash contributing equipment sales with the intent to support the cash
needs of continuing operations. Other revenues increased $5.3 million or 84%
from 1996 to 1997 as a result of increased market penetration into the long
distance market.
For the seven months ended July 31, 1998, revenues continued to decline due
to declines in sales of equipment and services, including long distance
services. These declines resulted from the continuing cash constraints and the
negative impact of the April 1998 bankruptcy filing which caused constriction of
supplier credit lines and a 30% reduction in sales and technical staffing.
OPERATING COSTS. Operating costs for the year ended December 31, 1997
increased $5.7 million to $69.4 million from $63.7 million for the year ended
December 31, 1996. Although equipment and service operating costs decreased from
the prior year as a result of lower sales, the overall increase in operating
costs is attributable to an increase in other revenues. Other revenues consist
of agency communications for LD services, virtual PBX services, rentals, and
royalties. Operating costs for other revenues are greater as a percentage of
other revenues than operating costs for revenues from equipment and services.
Operating costs for the seven months ended July 31, 1998 continued to rise
as a percentage of revenues as a result of the cash constraints and the
bankruptcy filing which hampered Tie's ability to obtain favorable credit terms
with its vendors. In addition to increased costs from suppliers for resale
equipment, additional costs were incurred stemming from contractual minimum cost
commitments by network providers related to long distance service.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased to $33.7 million or 35.3% of revenues for the
year ended December 31, 1997. These expenses increased $4.8 million from $28.9
million or 29.9% of revenues for the year ended December 31, 1996. The increase
in expenses is primarily a result of the costs incurred in the centralization of
support services including accounting, purchasing, national sales and call
center operations located in each of the field markets to Tie's headquarters in
Overland Park, Kansas. Operations in the field and the number of personnel
remained relatively constant from the prior year.
Selling, general and administrative expenses for the seven months ended July
31, 1998 were $15.8 million or 34.0% of revenues. Tie reorganized its operations
through significant cost cutting measures as a means to maintain cash for
ongoing operations and as a result of the April 1998 bankruptcy filing. Included
in these efforts to reduce costs and conserve cash, Tie reduced its workforce by
approximately 30%, resulting in a large reduction in sales and technical staff.
Despite these reductions, selling, general and administrative expenses increased
as a percentage of revenue due to the decline in revenues.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization
expense for the year ended December 31, 1997 was $4.9 million, up 6.5% from $4.6
million for the year ended December 31, 1996. The increase in depreciation and
amortization was a result of capital expenditures during 1997 stemming from the
centralization of accounting and call center operations which were acquired
under capital leases.
For the seven months ended July 31, 1998, depreciation and amortization
expense was $2.9 million. Depreciation and amortization remained relatively
constant in 1998 due to Tie's efforts to minimize cash used for capital
expenditures and it's inability to obtain financing.
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MANAGEMENT
The following table sets forth the names and ages of the executive officers
and directors of the Company, the principal offices and positions with the
Company held by each person and the date such person became a director or
executive officer. The Company's directors have staggered terms, with three
classes of directors serving terms as set forth below or until the director's
death, resignation or removal.
<TABLE>
<CAPTION>
OFFICER
AND/OR
DIRECTOR
NAMES OF EXECUTIVE OFFICERS AND DIRECTORS AGE SINCE POSITION
- ------------------------------------------------ --- ----------- ------------------------------------------------
<S> <C> <C> <C>
John R. Evans(1)(2)(3).......................... 43 1995 Chief Executive Officer, Chairman and Director
Keith V. Burge(2)(3)............................ 44 1995 President, Chief Operating Officer and Director
Philip G. Allen(4).............................. 51 1995 Executive Vice President, Secretary and Director
Roger W. Christoph(1)(2)(5)..................... 38 1997 Director
Roland E. Casati(2)(4).......................... 67 1997 Director
Richard G. Tomlinson, Ph.D.(1)(5)............... 62 1997 Director
Martin E. Freidel............................... 35 1997 Executive Vice President, General Counsel and
Assistant Secretary
John J. Phibbs.................................. 36 1997 Chief Financial Officer and Treasurer
</TABLE>
- ------------------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
(3) Elected to Class I, with a term expiring on the annual meeting following the
end of the calendar year 2000, and every three years thereafter.
(4) Elected to Class II, with a term expiring on the annual meeting following
the end of the calendar year 1999, and every three years thereafter.
(5) Elected to Class III, with a term expiring on the annual meeting following
the end of the calendar year 1998, and every three years thereafter.
JOHN R. EVANS, Chief Executive Officer since December 1995. Mr. Evans served
as the Chief Financial Officer and Executive Vice President of ICG
Communications, Inc. ("ICG") from its inception until December 1995. During his
five-year tenure, ICG's revenues grew from approximately $600,000 in 1991 to an
annualized rate of more than $140 million at the end of 1995. He also was ICG's
principal financial spokesperson in successful efforts of raising more than $500
million in public and private financings during this period. Mr. Evans was
primarily responsible for ICG's acquisition and development of core fiber optic
network investments prior to public recognition of the emerging CLEC
opportunities. Mr. Evans has also held various senior accounting and treasury
management positions with Northern Telecom Canada Ltd., including strategic
financial planning, analysis and budgeting, and held various audit and
management information systems positions during six years with Coopers &
Lybrand.
KEITH V. BURGE, President and Chief Operating Officer since December 1995.
Mr. Burge has nineteen years of data communications experience. He was the
founder, Chief Executive Officer and Chief Operating Officer of Fiber Optic
Technologies, Inc. ("FOTI"), a leading national network services integrator
specializing in the design, implementation and support of high-speed data
communication infrastructures, which was formed in 1986. While at FOTI, Mr.
Burge was responsible for formulating and executing a disciplined plan that
allowed FOTI to realize 90% annualized growth, culminating in revenues of $65
million in 1995 and 550 employees in thirteen offices throughout the western
United States. During
65
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his nine year tenure, Mr. Burge supervised FOTI's implementation of more than
10,500 LAN and WAN infrastructures for companies such as Exxon Corporation, The
Boeing Company, Amoco Corporation, International Business Machines,
Weyerhaeuser, MCI Communications Corporation, The Dow Chemical Company and
Hewlett-Packard Company. In 1994, Mr. Burge directed an initiative to execute a
Network Desktop Outsourcing program that successfully placed 140 full-time
network engineers and technicians onsite at Intel Corporation's Portland, Oregon
campus, assisting and supporting 8,000 network users. Prior to founding FOTI,
Mr. Burge was employed by Digital Equipment Corporation for nine years, where,
from 1983 to 1986, he was a senior sales executive.
PHILIP G. ALLEN, Executive Vice President, Secretary and a Director since
December 1995. Mr. Allen was most recently Vice President of Investor Relations
and Corporate Communications for ICG Communications, Inc. Prior to joining ICG
in 1992, Mr. Allen was President of Allen & Company Business Communications, a
communications company specializing in business development and the design and
production of marketing materials in the communications field. His customers
included U S West, Inc., AT&T and MCI. Mr. Allen was also an advisor to senior
management at what is now Ameritech and U S West from 1976 to 1986, where he
worked in various media relations, public policy and executive support areas.
ROGER W. CHRISTOPH, a Director since January 17, 1997. Mr. Christoph is a
Managing Partner of Keystone Capital Partners LLC, a Chicago-based venture
capital and private equity firm and is also a Managing Partner of Keystone
Investment Advisors LLC, a registered investment advisor and broker-dealer
providing asset management services to private customers. Mr. Christoph founded
and was President and CEO of Shepherd Financial Group, Inc., a private-customer
brokerage firm, prior to its sale. Earlier in his career, he was a Principal at
Christoph Securities, Inc., a private family-owned brokerage firm. Mr. Christoph
began his career as a financial consultant at PaineWebber, Inc. Mr. Christoph
has invested and raised growth capital for several privately owned and publicly
traded companies including: Boston Chicken, GST Telecommunications, ICG,
Neomedia Technologies, Stambaugh Hardware Co., and Universal Display Corp. Mr.
Christoph is a director of Christoph Securities, Inc., Stambaugh Hardware Co.,
Keystone Capital Partners and Keystone Investment Advisors.
ROLAND E. CASATI, a Director since January 17, 1997. Mr. Casati has
developed in excess of three million square feet of high-quality office
buildings in and around Chicago, Illinois, during the past 35 years. For the
last 15 years, Mr. Casati has been a venture capitalist, having been a start-up
investor in Callaway Golf and Zeigler Coal Holding Co., where he serves as a
director.
RICHARD G. TOMLINSON, Ph.D., a Director since June 28, 1997. Dr. Tomlinson
is the President of Connecticut Research, Inc. ("CRI"), a management consulting
company founded in 1986 which serves the telecommunications, electric utility
and computer industries. Since 1989, CRI has published a widely referenced
annual overview report on the competitive telecommunications industry (now
jointly produced with Chicago-based New Paradigm Resources Group, Inc.). He has
published numerous marketing studies, venture analyses and technical papers, is
a contributing author for several books and holds five patents. Prior to
founding CRI, he was the Vice President for Strategic Planning of United
Technologies Communications Co. Inc., a subsidiary of United Technologies
Corporation ("UTC"). His career at UTC spanned 20 years, including 16 years at
the UTC Research Laboratory where he held the position of Senior Principal
Scientist.
MARTIN E. FREIDEL, Executive Vice President, General Counsel and Assistant
Secretary since September 1997. Prior to joining the Company, Mr. Freidel served
as Special Counsel to the law firm of Miller & Welch, LLC in Denver, Colorado,
where he also acted as Associate General Counsel to the Company. From December
1992 until December 1996, Mr. Freidel was Vice President and General Counsel of
ICG. Prior to joining ICG, Mr. Freidel served as Vice President--Regulatory for
LDDS Communications, Inc. (now WorldCom) ("LDDS") and Vice President and General
Counsel for MidAmerican Technologies, Inc., MidAmerican Communications, Inc. and
Republic Telecom Services, Inc., which were purchased
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by LDDS in 1991. Mr. Freidel holds a Juris Doctor degree from the Creighton
University School of Law and a BSBA from Creighton University.
JOHN J. PHIBBS, Chief Financial Officer of the Company since March 1998. Mr.
Phibbs previously served as Vice President of Finance and Administration since
joining the Company in March 1997. Prior to joining the Company, Mr. Phibbs held
various financial positions from 1991 through February 1997 with ICG. Most
recently, Mr. Phibbs held the position of Vice President--Accounting and
previously, Vice President--Financial Planning and Analysis. From 1985 to 1991,
Mr. Phibbs was employed in various financial positions at Lockheed Martin
Corporation and McDonnell Douglas Corporation.
DIRECTOR COMPENSATION
Directors of the Company are reimbursed for certain reasonable expenses
incurred in attending Board or committee meetings. In addition, non-employee
Directors are compensated at the rate of $1,000 per day for on-site meetings of
the Board or its committees and $250 for teleconference meetings. Non-employee
Directors are also compensated with stock options to purchase 5,000 shares of
Common Stock per quarter for each quarter served as a Director of the Company.
AUDIT COMMITTEE
The Company's Board of Directors currently has an Audit Committee that
monitors the corporate financial reporting and the internal and external audits
of the Company, reviews and approves material accounting policy changes,
monitors internal accounting controls, recommends engagements of independent
auditors, reviews related-party transactions and performs other duties as
prescribed by the Board of Directors. The Audit Committee currently consists of
Messrs. Evans, Christoph and Tomlinson.
COMPENSATION COMMITTEE
The Company's Board of Directors currently has a Compensation Committee that
reviews and approves the compensation and benefits to be provided to the
executive officers of the Company. In addition, the Compensation Committee
administers the Company's 1996 and 1997 Incentive and Non-Statutory Stock Option
Plans and the 1998 Stock Option Plan. The Compensation Committee currently
consists of Messrs. Evans, Burge, Casati and Christoph.
67
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth in summary form the compensation earned by
the Company's Chief Executive Officer and the other highest paid executive
officers (collectively, the "Named Officers") for the Company.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------------------- -------------------------
OTHER ANNUAL SECURITIES UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR(1) SALARY BONUS(2) COMPENSATION OPTIONS(3) COMPENSATION
- --------------------------- ----------- --------- ----------- ------------- ------------------------- -------------
<S> <C> <C> <C> <C> <C> <C>
John R. Evans 1996 $ 6,250 -- -- 200,000 --
Chairman and Chief 1997 $ 150,000 $ 75,000 $ 12,781(4) -- $ 82,500(5)
Executive Officer
Keith V. Burge 1996 $ 5,417 -- -- 200,000 --
President and Chief 1997 $ 130,000 $ 65,000 $ 8,625(4) -- $ 72,022(5)
Operating Officer
Philip G. Allen 1996 $ 4,167 -- -- 200,000 --
Executive Vice President 1997 $ 100,000 $ 50,000 $ 12,172(4) -- $ 55,735(5)
and Secretary
Bruce Boland(6) 1996 $ 5,208 -- -- 100,000 --
Former Executive Vice 1997 $ 125,000 -- $ 6,900(4) -- $ 6,668(5)
President Corporate
Development
John J. Phibbs 1996 -- -- -- -- --
Chief Financial Officer
and 1997 $ 95,833(7) $ 32,383 $ 5,000(4) 300,000 $ 29,134(5)
Treasurer
Martin E. Freidel 1996 -- -- -- -- --
Executive Vice President, 1997 $ 36,939(8) $ 19,569 $ 2,199(4) 300,000 $ 21,445(5)
General Counsel and Asst.
Secretary
</TABLE>
- ------------------------------
(1) During 1996, the Company was in its initial formation stages and the
executive officers did not receive compensation for their services until
December 16, 1996.
(2) Includes the 50% of the individual's bonus under his employment agreement
which was paid in cash, plus, in the case of Mr. Phibbs, a signing bonus of
$8,425. Each of the individuals elected to receive the remaining 50% of his
bonus in shares of the Company's Common Stock, valued at fair market value
(determined by a regular quarterly appraisal). The total cash and deferred
bonus payments made to the Named Officers were as follows: Mr. Evans,
$150,000; Mr. Burge, $130,000; Mr. Allen, $100,000; Mr. Phibbs, $47,917, and
Mr. Freidel, $39,139. Mr. Boland did not receive a bonus because of his
resignation from the Company in February 1998.
(3) Amounts listed are options granted. Options vest with respect to twenty
percent (20%) of the shares of Common Stock on each anniversary of the date
of grant.
(4) Includes automobile allowance and other fringe benefit payments.
(5) Includes contributions to the Company's 401(k) Plan and 50% of the bonus
payments made under the individual's employment agreement which were
deferred and paid in Company Common Stock which is held under the Company's
Deferred Compensation Plan.
(6) Mr. Boland resigned from the Company on February 18, 1998. As a result of
his resignation, options to purchase 60,000 shares of Common Stock were
canceled.
(7) Mr. Phibbs' base salary is $130,000 per year. His employment commenced on
March 3, 1997.
(8) Mr. Freidel's base salary is $125,000 per year. Mr. Freidel's employment
commenced on September 15, 1997.
68
<PAGE>
OPTION GRANTS TABLE
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
NUMBER OF ASSUMED ANNUAL RATES OF STOCK
SECURITIES PERCENT OF PRICE APPRECIATION FOR OPTION
UNDERLYING TOTAL OPTIONS EXERCISE TERM(2)
OPTIONS GRANTED TO PRICE PER EXPIRATION ------------------------------
NAME YEAR GRANTED(1) EMPLOYEES SHARE DATE 5% 10%
- ------------------------- --------- ----------- --------------- ----------- ------------ --------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
John R. Evans............ 1996 200,000 23.3 $ 1.10 12/15/2001 $ 35,000 $ 102,000
1997 -- -- -- -- -- --
Keith V. Burge........... 1996 200,000 23.3 $ 1.10 12/15/2001 $ 35,000 $ 102,000
1997 -- -- -- -- -- --
Philip G. Allen.......... 1996 200,000 23.3 $ 1.10 12/15/2001 $ 35,000 $ 102,000
1997 -- -- -- -- -- --
Bruce Boland(3).......... 1996 100,000 11.6 $ 1.10 12/15/2001 $ 18,000 $ 51,000
1997 -- -- -- --
John J. Phibbs........... 1996 -- -- -- --
1997 300,000 7.9 $ 1.00 3/3/2007 $ 189,000 $ 478,000
Martin E. Freidel........ 1996 -- -- -- -- -- --
1997 300,000 7.9 $ 2.50 9/15/2007 $ 472,000 $ 1,195,000
</TABLE>
- ------------------------
(1) Options vest with respect to 20% of the shares on each anniversary of the
date of grant. Each of the option grants were made in the year the named
executive officer first executed an employment agreement with the Company.
(2) Amounts reflect assumed risks of appreciation set forth in the Commissions'
executive compensation disclosure requirements and do not reflect the
Company's beliefs as to the amount, if any, the fair market value of the
Company's Common Stock may appreciate. Amounts are rounded to the nearest
$1,000.
(3) Mr. Boland resigned from the Company on February 18, 1998. As a result of
his resignation, options to purchase 60,000 shares of Common Stock were
canceled.
AGGREGATED OPTION FISCAL YEAR-END VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED IN-
NUMBER OF SECURITIES THE-MONEY OPTIONS AT
INCLUDING UNEXERCISED FISCAL YEAR-END
OPTIONS AT FISCAL YEAR-END EXERCISABLE/
NAME EXERCISABLE/ UNEXERCISABLE UNEXERCISABLE(1)
- -------------------------------------------------------- ---------------------------- --------------------------
<S> <C> <C>
John R. Evans........................................... 40,000/200,000 $ 76,000/380,000
Keith V. Burge.......................................... 40,000/200,000 $ 76,000/380,000
Philip G. Allen......................................... 40,000/200,000 $ 76,000/380,000
Bruce Boland(2)......................................... 20,000/100,000 $ 38,000/190,000
John J. Phibbs.......................................... 0/300,000 $ 0/600,000
Martin E. Freidel....................................... 0/300,000 $ 0/150,000
</TABLE>
- ------------------------
(1) Assumes a fair market value of the Common Stock of the Company at December
31, 1997, of $3.00 per share based on a valuation of the Company performed
by an independent appraiser.
(2) Mr. Boland resigned from the Company on February 18, 1998. As a result of
his resignation, options to purchase 60,000 shares of Common Stock were
canceled.
69
<PAGE>
EMPLOYMENT AGREEMENTS
The Company has employment agreements with John R. Evans, Keith V. Burge,
Philip G. Allen, John J. Phibbs and Martin E. Freidel.
Each of Messrs. Evans', Burge's and Allen's employment agreement, as
amended, was originally executed effective December 15, 1996 and provides for an
initial term of five (5) years. Thereafter, each of the employment agreements
continues from year to year. Mr. Evans, Mr. Burge and Mr. Allen currently
receive annual base salaries of $200,000, $180,000 and $150,000, respectively.
In addition, each of Messrs. Evans, Burge and Allen receives a car allowance,
benefit package and an incentive bonus of up to 100% of their respective base
salaries for Messrs. Evans and Burge, and up to 50% of his base salary for Mr.
Allen. The incentive bonus is determined by the Compensation Committee of the
Board of Directors. In the event of termination by the Corporation without
cause, or by the employee, for certain events, including changes in control, the
employee is entitled to continue to receive his salary and accrued bonus for a
period of twenty-four (24) months, as well as the immediate vesting of all
options granted to the employee. In addition, each of Messrs. Evans, Burge and
Allan is subject to non-compete, non-interference and confidentiality provisions
for a period of twenty-four (24) months following the termination of their
respective employment agreement. Any disputes involving the employee's
employment or his respective employment agreement are subject to certain
arbitration provisions contained in the agreements.
Mr. Phibbs' employment agreement, as amended, is effective as of March 3,
1997 and provides for a term of four years. Mr. Phibbs receives an annual base
salary of $130,000. In addition, Mr. Phibbs receives a car allowance, benefit
package and an incentive bonus of up to 50% of his base salary. The incentive
bonus is determined by the Compensation Committee of the Board of Directors. In
the event of termination by the Company without cause, or by the employee upon
the occurrence of certain events, including changes in control, Mr. Phibbs is
entitled to continue to receive his salary for a period of 12 months. Any
disputes involving the Mr. Phibbs' employment or his employment agreement is
subject to certain arbitration provisions contained in the agreement.
Mr. Freidel's employment agreement is effective as of September 15, 1997 and
provides for an initial term of five years. Thereafter, the employment agreement
continues from year to year. Mr. Freidel receives an annual base salary of
$125,000. In addition, Mr. Freidel receives a car allowance, benefit package and
an incentive bonus of up to 100% of his base salary. The incentive bonus is
determined by the Compensation Committee of the Board of Directors. In the event
of termination by the Company without cause, or by the employee upon the
occurrence of certain events, including changes in control, Mr. Freidel is
entitled to continue to receive his salary and accrued bonus for a period of 24
months, as well as the immediate vesting of all options granted to Mr. Freidel.
Any disputes involving Mr. Freidel's employment or his employment agreement is
subject to certain arbitration provisions contained in the agreement.
STOCK INCENTIVE PLANS
The Company has adopted the 1996 and the 1997 Incentive and Non-Statutory
Option Plans and the 1998 Stock Option Plan (collectively "Plans") which
authorize the Company to grant incentive stock options within the meaning of
Section 422A of the Internal Revenue Code of 1986, as amended, and to grant
nonstatutory stock options. The Plans relate to a total of 6,400,000 shares of
Common Stock. Options to purchase 2,233,000 shares of the Common Stock under the
1996 Plan, 963,000 shares under the 1997 Plan and 2,067,500 shares of the
Company's Common Stock under the 1998 Plan, at exercise prices between $1.00 per
share and $5.50 per share are outstanding. A total of 550,000 of the outstanding
options are presently exercisable and all employee options vest 20% annually
over five years from the date of grant.
The Plans require that the exercise prices of options granted must be at
least equal to the fair market value of a share of Common Stock on the date of
grant, with a maximum term of ten years, provided that if
70
<PAGE>
an employee owns more than 10% of the Company's outstanding Common Stock, then
the exercise price of an incentive option must be at least 110% of the fair
market value of a share of the Company's Common Stock on the date of grant, and
the maximum term of such option may be no longer than five years. The aggregate
fair market value of Common Stock, determined at the time the option is granted,
for which incentive stock options become exercisable by an employee during any
calendar year is limited to $100,000.
The Plans are to be administered by the Company's Board of Directors or a
committee thereof which determines the terms of options granted, including the
exercise price, the number of shares of Common Stock subject to the option, and
the terms and conditions of exercise. No option granted under the Plans is
transferable by the optionee other than by will or the laws of descent and
distribution, and each option is exercisable during the lifetime of the optionee
only by such optionee.
The Company presently believes that in 1998 an amount of Common Stock equal
to approximately 15% of the fully diluted shares of the Common Stock of the
Company will be reserved as Options for employees so that the Company is better
able to attract and retain highly competent employees.
401(K) PLAN
The Company adopted an employee benefit 401(k) plan (the "401(k) Plan") for
all employees, effective March 1, 1997. Under the 401(k) Plan, employees may
voluntarily elect to have up to 15% of their salaries (subject to the maximum
amount allowed under Federal law) deducted from earnings and placed in the
401(k) Plan, to be invested among several alternatives selected by the employee.
The Company may elect to match the employee's contributions up to 6% by
depositing Common Stock into the 401(k) Plan. Such contributions are made on a
quarterly basis and the number of shares of Common Stock issued is determined
with reference to the value of the Common Stock at the end of each quarter, as
determined by an independent valuation. Shares of the Common Stock are fully
vested when issued under the 401(k) Plan. With respect to the six month period
ended June 30, 1998, the Company had issued a total of 110,231 shares of Common
Stock under the 401(k) Plan.
INCENTIVE COMPENSATION PLAN
The Company adopted an Incentive Compensation Plan in March, 1997 whereby
each employee is eligible to receive in the second quarter of each year a
payment based in part upon the employee's performance during the preceding
fiscal year as measured against predetermined objectives and in part upon the
performance of the Company during the same period. For director-level employees
and above, 50% of the employee's incentive compensation must be taken in the
form of shares of the Company's Common Stock, receipt of which may be deferred
pursuant to the Company's Deferred Compensation Plan. No payments were made
pursuant to the Incentive Compensation Plan during 1997 because payments are
based in part on the financial performance of the Company as reflected in its
audited financial statements which were not available until March 1998.
DEFERRED COMPENSATION PLAN
The Company has a Deferred Compensation Plan whereby certain management
employees can elect to defer a portion of their compensation which will be paid
in Common Stock of the Company at a future date. The plan requires the Company
to issue shares of Common Stock into a trust account which will then be
distributed to the employee at a specified date in the future not less than 1
year from the deferral date. As of June 30, 1998, 154,344 shares of Common Stock
are being held in the trust account.
71
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of August 31, 1998, by (i) each of the
Company's directors, and named officers, (ii) each person who is known to the
Company to own beneficially more than 5% of the outstanding Common Stock and the
address of each such person and (iii) all of the Company's officers and
directors as a group.
<TABLE>
<CAPTION>
SHARES OF COMMON
STOCK PERCENT
BENEFICIALLY BENEFICIALLY
NAME AND ADDRESS OWNED OWNED(1)
- --------------------------------------------------------------------------- ----------------- -------------------
<S> <C> <C>
Philip G. Allen(2)(3) .....................................................
400 Inverness Drive South, Suite 400
Englewood, CO 80112 2,393,785 8.58%
Keith V. Burge(2)(4) ......................................................
400 Inverness Drive South, Suite 400
Englewood, CO 80112 2,349,253 8.42%
John R. Evans(2)(5) .......................................................
400 Inverness Drive South, Suite 400
Englewood, CO 80112 1,882,666 6.75%
Roland E. Casati(6)........................................................ 1,160,123 4.11%
Roger W. Christoph(7)...................................................... 938,000 3.30%
Dr. Richard G. Tomlinson(8)................................................ 85,000 *
John J. Phibbs(9).......................................................... 70,315 *
Martin E. Freidel(10)...................................................... 132,439 *
First Continental Group, L.C. .............................................
5731 Greendale Road, Box 429
Johnston, Iowa 50131 2,005,000 7.21%
All Officers and Directors as a group (9 persons).......................... 9,016,371 30.80%
</TABLE>
- ------------------------
* Less than 1%
(1) Based on 27,813,507 shares of Common Stock issued and outstanding as of
August 31, 1998. Percentage ownership is calculated by dividing (i) the sum
of the number of shares owned by such stockholders plus the number of shares
such stockholder would receive upon exercise of options or warrants
exercisable within sixty (60) days of the date hereof ("Conversion Shares"),
by (ii) the total number shares of Common Stock outstanding plus such
stockholder's Conversion Shares.
(2) Shares of Common Stock now owned or hereafter acquired by Messrs. Evans,
Burge and Allen and their wives are subject to a voting agreement pursuant
to which all shares of Common Stock owned directly or indirectly by the
parties (including shares held in trust for Mr. Evan's children over which
shares Mr. Allen, as trustee, has sole voting power) will be voted together
as the parties agree by a simple majority of the parties to the voting
agreement. Each party to the voting agreement could be deemed to
beneficially own all the shares of Common Stock owned by the other parties
to such agreement due to such voting provision. As the Company believes that
it more accurately reflects ownership of the Company's Common Stock, this
table does not reflect shares that may be deemed to be beneficially owned by
any person solely by virtue of the voting agreement.
(3) Includes 200,000 shares of Common Stock held in trust for the benefit of Mr.
Evans' children and over which shares Mr. Allen, as trustee, has sole voting
power, 500,000 shares of Common Stock held by Mr. Allen's wife, options to
purchase 40,000 shares Common Stock, warrants to purchase 45,000 shares of
Common Stock, 3,401 shares of Common Stock held in the Company's 401(k)
Plan, and 15,384 shares held in the Company's Deferred Compensation Plan.
72
<PAGE>
(4) Includes 500,000 shares of Common Stock held by Mr. Burge's wife, options to
purchase 40,000 shares Common Stock, warrants to purchase 45,000 shares of
Common Stock, 4,253 shares of Common Stock held in the Company's 401(k)
Plan, and 20,000 shares held in the Company's Deferred Compensation Plan.
(5) Includes 500,000 shares of Common Stock held by Mr. Evans' wife's, options
to purchase 40,000 shares of Common Stock, warrants for 45,000 shares of
Common Stock, 4,590 shares of Common Stock held in the Company' 401(k) Plan,
and 23,076 shares held in the Company's Deferred Compensation Plan.
(6) Includes 35,000 options and warrants to purchase 375,000 shares of Common
Stock.
(7) Includes 35,000 options and warrants to purchase 573,000 shares of Common
Stock.
(8) Includes 25,000 options and warrants to purchase 20,000 shares of Common
Stock.
(9) Includes options to purchase 60,000 shares of Common Stock, 2,944 shares of
Common Stock held in the Company's 401(k) Plan and 7,371 shares of Common
Stock held in the Company's Deferred Compensation Plan.
(10) Includes 40,000 shares of Common Stock held by Freidel Development
International, LLC ("FDI"), for which Mr. Freidel has voting power, warrants
to purchase 1,800 shares of Common Stock, warrants to purchase 20,000 shares
of Common Stock held by FDI, options to purchase 60,000 shares of Common
Stock, 1,018 shares of Common Stock held in the Company's 401(k) plan, and
6,021 shares of Common Stock held in the Company's Deferred Compensation
Plan.
73
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In 1996, the Company issued 2,500,000 shares of Common Stock each to its
three founders, Messrs. Evans, Burge and Allen, for $150,000 each. Messrs.
Evans, Burge and Allen also each paid $50,000 to purchase 50,000 shares of
Common Stock and warrants to purchase 25,000 shares of Common Stock for $50,000
each in the Company's initial private placement offering.
As part of the Company's second private placement in 1997, Messrs. Evans,
Burge, Allen, Tomlinson and Freidel each paid $100,000 to purchase 40,000 shares
of Common Stock and warrants to purchase 20,000 shares of Common Stock.
Roger Christoph, a Director of the Company, provides financial advisory
services to the Company from time to time. An aggregate of $1,750 has been paid
to Mr. Christoph for such services. In addition, Mr. Christoph was a Principal
and owner of Shepherd Financial Group which received compensation totaling
approximately $1.5 million and the issuance of 438,000 warrants to purchase
Common Stock in exchange for placement agent services provided to the Company in
the Company's 1996 and 1997 private placements of Common Stock. Mr. Christoph
was also a Principal and owner of Shepherd Capital Group which was paid
approximately $0.5 million for financial advisory services provided to the
Company during 1997.
CERTAIN INDEBTEDNESS
COMDISCO FACILITY
In November 1997, the Company entered into a three year Program Agreement
which provides up to $50 million in equipment lease financing with Comdisco,
Inc. ("Comdisco"), a computer and telecommunications equipment leasing and
financing company. As of June 30, 1998, $10.0 million was available for lease to
the Company of which $1.8 million was being utilized. The availability of
additional amounts depends on whether the Company meets certain financial
criteria. The Program Agreement expires on June 30, 2000.
The Comdisco facility is collateralized by the equipment being financed and
is guaranteed by the Company. In addition, the Company is required to issue a
warrant to acquire Common Stock of the Company in an amount equal to ten percent
(10%) of the facility, divided by the exercise price per share. The exercise
price per share is equal to the price paid by investors in recent equity
offerings and will, in no event, be less than $3.00 per share. The warrants will
be issued in three installments based upon amounts available under the facility.
On November 19, 1997, the Company issued a warrant for the purchase of 333,333
shares of Common Stock at an exercise price of $3.00 per share for the first
$10.0 million of the facility. The warrants have been valued based on the value
of the Company's Common Stock obtained in a quarterly independent appraisal, and
are being amortized into interest expense over three years.
NATIONSCREDIT COMMERCIAL CORPORATION FACILITY
In February 1997, the Company entered into an inventory credit facility with
NationsCredit Commercial Corporation ("NationsCredit") for the purpose of
purchasing data and telephony inventory for sale to customers. The amount of the
credit line is currently $0.8 million which is collateralized by inventory.
GMAC
In June 1997, the Company obtained a one-year line of credit with General
Motors Acceptance Corporation in the amount of approximately $0.5 million to
purchase vehicles for its operations. Advances under the line are payable over a
four to five year term. The Company has utilized $155,521 of this credit
facility of which $133,064 remained outstanding as of June 30, 1998. The Company
does not anticipate additional borrowings under this facility.
74
<PAGE>
SUN FINANCIAL FACILITY
In May 1997, the Company entered into a Master Equipment Lease with Sun
Financial Group, Inc. to lease equipment, facilities and related items for the
Company's internal expansion as well as equipment to be used for customer
installations. The facility is collateralized by a $0.1 million standby letter
of credit. In connection with the establishment of the facility, the Company
issued a warrant to Sun Financial Group, Inc. for the purchase of 80,571 shares
of Common Stock at an exercise price of $3.00. The warrants have been valued
based on the value of the Company's Common Stock obtained in a regular
independent appraisal, and are being amortized into interest expense over three
years. The Company had outstanding amounts under this facility of $1.4 million
and $2.3 million as of December 31, 1997 and June 30, 1998, respectively.
DESCRIPTION OF THE NOTES
Except as otherwise indicated below, the following summary applies to both
the Old Notes and the New Notes. As used herein, the term "Notes" means the Old
Notes and the New Notes, unless otherwise indicated.
The form and terms of the New Notes will be identical in all material
respects to the form and terms of the Old Notes, except that the New Notes will
be registered under the Securities Act, and therefore such New Notes will not be
subject to certain transfer restrictions and registration rights applicable to
the Old Notes. See "The Exchange Offer."
The Notes are issued under an Indenture (the "Indenture"), dated as of April
2, 1998, between the Company and Norwest Bank Colorado, N.A. as trustee (in such
capacity, the "Trustee"). A copy of the form of Indenture is available from the
Initial Purchasers. Upon the issuance of the New Notes, the Indenture will be
subject to the Trust Indenture Act of 1939, as amended (the "Trust Indenture
Act" or the "TIA"). The following summary of all of the material provisions of
the Indenture does not purport to be complete and is subject to, and is
qualified in its entirety by reference to, (i) all of the provisions of the
Notes and the Indenture, including the definitions of certain terms contained
therein and those terms made a part of the Indenture through the incorporation
by reference of the Trust Indenture Act, as in effect on the Issue Date, and
(ii) the Trust Indenture Act, in the case of the New Notes. Whenever particular
provisions or definitions of the Indenture, the Notes or the terms defined
therein are referred to herein, such provisions or definitions are incorporated
herein by reference. As used in this section, the "Company" refers to Convergent
Communications, Inc. and does not include its subsidiaries except for purposes
of financial data determined on a consolidated basis. The definitions of certain
capitalized terms used in the following summary are set forth below under
"--Certain Definitions."
GENERAL
The Notes are general senior unsecured (except for the security interest in
the Collateral Account) obligations of the Company. The Notes are secured by a
first priority security interest in the Collateral Account described under
"--Disbursement of Funds; Collateral Account" and "--Ranking."
The Old Notes have been, and the New Notes will be, issued only in
registered form, without coupons, in denominations of $1,000 and integral
multiples of $1,000. See "Book-Entry; Delivery and Form." Principal of, premium,
if any, and interest on the Notes are payable, and the Notes are exchangeable
and transferable, at the office or agency of the Company in the City of New York
maintained for such purposes (which initially will be the corporate trust office
of the Trustee). See "Book-Entry; Delivery and Form." No service charge will be
made for any registration of transfer, exchange or redemption of the Notes,
except in certain circumstances for any tax or other governmental charge that
may be imposed in connection therewith.
75
<PAGE>
Any Old Notes that remain outstanding after the completion of the Exchange
Offer, together with the New Notes issued in connection with such Exchange
Offer, will be treated as a single class of securities under the Indenture.
MATURITY, INTEREST AND PRINCIPAL
The Notes are limited to $160,000,000 aggregate principal amount, and will
mature on April 1, 2008. Interest on the Notes will accrue at a rate of 13% per
annum, and will be payable semiannually in arrears on each April 1 and October
1, commencing October 1, 1998 to the holders of record of Notes at the close of
business on the March 15 and September 15 immediately preceding such interest
payment date. Interest will accrue from the most recent interest payment date to
which interest has been paid or duly provided for or, if no interest has been
paid or duly provided for, from the Issue Date. Interest will be computed on the
basis of a 360-day year of twelve 30-day months. Interest on overdue principal
and, to the extent permitted by law, on overdue installments of interest will
accrue at the rate of interest borne by the Notes. Because of the need to
incorporate into the Registration Statement audited financial information
regarding Tie (which was not readily available) the Registration Statement
relating to the Exchange Offer was not declared effective by the Securities and
Exchange Commission prior to August 30, 1998, and the Exchange Offer was not
consummated prior to September 29, 1998. Thus, the Notes will accrue additional
interest at a rate of 0.5% per annum for the period from August 31, 1998,
through the date the Exchange Offer is consummated.
OPTIONAL REDEMPTION
The Notes will be redeemable, in whole or in part, at any time on or after
April 1, 2003 at the option of the Company, upon not less than 30 nor more than
60 days' notice, at the redemption prices (expressed as percentages of principal
amount) set forth below, plus accrued and unpaid interest to the redemption
date, if redeemed during the 12-month period beginning April 1 of the years
indicated below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
- --------------------------------------------------------------------------------- -----------
<S> <C>
2003............................................................................. 106.50%
2004............................................................................. 104.33%
2005............................................................................. 102.17%
2006 and thereafter.............................................................. 100.00%
</TABLE>
Notwithstanding the foregoing, on or prior to April 1, 2001, the Company
may, at its option, use the net proceeds of one or more Public Equity Offerings
(as defined below) or one or more sales of Common Stock to a Strategic Equity
Investor (as defined) yielding gross cash proceeds to the Company of not less
than $50 million to redeem up to 35% of the aggregate principal amount of Notes
originally issued, in each case on a PRO RATA basis, at a redemption price of
113% of the principal amount thereof, together with accrued and unpaid interest
to the date of redemption; PROVIDED that not less than 65% of the originally
issued aggregate principal amount of Notes would remain outstanding immediately
after each such redemption. To effect the foregoing redemption, the Company must
mail a notice of redemption not later than 60 days after the consummation of any
Public Equity Offering or sale of Common Stock to a Strategic Equity Investor
that resulted in the requisite gross proceeds.
As used above, "Public Equity Offering" means an underwritten public
offering of Common Stock of the Company registered with the Commission under the
Securities Act.
Notice of an optional redemption must be given no less than 30 nor more than
60 days prior to the applicable redemption date. In the case of a partial
redemption of Notes, selection of the Notes for redemption will be made by lot,
PRO RATA or by such other method as the Trustee in its sole discretion deems
fair and appropriate or in such manner as complies with the requirements of the
principal securities exchange, if any, on which the Notes being redeemed are
listed and DTC; PROVIDED that any redemption
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following one or more Public Equity Offerings or sales of Common Stock to a
Strategic Equity Investor will be made on a PRO RATA or on as nearly a PRO RATA
basis as practicable (subject to the procedures of DTC). Upon giving of a
redemption notice, interest on Notes called for redemption will cease to accrue
from and after the date fixed for redemption (unless the Company defaults in
providing the funds for such redemption) and, upon redemption on such redemption
date, such Notes will cease to be outstanding.
SINKING FUND
The Company will not be required to make any mandatory sinking fund payments
in respect of the Notes.
CHANGE OF CONTROL
Upon the occurrence of a Change of Control (the date of such occurrence
being the "Change of Control Date"), the Company shall make an offer to purchase
(the "Change of Control Offer"), on a business day (the "Change of Control
Payment Date") not later than 60 days following the Change of Control Date, all
Notes then outstanding at a purchase price equal to 101% of the principal amount
thereof plus accrued and unpaid interest, if any, to any Change of Control
Payment Date. Notice of a Change of Control Offer shall be given to holders of
Notes, not less than 25 days nor more than 45 days before the Change of Control
Payment Date. The Change of Control Offer is required to remain open for at
least 20 business days and until the close of business on the Change of Control
Payment Date. The Company shall not be required to make a Change of Control
Offer following a Change of Control if a third party makes the Change of Control
Offer in the manner, at the times and otherwise in compliance with the
requirements applicable to a Change of Control Offer made by the Company and
purchases all Notes validly tendered and not withdrawn under such Change of
Control Offer.
If a Change of Control Offer is made, there can be no assurance that the
Company will have available funds sufficient to pay for all of the Notes that
may be delivered by holders of Notes seeking to accept the Change of Control
Offer. In addition, the requirement to make a Change of Control Offer would not
necessarily afford holders of the Notes protection in the event of a highly
leveraged reorganization, merger or similar transaction which would not qualify
as a Change of Control.
If the Company is required to make a Change of Control Offer, the Company
will comply with all applicable tender offer laws and regulations, including, to
the extent applicable, Section 14(e) and Rule 14e-1 under the Exchange Act, and
any other applicable securities laws and regulations. To the extent that the
provisions of any securities laws or regulations conflict with provisions of
this covenant, the Company will comply with the applicable securities laws and
regulations and will not be deemed to have breached its obligations under this
paragraph by virtue thereof.
DISBURSEMENT OF FUNDS; COLLATERAL ACCOUNT
The Notes are collateralized, pursuant to the Custody and Security Agreement
(the "Security Agreement") dated as of April 2, 1998, among the Company, the
Trustee and Norwest Bank Colorado, N.A., as Custodian of the Collateral Account,
by a pledge of the Collateral Account (as defined in the Security Agreement),
which contains approximately $56.8 million of the net proceeds from the sale of
the Old Notes issued pursuant to the Initial Offering and/or U.S. Government
Securities purchased therewith (the "Collateral"), that, together with the
proceeds from the investment thereof, will be sufficient to pay interest on the
Notes for the first six scheduled interest payments (but not any additional
interest that may arise under the Notes Registration Rights Agreement).
The Company has entered into the Security Agreement providing for the grant
by the Company to the Trustee, for the benefit of the holders of the Notes, of
security interests in the Collateral. All such security interests collateralize
the payment and performance when due of the obligation of the Company to pay
interest on the Notes for the first six scheduled interest payments, as provided
in the Security Agreement.
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The Liens created by the Security Agreement are first priority security
interests in the Collateral. The ability of holders to realize upon any such
funds or securities may be subject to certain bankruptcy law limitations in the
event of the bankruptcy of the Company. See "Risk Factors--Bankruptcy Risks
Related to Collateral Account."
Pursuant to the Security Agreement, Collateral may be released from the
Collateral Account only (i) to pay interest on the Notes or (ii) in the event
that the funds or U.S. Government Securities held in the Collateral Account
(together with the proceeds from the investment thereof) exceed the amount
sufficient, in the opinion of a nationally recognized firm of independent public
accountants or a nationally recognized investment banking firm selected by the
Company, to provide for payment in full of the first six scheduled interest
payments due on the Notes (or, in the event an interest payment or payments have
been made, an amount sufficient to provide for payment in full of any interest
payments remaining, up to and including the sixth scheduled interest payment),
the Trustee will be permitted to release to the Company at the Company's request
any such excess amount if no Default then exists under the Indenture.
Pending such disbursements, funds contained in the Collateral Account will
be invested in U.S. Government Securities. Interest earned on such U.S.
Government Securities will be placed in the Collateral Account. Upon the
acceleration of the maturity of the Notes, the Security Agreement will permit
the Trustee to exercise the rights of a secured party with respect to the
Collateral Account. Under the terms of the Indenture, the proceeds of the
Collateral Account shall be applied, first, to amounts owing to the Trustee in
respect of fees and expenses of the Trustee and, second, to all obligations of
the Company under the Notes and the Indenture. Under the Security Agreement,
assuming that the Company makes the first six scheduled interest payments on the
Notes in a timely manner, all of the Collateral will be released from the
Collateral Account.
RANKING
The Indebtedness evidenced by the Notes ranks pari passu in right of payment
with all other future unsecured senior indebtedness of the Company and senior in
right of payment to all existing and future obligations of the Company expressly
subordinated in right of payment to the Notes. As of June 30, 1998, which
includes the effect of the sale of the Units and the application of the proceeds
therefrom, there was approximately $0.1 million of Indebtedness of the Company
outstanding other than the Notes on an unconsolidated basis. The Notes are
unsecured (except for the security interest in the Collateral Account).
The Company is a holding company with no direct operations and no
significant assets other than cash and the stock of the Subsidiaries. The
Company operates its business through the Subsidiaries. The Company will be
dependent on the cash flow of the Subsidiaries to meet its obligations,
including the payment of interest and principal on the Notes. The Subsidiaries
are separate legal entities that have no obligation to pay any amounts due
pursuant to the Notes or to make any funds available therefor, whether by
dividends, loans or other payments. Because the Subsidiaries will not guarantee
the payment of the principal or interest on the Notes, any right of the Company
to receive assets of the Subsidiaries upon their liquidation or reorganization
(and the consequent right of holder of the Notes to participate in the
distribution or realize proceeds from those assets) will be effectively
subordinated to the claims of the creditors of the Subsidiaries (including trade
creditors and holders of indebtedness of such Subsidiaries), except if and to
the extent the Company is itself a creditor of any of the Subsidiaries, in which
case the claims of the Company would still be effectively subordinated to any
security interest in the assets of any of the Subsidiaries. As of June 30, 1998,
which includes the effect of the sale of the Units and the application of the
proceeds therefrom, the Subsidiaries had aggregate liabilities of approximately
$15.8 million. Subject to certain limitations, the Company and its Restricted
Subsidiaries may incur additional Indebtedness in the future, including secured
Indebtedness. For a discussion of certain adverse consequences of the Company
being a holding company and of the terms of certain existing and potential
future indebtedness of the Company and its Subsidiaries, see "Risk
Factors--Holding Company Structure; Structural Subordination."
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CERTAIN COVENANTS
Set forth below are certain covenants that are contained in the Indenture.
LIMITATION ON INDEBTEDNESS. The Indenture provides that the Company will
not, and will not permit any Restricted Subsidiary to, incur any Indebtedness
(including any Acquired Indebtedness) other than Permitted Indebtedness;
PROVIDED that the Company may Incur Indebtedness if and at the time of such
incurrence (i) the Consolidated Indebtedness to Consolidated Operating Cash Flow
Ratio would have been less than or equal to 6.0 to 1.0 and (ii) no Default or
Event of Default shall have occurred and be continuing or occur as a consequence
of the actions set forth in this covenant.
In making the foregoing calculation, (A) PRO FORMA effect will be given to:
(i) the incurrence or repayment of any Indebtedness to be incurred or repaid on
the date of the incurrence of such Indebtedness (the "Transaction Date"), (ii)
Asset Sales and Asset Acquisitions (including giving PRO FORMA effect to the
application of proceeds of any Assets Sales) that occur from the beginning of
the Four Quarter Period (as defined under the "Consolidated Indebtedness to
Consolidated Operating Cash Flow Ratio" definition) through the Transaction Date
(the "Reference Period"), as if such acquisition or disposition had occurred and
such proceeds had been applied on the first day of such Reference Period and
(iii) the acquisition (whether by purchase, merger or otherwise) or disposition
(whether by sale, merger or otherwise) of any company, entity or business
acquired or disposed of (including giving PRO FORMA effect to the application of
proceeds of such disposition) by any Person that has become a Restricted
Subsidiary or has been merged with or into the Company or any Restricted
Subsidiary during such Reference Period and that would have constituted Asset
Sales or Asset Acquisitions had such transactions occurred when such Person was
a Restricted Subsidiary as if such asset dispositions or asset acquisitions were
Asset Sales or Asset Acquisitions that occurred on the first day of such
Reference Period; PROVIDED that, to the extent that clause (ii) or (iii) of this
sentence requires that PRO FORMA effect be given to an Asset Acquisition or
Asset Sale, such PRO FORMA calculation shall be based upon the four full fiscal
quarters, immediately preceding the Transaction Date of the Person, or division
or line of business of the Person, that is acquired or disposed of for which
financial information is available, and (B) the aggregate amount of Indebtedness
outstanding as of the end of the Reference Period will be deemed to include an
amount of funds equal to the average daily balance of Indebtedness outstanding
during the Reference Period under any revolving credit or similar facilities of
the Company and its Restricted Subsidiaries. For purposes of this provision,
whenever PRO FORMA effect is to be given to a transaction, the PRO FORMA
calculations shall be made in good faith by a responsible financial or
accounting officer of the Company.
For the purposes of determining compliance with this covenant, in the event
that an item of Indebtedness or any portion thereof meets the criteria of more
than one of the types of Indebtedness the Company and the Restricted
Subsidiaries are permitted to incur, the Company will have the right, in its
sole discretion, to classify such item of Indebtedness or portion thereof at the
time of its incurrence and will only be required to include the amount and type
of such Indebtedness or portion thereof under the clause permitting the
Indebtedness as so classified.
LIMITATION ON RESTRICTED PAYMENTS. (a) The Indenture provides that the
Company will not, and will not permit any Restricted Subsidiary to, directly or
indirectly, take any of the following actions:
(i) declare or pay any dividend on, or make any distribution to holders of,
any shares of its Capital Stock (other than (x) dividends or
distributions payable solely in shares of its Qualified Capital Stock or
in options, warrants or other rights to acquire such shares of Qualified
Capital Stock and (y) dividends or distributions payable to the Company
or any Wholly Owned Restricted Subsidiary);
(ii) purchase, redeem or otherwise acquire or retire for value, directly or
indirectly, any shares of its Capital Stock or any Capital Stock of any
of its Affiliates or any options, warrants or other rights to acquire
such shares of Capital Stock;
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(iii) make any principal payment on, or repurchase, redeem, defease or
otherwise acquire or retire for value, prior to any scheduled principal
payment, sinking fund payment or maturity, any Subordinated
Indebtedness; or
(iv) make any Investment (other than any Permitted Investment);
(such payments or other actions described in (but not excluded from) clauses (i)
though (iv) are collectively referred to as "Restricted Payments"), unless at
the time of, and immediately after giving effect to, the proposed Restricted
Payment (the amount of any such Restricted Payment, if other than cash, as
determined by the Board, whose determination shall be conclusive and evidenced
by a Board Resolution), (1) no Default or Event of Default shall have occurred
and be continuing, (2) the Company could incur at least $1.00 of additional
Indebtedness (other than Permitted Indebtedness) pursuant to the proviso of the
"--Limitation on Indebtedness" covenant and (3) the aggregate amount of all
Restricted Payments declared or made after the Issue Date shall not exceed the
sum of:
(A) 50% of the aggregate amount of the Consolidated Adjusted Net Income (or,
if the Consolidated Adjusted Net Income is a loss, minus 100% of the
amount of such loss) (determined by excluding income resulting from
transfers of assets by the Company or a Restricted Subsidiary to an
Unrestricted Subsidiary) accrued on a cumulative basis during the period
(taken as one accounting period) beginning on the first day of the fiscal
quarter immediately following the Issue Date and ending on the last day
of the last full fiscal quarter immediately preceding the date of such
Restricted Payment for which quarterly or annual consolidated financial
statements of the Company are available; plus
(B) the aggregate Net Cash Proceeds received by the Company after the Issue
Date as a capital contribution or from the issuance and sale permitted by
the Indenture of its Capital Stock (other than Disqualified Stock) to a
Person who is not a Subsidiary of the Company, including an issuance or
sale permitted by the Indenture of Indebtedness of the Company for cash
subsequent to the Issue Date upon the conversion of such Indebtedness
into Capital Stock (other than Disqualified Stock) of the Company, or
from the issuance to a Person who is not a Subsidiary of the Company of
any options, warrants or other rights to acquire Capital Stock of the
Company (in each case, exclusive of any Disqualified Stock); plus
(C) to the extent not otherwise included in the Consolidated Adjusted Net
Income of the Company, an amount equal to the sum of (i) the net
reduction in Investments in any Person (other than Permitted Investments)
resulting from the payment in cash of dividends, repayments of loans or
advances or other transfers of assets, or from the Net Cash Proceeds from
the sale of any such Investment, in each case to the Company or any
Restricted Subsidiary after the Issue Date from such Person and (ii) the
portion (proportionate to the Company's equity interest in such
Subsidiary) of the Fair Market Value of the net assets of any
Unrestricted Subsidiary at the time such Unrestricted Subsidiary is
designated a Restricted Subsidiary; provided, however, that in the case
of (i) or (ii) above the foregoing sum shall not exceed the amount of
Investments previously made (and treated as a Restricted Payment) by the
Company or any Restricted Subsidiary in such Person or Unrestricted
Subsidiary.
(b) Notwithstanding paragraph (a) above, the Company and any Restricted
Subsidiary may take the following actions so long as (with respect to clauses
(ii) through (v) inclusive and clauses (vii) through (ix) inclusive below) no
Default or Event of Default shall have occurred and be continuing:
(i) the payment of any dividend within 60 days after the date of declaration
thereof, if at such date of declaration such dividend would have
complied with the provisions of paragraph (a) above and such payment
will be deemed to have been paid on such date of declaration for
purposes of the calculation required by paragraph (a) above;
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(ii) the purchase, redemption or other acquisition or retirement for value
of any shares of Capital Stock of the Company, in exchange for, or out
of the Net Cash Proceeds of a substantially concurrent issuance and
sale (other than to a Restricted Subsidiary) of, shares of Qualified
Capital Stock of the Company; PROVIDED, HOWEVER, that such Qualified
Capital Stock of the Company may not be redeemable at the option of the
holder or be required to be redeemed prior to the Stated Maturity of
the Notes;
(iii) the purchase, redemption, defeasance or other acquisition or retirement
for value of any Subordinated Indebtedness in exchange for or out of
the Net Cash Proceeds of a substantially concurrent issuance and sale
(other than to a Restricted Subsidiary) of shares of Qualified Capital
Stock of the Company;
(iv) the purchase of any Subordinated Indebtedness at a purchase price not
greater than 101% of the principal amount thereof in the event of a
Change of Control in accordance with provisions similar to the "Change
of Control" covenant; PROVIDED that prior to such purchase the Company
has made the Change of Control Offer as provided in such covenant with
respect to the Notes and has purchased all Notes validly tendered for
payment in connection with such Change of Control Offer;
(v) the purchase, redemption, defeasance or other acquisition or retirement
for value of Subordinated Indebtedness in exchange for, or out of the
Net Cash Proceeds of a substantially concurrent incurrence (other than
to a Subsidiary) of new Subordinated Indebtedness so long as (A) the
principal amount of such new Subordinated Indebtedness does not exceed
the principal amount (or, if such Subordinated Indebtedness being
refinanced provides for an amount less than the principal amount thereof
to be due and payable upon a declaration of acceleration thereof, such
lesser amount as of the date of determination) of the Subordinated
Indebtedness being so purchased, redeemed, defeased, acquired or
retired, plus the amount of any premium required to be paid in
connection with such refinancing pursuant to the terms of such
Subordinated Indebtedness being refinanced or the amount of any premium
reasonably determined by the Company as necessary to accomplish such
refinancing, PLUS, in either case, the amount of expenses of the Company
incurred in connection with such refinancing; (B) such new Subordinated
Indebtedness is subordinated to the Notes to the same extent as such
Subordinated Indebtedness so purchased, redeemed, defeased, acquired or
retired and (C) such new Subordinated Indebtedness has an Average Life
to Stated Maturity longer than the Average Life to Stated Maturity of
the Notes and a final Stated Maturity of principal later than the final
Stated Maturity of principal of the Notes;
(vi) the payment of cash in lieu of fractional shares of Common Stock
pursuant to the Warrant Agreement;
(vii) payments of amounts required for any repurchase, redemption or other
acquisition or retirement for value of any Capital Stock of the Company
or any options or rights to acquire such Capital Stock of the Company
owned by any director, officer or employee of the Company or its
Subsidiaries pursuant to any management equity subscription agreement
or similar agreement, or otherwise upon the death, disability,
retirement or termination of employment or departure from the Board,
PROVIDED that the aggregate price paid for all such repurchased,
redeemed, acquired or retired Capital Stock of the Company or options
shall not exceed in the aggregate $0.5 million in any calendar year;
(viii) payments that would otherwise be Restricted Payments in an aggregate
amount not to exceed $1.0 million;
(ix) investments in Telecommunications Businesses that would otherwise be
Restricted Payments, the sum of which does not exceed $5.0 million at
any one time outstanding; and
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(x) repurchases of Capital Stock of the Company solely in connection with
cashless exercises of options, warrants and other convertible
securities.
The actions described in clauses (i) through (iv) inclusive and clauses (vi)
through (ix) inclusive of this paragraph (b) shall be Restricted Payments that
shall be permitted to be taken in accordance with this paragraph (b) but shall
reduce the amount that would otherwise be available for Restricted Payments
under clause (3) of paragraph (a) and the actions described in clauses (v) and
(x) of this paragraph (b) shall be Restricted Payments that shall be permitted
to be taken in accordance with this paragraph (b) and shall not reduce the
amount that would otherwise be available for Restricted Payments under clause
(3) of paragraph (a) above. In the event the proceeds of an issuance of
Qualified Capital Stock of the Company are used for the redemption, repurchase
or other acquisition of the Notes, or Indebtedness that is PARI PASSU with the
Notes, then the Net Cash Proceeds of such issuance shall be included in clause
(B) of the first paragraph of this "Limitation on Restricted Payments" covenant
only to the extent such proceeds are not used for such redemption, repurchase or
other acquisition of Indebtedness.
LIMITATION ON LIENS. The Indenture provides that the Company will not, and
will not permit any Restricted Subsidiary to, directly or indirectly, create,
incur, assume or suffer to exist any Lien (other than Permitted Liens) on or
with respect to (i) any of its property or assets, including any shares of stock
or Indebtedness of any Restricted Subsidiary, whether owned at the Issue Date or
thereafter acquired, or any income, profits or proceeds therefrom, or assign or
otherwise convey any right to receive income thereon, unless (x) in the case of
any Lien securing Subordinated Indebtedness, the Notes are secured by a Lien on
such property, assets or proceeds that is senior in priority to such Lien and
(y) in the case of any other Lien, the Notes are equally and ratably secured
with the obligation or liability secured by such Lien, or (ii) the Collateral
Account.
LIMITATION ON ISSUANCES OF GUARANTEES OF INDEBTEDNESS BY RESTRICTED
SUBSIDIARIES. (a) The Indenture provides that the Company will not permit any
Restricted Subsidiary, directly or indirectly, to guarantee, assume or in any
other manner become liable with respect to any Indebtedness of the Company (the
"Guaranteed Indebtedness") unless (i) such Restricted Subsidiary simultaneously
executes and delivers a supplemental indenture providing for the guarantee (a
"Subsidiary Guarantee") of payment of the Notes by such Restricted Subsidiary;
PROVIDED that this paragraph (a) shall not be applicable to any guarantee of any
Restricted Subsidiary that existed at the time such Person became a Restricted
Subsidiary and was not incurred in connection with or in contemplation of such
Person becoming a Restricted Subsidiary. If the Guaranteed Indebtedness is (A)
PARI PASSU in right of payment with the Notes, then the guarantee of such
Guaranteed Indebtedness shall be PARI PASSU in right of payment with, or
subordinated in right of payment to, the Subsidiary Guarantee or (B)
subordinated in right of payment to the Notes, then the guarantee of such
Guaranteed Indebtedness shall be subordinated in right of payment to the
Subsidiary Guarantee at least to the extent that the Guaranteed Indebtedness is
subordinated in right of payment to the Notes.
(c) Notwithstanding the foregoing, any Subsidiary Guarantee created
pursuant to the provisions described in the foregoing paragraph (a) shall
provide by its terms that it shall be automatically and unconditionally
released and discharged upon (i) any sale, exchange or transfer, to any
Person who is not an Affiliate of the Company, of all of the Company's
Capital Stock in, or all or substantially all the assets of, such Restricted
Subsidiary (which sale, exchange or transfer is not prohibited by the
Indenture) or (ii) the release by the holders of the Indebtedness of the
Company described in the preceding paragraph of their guarantee by such
Restricted Subsidiary (including any deemed release upon payment in full of
all obligations under such Indebtedness, except by or as a result of payment
under such Subsidiary Guarantee), at a time when (A) no other Indebtedness
of the Company has been guaranteed by such Restricted Subsidiary or (B) the
holders of all such other Indebtedness which is guaranteed by such
Restricted Subsidiary also release their guarantee by such Restricted
Subsidiary (including any deemed released upon payment in full of all
obligations under such Indebtedness).
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LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED
SUBSIDIARIES. The Indenture provides that the Company will not, and will not
permit any Restricted Subsidiary to, directly or indirectly, create or otherwise
enter into or cause to become effective any consensual encumbrance or consensual
restriction of any kind on the ability of any Restricted Subsidiary to (a) pay
dividends, in cash or otherwise, or make any other distributions on its Capital
Stock or any other interest or participation in, or measured by, its profits to
the extent owned by the Company or any Restricted Subsidiary, (b) pay any
Indebtedness owed to the Company or any Restricted Subsidiary, (c) make any
Investment in the Company or any Restricted Subsidiary or (d) transfer any of
its properties or assets to the Company or to any Restricted Subsidiary, except
for:
(i) any encumbrance or restriction in existence on the Issue Date;
(ii) customary non-assignment provisions;
(iii) any encumbrance or restriction pertaining to an asset subject to a Lien
to the extent set forth in the documentation governing such Lien;
(iv) any encumbrance or restriction applicable to a Restricted Subsidiary at
the time that it becomes a Restricted Subsidiary that is not created in
contemplation thereof;
(v) any encumbrance or restriction existing under any agreement that
refinances or replaces an agreement containing a restriction permitted
by clause (i) or (iv) above; provided that the terms and conditions of
any such encumbrance or restriction are not materially less favorable to
the holders of Notes than those under or pursuant to the agreement being
replaced or the agreement evidencing the Indebtedness refinanced;
(vi) any encumbrance or restriction imposed upon a Restricted Subsidiary
pursuant to an agreement which has been entered into for the sale or
disposition of all or substantially all of the Capital Stock or assets
of such Restricted Subsidiary or any Asset Sale to the extent limited
to the Capital Stock or assets in question; and
(vii) any customary encumbrance or restriction applicable to a Restricted
Subsidiary that is contained in an agreement or instrument governing or
relating to Indebtedness contained in any Permitted Credit Facility;
PROVIDED that (subject to customary net worth, leverage, invested
capital and other financial covenants and the absence of default under
such agreement) the provisions of such agreement permit the payment of
interest and principal and mandatory repurchases pursuant to the terms
of the Indenture and the Notes and other indebtedness that is solely an
obligation of the Company; PROVIDED, FURTHER, that such agreement may
contain customary covenants regarding the merger of or sale of all or
any substantial part of the assets of the Company or any Restricted
Subsidiary, customary restrictions on transactions with affiliates, and
customary subordination provisions governing indebtedness owed to the
Company or any Restricted Subsidiary.
DISPOSITION OF PROCEEDS OF ASSET SALES. The Indenture provides that the
Company will not, and will not permit any Restricted Subsidiary to, make any
Asset Sale unless (a) the Company or such Restricted Subsidiary receives
consideration at the time of such Asset Sale at least equal to the Fair Market
Value of the shares or assets sold or otherwise disposed of and (b) at least 75%
of such consideration (excluding contingent liabilities assumed by the
transferee of any such assets) consists of cash or Cash Equivalents; PROVIDED
that the amount of any liabilities (other than Subordinated Indebtedness or
Indebtedness of a Restricted Subsidiary that would not constitute Restricted
Subsidiary Indebtedness) that are assumed by the transferee of any such assets
pursuant to an agreement that unconditionally releases the Company or such
Restricted Subsidiary, as the case may be, from further liability shall be
treated as cash for purposes of this covenant. Within 365 days after any Asset
Sale, the Company or the applicable Restricted Subsidiary, as the case may be,
may at its option (a) reinvest an amount equal to the Net Cash Proceeds (or any
portion thereof) from such disposition in properties and assets that will be
used in a Telecommunications Business (or in Capital Stock and other securities
of any Person that will become a Restricted Subsidiary as
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a result of such investment to the extent such Person owns properties and assets
that will be used in a Telecommunications Business) of the Company or any
Restricted Subsidiary ("Replacement Assets"), and/ or (b) apply an amount equal
to such Net Cash Proceeds (or remaining Net Cash Proceeds) to the permanent
reduction of any Indebtedness of the Company ranking PARI PASSU with the Notes
(including the Notes) or the permanent reduction of Indebtedness of any
Restricted Subsidiary of the Company. Pending the final application of any such
Net Cash Proceeds, the Company or such Restricted Subsidiary may temporarily
reduce revolving Indebtedness under any Permitted Credit Facility or otherwise
invest such Net Cash Proceeds in any manner that is not prohibited by the
Indenture. Any Net Cash Proceeds from any Asset Sale that are not used to
reinvest in Replacement Assets and/or repay any such PARI PASSU Indebtedness of
the Company or Indebtedness of its Restricted Subsidiaries constitute Excess
Proceeds.
When the aggregate amount of Excess Proceeds from one or more Asset Sales
equals or exceeds $5.0 million, the Company shall make an offer to purchase (an
"Asset Sale Offer"), from all holders of Notes issued under the Indenture, that
aggregate principal amount of Notes as can be purchased by application of such
Excess Proceeds at a price in cash equal to 100% of the outstanding aggregate
principal amount thereof plus accrued and unpaid interest, if any, to the
purchase date. Each Asset Sale Offer shall remain open for a period of 20
business days or such longer period as may be required by law. To the extent
that the aggregate purchase price for the Notes tendered pursuant to an Asset
Sale Offer is less than the Excess Proceeds, the Company or any Restricted
Subsidiary may use such deficiency for general corporate purposes. If the
aggregate purchase price for the Notes validly tendered and not withdrawn by
holders thereof exceeds the amount of Notes which can be purchased with the
Excess Proceeds, Notes to be purchased will be selected on a PRO RATA basis.
Upon completion of such Asset Sale Offer, the amount of Excess Proceeds shall be
reset to zero.
Notwithstanding the two immediately preceding paragraphs, the Company and
the Restricted Subsidiaries will be permitted to consummate an Asset Sale
without complying with such paragraphs to the extent (i) at least 75% of the
consideration of such Asset Sale constitutes Replacement Assets, cash or Cash
Equivalents (including obligations deemed to be cash under this covenant) and
(ii) such Asset Sale is for Fair Market Value; PROVIDED that any consideration
constituting (or deemed to constitute) cash or Cash Equivalents received by the
Company or any of the Restricted Subsidiaries in connection with any Asset Sale
permitted to be consummated under this paragraph shall constitute Net Cash
Proceeds subject to the provisions of the two preceding paragraphs.
If the Company is required to make an Asset Sale Offer, the Company will
comply with all applicable tender offer rules, including, to the extent
applicable, Section 14(e) and Rule 14e-1 under the Exchange Act, and any other
applicable securities laws and regulations.
LIMITATION ON ISSUANCES AND SALES OF CAPITAL STOCK OF RESTRICTED
SUBSIDIARIES. The Indenture provides that the Company will not (i) sell,
pledge, hypothecate or otherwise convey or dispose of any Capital Stock of a
Restricted Subsidiary of the Company (other than under a Permitted Credit
Facility) or (ii) permit any of its Restricted Subsidiaries to issue any Capital
Stock, in either case, other than to the Company or a Restricted Subsidiary of
the Company. The foregoing restrictions shall not apply to an Asset Sale
consisting of 100% of the Capital Stock of a Restricted Subsidiary owned by the
Company made in compliance with the covenant "--Disposition of Proceeds of Asset
Sales."
LIMITATION ON TRANSACTIONS WITH AFFILIATES. The Indenture provides that the
Company will not, and will not permit, cause or suffer any Restricted Subsidiary
to, conduct any business or enter into any transaction (or series of related
transactions which are similar or part of a common plan) with or for the benefit
of any of their respective Affiliates or any beneficial holder of 5% or more of
the Common Stock of the Company or any officer or director of the Company (each,
an "Affiliate Transaction"), unless the terms of the Affiliate Transaction are
set forth in writing, and are fair and reasonable to the Company or such
Restricted Subsidiary, as the case may be. Each Affiliate Transaction involving
aggregate payments or other Fair Market Value in excess of $1.0 million shall be
approved by a majority of the Board, such
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approval to be evidenced by a Board Resolution stating that the Board has
determined that such transaction or transactions comply with the foregoing
provisions. In addition to the foregoing, each Affiliate Transaction involving
aggregate consideration of $5.0 million or more shall be approved by a majority
of the Disinterested Directors; PROVIDED that, in lieu of such approval by the
Disinterested Directors, the Company may obtain a written opinion from an
Independent Financial Advisor stating that the terms of such Affiliate
Transaction to the Company or the Restricted Subsidiary, as the case may be, are
fair from a financial point of view. For purposes of this covenant, any
Affiliate Transaction approved by a majority of the Disinterested Directors or
as to which a written opinion has been obtained from an Independent Financial
Advisor, on the basis set forth in the preceding sentence, shall be deemed to be
on terms that are fair and reasonable to the Company and the Restricted
Subsidiaries, as the case may be, and therefore shall be permitted under this
covenant.
Notwithstanding the foregoing, the restrictions set forth in this covenant
shall not apply to (i) transactions with or among, or solely for the benefit of,
the Company and/or any of the Restricted Subsidiaries, (ii) transactions
pursuant to agreements and arrangements existing on the Issue Date, (iii)
dividends and other Restricted Payments paid by the Company pursuant to and in
compliance with the covenant "Limitation on Restricted Payments," (iv) customary
directors' fees, indemnification and similar arrangements, employee salaries and
bonuses, employment agreements and arrangements or compensation or employee
benefit arrangements (including options), (v) grants of customary registration
rights with respect to securities of the Company and (vi) loans or advances to
officers or employees of the Company or any Restricted Subsidiary made in the
ordinary course of business of the Company or such Restricted Subsidiary to pay
business related travel expenses or reasonable relocation costs of such officers
or employees in connection with their employment by the Company or such
Restricted Subsidiary.
REPORTS. The Indenture provides that, whether or not the Company has a
class of securities registered under the Exchange Act, the Company shall furnish
without cost to each holder of record of Notes issued thereunder (in sufficient
quantities for distribution to beneficial holders) and file with the Trustee and
the Commission (unless the Commission will not accept such a filing), (i) within
the applicable time period required under the Exchange Act, after the end of
each fiscal year of the Company, the information required by Form 10-K (or any
successor form thereto) under the Exchange Act with respect to such period
(including a "Management's Discussion and Analysis of Financial Condition and
Results of Operations" section that describes the consolidated financial
condition and results of operations of the Company), together with a report
thereon by the Company's certified independent accountants, (ii) within the
applicable time period required under the Exchange Act after the end of each of
the first three fiscal quarters of each fiscal year of the Company, the
information required by Form 10-Q (or any successor form thereto) under the
Exchange Act with respect to such period (including a "Management's Discussion
and Analysis of Financial Condition and Results of Operations" section and
describes the consolidated financial condition and results of operations of the
Company) and (iii) any current reports on Form 8-K (or any successor forms)
required to be filed under the Exchange Act.
LIMITATION ON BUSINESS. The Indenture provides that the Company will not,
and will not permit any of the Restricted Subsidiaries to, engage in a business
which is not a Telecommunications Business.
DESIGNATIONS OF UNRESTRICTED SUBSIDIARIES. The Indenture provides that the
Company will not designate any Subsidiary of the Company (other than a newly
created Subsidiary in which no Investment has previously been made) as an
"Unrestricted Subsidiary" under the Indenture (a "Designation") unless:
(a) no Default shall have occurred and be continuing at the time of or after
giving effect to such Designation;
(b) immediately after giving effect to such Designation, the Company would
be able to incur $1.00 of Indebtedness under the proviso of the covenant
"--Limitation on Indebtedness," except in the case of (1) a Permitted
Investment or (2) an Investment to the extent reasonably promptly made
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with the proceeds of (x) a capital contribution to the Company or (y) an
issue or sale of Capital Stock (other than Disqualified Stock) of the
Company (other than to a Subsidiary of the Company); PROVIDED that any
such Net Cash Proceeds are excluded from clause (3)(B) of paragraph (a)
of the covenant "--Limitation on Restricted Payments," and are not used
for the redemption, repurchase or other acquisition of Indebtedness; and
(c) The Company would not be prohibited under the Indenture from making an
Investment at the time of such Designation (assuming the effectiveness of
such Designation) in an amount (the "US Designation Amount") equal to the
Fair Market Value of the net Investment of the Company or any other
Restricted Subsidiary in such Subsidiary on such date. In the event of
any such Designation, the Company shall be deemed to have made an
Investment constituting a Restricted Payment pursuant to the covenant
"Limitation on Restricted Payments" for all purposes of the Indenture in
the US Designation Amount. The Indenture will further provide that
neither the Company nor any Restricted Subsidiary shall at any time (x)
provide a guarantee of, or similar credit support to, any Indebtedness of
any Unrestricted Subsidiary (including any undertaking, agreement or
instrument evidencing such Indebtedness); PROVIDED that the Company may
pledge Capital Stock or Indebtedness of any Unrestricted Subsidiary on a
nonrecourse basis such that the pledgee has no claim whatsoever against
the Company other than to obtain such pledged property, (y) be directly
or indirectly liable for any Indebtedness of any Unrestricted Subsidiary
or (z) be directly or indirectly liable for any other Indebtedness which
provides that the holder thereof may (upon notice, lapse of time or both)
declare a default thereon (or cause the payment thereof to be accelerated
or payable prior to its final scheduled maturity) upon the occurrence of
a default with respect to any other Indebtedness that is Indebtedness of
an Unrestricted Subsidiary (including any corresponding right to take
enforcement action against such Unrestricted Subsidiary), except in the
case of clause (x) or (y) to the extent permitted under the covenants
"Limitation on Restricted Payments" and "Limitation on Transactions with
Affiliates."
The Indenture further provides that the Company will not revoke any
Designation of a Subsidiary as an Unrestricted Subsidiary (a "Revocation")
unless:
(a) no Default shall have occurred and be continuing at the time of and
after giving effect to such Revocation; and
(b) all Liens and Indebtedness of such Unrestricted Subsidiary outstanding
immediately following such Revocation would, if incurred at such time,
have been permitted to be incurred for all purposes of the Indenture.
All Designations and Revocations must be evidenced by Board Resolutions
delivered to the Trustee certifying compliance with the foregoing provisions.
CONSOLIDATION, MERGER, SALE OF ASSETS, ETC.
The Indenture provides that the Company will not (i) consolidate or combine
with or merge with or into or, directly or indirectly, sell, assign, convey,
lease, transfer or otherwise dispose of all or substantially all of its
properties and assets to any Person or Persons in a single transaction or
through a series of transactions, or (ii) permit any of the Restricted
Subsidiaries to enter into any such transaction or series of transactions if it
would result in the disposition of all or substantially all of the properties or
assets of the Company and the Restricted Subsidiaries on a consolidated basis to
a Person other than the Company or another Restricted Subsidiary, unless, in the
case of either (i) or (ii), (a) the Company shall be the continuing Person or,
if the Company is not the continuing Person, the resulting, surviving or
transferee Person (the "surviving entity") shall be a company organized and
existing under the laws of the United States or any State or territory thereof;
(b) the surviving entity shall expressly assume all of the obligations of the
Company or such Restricted Subsidiary, as the case may be, under the Notes and
the Indenture, and
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shall, if required by law to effectuate such assumption, execute a supplemental
indenture to effect such assumption, which supplemental indenture shall be
delivered to the Trustee and shall be in form and substance reasonably
satisfactory to the Trustee; (c) immediately after giving effect to such
transaction or series of transactions on a PRO FORMA basis (including, without
limitation, any Indebtedness incurred or anticipated to be incurred in
connection with or in respect of such transaction or series of transactions),
the Company or the surviving entity (assuming such surviving entity's assumption
of the Company's or Restricted Subsidiary's, as the case may be, obligations
under the Notes and the Indenture), as the case may be, would be able to incur
$1.00 of Indebtedness under the proviso of the covenant "--Limitation on
Indebtedness;" (d) immediately after giving effect to such transaction or series
of transactions on a PRO FORMA basis (including, without limitation, any
Indebtedness incurred or anticipated to be incurred in connection with or in
respect of such transaction or series of transactions), no Default shall have
occurred and be continuing and (e) the Company or the surviving entity, as the
case may be, shall have delivered to the Trustee an officers' certificate
stating that such transaction or series of transactions, and, if a supplemental
indenture is required in connection with such transaction or series of
transactions to effectuate such assumption, such supplemental indenture,
complies with this covenant and that all conditions precedent in the Indenture
relating to the transaction or series of transactions have been satisfied.
Upon the occurrence of any transaction under clause (i) or (ii) of the
preceding paragraph in which the Company or a Restricted Subsidiary, as the case
may be, is not the continuing corporation, the successor corporation formed by
such a consolidation or into which the Company or any such Restricted Subsidiary
is merged or to which such transfer is made will succeed to, and be substituted
for, and may exercise every right and power of, the Company or such Restricted
Subsidiary, as the case may be, under the Indenture and the Notes with the same
effect as if such successor corporation had been named as the Company or such
Restricted Subsidiary therein; and thereafter, except in the case of any lease,
sale, assignment, conveyance, transfer or other disposition to a Restricted
Subsidiary of the Company, the Company shall be discharged from all obligations
and covenants under the Indenture and the Notes issued thereunder.
The Indenture provides that for all purposes of the Indenture and the Notes
(including the provision of this covenant and the covenants "Limitation on
Additional Indebtedness," "Limitation on Restricted Payments" and "Limitation on
Liens"), Subsidiaries of any surviving entity will, upon such transaction or
series of related transactions, become Restricted Subsidiaries or Unrestricted
Subsidiaries as provided pursuant to the covenant "Designations of Unrestricted
Subsidiaries" and all Indebtedness, and all Liens on property or assets, of the
Company and the Restricted Subsidiaries in existence immediately prior to such
transaction or series of related transactions will be deemed to have been
incurred upon such transaction or series of related transactions.
EVENTS OF DEFAULT
The following are "Events of Default" under the Indenture:
(i) default in the payment of interest on the Notes when it becomes due and
payable and continuance of such default for a period of 30 days or more;
PROVIDED that a default in the payment of any installment of interest
when it becomes due and payable on the Notes on or prior to April 1,
2001 will constitute an Event or Default, with no grace or cure period;
or
(ii) default in the payment of the principal of, or premium, if any, on the
Notes when due; or
(iii) default in the performance, or breach, of any covenant described under
"Change of Control," "--Certain Covenants--Disposition of Proceeds of
Asset Sales" or "Consolidation, Merger, Sale of Assets, Etc.;" or
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(iv) default in the performance, or breach, of any covenant in the Indenture
(other than defaults specified in clause (i), (ii) or (iii) above) or
the Security Agreement and continuance of such default or breach for a
period of 30 days or more after written notice to the Company by the
Trustee or to the Company and the Trustee by the holders of at least
25% of the aggregate principal amount of the outstanding Notes; or
(v) failure to perform any term, covenant, condition or provision of one or
more classes or issues of Indebtedness in an aggregate principal amount
of $5.0 million or more under which the Company or a Restricted
Subsidiary is obligated, and either (a) such Indebtedness is already due
and payable in full or (b) such failure results in the acceleration of
the maturity of such Indebtedness; or
(vi) one or more final non-appealable judgments, orders or decrees for the
payment of money of $5.0 million or more, either individually or in the
aggregate, shall be entered against the Company or any Restricted
Subsidiary or any of their respective properties and shall not be
discharged and there shall have been a period of 60 days or more during
which a stay of enforcement of such judgment or order, by reason of
pending appeal or otherwise, shall not be in effect; or
(vii) the entry by a court having jurisdiction in the premises of (i) a
decree or order for relief in respect of the Company, or any Material
Restricted Subsidiary of the Company in an involuntary case or
proceeding under U.S. bankruptcy laws, as now or hereafter constituted,
or any other applicable federal, state, or foreign bankruptcy,
insolvency, or other similar law or (ii) a decree or order adjudging
the Company, or any Material Restricted Subsidiary of the Company, a
bankrupt or insolvent, or approving as properly filed a petition
seeking reorganization, arrangement, adjustment or composition of or in
respect of the Company, or any Material Restricted Subsidiary of the
Company, under U.S. bankruptcy laws, as now or hereafter constituted,
or any other applicable federal, state, or foreign bankruptcy,
insolvency, or similar law, or appointing a custodian, receiver,
liquidator, assignee, trustee, sequestrator or other similar official
of the Company, or any Material Restricted Subsidiary of the Company,
or of any substantial part of the property or assets of the Company, or
any Material Restricted Subsidiary of the Company, or ordering the
winding up or liquidation of the affairs of the Company, or any
Material Restricted Subsidiary of the Company, and the continuance of
any such decree or order for relief or any such other decree or order
unstayed and in effect for a period of 60 consecutive days; or
(viii) the Company shall assert or acknowledge in writing that the Security
Agreement is invalid or unenforceable.
If an Event of Default (other than an Event of Default specified in clause
(vii) with respect to the Company) under the Indenture occurs and is continuing,
then the Trustee or the holders of at least 25% of the aggregate principal
amount of the outstanding Notes may by written notice, and the Trustee upon
request of the holders of not less than 25% of the aggregate principal amount of
the outstanding Notes shall, declare the aggregate principal amount of, premium
(if any) on, and any accrued and unpaid interest on the outstanding Notes issued
thereunder to be due and payable immediately. Upon any such declaration, the
aggregate principal amount of, premium (if any) on, and any accrued and unpaid
interest on the outstanding Notes shall become due and payable immediately. If
an Event of Default under the Indenture specified in clause (vii) with respect
to the Company occurs and is continuing then the aggregate principal amount of,
premium (if any) on, and any accrued and unpaid interest on the outstanding
Notes will IPSO FACTO become and be immediately due and payable without any
declaration or other act on the part of the Trustee or any holder.
After a declaration of acceleration or any ipso facto acceleration pursuant
to clause (vii) under the Indenture, the holders of a majority of the aggregate
principal amount of outstanding Notes may, by notice to the Trustee, rescind
such declaration of acceleration and its consequences if all existing Events of
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Default, other than nonpayment of the principal of, and accrued and unpaid
interest on, such Notes that have become due solely as a result of such
acceleration, have been cured or waived and if the rescission of acceleration
would not conflict with any judgment or decree. The holders of a majority of the
aggregate principal amount of the outstanding Notes also have the right to waive
past defaults, except a default in the payment of the principal of, or any
interest on, any outstanding Note, or in respect of a covenant or a provision
that cannot be modified or amended without the consent of all holders of the
Notes.
No holder of any of the Notes issued under the Indenture has any right to
institute any proceeding with respect to the Indenture or any remedy thereunder,
unless the holders of at least 25% of the aggregate principal amount of the
outstanding Notes have made written request, and offered reasonable indemnity,
to the Trustee to institute such proceeding as Trustee, the Trustee has failed
to institute such proceeding within 60 days after receipt of such notice and the
Trustee has not within such 60-day period received directions inconsistent with
such written request by holders of a majority of the aggregate principal amount
of the outstanding Notes. Such limitations do not apply, however, to a suit
instituted by a holder of a Note for the enforcement of the payment of the
principal of, premium, if any, or any accrued and unpaid interest on, such Note
on or after the respective due dates expressed in such Note.
During the existence of an Event of Default under the Indenture, the Trustee
is required to exercise such rights and powers vested in it under the Indenture
and use the same degree of care and skill in its exercise thereof as a prudent
person would exercise under the circumstances in the conduct of such person's
own affairs. Subject to the provisions of the Indenture relating to the duties
of the Trustee, if an Event of Default shall occur and be continuing, the
Trustee is not under any obligation to exercise any of its rights or powers
under the Indenture at the request or direction of any of the holders unless
such holders shall have offered to the Trustee reasonable security or indemnity.
Subject to certain provisions concerning the rights of the Trustee, the holders
of a majority of the aggregate principal amount of the outstanding Notes have
the right to direct the time, method and place of conducting any proceeding for
any remedy available to the Trustee, or exercising any trust, or power conferred
on the Trustee.
The Indenture provides that the Trustee will, within 45 days after the
occurrence of any Default, give to the holders of the Notes notice of such
Default known to it, unless such Default shall have been cured or waived;
PROVIDED that, except in the case of a Default in payment of principal of or
premium, if any, on any Note when due or in the case of any Default in the
payment of any interest on the Notes or in the case of any Default arising from
the occurrence of any Change of Control, the Trustee shall be protected in
withholding such notice if it determines in good faith that the withholding of
such notice is in the interest of such holders.
The Company is required to furnish to the Trustee annually a statement as to
compliance with all conditions and covenants under the Indenture.
SATISFACTION AND DISCHARGE OF THE INDENTURE; DEFEASANCE
The Company may terminate its obligations under the Indenture, when (1)
either: (A) all Notes issued thereunder that have been theretofore authenticated
and delivered have been delivered to the Trustee for cancellation, or (B) all
such Notes issued thereunder that have not theretofore been delivered to the
Trustee for cancellation will become due and payable (a "Discharge") under
irrevocable arrangements satisfactory to the Trustee for the giving of notice of
redemption by such Trustee in the name, and at the expense, of the Company, and
the Company has irrevocably deposited or caused to be deposited with such
Trustee funds in an amount sufficient to pay and discharge the entire
indebtedness on such issue of Notes, not theretofore delivered to the Trustee
for cancellation, for principal of, premium, if any, and interest on the Notes
to the date of deposit or maturity or date of redemption; (2) the Company has
paid or caused to be paid all other sums then due and payable under the
Indenture by the Company and (3) the Company has delivered to the Trustee an
officers' certificate and an opinion of counsel, each stating that all
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conditions precedent under the Indenture relating to the satisfaction and
discharge of the Indenture have been complied with.
The Company may elect, at its option, to have its obligations under the
Indenture discharged with respect to the outstanding Notes ("legal defeasance").
Such defeasance means that the Company will be deemed to have paid and
discharged the entire indebtedness represented by the outstanding Notes under
the Indenture, except for (1) the rights of holders of Notes to receive payments
in respect of the principal of and any premium and interest on the Notes when
payments are due, (2) the Company's obligations with respect to the Notes
concerning issuing temporary Notes, registration of transfer of Notes,
mutilated, destroyed, lost or stolen Notes and the maintenance of an office or
agency for payment and money for security payments held in trust, (3) the
rights, powers, trusts, duties and immunities of the Trustee, and (4) the
defeasance provisions of the Indenture. In addition, the Company may elect, at
its option, to have its obligations released with respect to certain covenants
in the Indenture, including covenants relating to Asset Sales and Changes of
Control ("covenant defeasance"), and any omission to comply with such obligation
shall not constitute a Default or an Event of Default with respect to the Notes
under the Indenture. In the event covenant defeasance occurs, certain events
(not including non-payment, bankruptcy and insolvency events) described under
"Events of Default" will no longer constitute an Event of Default with respect
to the Notes.
In order to exercise either legal defeasance or covenant defeasance with
respect to outstanding Notes: (1) the Company must irrevocably have deposited or
caused to be deposited with the Trustee as trust funds in trust for the purpose
of making the following payments, specifically pledged as security for, and
dedicated solely to the benefits of the holders of the Notes: (A) money in an
amount, or (B) U.S. Government Securities which through the scheduled payment of
principal and interest in respect thereof in accordance with their terms will
provide, not later than the due date of any payment, money in an amount, or (C)
a combination thereof, in each case sufficient without reinvestment, in the
opinion of a nationally recognized firm of independent public accountants or a
nationally recognized investment banking firm expressed in a written
certification thereof delivered to the Trustee to pay and discharge, and which
shall be applied by the Trustee to pay and discharge, the entire Indebtedness in
respect of the principal of and premium, if any, and interest on the Notes on
the maturity thereof or (if the Company has made irrevocable arrangements
satisfactory to the Trustee for the giving of notice of redemption by the
Trustee in the name and at the expense of the Company) the redemption date
thereof, as the case may be, in accordance with the terms of the Indenture and
Notes; (2) in the case of legal defeasance under the Indenture, the Company
shall have delivered to the Trustee an opinion of counsel stating that, under
then applicable Federal income tax law, the holders of the Notes will not
recognize gain or loss for federal income tax purposes as a result of the
deposit, defeasance and discharge to be effected with respect to the Notes and
will be subject to federal income tax on the same amount, in the same manner and
at the same times as would be the case if such deposit, defeasance and discharge
were not to occur; (3) in the case of covenant defeasance under the Indenture,
the Company shall have delivered to the Trustee an opinion of counsel to the
effect that the holders of such outstanding Notes will not recognize gain or
loss for U.S. federal income tax purposes as a result of the deposit and
covenant defeasance to be effected with respect to the Notes and will be subject
to U.S. federal income tax on the same amount, in the same manner and at the
same times as would be the case if such deposit and covenant defeasance were not
to occur; (4) no Default with respect to the outstanding Notes shall have
occurred and be continuing at the time of such deposit after giving effect
thereto or, in the case of legal defeasance, no Default relating to bankruptcy
or insolvency shall have occurred and be continuing at any time on or prior to
the 123rd day after the date of such deposit (it being understood that this
condition shall not be deemed satisfied until after such 123rd day); (5) such
legal defeasance or covenant defeasance shall not cause the Trustee to have a
conflicting interest within the meaning of the Trust Indenture Act (assuming all
Notes were in default within the meaning of such Act); (6) such defeasance or
covenant defeasance shall not result in a breach or violation of, or constitute
a default under, any other material agreement or instrument to which the Company
is a party or by which it is bound; (7) such legal defeasance or covenant
defeasance shall not
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result in the trust arising from such deposit constituting an investment company
within the meaning of the Investment Company Act of 1940, as amended, unless
such trust shall be registered under such Act or exempt from registration
thereunder and (8) the Company shall have delivered to the Trustee an officers'
certificate and an opinion of counsel stating that all conditions precedent with
respect to such defeasance or covenant defeasance have been complied with.
AMENDMENT AND WAIVERS
From time to time, the Company, when authorized by resolutions of the Board
and the Trustee, without the consent of the holders of Notes, may amend, waive
or supplement the Indenture and the Notes for certain specified purposes,
including, among other things, curing ambiguities, defects or inconsistencies,
to provide for the assumption of the Company's obligations to holders of the
Notes in the case of a merger or consolidation, to make any change that would
provide any additional rights or benefits to the holders of the Notes, to add
guarantors with respect to the Notes, to secure the Notes, to maintain the
qualification of the Indenture under the Trust Indenture Act or to make any
change that does not adversely affect the rights of any holder. Other amendments
and modifications of the Indenture or the Notes issued thereunder may be made by
the Company and the Trustee with the consent of the holders of not less than a
majority of the aggregate principal amount of the outstanding Notes; provided
that no such modification or amendment may, without the consent of the holder of
each outstanding Note affected thereby, (i) reduce the principal amount of, or
extend the fixed maturity of the Notes, or alter or waive the redemption
provisions of the Notes, (ii) change the currency in which any Notes or any
premium or the accrued interest thereon is payable, (iii) reduce the percentage
of the aggregate principal amount of outstanding Notes which must consent to an
amendment, supplement or waiver or consent to take any action under the
Indenture or the Notes, (iv) impair the right to institute suit for the
enforcement of any payment on or with respect to the Notes, (v) waive a default
in payment with respect to the Notes, (vi) reduce the rate or extend the time
for payment of interest on the Notes, (vii) following the occurrence of an Asset
Sale or a Change of Control, alter the obligation to purchase Notes as a result
thereof (except for changes required by applicable law) in accordance with the
Indenture or waive any default in the performance thereof, (viii) adversely
affect the ranking of the Notes, except in compliance with the terms of the
Indenture, or (ix) release any funds from the Collateral Account, except in
accordance with the terms of the Security Agreement as in effect on the Issue
Date.
REGARDING THE TRUSTEE
Norwest Bank Colorado, N.A. will serve as Trustee. The Indenture provides
that, except during the continuance of an Event of Default, the Trustee will
perform only such duties as are specifically set forth in the Indenture. If an
Event of Default has occurred and is continuing, the Trustee will exercise such
rights and powers vested in it under the Indenture and use the same degree of
care and skill in its exercise as a prudent person would exercise under the
circumstances in the conduct of such person's own affairs.
The Indenture and provisions of the Trust Indenture Act incorporated by
reference therein contain certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases or to realize on certain property received by it in respect of any
such claims, as security or otherwise. The Trustee is permitted to engage in
other transactions; PROVIDED that if the Trustee acquires any conflicting
interest (as defined) the Trustee must eliminate such conflict, apply to the
Commission for permission to continue as Trustee or resign.
GOVERNING LAW
The Indenture and the Security Agreement provide that the Indenture and the
Notes and the Security Agreement, respectively, are governed by and construed in
accordance with laws of the State of New York without giving effect to
principles of conflicts of law.
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CERTAIN DEFINITIONS
Set forth below is a summary of certain defined terms used in the Indenture,
unless otherwise noted. Reference is made to the Indenture for the full
definition of all such terms, as well as any other capitalized terms used herein
for which no definition is provided.
"Acquired Indebtedness" means Indebtedness of a Person existing at the time
such Person becomes a Restricted Subsidiary or assumed in connection with an
Asset Acquisition by such Person and not incurred in connection with, or in
anticipation of, such Person becoming a Restricted Subsidiary or such Asset
Acquisition; PROVIDED that Indebtedness of such Person which is redeemed,
defeased, retired or otherwise repaid at the time of or immediately upon
consummation of the transactions by which such Person becomes a Restricted
Subsidiary or such Asset Acquisition shall not constitute Acquired Indebtedness.
"Affiliate" of any specified Person means any other Person which, directly
or indirectly, controls, is controlled by or is under direct or indirect common
control with, such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise, and the terms
"affiliated," "controlling" and "controlled" have meanings correlative to the
foregoing.
"Asset Acquisition" means (i) any capital contribution (by means of
transfers of cash or other property to others or payments for property or
services for the account or use of others, or otherwise) by the Company or any
Restricted Subsidiary to any other Person, or any acquisition or purchase of
Capital Stock of any other Person by the Company or any Restricted Subsidiary,
in either case pursuant to which such Person shall (a) become a Restricted
Subsidiary or (b) shall be merged with or into the Company or any Restricted
Subsidiary or (ii) any acquisition by the Company or any Restricted Subsidiary
of the assets of any Person which constitute substantially all of an operating
unit or line of business of such Person or which is otherwise outside of the
ordinary course of business.
"Asset Sale" means any direct or indirect sale, conveyance, transfer or
lease (that has the effect of a disposition and is not for security purposes) or
other disposition (that is not for security purposes) to any Person other than
the Company or a Restricted Subsidiary, in one transaction or a series of
related transactions, of (i) the Capital Stock of any Restricted Subsidiary
(other than customary stock option programs), (ii) any assets of the Company or
any Restricted Subsidiary which constitute substantially all of an operating
unit or line of business of the Company and the Restricted Subsidiaries or (iii)
any other property or asset of the Company or any Restricted Subsidiary outside
of the ordinary course of business. For the purposes of this definition, the
term "Asset Sale" shall not include (i) any disposition of properties and assets
of the Company and/or the Restricted Subsidiaries that is governed under the
covenant "Consolidation, Merger, Sale of Assets, Etc.," (ii) sales of property
or equipment that have become worn out, obsolete or damaged or otherwise
unsuitable for use in connection with the business of the Company or any
Restricted Subsidiary, as the case may be, (iii) for purposes of the covenant
"Disposition of Proceeds of Asset Sales," any sale, conveyance, transfer, lease
or other disposition of any property or asset, whether in one transaction or a
series of related transactions occurring within one year, involving assets with
a Fair Market Value not in excess of $1.0 million, (iv) a Restricted Payment
that is permitted by the covenant "Limitation on Restricted Payments" and (v)
sales of Cash Equivalents.
"Average Life to Stated Maturity" means, with respect to any Indebtedness,
as at any date of determination, the quotient obtained by dividing (i) the sum
of the products of (a) the number of years from such date to the date or dates
of each successive scheduled principal payment (including, without limitation,
any sinking fund requirements) of such Indebtedness multiplied by (b) the amount
of each such principal payment by (ii) the sum of all such principal payments;
PROVIDED that, in the case of any Capitalized Lease Obligation, all calculations
hereunder shall give effect to any applicable options to renew in favor of the
Company or any Restricted Subsidiary.
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"Board" means the Board of Directors of the Company.
"Board Resolution" means a copy of a resolution certified by the Secretary
or an Assistant Secretary of the Company to have been duly adopted by the Board
and to be in full force and effect on the date of such certification and
delivered to the Trustee.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations, rights in, or other equivalents (however designated
and whether voting and/or non-voting) of, such Person's capital stock, whether
outstanding on the Issue Date or issued after the Issue Date, and any and all
rights (other than any evidence of Indebtedness), warrants or options
exchangeable for or convertible into such capital stock.
"Capitalized Lease Obligations" means, with respect to any Person, any
obligation of such Person to pay rent or other amounts under a lease of (or
other agreement conveying the right to use) any property (whether real, personal
or mixed, immovable or movable) that is required to be classified and accounted
for as a capitalized lease obligation under GAAP, and, for the purpose of the
Indenture, the amount of such obligation at any date shall be the capitalized
amount thereof at such date, determined in accordance with GAAP.
"Cash Equivalents" means (i) any evidence of Indebtedness (with, for
purposes of the covenant "Disposition of Proceeds of Asset Sales" only, a
maturity of 365 days or less) issued or directly and fully guaranteed or insured
by the United States or any agency or instrumentality thereof (PROVIDED that the
full faith and credit of the United States is pledged in support thereof or such
Indebtedness constitutes a general obligation of such country); (ii) deposits,
certificates of deposit or acceptances (with, for purposes of the covenant
"Disposition of Proceeds of Asset Sales" only, a maturity of 365 days or less)
of any financial institution that is a member of the Federal Reserve System, in
each case having combined capital and surplus and undivided profits (or any
similar capital concept) of not less than $500.0 million and whose senior
unsecured debt is rated at least "A-l" by S&P or "P-l" by Moody's; (iii)
commercial paper with a maturity of 365 days or less issued by a corporation
(other than an Affiliate of the Company) organized under the laws of the United
States or any State thereof and rated at least "A-l" by S&P or "P-l" by Moody's;
(iv) repurchase agreements and reverse repurchase agreements relating to
marketable direct obligations issued or unconditionally guaranteed by the United
States Government or issued by any agency thereof and backed by the full faith
and credit of the United States Government maturing within 365 days from the
date of acquisition and (v) money market funds which invest substantially all of
their assets in securities described in the preceding clauses (i) through (iv).
"Change of Control" is defined to mean the occurrence of any of the
following events: (a) any "person" or "group" (as such terms are used in
Sections 13(d) and 14(d) of the Exchange Act), excluding the Permitted Holders,
is or becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under
the Exchange Act, except that a person shall be deemed to have "beneficial
ownership" of all securities that such person has the right to acquire, whether
such right is exercisable immediately or only after the passage of time),
directly or indirectly, of more than 50% of the total Voting Stock of the
Company; (b) prior to a Public Equity Offering or one or more sales of Common
Stock to a Strategic Equity Investor, any "person" or "group" (as such terms are
used in clause (a)) contemporaneously becomes the "beneficial owner" (as such
term is used in clause (a)), directly or indirectly, of Voting Stock of the
Company in an amount greater than the total Voting Stock of the Company
"beneficially owned" (as such term is used in clause (a)) by the Permitted
Holders; (c) the Company consolidates with, or merges with or into, another
person or sells, assigns, conveys, transfers, leases or otherwise disposes of
all or substantially all of its assets to any person, or any person consolidates
with, or merges with or into, the Company, in any such event pursuant to a
transaction in which the outstanding Voting Stock of the Company is converted
into or exchanged for cash, securities or other property, other than any such
transaction where (i) the outstanding Voting Stock of the Company is converted
into or exchanged for (1) Voting Stock (other than Disqualified Stock) of the
surviving or transferee corporation or its parent corporation and/or (2) cash,
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securities and other property in an amount which could be paid by the Company as
a Restricted Payment under the Indenture and (ii) immediately after such
transaction no "person" or "group" (as such terms are used in clause (a)),
excluding Permitted Holders, is the "beneficial owner" (as such term is used in
clause (a)), directly or indirectly, of more than 50% of the total Voting Stock
of the surviving or transferee corporation or its parent corporation, as
applicable; or (d) during any consecutive two-year period, individuals who at
the beginning of such period constituted the Board (together with any new
directors whose election by the Board or whose nomination for election by the
stockholders of the Company was approved by a vote of a majority of the
directors then still in office who were either directors at the beginning of
such period or whose election or nomination for election was previously so
approved) cease for any reason to constitute a majority of the Board then in
office.
"Common Stock" means, with respect to any Person, any and all shares,
interest or other participations in, and other equivalents (however designated
and whether voting or nonvoting) of such Person's common stock whether
outstanding at the Issue Date, and includes, without limitation, all series and
classes of such common stock.
"Consolidated Adjusted Net Income" means, for any period, the consolidated
net income (or loss) of the Company and all Restricted Subsidiaries for such
period as determined in accordance with GAAP, adjusted by excluding, without
duplication, (a) any net after-tax extraordinary or non-recurring gains or
losses; (b) any net after-tax gains or losses attributable to asset dispositions
other than in the ordinary course of business; (c) the portion of net income (or
loss) of any Person (other than the Company or a Restricted Subsidiary),
including Unrestricted Subsidiaries, in which the Company or any Restricted
Subsidiary has an ownership interest, except to the extent of the amount of
dividends or other distributions actually paid to the Company or any Restricted
Subsidiary in cash dividends or distributions during such period; (d) net income
(but not loss) of any Person combined with the Company or any Restricted
Subsidiary on a "pooling of interests" basis attributable to any period prior to
the date of combination; (e) the net income of any Restricted Subsidiary, to the
extent that the declaration or payment of dividends or similar distributions by
such Restricted Subsidiary is not at the date of determination permitted,
directly or indirectly, by operation of the terms of its charter or any
agreement, instrument, judgment, decree, order, statute, rule or governmental
regulation applicable to such Restricted Subsidiary or its stockholders; (f) any
gain or loss, net of taxes, realized upon the termination of any employee
benefit plan and (g) the cumulative effect of a change in accounting principles
(effected either through cumulative effect adjustment or a retroactive
application, in each case, in accordance with GAAP).
"Consolidated Indebtedness to Consolidated Operating Cash Flow Ratio" means,
at any date of determination, the ratio of (i) the aggregate amount of
Indebtedness of the Company and its Restricted Subsidiaries outstanding at the
date of determination as determined on a consolidated basis in accordance with
GAAP to (ii) the aggregate amount of Consolidated Operating Cash Flow for the
then most recent four full fiscal quarters for which consolidated financial
statements of the Company are available preceding the date of the transaction
giving rise to the need to calculate the Consolidated Indebtedness to
Consolidated Operating Cash Flow Ratio (such four fiscal quarter period being
referred to as the "Four Quarter Period").
"Consolidated Interest Expense" of the Company means, for any period,
without duplication, the sum of (a) the interest expense of the Company and its
Restricted Subsidiaries for such period, including, without limitation, (i)
amortization of debt discount; (ii) the net cost of Interest Rate Agreements
(including amortization of discounts); (iii) the interest portion of any
deferred payment obligation; (iv) accrued interest; (v) the consolidated amount
of any interest capitalized by the Company and (vi) amortization of debt
issuance costs, PLUS (b) the interest component of Capitalized Lease Obligations
of the Company and its Restricted Subsidiaries paid, accrued and/or scheduled to
be paid or accrued during such period, EXCLUDING, HOWEVER, any amount of such
interest of any Restricted Subsidiary if the net income of such Restricted
Subsidiary is excluded in the calculation of Consolidated Adjusted Net Income
pursuant to clause (e) of the definition thereof (but only in the same
proportion as the net income of such
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Restricted Subsidiary is excluded from the calculation of Consolidated Adjusted
Net Income pursuant to clause (e) of the definition thereof); PROVIDED that the
Consolidated Interest Expense attributable to interest on any Indebtedness
computed on a PRO FORMA basis and (A) bearing a floating interest rate shall be
computed as if the rate in effect on the date of computation had been the
applicable rate for the entire period and (B) which was not outstanding during
the period for which the computation is being made but which bears, at the
option of the Company, a fixed or floating rate of interest, shall be computed
by applying, at the option of the Company, either the fixed or the floating
rate.
"Consolidated Net Worth" means, with respect to any Person, the consolidated
stockholders' or partners' equity of such Person reflected on the most recent
financial statements of such Person, determined in accordance with GAAP, less
any amounts attributable to Disqualified Stock of such Person.
"Consolidated Operating Cash Flow" means, with respect to any period, the
Consolidated Adjusted Net Income for such period (a) increased by (to the extent
included in computing Consolidated Adjusted Net Income) the sum of (i) the
Consolidated Tax Expense for such period (other than taxes attributable to
extraordinary or non-recurring gains or losses); (ii) Consolidated Interest
Expense for such period; (iii) depreciation of the Company and the Restricted
Subsidiaries for such period, determined on a consolidated basis in accordance
with GAAP; (iv) amortization of the Company and its Restricted Subsidiaries for
such period, determined on a consolidated basis in accordance with GAAP and (v)
any other non-cash charges that were deducted in computing Consolidated Adjusted
Net Income (excluding any non-cash charge which requires an accrual or reserve
for cash charges for any future period) of the Company and its Restricted
Subsidiaries for such period in accordance with GAAP and (b) decreased by any
non-cash gains that were included in computing Consolidated Adjusted Net Income.
"Consolidated Tax Expense" means, for any period, the provision for federal,
state, provincial, local and foreign income taxes of the Company and all
Restricted Subsidiaries for such period as determined on a consolidated basis in
accordance with GAAP.
"Consolidation" means with respect to the Company, the consolidation of the
accounts of the Restricted Subsidiaries with those of the Company, all in
accordance with GAAP; PROVIDED that "consolidation" will not include
consolidation of the accounts of any Unrestricted Subsidiary with the accounts
of the Company. The term "consolidated" has a correlative meaning to the
foregoing.
"Currency Agreements" means any spot or forward foreign exchange agreements
and currency swap, currency option or other similar financial agreements or
arrangements entered into by the Company or any of its Restricted Subsidiaries
designed solely to protect against or manage exposure to fluctuations in
currency exchange rates.
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Designation" has the meaning set forth under the covenant "Designations of
Unrestricted Subsidiaries."
"Disinterested Director" means, with respect to any transaction or series of
transactions in respect of which the Board is required to deliver a Board
Resolution under the Indenture, a member of the Board who does not have any
material direct or indirect financial interest in or with respect to such
transaction or series of transactions.
"Disqualified Stock" means, with respect to any Person, any Capital Stock
which, by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable), or upon the happening of any
event, matures or becomes mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or becomes exchangeable for Indebtedness at the option
of the holder thereof, or becomes redeemable at the option of the holder
thereof, in whole or in part, on or prior to the final maturity date of the
Notes; PROVIDED such Capital Stock shall only constitute Disqualified Stock to
the
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extent it so matures or becomes so redeemable or exchangeable on or prior to the
final maturity date of the Notes; PROVIDED, FURTHER, that any Capital Stock that
would not constitute Disqualified Stock but for provisions thereof giving
holders thereof the right to require such Person to repurchase or redeem such
Capital Stock upon the occurrence of an "asset sale" or "change of control"
occurring prior to the final maturity date of the Notes shall not constitute
Disqualified Stock if the "asset sale" or "change of control" provisions
applicable to such Capital Stock are no more favorable to the holders of such
Capital Stock than the provisions contained in the covenants "Disposition of
Proceeds of Asset Sales" and "Change of Control" and such Capital Stock
specifically provides that such Person will not repurchase or redeem any such
stock pursuant to such provision prior to the Company's repurchase of such Notes
as are required to be repurchased pursuant to the covenants "Disposition of
Proceeds of Asset Sales" and "Change of Control" and at all times subject to the
covenant "Limitation on Restricted Payments."
"Eligible Working Capital Borrowing Base" means an amount equal to the sum
of (i) 50% of the net inventory of the Company and (ii) 85% of the net accounts
receivable of the Company.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
together with the rules and regulations promulgated thereunder.
"Fair Market Value" means, with respect to any asset or property, the price
that could be negotiated in an arms-length free market transaction, for cash,
between a willing seller and a willing buyer, neither of whom is under pressure
or compulsion to complete the transaction. Unless otherwise specified in the
Indenture, Fair Market Value shall be determined by the Board acting in good
faith and shall be evidenced by a Board Resolution.
"GAAP" means generally accepted accounting principles in the United States
in effect on the Issue Date, consistently applied.
"Guarantee" means, as applied to any obligation, (i) a guarantee (other than
by endorsement of negotiable instruments for collection in the ordinary course
of business), direct or indirect, in any manner, of any part or all of such
obligation and (ii) an agreement, direct or indirect, contingent or otherwise,
the practical effect of which is to assure in any way the payment or performance
(or payment of damages in the event of non-performance) of all or any part of
such obligation, including, without limiting the foregoing, the payment of
amounts drawn down by letters of credit.
"Incur" or "incur" means, with respect to any Indebtedness, to create,
issue, assume, guarantee or in any manner become directly or indirectly liable
for the payment of, or otherwise incur such Indebtedness; PROVIDED that neither
the accrual of interest nor the accretion of original issue discount shall be
considered an Incurrence of Indebtedness.
"Indebtedness" means, with respect to any Person, without duplication, (a)
all liabilities, contingent or otherwise, of such Person: (i) for borrowed money
(including overdrafts); (ii) in connection with any letters of credit and
acceptances issued under letter of credit facilities, acceptance facilities or
other similar facilities; (iii) evidenced by bonds, notes, debentures or other
similar instruments; (iv) for the deferred purchase price of property or
services or created or arising under any conditional sale or other title
retention agreement with respect to property acquired by such Person; or (v) for
Capitalized Lease Obligations; (b) all obligations of such Person under or in
respect of Interest Rate Agreements or Currency Agreements; (c) all indebtedness
referred to in (but not excluded from) the preceding clauses of other Persons
and all dividends of other Persons, the payment of which is secured by (or for
which the holder of such Indebtedness has an existing right, contingent or
otherwise, to be secured by) any Lien upon or with respect to property
(including, without limitation, accounts and contract rights) owned by such
Person, even though such Person has not assumed or become liable for the payment
of such Indebtedness (the amount of such obligation being deemed to be the
lesser of the value of such property or asset or the amount of the obligation so
secured); (d) all guarantees by such Person of Indebtedness referred to in this
definition of any other Person and (e) all Disqualified Stock of such Person
valued at the greater of its
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voluntary or involuntary maximum fixed repurchase price plus accrued and unpaid
dividends. The amount of Indebtedness of any Person at any date shall be the
outstanding balance at such date (or, in the case of a revolving credit or other
similar facility, the total amount of funds outstanding on the date of
determination) of all unconditional obligations as described above and, with
respect to contingent obligations, the maximum liability upon the occurrence of
the contingency giving rise to the obligation; PROVIDED that the amount
outstanding at any time of any Indebtedness issued with original issue discount
equals the face amount of such Indebtedness less the remaining unamortized
portion of the original issue discount with respect to such Indebtedness at the
time of its issuance as determined in conformity with GAAP. For purposes hereof,
the "maximum fixed repurchase price" of any Disqualified Stock which does not
have a fixed repurchase price shall be calculated in accordance with the terms
of such Disqualified Stock as if such Disqualified Stock were purchased on any
date on which Indebtedness shall be required to be determined pursuant to the
Indenture, and if such price is based upon, or measured by, the fair market
value of such Disqualified Stock, such fair market value shall be determined in
good faith by the board of directors of the issuer of such Disqualified Stock.
Notwithstanding the foregoing, trade accounts and accrued liabilities arising in
the ordinary course of business and any liability for federal, state or local
taxes or other taxes owed by such Person will not be considered Indebtedness for
purposes of this definition.
"Independent Financial Advisor" means a United States investment banking,
consulting or accounting firm of national standing in the United States (i)
which does not, and whose directors, officers and employees or Affiliates do
not, have a material direct or indirect financial interest in the Company or any
of its Subsidiaries or Affiliates and (ii) which, in the judgment of the Board,
is otherwise independent and qualified to perform the task for which it is to be
engaged.
"Interest Rate Agreements" means any interest rate protection agreements and
other types of interest rate hedging agreements or arrangements (including,
without limitation, interest rate swaps, caps, floors, collars and other similar
agreements) designed solely to protect the Company or any Restricted Subsidiary
against fluctuations in interest rates in respect of Indebtedness of the Company
or any Restricted Subsidiary.
"Interest Rate Obligations" means the obligations of any Person pursuant to
any arrangement with any other Person whereby, directly or indirectly, such
Person is entitled to receive from time to time periodic payments calculated by
applying either a floating or a fixed rate of interest on a stated notional
amount and shall include without limitation, interest rate swaps, caps, floors,
collars, forward interest rate agreements and similar agreements.
"Investment" means, with respect to any Person, any advance, loan, account
receivable (other than an account receivable arising in the ordinary course of
business), or other extension of credit (including, without limitation, by means
of any guarantee) or any capital contribution to (by means of transfers of
property to others, payments for property or services for the account or use of
others, or otherwise), or any purchase or ownership of any stocks, bonds, notes,
debentures or other securities of, any other Person. Notwithstanding the
foregoing, in no event shall any issuance of Capital Stock (other than
Disqualified Stock) of the Company in exchange for Capital Stock, property or
assets of another Person or any redemption or repurchase of the Notes or other
Indebtedness of the Company or any Restricted Subsidiary constitute an
Investment by the Company in such other Person.
"Issue Date" means the original date of issuance of the Notes.
"Lien" means any mortgage, charge, pledge, lien (statutory or other),
security interest, hypothecation, assignment for security, claim, or preference
or priority or other encumbrance upon or with respect to any property of any
kind. A Person shall be deemed to own subject to a Lien any property which such
Person has acquired or holds subject to the interest of a vendor or lessor under
any conditional sale agreement, capital lease or other title retention
agreement.
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"Market Capitalization" of any Person means, as of any day of determination,
the average Closing Price of such Person's common stock over the 20 consecutive
trading days immediately preceding such day. "Closing Price" on any trading day
with respect to the per share price of any shares of common stock means the last
reported sale price regular way or, in case no such reported sale takes place on
such day, the average of the reported closing bid and asked prices regular way,
in either case on the New York Stock Exchange or, if such shares of common stock
are not listed or admitted to trading on such exchange, on the principal
national securities exchange on which such shares are listed or admitted to
trading or, if not listed or admitted to trading on any national securities
exchange, on The Nasdaq National Market or, if such shares are not listed or
admitted to trading on any national securities exchange or quoted on the Nasdaq
National Market, the average of the closing bid and asked prices in the
over-the-counter market as furnished by any New York Stock Exchange member firm
that is selected from time to time by the Company for that purpose and is
reasonably acceptable to the Trustee.
"Material Restricted Subsidiary" means any Restricted Subsidiary of the
Company, which, at any date of determination, is a "Significant Subsidiary" (as
that term is defined in Regulation S-X issued under the Securities Act).
"Maturity" means, with respect to any Note, the date on which any principal
of such Note becomes due and payable as therein or herein provided, whether at
the Stated Maturity with respect to such principal or by declaration of
acceleration, call for redemption or purchase or otherwise.
"Moody's" means Moody's Investors Service.
"Net Cash Proceeds" means, (a) with respect to any asset sale, the proceeds
thereof in the form of cash (including assumed liabilities and other items
deemed to be cash under the proviso to the first sentence of the covenant
"Disposition of Proceeds of Asset Sales") or Cash Equivalents including payments
in respect of deferred payment obligations when received in the form of cash or
Cash Equivalents (except to the extent that such obligations are financed or
sold with recourse to the Company or any Restricted Subsidiary) net of (i)
brokerage commissions and other fees and expenses (including fees and expenses
of legal counsel, accountants, consultants and investment bankers) related to
such Asset Sale, (ii) provisions for all taxes payable as a result of such Asset
Sale, (iii) amounts required to be paid to any Person (other than the Company or
any Restricted Subsidiary) owning a beneficial interest in or having a Lien on
the assets subject to the Asset Sale and (iv) appropriate amounts to be provided
by the Company or any Restricted Subsidiary, as the case may be, as a reserve
required in accordance with GAAP against any liabilities associated with such
Asset Sale and retained by the Company or any Restricted Subsidiary, as the case
may be, after such Asset Sale, including, without limitation, pension and other
post-employment benefit liabilities, liabilities related to environmental
matters and liabilities under any indemnification obligations associated with
such Asset Sale, all as reflected in an officers' certificate delivered to the
Trustee, and (b) with respect to any issuance or sale of Capital Stock or
options, warrants or rights to purchase Capital Stock, or debt securities or
Disqualified Stock that have been converted into or exchanged for Qualified
Capital Stock, as referred to under the "Limitation on Restricted Payments"
covenant, the proceeds of such issuance or sale in the form of cash or Cash
Equivalents, including payments in respect of deferred payment obligations when
received in the form of, or stock or other assets when disposed for, cash or
Cash Equivalents (except to the extent that such obligations are financed or
sold with recourse to the Company or any Restricted Subsidiary, net of
attorney's fees, accountant's fees and brokerage, consultation, underwriting and
other fees and expenses actually incurred in connection with such issuance or
sale and net of taxes paid or payable as a result thereof.
"Permitted Credit Facility" means any senior commercial term loan and/or
revolving credit facility or any letter of credit facility entered into
principally with commercial banks and/or other financial institutions typically
party to commercial loan agreements.
"Permitted Holders" mean (i) John R. Evans, Keith V. Burge and Philip G.
Allen and their spouses, issue or other members of their immediate families (the
"Evans Family," the "Burge Family" and the
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"Allen Family," respectively), (ii) trusts or other entities created for the
benefit of any member of the Evans Family, the Burge Family or the Allen Family,
(iii) entities controlled by any of the Evans Family, the Burge Family or the
Allen Family, and (iv) in the event of the death of any member of the Evans
Family, the Burge Family or the Allen Family, the heirs or testamentary legatees
of such member of the Evans Family, the Burge Family or the Allen Family.
"Permitted Indebtedness" means the following Indebtedness (each of which
shall be given independent effect):
(a) Indebtedness under the Notes and the Indenture;
(b) Indebtedness of the Company and/or any Restricted Subsidiary outstanding
on the Issue Date;
(c) (i) Indebtedness of the Company issued to and held by a Wholly Owned
Restricted Subsidiary and (ii) Indebtedness of a Restricted Subsidiary
issued to and held by the Company or a Wholly Owned Restricted
Subsidiary; PROVIDED, HOWEVER, that (x) any subsequent issuance or
transfer of any Capital Stock that results in any such Wholly Owned
Restricted Subsidiary ceasing to be a Wholly Owned Restricted Subsidiary,
(y) any Designation of such Wholly Owned Restricted Subsidiary as an
Unrestricted Subsidiary or (z) any subsequent transfer of such
Indebtedness (other than to the Company or a Wholly Owned Restricted
Subsidiary) will be deemed, in each case, to constitute the issuance of
such Indebtedness by the Company or such Indebtedness by such Restricted
Subsidiary;
(d) Interest Rate Obligations of the Company and/or any Restricted
Subsidiary relating to Indebtedness of the Company and/or such Restricted
Subsidiary, as the case may be (which Indebtedness (x) bears interest at
fluctuating interest rates and (y) is otherwise permitted to be incurred
under the "Limitation on Additional Indebtedness" covenant), but only to
the extent that the notional principal amount of such Interest Rate
Obligations does not exceed the principal amount of the Indebtedness
(and/or Indebtedness subject to commitments) to which such Interest Rate
Obligations relate;
(e) Indebtedness of the Company and/or any Restricted Subsidiary in respect
of performance bonds of the Company or any Restricted Subsidiary or
surety bonds provided by the Company or any Restricted Subsidiary, in
each case incurred in the ordinary course of business;
(f) Indebtedness of the Company and/or any Restricted Subsidiary to the
extent it represents a replacement, renewal, refinancing or extension (a
"Refinancing") of outstanding Indebtedness of the Company and/or of any
Restricted Subsidiary incurred or outstanding pursuant to clause (b), (g)
or (h) of this definition or the proviso of the covenant "Limitation on
Additional Indebtedness;" PROVIDED that (1) Indebtedness of the Company
may not be Refinanced to such extent under this clause (f) with
Indebtedness of any Restricted Subsidiary and (2) any such Refinancing
shall only be permitted under this clause (f) to the extent that (x) it
does not result in a lower Average Life to Stated Maturity of such
Indebtedness as compared with the Indebtedness being Refinanced, and (y)
it does not exceed the sum of the principal amount (or, if such
Indebtedness provides for a lesser amount to be due and payable upon a
declaration of acceleration thereof, an amount no greater than such
lesser amount) of the Indebtedness being Refinanced plus the amount of
accrued interest thereon and the amount of any reasonably determined
prepayment premium necessary to accomplish such Refinancing and such
reasonable fees and expenses incurred in connection therewith;
(g) Indebtedness of the Company and/or any Restricted Subsidiary incurred
under one or more Permitted Credit Facilities, such that the aggregate
principal amount of the Indebtedness of the Company and the Restricted
Subsidiaries under Permitted Credit Facilities does not exceed the
greater of (i) $50.0 million at any time outstanding and (ii) the
Eligible Working Capital Borrowing Base;
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(h) Indebtedness of the Company not to exceed, at any one time outstanding,
two times (A) the Net Cash Proceeds received by the Company after the
Issue Date as a capital contribution or from the issuance and sale of its
Qualified Capital Stock to a Person that is not a Subsidiary of the
Company, to the extent such Net Cash Proceeds have not been used pursuant
to clause (a)(3)(B) or clauses (b)(ii) and (iii) of the "Limitation on
Restricted Payments" covenant to make a Restricted Payment or for the
redemption, repurchase or other acquisition of Indebtedness and (B) 80%
of the Fair Market Value of property (other than cash and Cash
Equivalents) received by the Company after the Issue Date as a
contribution of capital or from the sale of its Qualified Capital Stock
to a Person that is not a Subsidiary of the Company, to the extent such
capital contribution or sale of Qualified Capital Stock has not been used
pursuant to clause (a) (3) (B) of the "Limitation on Restricted Payments"
covenant to make a Restricted Payment; PROVIDED that such Indebtedness
does not mature prior to the Stated Maturity of the Notes and (y) has an
Average Life to Stated Maturity longer than the Notes;
(i) Purchase Money Indebtedness;
(j) Indebtedness evidenced by letters of credit issued in the ordinary
course of business of the Company and/or any Restricted Subsidiary to
secure workers' compensation and other insurance coverages; and
(k) Indebtedness of the Company and/or any Restricted Subsidiary in addition
to that permitted to be incurred pursuant to clauses (a) through (j)
above in an aggregate principal amount not in excess of $5.0 million
outstanding at any one time.
"Permitted Investments" means (a) Cash Equivalents; (b) Investments in
prepaid expenses, negotiable instruments held for collection and lease, utility
and workers' compensation, performance and other similar deposits; (c) Interest
Rate Obligations incurred in compliance with the covenant "Limitation on
Additional Indebtedness;" (d) Investments in the Company or any Wholly Owned
Restricted Subsidiary; (e) Investments made in any Person as a result of which
such Person becomes a Wholly Owned Restricted Subsidiary or is merged into, or
transfers substantially all of its assets to the Company or a Wholly Owned
Restricted Subsidiary; (f) any Investment made as a result of the receipt of
non-cash consideration from an Asset Sale that was made in compliance with the
covenant "Disposition of Proceeds of Asset Sales;" (g) Investments received as a
part of the settlement of litigation or in satisfaction of extensions of credit
to any Person otherwise permitted under the Indenture pursuant to the
reorganization, bankruptcy or liquidation of such Person or a good faith
settlement of debts with such Person and (h) loans or advances to officers or
employees of the Company or any Restricted Subsidiary made in the ordinary
course of business of the Company or such Restricted Subsidiary to pay business
related travel expenses or reasonable relocation costs of such officers or
employees in connection with their employment by the Company or such Restricted
Subsidiary.
"Permitted Liens" means the following types of Liens:
(a) Liens existing as of the Issue Date of the Notes;
(b) Liens on any property or assets of a Subsidiary granted in favor of the
Company or any Restricted Subsidiary;
(c) Liens securing the Notes;
(d) any interest or title of a lessor under any Capitalized Lease
Obligations or of a seller under any Purchase Money Indebtedness
permitted by the Indenture;
(e) Liens securing Indebtedness incurred under clause (g) or (i) of the
definition of "Permitted Indebtedness;"
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(f) statutory Liens or landlord's and carrier's, warehouseman's, mechanic's,
supplier's materialmen's, repairmen's or other like Liens arising in the
ordinary course of business and with respect to amounts not yet
delinquent or being contested in good faith by appropriate proceedings,
if a reserve or other appropriate provision, if any, as shall be required
in conformity with GAAP shall have been made therefor;
(g) Liens for taxes, assessments, government charges or claims that are
being contested in good faith by appropriate proceedings promptly
instituted and diligently conducted and if a reserve or other appropriate
provision, if any, as shall be required in conformity with GAAP shall
have been made therefor;
(h) Liens incurred or deposits made to secure the performance of tenders,
bids, leases, statutory obligations, surety and appeal bonds, government
contracts, performance bonds and other obligations of a like nature
(including, without limitation, indefeasible rights to use) incurred in
the ordinary course of business (other than contracts for the payment of
money);
(i) easements, servitudes, rights-of-way, restrictions (including, without
limitation, zoning restrictions) and other similar charges or
encumbrances not interfering in any material respect with the business of
the Company or any Subsidiary incurred in the ordinary course of
business;
(j) Liens arising by reason of any judgment, decree or order of any court so
long as such Lien is adequately bonded and any appropriate legal
proceedings that may have been duly initiated for the review of such
judgment, decree or order shall not have been finally terminated or the
period within which such proceedings may be initiated shall not have
expired;
(k) Liens securing Acquired Indebtedness created prior to (and not in
connection with or in contemplation of) the incurrence of such
Indebtedness by the Company or any Subsidiary; PROVIDED that such Lien
does not extend to any property or assets of the Company or any
Subsidiary other than the assets acquired in connection with the
incurrence of such Acquired Indebtedness;
(l) Liens securing Interest Rate Agreements or Currency Agreements permitted
to be incurred pursuant to clause (e) of the definition of "Permitted
Indebtedness" or any collateral for the Indebtedness to which such
Interest Rate Agreements or Currency Agreements relate;
(m) Liens arising from purchase money mortgages and purchase money security
interests; PROVIDED that the related Indebtedness shall not be secured by
any property or assets of the Company or any Subsidiary other than the
property and assets so acquired;
(n) Liens with respect to assets of a Restricted Subsidiary granted by such
Restricted Subsidiary to the Company or a Restricted Subsidiary to secure
Indebtedness owing to the Company or such Restricted Subsidiary;
(o) pledges and deposits made in the ordinary course of business in
connection with workers' compensation, unemployment insurance and other
types of statutory obligations;
(p) Liens with respect to the assets of any entity which becomes the
successor to the Company as provided under "--Consolidation Merger, Sale
of Assets, Etc."; and
(q) any extension, renewal or replacement, in whole or in part, of any Lien
described in the foregoing clauses (a) through (p); PROVIDED that any
such extension, renewal or replacement shall be no more restrictive in
any material respect than the Lien so extended, renewed or replaced and
shall not extend to any additional property or assets.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government or any agency or political subdivision
thereof.
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"Preferred Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated) of such
Person's preferred or preference stock whether now outstanding, or issued after
the Issue Date, and including, without limitation, all classes and series of
preferred or preference stock of such Person.
"Purchase Money Indebtedness" means Indebtedness of the Company or any
Restricted Subsidiaries incurred for the purpose of financing all or any part of
the cost of, the construction, expansion, installation, acquisition or
improvement by the Company or any Restricted Subsidiary of the Company of any
Telecommunications Assets or not less than 66 2/3 percent of the outstanding
Voting Stock of a Person that becomes a Restricted Subsidiary the assets of
which consist primarily of Telecommunications Assets; PROVIDED, that the Net
Cash Proceeds from the issuance of such Indebtedness (or the amount of such
Indebtedness constituting Capitalized Lease Obligations) does not exceed, as of
the date of incurrence of such Indebtedness, 100 percent of the lesser of cost
or Fair Market Value of such Telecommunication Assets.
"Qualified Capital Stock" of any Person means any and all Capital Stock of
such Person other than Disqualified Stock.
"Refinancing" has the meaning set forth in clause (f) of the definition of
"Permitted Indebtedness."
"Restricted Subsidiary" means any Subsidiary of the Company that has not
been designated by the Board, by a Board Resolution delivered to the Trustee, as
an Unrestricted Subsidiary pursuant to and in compliance with the covenant
"Designations of Unrestricted Subsidiaries." Any such Designation may be revoked
by a Board Resolution delivered to the Trustee, subject to the provisions of
such covenant.
"Restricted Subsidiary Indebtedness" means Indebtedness of any Restricted
Subsidiary (i) which is not subordinated to any other Indebtedness of such
Restricted Subsidiary and (ii) in respect of which the Company is not also
obligated (by means of a guarantee or otherwise) other than, in the case of this
clause (ii), Indebtedness under any Permitted Credit Facilities.
"Revocation" has the meaning set forth under the covenant "Designations of
Unrestricted Subsidiaries."
"S&P" means Standard & Poor's Corporation.
"Stated Maturity" means, when used with respect to any Note or any
installment of interest thereon, the date specified in such Note as the fixed
date on which the principal of such Note or such installment of interest is due
and payable, and, when used with respect to any other Indebtedness, means the
date specified in the instrument governing such Indebtedness as the fixed date
on which the principal of such Indebtedness, or any installment of interest
thereon, is due and payable.
"Strategic Equity Investor" means any Person engaged principally in one or
more Telecommunications Businesses with a Market Capitalization or Consolidated
Net Worth of at least $1.0 billion.
"Subordinated Indebtedness" means any Indebtedness of the Company or any
Restricted Subsidiary which is expressly subordinated in right of payment to the
Notes.
"Subsidiary" means, with respect to any Person, (i) any corporation of which
the outstanding Capital Stock having at least a majority of the votes entitled
to be cast in the election of directors shall at the time be owned, directly or
indirectly, by such Person, or (ii) any other Person of which at least a
majority of voting interest is at the time, directly or indirectly, owned by
such Person.
"Telecommunications Assets" means, with respect to any Person, all assets,
rights (contractual or otherwise) and properties, whether tangible or
intangible, used or intended for use in connection with a Telecommunications
Business.
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"Telecommunications Business" means the business of (i) transmitting, or
providing services relating to the transmission of voice, video or data through
customer or company owned or leased transmission facilities, including without
limitation frame relay, ATM, Internet access, cellular services, paging
services, voice messaging services, local and long distance services, (ii)
constructing, planning, designing, creating, installing, managing, consulting
with respect to developing, leasing, financing, selling or marketing data and
voice equipment, computer hardware and software, networking hardware and
software and other similar devices including without limitation servers,
routors, data switches, personal computers, key systems and handsets, and (iii)
consulting on advisory services relating to either of (i) or (ii), including
without limitation services relating to the design, implementation and
maintenance of web applications, web hosting and Internet access or (iv)
evaluating, participating or pursuing any other activity or opportunity that is
primarily related to those identified in (i), (ii) or (iii) above; PROVIDED that
the determination of what constitutes a Telecommunications Business shall be
made in good faith by the Board.
"Unrestricted Subsidiary" means any Subsidiary of the Company designated as
such pursuant to and in compliance with the covenant "Designations of
Unrestricted Subsidiaries." Any such designation may be revoked by a Board
Resolution delivered to the Trustee, subject to the provisions of such covenant.
"US Designation Amount" has the meaning set forth under the covenant
"Designations of Unrestricted Subsidiaries."
"U.S. Government Securities" means direct obligations of the United States
of America, or obligations guaranteed by the United States of America, for the
payment of which obligations or guarantee its full faith and credit is pledged.
"Voting Stock" means, with respect to any Person, the Capital Stock of any
class or kind ordinarily having the power to vote for the election of directors
or other members of the governing body of such Person.
"Wholly Owned Restricted Subsidiary" means any Restricted Subsidiary in
which all of the outstanding Capital Stock is owned by the Company or another
Wholly Owned Restricted Subsidiary. For the purposes of this definition, any
directors' qualifying shares or investments by foreign nationals mandated by
applicable law shall be disregarded in determining the ownership of a Restricted
Subsidiary.
BOOK-ENTRY; DELIVERY AND FORM
Except as set forth under "--Certificated Notes," the New Notes will be
issued in the form of one Global New Note. Ownership of beneficial interest in a
Global New Note will be limited to persons who have accounts with DTC
("participants") or persons who hold interests through participants. Ownership
of beneficial interests in a Global New Note will be shown on, and the transfer
of that ownership will be effected only through, records maintained by DTC or
its nominee (with respect to interests of participants) and the records of
participants (with respect to interests of persons other than participants).
So long as DTC, or its nominee, is the registered owner or holder of a
Global New Note, DTC or such nominee, as the case may be, will be considered the
sole owner or holder of the related New Notes represented by such Global New
Note for all purposes under the Indenture and the New Notes. No beneficial owner
of an interest in a Global New Note will be able to transfer that interest
except in accordance with applicable procedures of DTC, in addition to those
provided for under the Indenture.
Payments of the principal of, and interest on, New Notes represented by the
Global New Note registered in the name of and held by the Depository or its
nominee will be made to DTC or its nominee, as the case may be, as the
registered owner thereof. None of the Company, the Trustee or any Paying Agent
will have any responsibility or liability for any aspect of the records relating
to or payments made on account of beneficial ownership interests in the Global
New Note or for maintaining, supervising or reviewing any records relating to
such beneficial ownership interests.
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The Company expects that DTC or its nominee, upon receipt of any payment of
principal or interest in respect of the Global New Note will credit
participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of such Global New Note
as shown on the records of DTC or its nominee. The Company also expects that
payments by participants to owners of beneficial interests in the Global New
Note held through such participants will be governed by standing instructions
and customary practices, as is now the case with securities held for the
accounts of customers registered in the names of nominees for such customers.
Such payments will be the responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules and will be settled in same-day funds. Transfers
between participants in Euroclear and Cedel Bank will be effected in the
ordinary way in accordance with their respective rules and operating procedures.
If a holder requires physical delivery of a certificated Note for any reason,
such holder must transfer its interest in the Global New Note in accordance with
the procedures described under "Notice to Investors," as well as DTC's
applicable procedures and, if applicable, those of Euroclear and Cedel Bank.
The Company expects that DTC will take any action permitted to be taken by a
holder of New Notes (including the presentation of New Notes for exchange as
described below) only at the direction of one or more participants to whose
account the DTC interests in the Global New Note is credited and only in respect
of such portion of the aggregate principal amount of New Notes, as to which such
participant or participants has or have given such direction. However, if there
is an Event of Default under the New Notes, DTC will exchange the applicable
Global New Note for certificated New Notes, which it will distribute to its
participants and which may be legended as set forth under "Notice to Investors."
The Company understands that: DTC is a limited-purpose trust company
organized under the laws of the State of New York, a "banking organization"
within the meaning of New York Banking Law, a member of the Federal Reserve
System, a "clearing corporation" within the meaning of the Uniform Commercial
Code and a "Clearing Agency" registered pursuant to the provisions of Section
17A of the Exchange Act. DTC was created to hold securities for its participants
and facilitate the clearance and settlement of securities transactions between
participants through electronic book-entry changes in accounts of its
participants, thereby eliminating the need for physical movement of certificates
and certain other organizations. Indirect access to the DTC system is available
to others such as banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a participant, either directly or
indirectly ("indirect participants").
Although DTC, Euroclear and Cedel Bank are expected to follow the foregoing
procedures in order to facilitate transfers of interests in the Global New Note
among participants of DTC, Euroclear and Cedel Bank, they are under no
obligation to perform or continue to perform such procedures, and such
procedures may be discontinued at any time. Neither the Company nor the Trustee
will have any responsibility for the performance by DTC, Euroclear or Cedel Bank
or their respective participants or indirect participants of their respective
obligations under the rules and procedures governing their operations.
CERTIFICATED NOTES
If DTC is at any time unwilling or unable to continue as a depository for
the Global New Note and a successor depository is not appointed by the Company
within 90 days, the Company will issue certificated New Notes in exchange for
the Global New Notes. Holders of an interest in the Global New Note may receive
a certificated New Note in accordance with DTC's rules and procedures in
addition to those provided for under the Indenture.
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UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
In the opinion of Gibson, Dunn & Crutcher LLP, the following discussion sets
forth the material United States federal income tax considerations relevant to
the exchange of Old Notes for New Notes pursuant to the Exchange Offer and the
ownership and disposition of the New Notes by holders who acquire the New Notes
pursuant to the Exchange Offer. The discussion is based upon the Internal
Revenue Code of 1986, as amended (the "Code"), existing and proposed Treasury
regulations, Internal Revenue Service ("IRS") rulings and pronouncements and
judicial and administrative determinations, all in effect as of the date hereof,
and all of which are subject to change at any time, possibly on a retroactive
basis in a manner which could adversely affect a holder of the New Notes. The
discussion does not address state, local or foreign tax consequences, nor does
it address all of the federal income tax consequences that might be relevant to
a holder in light of such holder's particular circumstances or to holders
subject to special rules, such as certain financial institutions, insurance
companies, dealers in securities, tax-exempt organizations, and persons who hold
the New Notes as part of a "straddle," "hedge," "conversion transaction," or
other risk reduction transaction. This discussion is limited to persons
purchasing the Old Notes for cash at original issue. Moreover, the discussion
deals only with New Notes held as "capital assets" within the meaning of section
1221 of the Code. No rulings have been or will be sought from the IRS with
respect to any of the positions of the Company discussed below.
THIS SECTION DOES NOT PURPORT TO DEAL WITH ALL ASPECTS OF FEDERAL TAXATION
THAT MAY BE RELEVANT TO AN INVESTOR'S DECISION TO EXCHANGE OLD NOTES FOR NEW
NOTES. EACH INVESTOR SHOULD CONSULT WITH ITS OWN TAX ADVISOR CONCERNING THE
APPLICATION OF THE FEDERAL INCOME TAX LAWS AND OTHER TAX LAWS TO ITS PARTICULAR
SITUATION BEFORE DETERMINING WHETHER TO PARTICIPATE IN THE EXCHANGE OFFER.
TAXATION OF U.S. HOLDERS
The following discussion is limited to the U.S. federal income tax
consequences relevant to a holder of New Notes that is (i) a citizen or resident
of the United States, (ii) a corporation or partnership created or organized
under the laws of the United States or any political subdivision thereof or
therein, (iii) an estate or trust described in section 7701(a)(30) of the Code
or (iv) a person whose worldwide income or gain is otherwise subject to U.S.
federal income taxation on a net income basis (a "U.S. Holder"). Certain U.S.
federal income tax consequences relevant to a holder other than a U.S. Holder
are discussed separately below.
THE EXCHANGE OFFER
The exchange of Old Notes for New Notes pursuant to the Exchange Offer will
not be treated as an exchange or other taxable event for U.S. federal income tax
purposes. As a result, there will be no U.S. Federal income tax consequences for
holders regardless of whether such holders participate in the Exchange Offer,
and each holder will continue to be required to include stated interest and
original issue discount ("OID") in its gross income as discussed below, and will
continue to have the same adjusted issue price, adjusted basis and holding
period in its Notes as it had immediately before the exchange.
THE NOTES
STATED INTEREST. Notwithstanding the fact that the Old Notes were
considered to be issued with OID as discussed below, holders of the Notes will
be required to include stated interest on the Notes in gross income in
accordance with their respective methods of accounting for U.S. federal income
tax purposes.
ORIGINAL ISSUE DISCOUNT ON THE NOTES. Since the Old Notes were issued as
part of an investment unit, the Notes are considered to be issued with OID in an
amount equal to the portion of the issue price of a Unit that was allocable to
the Warrants. Each holder (regardless of its accounting method) must generally
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include in gross income a portion of the OID in each taxable year during which
the Note is held in accordance with the OID rules described below.
A holder of a Note must include in gross income for federal income tax
purposes the sum of the daily portions of the OID with respect to the Note for
each day during the taxable year or portion of a taxable year on which such
holder holds the Note. The daily portion is determined by allocating to each day
of each accrual period a pro rata portion of an amount equal to the adjusted
issue price of the Note at the beginning of the accrual period multiplied by the
yield to maturity (generally, the discount rate that, when used in computing the
present value of all principal and stated interest payments to be made on the
Note, produces an amount equal to its issue price) of the Note (determined by
compounding at the close of each accrual period and adjusted for the length of
the accrual period). The adjusted issue price of a Note at the start of any
accrual period will be the issue price of the Note increased by the accrued OID
for each prior accrual period. Under these rules, holders will have to include
in gross income increasingly greater amounts of OID in each successive accrual
period. A holder's original tax basis for determining gain or loss on the sale
or other disposition of a Note will be increased by any accrued OID includible
in such Holder's gross income.
There are several circumstances under which the Company could make a payment
on a Note which would affect the yield to maturity of a Note, including (as
described under "Description of Notes") the payment of additional interest due
to the failure to effect the Exchange Offer, or the redemption or repurchase of
Notes. According to Treasury Regulations, the possibility of a change in the
yield will not be treated as affecting the amount of OID required to be realized
by a holder (or the timing of such recognition) if the likelihood of the change,
as of the date the debt obligations were issued, is remote. The Company intends
to report on the basis that the likelihood of any change in the yield on the
Notes is remote. The Company also intends to report on the basis that there is
no alternative payment schedule that would minimize the yield on the Notes to
the Company.
The Company will report annually to the IRS and to record holders of the
Notes information with respect to OID accruing during the calendar year.
Information regarding OID accruals will be based on the adjusted issue price of
a Note determined as if the record holder were the original holder of the Note.
SALE OR RETIREMENT OF A NOTE. In general, a U.S. Holder of a Note will
recognize gain or loss upon the sale, retirement, redemption or other taxable
disposition of such Note in an amount equal to the difference between (a) the
amount of cash and the fair market value of other property received in exchange
therefor (other than amounts attributable to accrued but unpaid interest not
previously included in income, which amounts will be taxable as ordinary income)
and (b) the holder's adjusted tax basis in such Note. A holder's tax basis in a
Note generally will be equal to the price paid for such Note, increased by the
amount of OID includible in gross income prior to the date of disposition, and
decreased by the amount of any payment (other than "qualified stated interest")
on such Note prior to disposition.
Any gain or loss recognized on the sale, retirement, redemption or other
taxable disposition of a Note generally will be capital gain or loss. Such
capital gain or loss generally will be long-term capital gain or loss if the
Note has been held by the holder for more than one year and otherwise will be a
short-term capital gain or loss. The maximum rate of tax on long-term capital
gains on most capital assets held by an individual for more than 18 months is
20%, and gain on most capital assets held by an individual for more than one
year and up to 18 months is subject to tax at a maximum rate of tax of 28%.
Holders are urged to consult their tax advisors with respect to these capital
gains rates.
TAXATION OF NON-U.S. HOLDERS
The following discussion is limited to the U.S. federal income tax
consequences relevant to a holder of a Note that is not a U.S. Holder (a
"Non-U.S. Holder").
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INTEREST AND OID ON THE NOTES. Subject to the discussion of backup
withholding below, payments of interest (including OID) on a Note to any
Non-U.S. Holder will generally not be subject to U.S. federal income or
withholding tax, provided that (1) the holder is not (i) a direct or indirect
owner of 10% or more of the total voting power of all voting stock of the
Company, (ii) a controlled foreign corporation related to the Company through
stock ownership or (iii) a foreign tax-exempt organization or a foreign private
foundation for U.S. federal income tax purposes, (2) such interest payments are
not effectively connected with the conduct by the Non-U.S. Holder of a trade or
business within the United States and (3) the Company or its paying agent
receives (i) from the Non-U.S. Holder, a properly completed Form W-8 (or
substitute Form W-8, or any successor form) under penalties of perjury which
provides the Non-U.S. Holder's name and address and certifies that the Non-U.S.
Holder of the Note is not a U.S. Holder or (ii) from a security clearing
organization, bank or other financial institution that holds the Senior Notes in
the ordinary course of its trade or business (a "financial institution") on
behalf of the Non-U.S. Holder, certification under penalties of perjury that
such a Form W-8 (or substitute Form W-8, or any successor form) has been
received by it, or by another such financial institution, from the Non-U.S.
Holder, and a copy of the Form W-8 (or substitute Form W-8, or any successor
form) is furnished to the payor.
A Non-U.S. Holder that does not qualify for exemption from withholding under
the preceding paragraph generally will be subject to withholding of U.S. federal
income tax at the rate of 30% (or lower applicable treaty rate) on payments of
interest (including OID) on the Notes.
If the payments of interest (including OID) on a Note are effectively
connected with the conduct by a Non-U.S. Holder of a trade of business in the
United States, such payments will be subject to U.S. federal income tax on a net
basis at the rates applicable to United States persons generally (and, with
respect to corporate holders, may also be subject to a 30% branch profits tax).
If payments are subject to U.S. federal income tax on a net basis in accordance
with the rules described in the preceding sentence, such payments will not be
subject to United States withholding tax so long as the holder provides the
Company or its paying agent with a properly executed Form 4224 (or any successor
form).
Non-U.S. Holders should consult any applicable income tax treaties, which
may provide for a lower rate of withholding tax, exemption from or reduction of
branch profits tax, or other rules different from those described above.
DISPOSITION OF NOTES. Subject to the discussion concerning backup
withholding below, any gain realized by a Non-U.S. Holder on the sale, exchange,
retirement or other disposition of a Note generally will not be subject to U.S.
federal income tax, unless (i) such gain is effectively connected with the
conduct by such Non-U.S. Holder of a trade or business within the United States,
(ii) the Non-U.S. Holder is an individual who is present in the United States
for 183 days or more in the taxable year of the disposition and certain other
conditions are satisfied or (iii) the Non-U.S. Holder is subject to tax pursuant
to the provisions of U.S. tax law applicable to certain U.S. expatriates.
FEDERAL ESTATE TAX Notes held (or treated as held) by an individual who is
a Non-U.S. Holder at the time of his or her death will not be subject to U.S.
federal estate tax provided that (i) the individual does not actually or
constructively own 10% or more of the total voting power of all voting stock of
the Company and (ii) income on the Notes was not effectively connected with the
conduct by such Non-U.S. Holder of a trade or business within the United States.
BACKUP WITHHOLDING
U.S. HOLDERS. A holder of a Note may be subject to backup withholding at a
rate of 31% with respect to interest and OID on, and gross proceeds upon sale or
retirement of, a Note unless such holder (i) is a corporation or other exempt
recipient and, when required, demonstrates that fact, or (ii) provides a correct
taxpayer identification number, certifies under penalty of perjury, when
required, that the taxpayer identification number provided is the holder's
correct number and that such holder is not subject to backup withholding, and
otherwise complies with applicable requirements of the backup withholding rules.
Backup
107
<PAGE>
withholding is not an additional tax; any amounts so withheld are creditable
against the holder's federal income tax, provided the required information is
provided to the IRS. Holders of the Notes should consult their tax advisors as
to their qualification for exemption from backup withholding and the procedure
for obtaining such an exemption.
NON-U.S. HOLDERS. The Company must report annually to the IRS and to each
Non-U.S. Holder the amount of any dividends paid to, and the tax withheld with
respect to, such holder, regardless of whether any tax was actually withheld.
Copies of these information returns may also be made available under the
provisions of a specific treaty or agreement to the tax authorities of the
country in which the Non-U.S. Holder resides.
Under current Treasury Regulations, backup withholding and information
reporting will not apply to payments of principal (including cash payments in
respect of OID) on the Notes by the Company or any agent thereof to a Non-U.S.
Holder if the Non-U.S. Holder certifies as to its Non-U.S. Holder status under
penalties of perjury or otherwise establishes an exemption (provided that
neither the Company nor its agent has actual knowledge that the holder is a U.S.
person or that the conditions of any other exemptions are not in fact
satisfied). The payment of the proceeds on the disposition of Notes to or
through the United States office of a United States or foreign broker will be
subject to information reporting and backup withholding unless the owner
provides the certification described above or otherwise establishes an
exemption. The proceeds of the disposition by a Non-U.S. Holder of Notes to or
through a foreign office of a broker will not be subject to backup withholding
or information reporting. However, if such broker is a U.S. person, a
"controlled foreign corporation" for U.S. federal income tax purposes, or a
foreign person, 50% or more of whose gross income from all sources for certain
periods is from activities that are effectively connected with a U.S. trade or
business, information reporting requirements will apply unless such broker has
documentary evidence in its files of the holder's non-U.S. status and has no
actual knowledge to the contrary, or unless the holder otherwise establishes an
exemption. Recently finalized Treasury Regulations would modify the application
of information reporting requirements and the backup withholding tax to Non-U.S.
Holders generally effective for payments made on or after January 1, 1999. Among
other things, such Treasury Regulations may require Non-U.S. Holders to furnish
new certification of their non-U.S. status after December 31, 1998. Prospective
investors should consult their tax advisors concerning the applicability and
effect of such Treasury Regulations on an investment in Notes.
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Old Notes where
such Old Notes were acquired as a result of market-making activities or other
trading activities. The Company has agreed that, starting on the Expiration Date
and ending on 180 days after the Expiration Date, it will make this Prospectus,
as amended or supplemented, available to any broker-dealer for use in connection
with any such resale. In addition, until such date, all dealers effecting
transactions in the New Notes may be required to deliver a prospectus.
The Company will not receive any proceeds from any sales of New Notes by
broker-dealers or others. New Notes received by broker-dealers for their own
account pursuant to the Exchange Offer may be sold from time to time in one or
more transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the New Notes or a combination of such methods
of resale, at market prices prevailing at the time of resale, at prices related
to such prevailing market prices or negotiated prices. Any such resale may be
made directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such New Notes. Any broker-dealer
that resells New Notes that were received by it for its own account pursuant to
the Exchange Offer and any broker or dealer that participates in a distribution
108
<PAGE>
of such New Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit from any such resale of New Notes and any
commissions received by any such persons may be deemed to be underwriting
compensation under the Securities Act. The Letter of Transmittal states that by
acknowledging that it will deliver and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
For a period of 180 days after the Expiration Date, the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such documents
in the Letter of Transmittal.
LEGAL MATTERS
The validity of the New Notes will be passed upon for the Company by Gibson,
Dunn and Crutcher LLP, Denver, Colorado. The partner at Gibson, Dunn & Crutcher
LLP who has primary responsibility for that firm's work in connection with the
Registration Statement is the beneficial owner of 20,000 shares of the Company's
Common Stock.
EXPERTS
The consolidated balance sheets of Convergent Communications, Inc., as of
December 31, 1996 and 1997, and the related consolidated statements of
operations, shareholders' equity and cash flows for the year ended December 31,
1995, the period from January 1, 1996 to December 16, 1996, the period from
inception (March 1, 1996) through December 31, 1996 and the year ended December
31, 1997, included in this Registration Statement, have been included herein in
reliance on the report of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of that firm as experts in accounting and auditing.
The consolidated balance sheets of Tie Communications, Inc. as of December
31, 1995, 1996 and 1997 and July 31, 1998, and the related consolidated
statements of operations, stockholder's equity (deficit) and cash flows for the
two months ended December 31, 1995, the years ended December 31, 1996 and 1997
and the seven months ended July 31, 1998, included in this Registration
Statement, have been included herein in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
that firm as experts in accounting and auditing.
109
<PAGE>
GLOSSARY
ACCESS CHARGES--The charges paid by long distance carriers to the local
telephone companies for accessing the local networks of the local telephone
companies to originate and terminate long distance calls.
ATM--Asynchronous Transfer Mode. Very high-speed telecommunications
transmission technology. ATM is a high bandwidth, low-delay packet-like
switching and multiplexing technique. Usable capacity is segmented into
fixed-size cells, consisting of header and information fields, allocated to
services on demand. The Consultative Committee on International Telegraphy and
Telephony has selected ATM as the basis for the future broadband network in view
of its flexibility and suitability for both transmission and switching.
BANDWIDTH--The relative range of frequencies that can be passed through a
medium, such as glass fibers, without distortion. The greater the bandwidth, the
greater the information-carrying capacity of such medium, and references to
"bandwidth" are usually intended to refer to the capacity of the
telecommunication-carrying medium. For fiber-optic transmission, electronic
transmitting devices determine the bandwidth, not the fibers themselves.
CARRIERS--Companies that provide telecommunications transmission services.
CENTRAL OFFICES--The switching centers or central switching facilities of
the local telephone companies.
CLEC--Competitive Local Exchange Company. A carrier other than the incumbent
local exchange provider capable of providing end users with basic local
telephone service.
DIGITAL--Describes a method of storing, processing and transmitting
information through the use of distinct electronic or optical pulses that
represent the binary digits 0 and 1. Digital transmission and switching
technologies employ a sequence of these pulses to convey information, as opposed
to the continuously variable analog signal. The precise digital numbers preclude
any distortion (such as graininess or "snow", in the case of video transmission,
or static or other background distortion in the case of audio transmission).
FCC--Federal Communications Commission. Under the Communications Act of
1934, as amended, the FCC exercises jurisdiction over all facilities and
services of telecommunications common carriers to the extent those facilities
are used to provide, originate or terminate interstate or international
communications.
ILEC--Incumbent Local Exchange Carrier. The RBOCs and GTE.
IXC--Interchange Carrier. Usually referred to as long-distance service
providers.
LAN--Local Area Network. The interconnection of computers in one building
for the purpose of sharing files, programs and printers. LANs may include
dedicated computer or file servers that provide a centralized source of shared
files and programs.
LATA--Local Access and Transport Areas. The approximately 200 geographic
areas defined pursuant to the Consent Decree between which the RBOCs are
generally prohibited from providing long distance service.
LEC--Local Exchange Carrier. A company providing local telephone services,
which, until the 1996 Act, were provided by a monopoly public utility. Each
Regional Bell Operating Company which provides local telephone services is a
local exchange carrier. There are approximately 1,000 other independent local
exchange carriers in the U.S.
LOCAL EXCHANGE--A geographic area determined by the appropriate state
regulatory authority in which calls generally are transmitted without toll
charges to the calling or called party by the LEC.
A-1
<PAGE>
LONG DISTANCE CARRIER--A long-distance carrier providing services between
local exchanges on an intrastate or interstate basis, also referred to in the
industry as an "interexchange carrier". A long distance carrier may also be a
long distance resale company.
NETWORK--An integrated system composed of switching equipment and
transmission facilities designed to provide for the direction, transport and
recording of telecommunications traffic.
PBX--Private Branch Exchange. A privately-owned and operated switching
system, generally limited to serving the premises of a single customer. The PBX
switch calls between the stations it serves and acts as an interface between
those stations and the public switched network.
POP--Points of Presence. Locations where a long distance carrier has
installed transmission equipment in a service area that serves as, or relays
calls to, a network switching center of that long distance carrier.
PUBLIC SWITCHED NETWORK--Refers to that portion of the local telephone
company's network available to all users generally on a shared basis (i.e., not
dedicated to a particular user). Traffic along the public switched network is
switched at the local telephone company's central office.
PUC--A state regulatory body empowered to establish and enforce rules and
regulations governing public utility companies and others such as the Company in
many of its state jurisdictions.
RBOC--Regional Bell Operating Company. Any of seven regional Bell holding
companies established under the AT&T Divestiture Decree to serve as parent
companies for the Bell Operating Companies.
RESELLERS--Generally used to refer to a telecommunications provider who does
not own any switching or transmission facilities. In reality, a large number of
providers furnish services through a combination of owned and resold facilities.
SONET--Synchronous Optical Network Technology. A technology and network
architecture that enables signals to be transported simultaneously along two
different paths so that if one pathway is cut, traffic can continue in the other
direction without interruption to its destination. This is also referred to as
"diverse routing."
SWITCH--A device that opens or closes circuits or selects the paths or
circuits to be used for transmission of information. Switching is the process of
interconnecting circuits to form a transmission path between users.
SWITCHING EQUIPMENT--A computer that directs telecommunications traffic in
accordance with programmed instructions.
TARIFF--The schedule of rates and regulation set by communications common
carriers and filed with the appropriate Federal and State regulatory agencies;
also the published official list of charges, terms and conditions governing
provision of a specific communications service or facility, which functions in
lieu of a contract between the user and the supplier of a carrier.
WAN--Wide Area Network. A network of computers involving large distances,
generally intercity or interstate.
A-2
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
CONVERGENT COMMUNICATIONS, INC.
Report of Independent Accountants.................................................... F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997 and June 30, 1998....... F-3
Consolidated Statements of Operations for the year ended December 31, 1995, the
period from January 1, 1996 to December 16, 1996, the period from inception (March
1, 1996) to December 31, 1996, the year ended December 31, 1997 and the six months
ended June 30, 1997 and 1998....................................................... F-4
Consolidated Statements of Shareholders' Equity for the year ended December 31, 1995,
the period from January 1, 1996 to December 16, 1996, the period from inception
(March 1, 1996) to December 31, 1996, the year ended December 31, 1997 and the six
months ended June 30, 1998......................................................... F-5
Consolidated Statements of Cash Flows for the year ended December 31, 1995, the
period from January 1, 1996 to December 16, 1996, the period from inception (March
1, 1996) to December 31, 1996, the year ended December 31, 1997 and the six months
ended June 30, 1997 and 1998....................................................... F-6
Notes to Consolidated Financial Statements........................................... F-7
TIE COMMUNICATIONS, INC.
Report of Independent Accountants.................................................... F-25
Consolidated Balance Sheets as of December 31, 1995, 1996 and 1997 and July 31,
1998............................................................................... F-26
Consolidated Statements of Operations for the two months ended December 31, 1995,
years ended December 31, 1996 and 1997 and the seven months ended July 31, 1998.... F-27
Consolidated Statements of Stockholders' Equity for the two months ended December 31,
1995, years ended December 31, 1996 and 1997 and the seven months ended July 31,
1998............................................................................... F-28
Consolidated Statements of Cash Flows for the two months ended December 31, 1995,
years ended December 31, 1996 and 1997 and the seven months ended July 31, 1998.... F-29
Notes to Consolidated Financial Statements........................................... F-30
PRO FORMA COMBINED FINANCIAL STATEMENTS
Pro Forma Combined Financial Statements.............................................. F-47
Pro Forma Combining Balance Sheets as of June 30, 1998............................... F-48
Pro Forma Combining Statement of Operations for the year ended December 31, 1997..... F-49
Pro Forma Combining Statement of Operations for the six months ended June 30, 1998... F-50
Notes to Pro Forma Combining Financial Statements.................................... F-51
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Convergent Communications, Inc.:
We have audited the accompanying consolidated balance sheets of Convergent
Communications, Inc. (as defined in Note 1) as of December 31, 1996 and 1997 and
the related consolidated statements of operations, shareholders' equity and cash
flows for the year ended December 31, 1995, the period from January 1, 1996 to
December 16, 1996, the period from inception (March 1, 1996) to December 31,
1996 and the year ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
As explained in Note 1 to the financial statements, the Successor Company
purchased all of the net assets of the Predecessor Company as of December 17,
1996. The transaction was accounted for as a purchase whereby the purchase price
was allocated to the assets and liabilities of the Predecessor based upon their
estimated fair values as of December 17, 1996. Accordingly, the financial
statements of the Successor Company are not comparable to those of the
Predecessor Company.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Convergent Communications, Inc. (as defined in Note 1) as of December 31, 1996
and 1997 and the consolidated results of its operations and cash flows for the
year ended December 31, 1995, the period from January 1, 1996 to December 16,
1996, the period from inception (March 1, 1996) to December 31, 1996 and the
year ended December 31, 1997 in conformity with generally accepted accounting
principles.
As described in Note 8, the accompanying financial statements have been
restated.
PricewaterhouseCoopers LLP
Denver, Colorado
March 4, 1998
F-2
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------- JUNE 30,
1998
--------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................ $3,161,387 $ 667,344 $ 4,303,514
Short-term investment................................................ -- 7,371,303 81,410,260
Restricted cash...................................................... -- -- 20,800,000
Trade accounts receivable, net of allowance for doubtful accounts of
$15,827, $21,389 and $165,569, respectively........................ 147,905 2,075,150 5,639,704
Prepaid expenses and other current assets............................ 58,959 449,158 2,570,618
------------ ------------- --------------
Total current assets............................................... 3,368,251 10,562,955 114,724,096
Property and equipment................................................. 1,933,509 5,448,183 14,641,986
Less accumulated depreciation........................................ (10,060) (610,386) (1,919,902)
------------ ------------- --------------
Total property and equipment....................................... 1,923,449 4,837,797 12,722,084
Restricted cash........................................................ -- 405,816 39,084,300
Goodwill, net of amortization of $12,090, $475,052 and $909,554,
respectively......................................................... 3,200,517 6,392,600 9,368,627
Other intangible assets, net of amortization of $18,548, $358,486, and
$746,383, respectively............................................... 1,354,414 1,328,676 8,972,495
Investments and other assets........................................... 40,000 1,394,325 1,006,938
------------ ------------- --------------
Total assets....................................................... $9,886,631 $ 24,922,169 $ 185,878,540
------------ ------------- --------------
------------ ------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable............................................... $ 131,535 $ 2,040,457 $ 5,058,209
Accrued compensation................................................. -- 1,467,587 2,004,528
Accrued interest..................................................... -- -- 5,200,000
Other accrued liabilities............................................ 314,262 753,326 2,134,426
Current portion of notes payable and capital leases.................. 1,032,724 967,358 2,930,461
Liability related to business acquisition............................ -- -- 1,700,000
------------ ------------- --------------
Total current liabilities.......................................... 1,478,521 5,228,728 19,027,624
Non-current portion of notes payable and capital leases................ 423,020 965,711 155,605,758
Commitments (Note 7)...................................................
Shareholders' equity:
Preferred stock, 1 million shares authorized, none issued............ -- -- --
Common stock, no par value, 100 million shares authorized,
15,739,525, 26,859,000 and 27,473,507 issued and outstanding,
respectively....................................................... 8,007,015 24,004,297 25,595,104
Warrants............................................................. 152,000 4,773,751 11,660,151
Treasury stock....................................................... -- -- (501,674)
Deferred compensation obligation..................................... -- -- 501,674
Accumulated other comprehensive income............................... -- (16,864) 275,444
Unearned compensation................................................ -- (204,750) (177,450)
Accumulated deficit.................................................. (173,925) (9,828,704) (26,108,091)
------------ ------------- --------------
Total shareholders' equity......................................... 7,985,090 18,727,730 11,245,158
------------ ------------- --------------
Total liabilities and shareholders' equity......................... $9,886,631 $ 24,922,169 $ 185,878,540
------------ ------------- --------------
------------ ------------- --------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE PERIOD FOR THE PERIOD FOR THE YEAR FOR THE SIX MONTHS ENDED
ENDED FROM JANUARY 1, FORM INCEPTION ENDED -----------------------------
DECEMBER 31, 1996 THROUGH THROUGH DECEMBER 31, JUNE 30, 1997 JUNE 30, 1998
1995 DECEMBER 16, DECEMBER 31, 1997 ------------- --------------
------------ 1996 1996 -------------
--------------- -------------- (SUCCESSOR) (SUCCESSOR)
(PREDECESSOR) (SUCCESSOR)
(PREDECESSOR) (SUCCESSOR) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Data and voice product
revenue................ $ -- $ -- $ -- $ 7,415,247 $ 1,635,276 $ 10,275,084
Data and voice service
revenue................ 1,434,167 1,495,977 97,741 2,794,777 983,115 4,229,619
------------ --------------- -------------- ------------- ------------- --------------
Total revenue.......... 1,434,167 1,495,977 97,741 10,210,024 2,618,391 14,504,703
Operating costs.......... 964,277 1,018,494 79,459 7,368,509 1,736,877 10,569,675
Selling, general and
administrative......... 404,373 554,109 552,092 10,982,769 3,161,702 13,772,410
Depreciation and
amortization........... 127,261 124,086 40,698 1,453,019 455,958 1,953,151
------------ --------------- -------------- ------------- ------------- --------------
Total operating
expenses............. 1,495,911 1,696,689 672,249 19,804,297 5,354,537 26,295,236
Operating loss........... (61,744) (200,712) (574,508) (9,594,273) (2,736,146) (11,790,533)
Interest income (expense)
and other.............. (17,457) (20,588) (884) (60,506) 65,969 (4,488,854)
------------ --------------- -------------- ------------- ------------- --------------
Net loss................. (79,201) (221,300) (575,392) (9,654,779) (2,670,177) (16,279,387)
Other comprehensive
income, unrealized
holdings gains on
securities............. -- -- -- -- -- 292,308
------------ --------------- -------------- ------------- ------------- --------------
Comprehensive loss....... $ (79,201) $ (221,300) $ (575,392) $ (9,654,779) $ (2,670,177) $ (15,987,079)
------------ --------------- -------------- ------------- ------------- --------------
------------ --------------- -------------- ------------- ------------- --------------
Net loss per share
(basic)................ -- -- $ (0.07) $ (0.46) $ (0.15) $ (0.60)
------------ --------------- -------------- ------------- ------------- --------------
------------ --------------- -------------- ------------- ------------- --------------
Weighted average shares
outstanding (basic).... -- -- 7,774,651 20,921,569 18,263,251 27,131,375
------------ --------------- -------------- ------------- ------------- --------------
------------ --------------- -------------- ------------- ------------- --------------
Net loss per share
(diluted).............. -- -- $ (0.07) $ (0.46) $ (0.15) $ (0.60)
------------ --------------- -------------- ------------- ------------- --------------
------------ --------------- -------------- ------------- ------------- --------------
Weighted average shares
outstanding
(diluted).............. -- -- 7,774,651 20,921,569 18,263,251 27,131,375
------------ --------------- -------------- ------------- ------------- --------------
------------ --------------- -------------- ------------- ------------- --------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<S> <C>
PREDECESSOR:
Member's equity, January 1, 1995............................. $ 341,569
Receivable from member....................................... (45,535)
Net loss allocated to members................................ (79,201)
---------
Balance, December 31, 1995................................... 216,833
Net loss allocated to members................................ (221,300)
Contributions from members................................... 214,128
---------
Balance, December 16, 1996................................... $ 209,661
---------
---------
</TABLE>
SUCCESSOR:
<TABLE>
<CAPTION>
DEFERRED ACCUMULATED
COMPENSA- UNEARNED OTHER
COMMON TREASURY TION COMPENSA- COMPREHEN-
SHARES COMMON STOCK WARRANTS STOCK OBLIGATION TION SIVE INCOME
----------- ------------ ------------ ---------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, March 1, 1996........... -- $ -- $ -- $ -- $ -- $ -- $ --
Conversion from Subchapter S
corporation.................... -- (401,467) -- -- -- -- --
Initial sale of stock to
founders....................... 7,500,000 450,000 -- -- -- -- --
Sale of stock in private
placement...................... 4,739,525 4,587,525 152,000 -- -- -- --
Offering costs................... -- (411,310) -- -- -- -- --
Stock issued in acquisition of
ICN............................ 3,500,000 3,500,000 -- -- -- -- --
Stock compensation............... -- 282,267 -- -- -- -- --
Net loss......................... -- -- -- -- -- -- --
----------- ------------ ------------ ---------- ----------- ----------- -------------
Balance, December 31, 1996....... 15,739,525 8,007,015 152,000 -- -- -- --
Sale of stock in private
placement...................... 9,060,475 15,845,915 3,414,560 -- -- -- --
Offering costs................... -- (2,780,400) 777,291 -- -- -- --
Stock issued to SONeTech......... 375,000 375,000 -- -- -- -- --
Stock issued in acquisitions..... 875,000 2,112,500 -- -- -- -- --
Exercise of stock options........ 950,000 261,750 -- -- -- (204,750) --
Stock purchases.................. (200,000) (12,000) -- -- -- -- --
Stock compensation............... 59,000 194,517 -- -- -- -- --
Warrants......................... -- -- 429,900 -- -- -- --
Unrealized (loss) on securities.. -- -- -- -- -- -- (16,864)
Net loss......................... -- -- -- -- -- -- --
----------- ------------ ------------ ---------- ----------- ----------- -------------
Balance, December 31, 1997....... 26,859,000 24,004,297 4,773,751 -- -- (204,750) (16,864)
Common Stock issued for:
401K match..................... 110,231 297,079 -- -- -- -- --
Payments to consultants........ 20,333 55,000 -- -- -- -- --
Correction of private
placement.................... 20,000 -- -- -- -- -- --
Business combinations.......... 140,000 566,400 -- -- -- -- --
Exercise of stock options...... 85,000 14,500 -- -- -- -- --
Exercise of warrants........... 69,950 108,600 -- -- -- -- --
Stock compensation............. 168,993 549,228 -- -- -- -- --
Deferred stock compensation.... -- -- -- (501,674) 501,674 -- --
Warrants issued in private
placement.................... -- -- 6,886,400 -- -- -- --
Amortization of unearned
compensation................... -- -- -- -- -- 27,300 --
Other comprehensive income:
Unrealized gain on securities.. -- -- -- -- -- -- 292,308
Net loss......................... -- -- -- -- -- -- --
----------- ------------ ------------ ---------- ----------- ----------- -------------
Balance, June 30, 1998
(unaudited).................... 27,473,507 $ 25,595,104 $ 11,660,151 $ (501,674) $ 501,674 $(177,450) $ 275,444
----------- ------------ ------------ ---------- ----------- ----------- -------------
----------- ------------ ------------ ---------- ----------- ----------- -------------
<CAPTION>
ACCUMULATED
DEFICIT TOTAL
------------- -------------
<S> <C> <C>
Balance, March 1, 1996........... $ -- $ --
Conversion from Subchapter S
corporation.................... -- (401,467)
Initial sale of stock to
founders....................... -- 450,000
Sale of stock in private
placement...................... -- 4,739,525
Offering costs................... -- (411,310)
Stock issued in acquisition of
ICN............................ -- 3,500,000
Stock compensation............... -- 282,267
Net loss......................... (173,925) (173,925)
------------- -------------
Balance, December 31, 1996....... (173,925) 7,985,090
Sale of stock in private
placement...................... -- 19,260,475
Offering costs................... -- (2,003,109)
Stock issued to SONeTech......... -- 375,000
Stock issued in acquisitions..... -- 2,112,500
Exercise of stock options........ -- 57,000
Stock purchases.................. -- (12,000)
Stock compensation............... -- 194,517
Warrants......................... -- 429,900
Unrealized (loss) on securities.. -- (16,864)
Net loss......................... (9,654,779) (9,654,779)
------------- -------------
Balance, December 31, 1997....... (9,828,704) 18,727,730
Common Stock issued for:
401K match..................... -- 297,079
Payments to consultants........ -- 55,000
Correction of private
placement.................... -- --
Business combinations.......... -- 566,400
Exercise of stock options...... -- 14,500
Exercise of warrants........... -- 108,600
Stock compensation............. -- 549,228
Deferred stock compensation.... -- --
Warrants issued in private
placement.................... -- 6,886,400
Amortization of unearned
compensation................... -- 27,300
Other comprehensive income:
Unrealized gain on securities.. -- 292,308
Net loss......................... (16,279,387) (16,279,387)
------------- -------------
Balance, June 30, 1998
(unaudited).................... $(26,108,091) $ 11,245,158
------------- -------------
------------- -------------
</TABLE>
F-5
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE PERIOD FOR THE PERIOD FOR THE YEAR SIX MONTHS
ENDED FROM JANUARY 1, FROM INCEPTION ENDED ENDED
DECEMBER 31, 1996 THROUGH THROUGH DECEMBER DECEMBER 31, -------------
1995 DECEMBER 16, 1996 31, 1996 1997 JUNE 30, 1997
------------- ----------------- ----------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
(PREDECESSOR) (PREDECESSOR) (SUCCESSOR) (SUCCESSOR) (SUCCESSOR)
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................ $ (79,201) $(221,300) $ (575,392) $(9,654,779) $(2,670,177)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization........... 121,852 124,076 40,698 1,453,019 455,958
Amortization of deferred financing
costs................................. -- -- -- -- --
Provision for uncollectible accounts.... 10,273 3,802 -- -- --
Stock compensation expense.............. -- -- 241,534 194,517 --
401K contributions through the issuance
of stock.............................. -- -- -- -- --
(Gain) loss from sale of equipment...... (269) 312 -- 50,751 --
Other................................... -- -- -- 40,000 --
Change in working capital (net of
acquisitions):
Trade accounts receivable............. (55,643) 61,535 (97,741) (1,527,544) (510,566)
Prepaid expenses and other current
assets.............................. 1,962 1,107 (51,697) (274,229) (165,345)
Trade accounts payable................ 29,321 10,341 56,278 1,326,723 982,573
Accrued compensation.................. -- -- -- 1,467,587 --
Accrued interest...................... -- -- -- -- --
Other accrued liabilities............. 32,173 (10,544) 103,731 225,672 288,498
------------- ----------------- ----------------- ------------ -------------
Net cash provided by (used in) operating
activities............................ 60,468 (30,671) (282,589) (6,698,283) (1,619,059)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions of property and equipment,
net................................... (22,624) (36,042) (28,713) (2,042,203) (495,513)
Proceeds from sales of property and
equipment............................. 14,346 300 -- -- --
Acquisitions, net of cash acquired...... -- -- (1,157,304) (1,542,208) (85,203)
Investment.............................. -- -- (40,000) -- (60,000)
Short--term investments, net............ -- -- -- (7,388,167) --
Restricted cash......................... -- -- -- (405,816) --
------------- ----------------- ----------------- ------------ -------------
Other assets............................ -- (115) (219,637) (269,425) --
------------- ----------------- ----------------- ------------ -------------
Net cash used in investing activities... (8,278) (35,857) (1,445,654) (11,647,819) (640,716)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from private placement, net.... -- -- -- -- --
Payments on long--term borrowings....... (15,725) (9,214) -- (317,927) (152,685)
Advances to members..................... (45,535) -- -- -- --
Proceeds from new borrowings............ -- 100,000 -- -- --
Proceeds from initial capital
contributions......................... -- -- 450,000 -- --
Proceeds from sale of common stock,
net................................... -- -- 4,439,630 17,257,366 2,057,890
Payment of note to former owner of
ICN................................... -- -- -- (1,000,000) (1,000,000)
Cash paid to retire indebtedness of
predecessor company................... -- -- -- (132,380) --
Proceeds from exercise of stock options
and warrants.......................... -- -- -- 57,000 59,817
Repurchase of common shares............. -- -- -- (12,000) --
------------- ----------------- ----------------- ------------ -------------
Net cash provided by (used in) financing
activities............................ (61,260) 90,786 4,889,630 15,852,059 965,022
Net increase (decrease) in cash and cash
equivalents........................... (9,070) 24,258 3,161,387 (2,494,043) (1,294,753)
Cash and cash equivalents at beginning
of period............................. 22,508 13,438 -- 3,161,387 3,161,387
------------- ----------------- ----------------- ------------ -------------
Cash and cash equivalents at end of
period................................ $ 13,438 $ 37,696 $ 3,161,387 $ 667,344 $ 1,866,634
------------- ----------------- ----------------- ------------ -------------
------------- ----------------- ----------------- ------------ -------------
Non cash transactions and supplemental
disclosures:
Acquisition of equipment through the
assumption of capital lease
obligations........................... $ -- $ -- $ -- $1,674,596 $ 541,000
Issuance of common stock for investment
and business combinations............. -- -- 3,500,000 2,487,500 50,000
Interest paid........................... 17,457 18,190 -- 144,782 8,475
Income taxes paid....................... -- -- -- -- --
<CAPTION>
JUNE 30, 1998
-------------
<S> <C>
(SUCCESSOR)
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................ $(16,279,387)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization........... 1,953,151
Amortization of deferred financing
costs................................. 191,804
Provision for uncollectible accounts.... 144,180
Stock compensation expense.............. 576,528
401K contributions through the issuance
of stock.............................. 297,079
(Gain) loss from sale of equipment...... --
Other................................... --
Change in working capital (net of
acquisitions):
Trade accounts receivable............. (3,197,592)
Prepaid expenses and other current
assets.............................. (2,019,128)
Trade accounts payable................ 2,353,884
Accrued compensation.................. 536,941
Accrued interest...................... 5,200,000
Other accrued liabilities............. 1,406,099
-------------
Net cash provided by (used in) operating
activities............................ (8,836,441)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions of property and equipment,
net................................... (5,645,999)
Proceeds from sales of property and
equipment............................. --
Acquisitions, net of cash acquired...... (1,608,743)
Investment.............................. --
Short--term investments, net............ (73,746,649)
Restricted cash......................... (59,478,484)
-------------
Other assets............................ (179,819)
-------------
Net cash used in investing activities... (140,659,694)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from private placement, net.... 154,153,217
Payments on long--term borrowings....... (1,264,750)
Advances to members..................... --
Proceeds from new borrowings............ 120,738
Proceeds from initial capital
contributions......................... --
Proceeds from sale of common stock,
net................................... --
Payment of note to former owner of
ICN................................... --
Cash paid to retire indebtedness of
predecessor company................... --
Proceeds from exercise of stock options
and warrants.......................... 123,100
Repurchase of common shares............. --
-------------
Net cash provided by (used in) financing
activities............................ 153,132,305
Net increase (decrease) in cash and cash
equivalents........................... 3,636,170
Cash and cash equivalents at beginning
of period............................. 667,344
-------------
Cash and cash equivalents at end of
period................................ $ 4,303,514
-------------
-------------
Non cash transactions and supplemental
disclosures:
Acquisition of equipment through the
assumption of capital lease
obligations........................... $ 3,372,326
Issuance of common stock for investment
and business combinations............. 566,400
Interest paid........................... 490,787
Income taxes paid....................... --
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION:
Convergent Communications, Inc. (the "Company" or "Convergent") was formed
under the laws of the State of Colorado in October 1995 and capitalized on March
1, 1996 ("Inception").
Convergent Communications-TM- is an Enterprise Network Carrier-TM- offering
comprehensive, single-source communications services primarily to small and
medium-sized businesses. The Company provides the following products and
services:
DATA:
- Data networking services--including the planning, design, installation and
management of networks, from simple LANs to complex WANs.
- Data products--including the sale and integration of servers, routers,
data switches and desk top computers.
- Data transport services--including frame relay and ATM.
- Internet services--including web applications, web hosting and Internet
access.
TELEPHONY:
- Voice services--including local and long distance services.
- Voice products--including the sale and integration of key systems and
PBXs.
ENTERPRISE NETWORK SERVICES:
- ENS--the delivery under long-term contract of one or more of the Company's
data and telephony services utilizing the Company's owned network inside
the customer's premise.
As an Enterprise Network Carrier-TM-, the Company integrates its data and
telephony products and services into a single product offering, enabling the
Company to act as a single-source, one-stop provider of its customer's total
communications requirements. Unlike traditional telecommunications companies
that provide services from outside a customer's premise, in providing Enterprise
Network Services ("ENS"), the Company designs, buys and builds its own network
within the customer's premise, enabling the Company to act as an outsource
provider of any or all of the customer's communications requirements.
The Company focuses on small to medium size businesses and has offices in 32
locations in the United States.
In November 1996, the Company consummated a private placement offering (the
"Private Placement") and on December 17, 1996 acquired all of the assets of
Integrated Communication Networks, L.C. ("ICN") in exchange for cash, notes and
shares of common stock. The acquisition of ICN has been treated as a business
combination accounted for by the purchase method of accounting. The accompanying
consolidated financial statements include the accounts of ICN from December 17,
1996, the effective date of the acquisition. For purposes of identification and
description, ICN is referred to as the "Predecessor" for the period prior to the
acquisition. The Company since inception and ICN since December 17, 1996 are
referred to as the "Successor" (see Note 3).
F-7
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION:
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All intercompany amounts and
transactions have been eliminated.
UNAUDITED FINANCIAL INFORMATION:
The interim consolidated financial statements as of June 30, 1998 and for
the six months ended June 30, 1997 and 1998 and related disclosures included
herein are unaudited, but reflect, in the opinion of management, all adjustments
(which include only normal recurring adjustments) necessary to fairly present
the results for all such periods. All disclosures subsequent to March 4, 1998
are unaudited.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS:
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
SHORT-TERM INVESTMENTS:
Short-term investments are classified as available-for-sale securities at
December 31, 1997 and June 30, 1998. Gains or losses on the sale of short-term
investments are recognized on the specific identification method. Unrealized
gains or losses are treated as a separate component of shareholders' equity
until the security to which they relate is sold.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying amounts reported in the balance sheets for cash and cash
equivalents, accounts receivable, accounts payable and short-term borrowings
approximate fair value because of the immediate or short-term maturity of these
financial instruments. Short-term investments are stated at fair value. The
carrying amounts reported for long-term debt approximate fair value based upon
management's best estimates of what interest rates would be available for the
same or similar instruments.
PROPERTY AND EQUIPMENT:
Property and equipment are recorded at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets, which
range from two to five years. Expenditures which significantly increase asset
values or extend useful lives are capitalized. Maintenance and repairs are
expensed as incurred. When property and equipment is retired, sold or otherwise
disposed of, the cost and related accumulated depreciation are removed from the
accounts, and gains and losses resulting from such transactions are reflected in
operations.
F-8
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
RESTRICTED CASH:
Restricted cash represents funds held in collateral accounts for payment of
semi-annual interest payments on certain indebtedness through April 1, 2001. The
cash is invested in U.S. Government Securities which mature semi-annually on
predetermined payment dates through April 1, 2001, and, therefore, is classified
as held to maturity. Restricted cash also represents cash used to collateralize
letters of credit, which are held as collateral for certain of the Company's
office leases and capital lease obligations.
INTANGIBLE ASSETS:
Site location contracts are exclusive rights to operate public telephones at
various locations acquired through business combinations. The site location
contracts are being amortized over the average lives of the contracts, primarily
five years. Software license fees represent proprietary rights to software
associated with the public telephones which is being amortized over five years,
the estimated life of the related equipment. Deferred finance costs are costs
associated with obtaining certain financing arrangements and are amortized over
the life of the financing arrangement, three years. Debt offering costs are
being amortized over five years. Customer lists are being amortized over five
years. Goodwill represents the excess purchase price over the net assets
acquired in acquisitions and is being amortized over ten years. The Company
periodically assesses the realizability of intangible assets based upon
estimated fair value.
LONG-LIVED ASSETS:
The Company evaluates the recoverability of long-lived assets in accordance
with Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
("SFAS 121"). SFAS 121 requires an evaluation of indicators of impairment and
future undiscounted cash flows to be generated by those assets. Impairment is
measured as the amount by which the asset's carrying amounts exceed the future
discounted cash flows estimated to be generated by those assets.
INVESTMENTS:
Investments consist of ownership interests of less than 20% in unrelated
entities and are accounted for using the cost method.
SOFTWARE:
The Company capitalizes certain costs of developing software for internal
use. Such costs are amortized on a straight line basis over five years, the
estimated useful lives of the software. In March 1998, the AICPA issued
Statement of Position No. 98-1 ("SOP 98-1"), "Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use." SOP 98-1 provides
guidance regarding the conditions under which the costs of internal-use software
should be capitalized, and is effective for financial statements for years
beginning after December 15, 1998. The Company does not expect adoption of SOP
98-1 to have a material effect on the Company's financial statements.
F-9
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
REVENUE RECOGNITION:
Revenue is recognized for product sales when the product is shipped.
Revenues from non-recurring services are recognized when the services are
provided. Revenue for long-term service contracts is recognized on a straight-
line basis over the term of the contract.
INCOME TAXES:
Deferred tax assets and liabilities are recognized for future tax
consequences attributable to the differences between the financial statement
carrying value of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured by using enacted tax
rates that are applicable to the future years in which deferred tax assets or
liabilities are expected to be realized or settled. The effect of a change in
tax rates on deferred tax assets and liabilities is recognized in net earnings
in the period in which the tax rate change is enacted. The Company establishes a
valuation allowance when it is more likely than not that a deferred tax asset
will not be recovered.
STOCK-BASED COMPENSATION:
The Company uses the intrinsic value method of Accounting Principles Board
Opinion No. 25 to account for all of its employee stock-based compensation
plans. Options and warrants granted to non-employees are accounted for in
accordance with Statement of Financial Accounting Standards No. 123 "Accounting
for Stock-Based Compensation" ("SFAS 123"). Under SFAS 123, options and warrants
granted to non-employees are valued at fair value at the time of grant.
CONCENTRATIONS OF CREDIT RISK:
The Company sells its products and services to small to medium sized
businesses on open account. The Company typically does not obtain collateral for
its receivables. The Company believes it maintains adequate reserves for
potential credit losses and performs on-going credit evaluations. To date, the
Company has not experienced any significant credit losses.
All of the Company's investments are maintained at a single financial
institution. The investments consist of high-quality commercial paper.
RECENTLY ADOPTED ACCOUNTING STANDARDS:
Effective January 1, 1998 the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." This
statement establishes standards for reporting and display of comprehensive
income and its components. Comprehensive income generally includes changes in
separately reported components of equity along with net income.
The Company will adopt SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information" for the year ended December 31, 1998. The
Company is currently evaluating the financial information used by senior
management in making strategic operating decisions to determine the operating
segments to be disclosed. The Company believes there will be more than one
operating segment, however, the total number is undetermined at this time. This
statement will not affect the results of operations, financial position or cash
flows of the Company and has no effect on the financial statements as previously
presented.
F-10
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS:
INTEGRATED COMMUNICATION NETWORKS, L.C. In December 1996, the Company
acquired Integrated Communication Networks, L.C. (ICN), a public telephone
service provider. The Company paid $1,232,300 in cash, issued a $1,000,000
promissory note and issued 3,500,000 shares of Common Stock valued at $3,500,000
for total consideration of $5,732,300. The note was paid in January 1997.
COMMUNICATION SERVICES OF IOWA, INC. In April 1997, the Company acquired
Communication Services of Iowa, Inc. (CSI), an Iowa reseller of telephony
keyboard PBX telephone equipment to businesses. The Company paid $100,000 cash,
issued a $100,000 one-year promissory note at 8% and issued 50,000 shares of
Common Stock valued at $50,000 for total consideration of $250,000. The note was
paid in March 1998.
A.T.T.EX CORPORATION. In September 1997, the Company acquired A.T.T.ex
Corporation (A.T.T.ex) of Des Moines, Iowa, a telecommunications service company
providing direct telephony service support to corporate customers. The purchase
price consisted of $450,000 in cash and the issuance of 75,000 shares of Common
Stock valued at $187,500 for total consideration of $537,500.
VITAL INTEGRATION SOLUTIONS, INC. In September 1997, the Company acquired
Vital Integration Solutions, Inc. (Vital) of Des Moines, Iowa and Omaha,
Nebraska, a full service integration solutions provider, specializing in
comprehensive information management and networking solutions. Vital provides
its clients with the hardware, software and integration services necessary to
build information systems and networks. The Company paid $500,000 in cash and
issued 750,000 shares of Common Stock valued at $1,875,000 for total
consideration of $2,375,000.
TELEPHONE COMMUNICATIONS CORPORATION. In February 1998, the Company
acquired the assets and assumed certain liabilities of Telephone Communications
Corporation ("TCC") of Vail, Colorado. TCC is a long distance switchless
reseller providing 1+, 0+, 800, and Calling Card services to cities such as
Dillon, Frisco and the Vail Valley. The Company paid $400,000 in cash, issued a
$200,000 one-year note at 8% and issued 10,000 shares of Common Stock which for
purchase accounting purposes were assigned a value of $4.00 per share. The
Company also assumed a note with National Network Corporation of approximately
$287,000, which will be paid down monthly in equal installments through 1998.
Total consideration for the purchase was $927,000. The Company negotiated an
early discounted payoff of the note in the total amount of $180,000 (including
accrued interest) in May, 1998.
NETWORK COMPUTER SOLUTIONS, LLC. In February 1998, the company acquired the
assets and certain liabilities of Network Computer Solutions ("NCS") of
Greenwood Village, Colorado. NCS provides network integration services. The
Company paid $500,000 in cash, issued 100,000 shares of Common Stock which for
purchase accounting purposes were assigned a value of $4.00, assumed liabilities
of $438,372 and paid a finders fee of $150,000 for total consideration of
$1,488,372.
COMMUNICATION SERVICES OF COLORADO. In May 1998, the Company completed a
merger with Communication Services of Colorado ("CSC") of Englewood, Colorado.
CSC is a long distance switchless reseller providing 1+, 0+, 800, and Calling
Card services. The purchase price consisted of $475,000 in cash and the issuance
of a $530,000 one-year note at 8% and assumed liabilities of $341,054 for total
consideration of $1,346,054. The acquisition of CSC, combined with the
acquisition of TCC, is designed to further enhance the Company's long distance
offering.
HH&H COMMUNICATIONS TECHNOLOGIES, INC. In May 1998, the Company completed
the acquisition of the assets and certain liabilities of HH&H Communications
Technologies, Inc. ("CTI"), a voice equipment
F-11
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS: (CONTINUED)
provider in Texas. The Company paid $200,000 in cash, issued 30,000 shares of
Common Stock which for accounting purposes were assigned a value at $4.25 per
share and assumed liabilities of $151,383 for total consideration of $478,883.
CMB HOLDINGS, INC. D/B/A INDEPENDENT EQUIPMENT COMPANY. In June 1998, the
Company completed the acquisition of substantially all of the assets of CMB
Holdings, Inc. d/b/a Independent Equipment Company ("IEC"), an equipment
remarketer in Florida. The purchase price consisted of the issuance of 340,000
shares of Common Stock which for accounting purposes were assigned a value of
$5.00 per share for total consideration of $1.7 million. As of June 30, 1998 the
Common Stock had not been issued and is shown as a liability. Through the IEC
acquisition, the Company enhanced the ability of its wholly owned subsidiary,
C3, to remarket less technologically advanced equipment obtained from new
customers when their existing equipment is updated.
The above acquisitions have been accounted for as business combinations
accounted for by the purchase method of accounting. The acquisitions were valued
at the fair market value of the consideration given. The fair market value of
the Common Stock and warrants issued was based on quarterly appraisals of the
Company's Common Stock obtained from an independent appraiser. In connection
with the acquisitions, the excess of consideration given over the fair market
value of the net assets acquired is being amortized on a straight line basis
over the estimated life of the intangible assets acquired, five to ten years.
The accompanying financial statements include the accounts of the acquired
companies from the effective dates of the acquisitions.
In addition to the above business acquisitions, the Company has also
completed purchases of certain assets of other companies as follows:
BIG PLANET, INC. In October 1997, the Company acquired certain assets and
assumed certain liabilities of Big Planet, Inc., of Portland, Oregon. Big Planet
is an Internet service provider (ISP) offering a full range of Internet
services, including Internet access, Web hosting, maintenance, and site design.
The Company paid $250,000 in cash for the assets and the assumption of certain
trade payables.
SIGMACOM CORPORATION. In December 1997, the Company acquired certain data
integration assets of Sigmacom Corporation of Denver, Colorado. Sigmacom is a
systems integrator for corporate audio, video and data communications, providing
state-of-the-art systems that combine telecommunications and computer network
technologies. Sigmacom is also developing Internet application software for
financial institutions such as credit unions. The Company paid $875,000 in cash
and issued Sigmacom a warrant to purchase 50,000 shares of Common Stock at an
exercise price of $7.50 per share, which expires in December 1999. The Company
did not acquire the software development assets; however, the Company received a
17.9% investment position in Sigmacom's software development business. The
Company allocated $350,000 of the purchase price to the 17.9% investment. The
allocation was determined by an independent valuation firm. This investment is
not readily marketable.
F-12
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS: (CONTINUED)
The consideration paid for acquisitions in 1996 and 1997 and the six months
ended June 30, 1998, and the allocation of such consideration to the acquired
assets is as follows:
<TABLE>
<CAPTION>
1996 1997
------------ ------------ SIX MONTHS
ENDED JUNE
30, 1998
------------
(UNAUDITED)
<S> <C> <C> <C>
Cash paid for the assets, net of cash acquired.......................... $ 1,157,304 $ 1,542,208 $ 1,608,743
Notes payable and liability to former owners............................ 1,000,000 100,000 2,407,500
Common stock issued to the former owners................................ 3,500,000 2,112,500 566,400
Receivable eliminated through the acquisition of ICN.................... 75,000 -- --
Warrants issued......................................................... 30,000 --
Expenses associated with acquisitions................................... 25,000
Liabilities assumed:
Accounts payable and accrued liabilities.............................. 140,107 636,747 930,605
Debt assumed.......................................................... 455,744 163,293 287,000
------------ ------------ ------------
Total amount to be allocated to acquired assets......................... $ 6,328,155 $ 4,609,748 $ 5,800,248
------------ ------------ ------------
------------ ------------ ------------
Allocation to acquired assets:
Equipment............................................................... $ 1,904,796 $ 355,959 $ 188,517
Accounts receivable..................................................... 50,164 399,700 511,142
Prepaid expenses and other current assets............................... 7,262 -- --
Inventory and other current assets...................................... -- 115,971 103,362
Deposits................................................................ 3,950 --
Investments............................................................. -- 350,000 --
Site contracts.......................................................... 656,682 -- --
Software license........................................................ 496,643 -- --
Customer lists.......................................................... -- -- 1,683,696
Goodwill................................................................ 3,212,608 3,384,168 3,313,531
------------ ------------ ------------
Amounts allocated to acquired assets.................................... $ 6,328,155 $ 4,609,748 $ 5,800,248
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-13
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS:
On a pro forma basis, as though the above combinations had taken place at
the beginning of the periods presented, revenue, net loss and net loss per share
would have been as follows (unaudited):
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
1996 1997 JUNE 30, 1998
------------- -------------- --------------
<S> <C> <C> <C>
Revenue....................................... $ 9,188,745 $ 23,590,021 $ 16,099,513
Net loss...................................... $ (1,330,905) $ (11,130,051) $ (16,645,368)
Net loss per share............................ $ (0.15) $ (0.51) $ (0.60)
Weighted average shares....................... 8,649,651 21,963,316 27,514,708
</TABLE>
4. SHORT-TERM INVESTMENTS:
All of the Company's short-term investments as of December 31, 1997 are
classified as available for sale. At December 31, 1997, the investments had an
amortized cost basis of $7,388,167 and a fair value of $7,371,303. The
unrealized loss at December 31, 1997 related to these investments was ($16,864).
These investments mature at the rate of $1,000,000 per month through July 1998
and $500,000 in August 1998.
5. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1997 JUNE 30, 1998
------------ ------------ -------------
<S> <C> <C> <C>
(UNAUDITED)
Leasehold improvements............................ $ 37,141 $ 56,559 $ 334,949
Office furniture & equipment...................... 79,219 2,908,261 3,983,924
Company vehicles.................................. 33,058 226,421 237,795
Network equipment................................. 1,784,091 2,256,942 10,085,318
------------ ------------ -------------
1,933,509 5,448,183 14,641,986
Less: accumulated depreciation.................... (10,060) (610,386) (1,919,902)
------------ ------------ -------------
Net property and equipment........................ $ 1,923,449 $ 4,837,797 $ 12,722,084
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
Depreciation expense was $10,927, $70,739, $5,365, $515,317, $137,867 and
$1,307,020 for the year ended December 31, 1995, the period from January 1, 1996
to December 16, 1996, the period from inception to December 31, 1996, the year
ended December 31, 1997 and the six months ended June 30, 1997 and 1998
(unaudited), respectively. The Company enters into capital leases for various
equipment. Equipment under capital leases is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- JUNE 30,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
(UNAUDITED)
Furniture and equipment............................. $ -- $ 1,674,596 $ 5,044,145
Less: accumulated depreciation...................... -- (338,199) (917,825)
------------ ------------ ------------
$ -- $ 1,336,397 $ 4,126,320
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-14
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. NOTES PAYABLE AND CAPITAL LEASES:
NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1997 JUNE 30, 1998
------------- ----------- --------------
<S> <C> <C> <C>
(UNAUDITED)
Senior Notes payable, interest at 13% ((i) below).................... $ -- $ -- $ 153,447,209
Note payable for acquisition, interest at 8%, principal and accrued
interest due May 1999.............................................. -- -- 530,000
Note payable for acquisition, interest at 11%, principal and accrued
interest due January 1997.......................................... 1,000,000 -- --
Note payable, interest at 4%, payable in monthly installments of
$1,963 through September 2014 ((ii) below)......................... 430,744 287,565 --
Note payable assumed in acquisition, interest at 9%, payable in
monthly installments of $29,876, through December 1998............. -- -- 146,076
Note payable assumed in acquisition, interest at 9.75%, payable in
monthly installments of $2,257, through May 2000................... -- -- 47,182
Line of credit for multiple items, interest at 2.5% over prime,
principal and accrued interest due January 1997.................... 25,000 -- --
Note payable for acquisition, interest at 8%, principal and accrued
interest due March 1998............................................ -- 106,670 --
Notes payable for vehicles, interest rates ranging from 6.9% to
11.2%, payable in monthly installments totaling $5,848 through June
2002 ((iii) below)................................................. -- 147,746 162,220
------------- ----------- --------------
1,455,744 541,981 154,332,687
Less current portion................................................. (1,032,724) (163,220) (747,327)
------------- ----------- --------------
Long term portion.................................................... $ 423,020 $ 378,761 $ 153,585,360
------------- ----------- --------------
------------- ----------- --------------
</TABLE>
Scheduled maturities on debt outstanding are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 JUNE 30, 1998
----------------- --------------
<S> <C> <C>
(UNAUDITED)
Due within year:
One....................................................... $ 163,220 $ 747,327
Two....................................................... 49,615 72,732
Three..................................................... 51,825 46,994
Four...................................................... 38,262 18,425
Five...................................................... 18,017 --
Thereafter................................................ 221,042 160,000,000
-------- --------------
541,981 160,885,478
Less: unaccreted discount................................. -- (6,552,791)
-------- --------------
Total debt................................................ $ 541,981 $ 154,332,687
-------- --------------
-------- --------------
</TABLE>
F-15
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. NOTES PAYABLE AND CAPITAL LEASES: (CONTINUED)
(i) On April 2, 1998 the Company completed a private offering of $160.0
million of 13% Senior Notes ("13% Notes") and 640,000 warrants to
purchase 1,728,000 common shares of the Company (the "Warrants")
(collectively, the "13% Notes Offering"). The 13% Notes mature on April
1, 2008 and interest is payable semi-annually in arrears on April 1 and
October 1 of each year beginning October 1, 1998. Concurrent with the
closing of the 13% Notes Offering, the Company deposited in a collateral
account U.S. Government Securities, which, together with the interest
received thereon, will be sufficient to pay the first six interest
payments on the 13% Notes. Each Warrant entitles the holder to purchase
2.7 shares of Common Stock of the Company at an exercise price of $.01
per share. Each Warrant was assigned a value of $10.76 based on an
independent appraisal. The proceeds attributable to the Warrants were
treated as a discount to the Notes and allocated to shareholders'
equity. Proceeds available to the Company, net of offering costs of
approximately $6.0 million and the deposit into the collateral account
of $56.8 million, were approximately $97.2 million. As of June 30, 1998
the amount outstanding, net of unaccreted discount of $6.6 million
resulting from the allocation of the warrants, was $153.4 million.
(ii) As part of the acquisition of ICN, the Company assumed a loan issued by
the Small Business Administration ("SBA") to ICN for the purpose of
rebuilding and repairs under the disaster relief program as a result of
flooding in Iowa during 1993. The loan was collateralized by equipment
and inventory of the Company and guaranteed by Bruce Boland, a former
officer and director of the Company and former president of ICN. The
loan accrued interest at the rate of 4% per annum. At December 31,
1997, the outstanding balance of the loan was approximately $288,000
which was subsequently paid in full with a portion of the proceeds from
the Senior Notes Offering.
(iii) In June 1997, the Company obtained a one-year renewable line of credit
with General Motors Acceptance Corporation in the amount of $538,000 to
acquire vehicles for its operations. Advances under the line are
payable over a four to five year term. The Company utilized $155,521 of
this credit facility of which $133,064 was outstanding as of June 30,
1998. The Company does not anticipate additional borrowings under this
facility.
CREDIT FACILITIES
NATIONSCREDIT COMMERCIAL CORPORATION FACILITY. In February 1997 the Company
entered into an inventory credit facility with NationsCredit Commercial
Corporation ("NationsCredit") for the purpose of purchasing data and telephony
inventory for sale to customers. The credit line is currently $800,000 and is
collateralized by inventory.
F-16
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. NOTES PAYABLE AND CAPITAL LEASES: (CONTINUED)
CAPITAL LEASES
The Company leases certain equipment used by its customers under capital
leases. The following is a schedule of the minimum lease payments under capital
leases together with the present value of the minimum lease payments.
<TABLE>
<CAPTION>
DECEMBER 31, 1997 JUNE 30, 1998
----------------- -------------
<S> <C> <C>
(UNAUDITED)
Due within year:
One......................................................... $ 944,573 $ 2,500,576
Two......................................................... 620,234 1,483,806
Three....................................................... 1,216 717,130
----------------- -------------
Total minimum lease payments................................ 1,566,023 4,701,512
Less: Amount representing interest.......................... (174,935) (497,980)
----------------- -------------
Present value of minimum lease payments..................... 1,391,088 4,203,532
Less: current portion....................................... (804,138) (2,183,134)
----------------- -------------
Long term portion........................................... $ 586,950 $ 2,020,398
----------------- -------------
----------------- -------------
</TABLE>
COMDISCO FACILITY. In November 1997 the Company entered into a three year
Program Agreement with Comdisco, Inc. ("Comdisco") which provides for up to $50
million of equipment lease financing. At June 30, 1998, $10 million was
available for lease to the Company of which $1.8 million was being utilized. The
availability of additional amounts depends on whether the Company meets certain
financial criteria. The Program Agreement expires on June 30, 2000.
The Comdisco facility is collateralized by the equipment being financed and
is guaranteed by the Company. In addition, the Company is required to issue a
warrant to acquire Common Stock of the Company in an amount equal to ten percent
(10%) of the facility, divided by the exercise price per share. The exercise
price per share is equal to the price paid by investors in recent equity
offerings and will, in no event, be less than $3.00 per share. The warrants will
be issued in three installments based upon amounts available under the facility.
As such, the Company has issued a warrant for the purchase of 333,333 shares of
Common Stock at an exercise price of $3.00 per share for the first $10 million
of the facility. The warrants have been valued based on the value of the
Company's Common Stock obtained in a quarterly independent appraisal, and are
being amortized into interest expense over three years.
SUN FINANCIAL FACILITY. In May 1997, the Company entered into a Master
Equipment Lease with Sun Financial Group, Inc. to lease equipment, facilities
and related items for the Company's internal expansion as well as equipment to
be used for customer installations. The facility is collateralized by a $100,000
standby letter of credit. In connection with the establishment of the facility,
the Company issued a warrant to Sun Financial Group, Inc. for the purchase of
80,571 shares of Common Stock at an exercise price of $3.00 per share. The
warrants have been valued based on the value of the Company's Common Stock
obtained in a quarterly independent appraisal, and are being amortized into
interest expense over three years. The Company had outstanding amounts under
this facility of $1.4 million and $2.3 million as of December 31, 1997 and June
30, 1998, respectively.
F-17
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. COMMITMENTS:
OPERATING LEASES
The Company leases a portion of its buildings and equipment under operating
leases. Future minimum payments under operating leases are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------ JUNE 30,
1998
------------
(UNAUDITED)
<S> <C> <C>
Due within year:
One.............................................................. $ 736,859 $ 2,008,379
Two.............................................................. 744,375 2,063,531
Three............................................................ 757,392 2,078,713
Four............................................................. 776,005 1,921,297
Five............................................................. 482,784 1,434,281
Thereafter....................................................... -- 52,708
------------ ------------
$3,497,415 $ 9,558,909
------------ ------------
------------ ------------
</TABLE>
Rent expense under operating leases was $28,787, $45,874, $17,927, $431,930
and 549,347, respectively for the year ended December 31, 1995, the period from
January 1, 1996 to December 16, 1996, the period from inception to December 31,
1996, the year ended December 31, 1997 and six months ended June 30, 1998.
SONETECH ENGINEERING AND CONSULTING AGREEMENT:
The Company has an exclusive engineering and consulting agreement with
Services-oriented Open Network Technologies, Inc. ("SONeTech") for engineering
services to the Company's internal engineering staff relating solely to the
initial configuration of the architecture of the E-POP-TM- network strategy and
the development of service logic for the Company's call processing design. The
Company issued 375,000 shares of Common Stock in exchange for a 10% equity
interest in SONeTech and an exclusive engineering and consulting agreement. The
Company will be entitled to reacquire a portion of the Common Stock if SONeTech
terminates the agreement. The Company has a right to acquire an additional 35%
equity interest in SONeTech.
8. SHAREHOLDERS' EQUITY:
In connection with the acquisition of certain assets of Sigmacom (see Note
3), the Company issued warrants to purchase 50,000 shares of Common Stock
exercisable at $7.50 per share through December 1999.
In February 1997, the Company completed the offering of 7,000,000 units
consisting of one share of common stock and one-half warrant to purchase a share
of common stock. The units were sold at a price of $1.00 each. One warrant
entitles the holder to purchase one share of common stock for a price of $1.50
per share for five years from the date of the offering. The proceeds, net of
related offering costs, were approximately $6,386,000, of which approximately
$4,328,000 was received during 1996. As part of the offering, the Company issued
warrants to purchase 3,500,000 Common Shares to investors exercisable at $1.50
per share and warrants to purchase 741,250 Common Shares to the placement agents
exercisable at $1.20 per share through November 7, 2001.
F-18
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. SHAREHOLDERS' EQUITY: (CONTINUED)
In October 1997, the Company completed the offering of 6,800,000 units
consisting of one share of common stock and one-half warrant to purchase a share
of common stock. The units were sold at a price of $2.50 each. One warrant
entitles the holder to purchase one share of common stock for a price of $3.75
per share for two years from the date of the offering. The proceeds, net of
related offering costs, were approximately $15,200,000. As part of the offering,
the Company issued warrants to purchase 3,410,000 Common Shares to investors
exercisable at $3.75 per share beginning in November 1998 through July 14, 1999
and warrants to purchase 615,860 Common Shares to the placement agents
exercisable at $3.00 per share beginning in May 1998 through November 14, 2002.
In connection with the signing of financing agreements with Comdisco, Inc.
and Sun Financial (see Note 6), the Company granted Comdisco, Inc. and Sun
Financial warrants to purchase 333,333 and 80,571 shares of common stock
respectively, exercisable at $3.00 per share. The Comdisco warrants expire at
the earlier of (i) November 2007, and (ii) five years following the Company's
initial public offering. The Sun Financial warrants are exercisable beginning in
May 1998 and expire in May 2002.
The holders of certain warrants have the right to demand the Company file a
registration statement concerning their shares in 1998 and 1999.
The 1996 financial statements have been restated to reflect as compensation
expense, time contributed to the Company by its founders during the start-up
phase from March 1, 1996 to December 15, 1996, when they began receiving
compensation. The restatement had the following effect on the 1996 results:
<TABLE>
<CAPTION>
AS ORIGINALLY
AS RESTATED REPORTED
----------- ---------------------
<S> <C> <C>
Net loss.................................................. $(575,392) $ (333,858)
Net loss per share........................................ $ (0.07) $ (0.04)
</TABLE>
STOCK OPTION PLANS:
The Company has adopted the 1996 and 1997 Incentive and Non-Statutory Option
Plans and the 1998 Stock Option Plan (the "Plans") which authorize the Company
to grant up to 5,600,000 shares of the Company's common stock to employees,
consultants and directors under incentive stock options within the meaning of
Section 422A of the Internal Revenue Code of 1986, as amended, and to grant
non-statutory stock options.
The Plans require that the exercise price of options granted must be at
least equal to the fair market value of share of Common Stock on the date of
grant and are exercisable over a period of up to ten years, provided that if an
employee owns more than 10% of the Company's outstanding Common Stock, then the
exercise price of an incentive option must be at least 110% of the fair market
value of a share of the Company's Common Stock on the date of grant and are
exercisable over a period of five years. The options vest over 5 years.
The Plan is administered by the Company's Board of Directors or a committee
thereof which determines the terms of the options granted, including the
exercise price, the number of shares of Common Stock subject to the option, and
the terms and conditions of exercise. No option granted under the Plan is
transferable by the optionee other than by will or the laws of descent and
distribution and each option is exercisable during the lifetime of the optionee
only by such optionee.
F-19
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. SHAREHOLDERS' EQUITY: (CONTINUED)
In May 1997, the Company accelerated the vesting provisions related to
options to purchase 950,000 shares with an exercise price of $0.06 per share and
all of the options were exercised. The underlying shares are subject to a
repurchase agreement over a five year period whereby the shares are subject to
being repurchased by the Company upon termination of employment, provided that,
the amount available for repurchase is reduced by 20% each year of employment.
In late 1997, the Company repurchased 200,000 shares for $0.06 per share, upon
the termination of one of the exercising employees. The repurchased shares are
included in the authorized but unissued shares of Common Stock. At December 31,
1997, 190,000 shares were no longer subject to repurchase.
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER OF WEIGHTED AVERAGE GRANT DATE FAIR
SHARES EXERCISE PRICE VALUE
---------- ----------------- -----------------
<S> <C> <C> <C>
Outstanding at March 1, 1996................. -- --
Granted...................................... 1,810,000 $ 0.51 $ 1.06
Exercised.................................... -- --
Forfeited.................................... -- --
---------- -----
Outstanding at December 31, 1996............. 1,810,000 0.51
Granted...................................... 3,795,000 1.84 1.47
Exercised.................................... (950,000) 0.06
Forfeited.................................... (12,000) 1.33
---------- -----
Outstanding at December 31, 1997............. 4,643,000 $ 1.69
---------- -----
---------- -----
</TABLE>
At December 31, 1997, options for 345,000 shares are exercisable with a
weighted average exercise price of $1.29. No options were exercisable at
December 31, 1996.
At December 31, 1997, the range of exercise prices and weighted average
remaining contractual life for options outstanding was as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
REMAINING
NUMBER OF SHARES OPTION PRICE CONTRACTUAL LIFE
- -------------------------------------------------------------- ------------ ----------------
<S> <C> <C>
75,000...................................................... $ 0.06 4.00 years
1,955,000..................................................... 1.00 4.15 years
700,000...................................................... 1.10 4.00 years
165,000...................................................... 2.00 4.39 years
952,000...................................................... 2.50 4.67 years
796,000...................................................... 3.00 4.87 years
</TABLE>
F-20
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. SHAREHOLDERS' EQUITY: (CONTINUED)
Had compensation cost for the Plan been determined based on the fair value
at the grant dates for awards using the method prescribed by SFAS No. 123, the
Company's pro forma net loss and net loss per share would have been as follows:
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION
THROUGH YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1997
----------------- -----------------
<S> <C> <C>
Net loss:
As reported.......................................... $ (575,392) $ (9,654,779)
Pro forma............................................ (575,808) (9,703,446)
Net loss per share:
As reported.......................................... (0.07) (0.46)
Pro forma............................................ (0.07) (0.46)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the minimum value method with the following assumptions:
<TABLE>
<CAPTION>
DECEMBER
----------------------
1996 1997
---------- ----------
<S> <C> <C>
Dividend Yield........................................................................... -- --
Risk Free Interest Rate.................................................................. 6.06-6.48% 5.65-6.84%
Expected Lives........................................................................... 5 years 5 years
</TABLE>
Because the determination of the fair value of all options granted if the
Company becomes a public entity will include an expected volatility factor in
addition to the factors described in the preceding paragraph and, because
additional option grants are expected to be made each year, the above pro forma
disclosures are not representative of pro forma effects on net income to be
reported for future years.
During the periods ended December 31, 1996 and 1997, the Company recognized
compensation expense of $282,267 and $194,517, respectively for employee stock
grants and stock options.
9. DEFERRED COMPENSATION:
The Company has a Deferred Compensation plan whereby certain management
employees can elect to defer a portion of their compensation which will be paid
in Common Stock of the Company at a future date. The plan requires the Company
to issue shares of Common Stock into a trust account which will then be
distributed to the employee at a specified date in the future not less than 1
year from the deferral date. The Company has recorded the deferred compensation
amount as treasury stock (for accounting purposes) and as a deferred
compensation obligation in the shareholders' equity section of the balance
sheet. As of June 30, 1998, 154,344 shares of Common Stock are being held in the
trust account.
F-21
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. INCOME TAXES:
The Company was organized as an S corporation under the provisions of
Section 1361 of the Internal Revenue Code. As an S corporation, the entity was
not subject to tax on its income; rather the shareholders of the entity was
taxed on its share of the taxable income, whether or not the income was
distributed. Effective December 5, 1996, the Company rescinded its S Corporation
election under the Internal Revenue Code and became subject to tax on its
income. No pro forma tax benefit has been provided for either the Company or ICN
as Predecessor due to their continuing losses.
The Predecessor was a limited liability company which was treated as a
partnership for taxation purposes.
No income taxes were paid for the periods ended December 31, 1996 or 1997.
At December 31, 1997, the Company had, for federal income tax purposes, net
operating loss carryforwards of approximately $9.1 million which will expire
beginning in 2011.
The components of the net deferred tax assets as of December 31, 1996 and
1997 are as follows:
<TABLE>
<CAPTION>
1996 1997
---------- -------------
<S> <C> <C>
Deferred tax assets:
Non-current:
Allowance for doubtful accounts.................................................... $ 6,014 $ 8,127
Net operating loss carryforwards................................................... 40,377 3,461,765
Property and equipment............................................................. -- 112,106
Valuation allowance................................................................ (46,391) (3,581,998)
---------- -------------
Total deferred tax assets.............................................................. $ -- $ --
---------- -------------
---------- -------------
</TABLE>
The Company's actual income taxes differed from the expected statutory rate
of 34% as follows:
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION TO YEAR ENDED DECEMBER
DECEMBER 31, 1996 31, 1997
--------------------------- -------------------
<S> <C> <C>
Statutory tax rate.................................................... 34% 34%
State taxes, net of federal benefit................................... 4 4
Valuation allowance................................................... (38) (38)
--
---
Effective tax rate.................................................... 0% 0%
--
--
---
---
</TABLE>
The increase in the valuation allowance of $3,535,607 in 1997 is due to
increased losses during the year. The Company has recorded a full valuation
allowance on its deferred tax assets due to continuing losses.
F-22
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. NET LOSS PER SHARE:
The net loss available to common shareholders consists of the following:
<TABLE>
<CAPTION>
PERIOD FROM YEAR ENDED SIX MONTHS ENDED JUNE 30
INCEPTION TO DECEMBER 31, -----------------------------
DECEMBER 31, 1996 1997 1997 1998
-------------------- ------------- ------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net loss..................................... $ (575,392) $ (9,654,779) $ (2,670,177) $ (16,279,387)
---------- ------------- ------------- --------------
---------- ------------- ------------- --------------
</TABLE>
The weighted average shares consist of the following:
<TABLE>
<CAPTION>
PERIOD FROM YEAR ENDED SIX MONTHS ENDED JUNE 30,
INCEPTION TO DECEMBER 31, --------------------------
DECEMBER 31, 1996 1997 1997 1998
-------------------- ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Weighted average common shares used for basic
earnings per share............................. 7,774,651 20,921,569 18,263,251 27,131,375
Warrants......................................... -- -- -- --
Stock options.................................... -- -- -- --
---------- ------------ ------------ ------------
Weighted average common shares used for fully
diluted earnings per share..................... 7,774,651 20,921,569 18,263,251 27,131,375
---------- ------------ ------------ ------------
---------- ------------ ------------ ------------
</TABLE>
For the period from inception to December 31, 1996, the year ended December
31, 1997 and the six months ended June 30, 1997 and 1998, a total of 307,181,
7,653,035, 5,321,477 and 10,712,575, respectively, weighted average options and
warrants were not included in the above calculation because their effect would
be anti-dilutive.
12. EMPLOYEE BENEFIT PLANS:
The Company adopted an employee benefit 401(k) plan for all employees
effective March 1, 1997. Under the plan, employees may voluntarily elect to have
up to 15% of their salaries deducted from earnings and placed in the plan. The
Company may elect to match up to 6% of the employee contributions by
contributing the Company's common stock to the plan. Company contributions are
made on a quarterly basis and the number of shares to be contributed is based
upon the estimated fair value of the stock at the end of each quarter. The
Company accrued matching contributions of $166,467 for the year ended December
31, 1997.
13. RELATED PARTY TRANSACTIONS:
During 1995, $45,535 of short-term cash and working capital advances were
paid to a shareholder of ICN. This balance represents advances of $50,535 offset
by $5,000 of amounts borrowed from the shareholder. This transaction has been
reflected as a reduction of members' equity. During 1996, capital contributions
to the predecessor include $206,237 of public telephone equipment, approximately
$11,343 of other equipment and furniture and repayment of the advances from 1995
contributed by a shareholder of ICN.
Pursuant to the terms of a non-cancelable license fee related to proprietary
telecommunications equipment technology, ICN paid monthly license fees of $2,500
and management fees of $1,200 to a
F-23
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. RELATED PARTY TRANSACTIONS: (CONTINUED)
shareholder of ICN. During the period from January 1, 1996 through December 16,
1996 and the year ended December 31, 1995, ICN incurred costs of $44,400 under
these arrangements.
A Director of the Company provides financial advisory services to the
Company from time to time. An aggregate of $1,750 has been paid to the Director
for such services. In addition, the Director was a Principal and owner of
Shepherd Financial Group which received compensation totaling approximately $1.5
million and the issuance of 438,000 warrants to purchase Common Stock in
exchange for placement agent services provided to the Company in the Company's
1996 and 1997 private placements of Common Stock. The Director was also a
Principal and owner of Shepherd Capital Group which was paid approximately $0.5
million for financial advisory services provided to the Company during 1997.
14. SUBSEQUENT EVENT (UNAUDITED):
TIE COMMUNICATIONS, INC. Effective August 1, 1998, the Company completed
the acquisition of substantially all the assets and certain of the liabilities
of Tie Communications, Inc. ("Tie"). The purchase price consisted of $40.0
million in cash and the assumption of certain liabilities, which, with legal and
professional and other costs resulted in a total purchase price of approximately
$51.4 million. Tie was a telecommunications equipment provider and a nationwide
reseller of long-distance service. It is anticipated that the acquisition will
accelerate the Company's growth by adding approximately 55,000 customers in 24
new markets and providing the Company with extensive experience in telephony
services including digital telephone systems, larger telephone systems (PBXs),
computer-telephony integration hardware and software, video teleconferencing and
data networking services.
F-24
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder of
TIE/communications, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of changes in stockholder's
equity/(deficit) and of cash flows present fairly, in all material respects, the
financial position of TIE/communications, Inc. (a wholly-owned subsidiary of TIE
Acquisition Co. and a Debtor-in-Possession) at December 31, 1995, December 31,
1996, December 31, 1997 and July 31, 1998 and the results of its operations and
its cash flows for the period from November 1, 1995 through December 31, 1995,
the years ended December 31, 1996 and 1997, and the seven months ended July 31,
1998, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has experienced net losses since its inception
and is not in compliance with certain provisions in its loan agreement with a
financial institution. Additionally, on April 10, 1998, the Company filed a
voluntary petition (as a debtor-in-possession) for relief under Chapter 11 of
Title 11 of the United States Bankruptcy Code. Effective August 1, 1998, the
Company sold substantially all of its operating assets to a third party. The
accompanying financial statements do not reflect the sale of substantially all
of the assets to and the assumption of certain liabilities by the third party.
These uncertainties raise substantial doubt about the Company's ability to
continue as a going concern. The accompanying financial statements do not
include any adjustments which may result from the outcome of these
uncertainties.
PricewaterhouseCoopers LLP
Kansas City, Missouri
September 4, 1998
F-25
<PAGE>
TIE/COMMUNICATIONS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TIE ACQUISITION CO. AND A DEBTOR-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31, JULY 31,
1995 1996 1997 1998
------------- ------------- ------------- ---------
<S> <C> <C> <C> <C>
ASSETS
Current assets
Cash.......................................................... $ 1,812 $ 469 $ 326 $ 650
Accounts receivable, net of allowance of $1,640, $1,126,
$1,914 and $2,517, respectively............................. 11,131 10,659 12,041 8,508
Inventories, net of reserves of $4,664, $4,932, $2,273 and
$2,520, respectively........................................ 6,540 8,789 5,447 4,782
Prepaid expenses.............................................. 833 801 541 1,032
Net assets held for sale...................................... 9,196 -- -- --
Other current assets.......................................... 1,922 1,961 819 1,182
Deferred tax asset............................................ -- -- -- 6,892
------------- ------------- ------------- ---------
Total current assets...................................... 31,434 22,679 19,174 23,046
Property and equipment, net..................................... 1,596 1,792 4,597 3,428
Excess purchase price over fair value of net assets acquired,
net........................................................... 28,209 28,623 25,246 20,731
Equipment credit receivable..................................... 1,500 -- -- --
Debt issuance costs, net........................................ 543 622 64 --
Other assets.................................................... 1,104 1,886 619 519
------------- ------------- ------------- ---------
Total assets.............................................. $ 64,386 $ 55,602 $ 49,700 $ 47,724
------------- ------------- ------------- ---------
------------- ------------- ------------- ---------
LIABILITIES AND STOCKHOLDER'S EQUITY/(DEFICIT)
Liabilities subject to compromise............................... $ -- $ -- $ -- $ 38,779
Liabilities not subject to compromise
Current liabilities:
Note payable and current maturities of long-term debt:
Related parties............................................. -- 1,515 5,734 --
Other....................................................... -- 15,896 16,913 1,644
Advance from Convergent Communications Services, Inc.......... -- -- -- 15,917
Accounts payable.............................................. 3,720 7,770 12,583 4,458
Accrued wages and benefits.................................... 3,897 2,922 3,369 2,667
Restructuring reserve......................................... 2,399 1,684 523 --
Other accrued expenses:
Related parties............................................. -- 136 2,418 --
Other....................................................... 7,418 5,873 6,001 6,634
Deferred service revenue...................................... 6,625 6,114 5,538 2,186
Income taxes payable.......................................... 1,732 1,114 939 33
------------- ------------- ------------- ---------
Total current liabilities................................. 25,791 43,024 54,018 72,318
Long-term debt:
Related parties............................................... 10,000 10,000 10,000 --
Other......................................................... 20,000 59 2,325 1,495
Other non-current liabilities................................... 1,339 117 58 --
------------- ------------- ------------- ---------
Total liabilities......................................... 57,130 53,200 66,401 73,813
------------- ------------- ------------- ---------
Commitments and contingencies
Stockholder's equity/(deficit)
Series A preferred stock...................................... -- -- 9 9
Common stock.................................................. -- -- 102 102
Additional paid-in capital.................................... 7,833 7,753 7,642 7,642
Accumulated deficit........................................... (577) (5,351) (24,454) (33,842)
------------- ------------- ------------- ---------
Total stockholder's equity/(deficit)...................... 7,256 2,402 (16,701) (26,089)
------------- ------------- ------------- ---------
Total liabilities and stockholder's equity/(deficit)...... $ 64,386 $ 55,602 $ 49,700 $ 47,724
------------- ------------- ------------- ---------
------------- ------------- ------------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE>
TIE/COMMUNICATIONS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TIE ACQUISITION CO. AND A DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 1, 1995 YEAR ENDED YEAR ENDED SEVEN MONTHS
THROUGH DECEMBER DECEMBER 31, DECEMBER 31, ENDED JULY
31, 1995 1996 1997 31, 1998
----------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Net revenue:
Equipment........................................ $ 7,302 $ 45,114 $ 40,338 $ 17,258
Services......................................... 7,562 45,111 43,390 21,334
Other............................................ 1,499 6,332 11,646 7,880
------- ------------ ------------ -------------
16,363 96,557 95,374 46,472
------- ------------ ------------ -------------
Cost of sales:
Equipment........................................ 5,502 32,706 32,767 15,250
Services......................................... 4,620 28,518 28,362 14,115
Other............................................ 663 2,467 8,230 7,251
------- ------------ ------------ -------------
10,785 63,691 69,359 36,616
------- ------------ ------------ -------------
Gross margin:
Equipment........................................ 1,800 12,408 7,571 2,008
Services......................................... 2,942 16,593 15,028 7,219
Other............................................ 836 3,865 3,416 629
------- ------------ ------------ -------------
5,578 32,866 26,015 9,856
------- ------------ ------------ -------------
Selling, general and administrative expenses....... 4,837 28,944 33,667 15,775
Depreciation and amortization...................... 712 4,632 4,851 2,909
Other operating expenses........................... -- 706 893 1,000
------- ------------ ------------ -------------
Operating income/(loss)............................ 29 (1,416) (13,396) (9,828)
Interest expense:
Related parties (contractual interest at July 31,
1998 was $2,965)............................... -- 1,443 2,997 832
Other............................................ 560 1,588 2,517 1,295
Other expenses, net................................ 38 291 158 58
Reorganization expenses............................ -- -- -- 1,439
------- ------------ ------------ -------------
Loss before income taxes........................... (569) (4,738) (19,068) (13,452)
Provision for (benefit from) income taxes.......... 8 36 35 (4,064)
------- ------------ ------------ -------------
Net loss........................................... $ (577) $ (4,774) $ (19,103) $ (9,388)
------- ------------ ------------ -------------
------- ------------ ------------ -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-27
<PAGE>
TIE/COMMUNICATIONS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TIE ACQUISITION CO. AND A DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY/(DEFICIT)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK, COMMON STOCK, COMMON STOCK,
$0.01 PAR, 100 $0.10 PAR, $0.01 PAR,
SHARES 10,000,000 SHARES 15,000,000 SHARES
AUTHORIZED AUTHORIZED AUTHORIZED
--------------- ------------------ ------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ------ ---------- ------ ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance at November 1, 1995... -- $-- 3,988,392 $ 398 -- $--
Recapitalization due to merger
with TIE Merger Co.......... 100 -- (3,988,392) (398) -- --
Net loss for the period from
November 1, 1995 through
December 31, 1995........... -- -- -- -- -- --
------ ------ ---------- ------ ---------- ------
Balance at December 31,
1995........................ 100 -- -- -- -- --
Return of equity to TIE
Acquisition Co.............. -- -- -- -- -- --
Net loss for the year ended
December 31, 1996........... -- -- -- -- -- --
------ ------ ---------- ------ ---------- ------
Balance at December 31,
1996........................ 100 -- -- -- -- --
Recapitalization.............. (100) -- -- -- 10,200,000 102
------ ------ ---------- ------ ---------- ------
Net loss for the year ended
December 31, 1997........... -- -- -- -- -- --
------ ------ ---------- ------ ---------- ------
Balance at December 31,
1997........................ -- -- -- -- 10,200,000 102
Net loss for the seven month
period ended July 31,
1998........................ -- -- -- -- -- --
------ ------ ---------- ------ ---------- ------
Balance at July 31, 1998...... -- $-- -- $-- 10,200,000 $102
------ ------ ---------- ------ ---------- ------
<CAPTION>
PREFERRED
STOCK, $0.01
PAR, 1,000,000
SERIES A
8.0785%
CUMULATIVE,
SHARES
AUTHORIZED ADDITIONAL
--------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------- ------ ---------- ----------- --------
<S> <C> <C> <C> <C> <C>
Balance at November 1, 1995... -- -$- $15,727 $ -- $ 16,125
Recapitalization due to merger
with TIE Merger Co.......... -- -- (7,894) -- (8,292)
Net loss for the period from
November 1, 1995 through
December 31, 1995........... -- -- -- (577) (577)
------- ------ ---------- ----------- --------
Balance at December 31,
1995........................ -- -- 7,833 (577) 7,256
Return of equity to TIE
Acquisition Co.............. -- -- (80) -- (80)
Net loss for the year ended
December 31, 1996........... -- -- -- (4,774) (4,774)
------- ------ ---------- ----------- --------
Balance at December 31,
1996........................ -- -- 7,753 (5,351) 2,402
Recapitalization.............. 940,000 9 (111) -- --
------- ------ ---------- ----------- --------
Net loss for the year ended
December 31, 1997........... -- -- -- (19,103) (19,103)
------- ------ ---------- ----------- --------
Balance at December 31,
1997........................ 940,000 9 7,642 (24,454) (16,701)
Net loss for the seven month
period ended July 31,
1998........................ -- -- -- (9,388) (9,388)
------- ------ ---------- ----------- --------
Balance at July 31, 1998...... 940,000 $9 7,642 $(33,842) $(26,089)
------- ------ ---------- ----------- --------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE>
TIE/COMMUNICATIONS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TIE ACQUISITION CO. AND A DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 1, 1995 SEVEN
THROUGH YEAR ENDED YEAR ENDED MONTHS ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, JULY 31,
1995 1996 1997 1998
----------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................ $ (577) $ (4,774) $ (19,103) $ (9,388)
Adjustments to reconcile net loss to cash flows utilized
for operating activities:
Depreciation and amortization......................... 712 4,632 4,851 2,909
Provision for doubtful accounts....................... (53) 788 717 635
Deferred income taxes................................. -- -- -- (4,085)
Changes in working capital, net:
Accounts receivable................................. (1,459) (316) (2,099) 2,899
Inventories......................................... 486 (924) 3,342 665
Prepaid expenses.................................... (268) 32 260 (491)
Other current assets................................ (282) 203 993 (376)
Accounts payable.................................... 484 4,050 4,810 4,366
Accrued wages and benefits.......................... (475) (975) 568 (662)
Restructuring reserve............................... (101) (1,941) (991) (37)
Other accrued expenses.............................. 605 (1,508) 2,701 4,613
Deferred service revenue............................ (60) (511) (576) (635)
Income taxes payable................................ 24 (1,716) (175) 22
Other................................................. -- -- 2,175 94
------- ------------- ------------ -------------
Cash provided by (utilized for) operating activities...... (964) (2,960) (2,527) 529
------- ------------- ------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment..................... (123) (2,556) (1,075) (23)
Proceeds from sales of property and equipment........... -- 265 518 --
Proceeds from sale of assets held for sale.............. -- 8,456 -- --
Other................................................... (131) (1,793) (58) --
------- ------------- ------------ -------------
Cash provided by (utilized for) investing activities...... (254) 4,372 (615) (23)
------- ------------- ------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under revolving lines of
credit................................................ -- 15,838 (307) (8,531)
Proceeds from advances from Convergent Communications
Services, Inc......................................... -- -- -- 15,197
Cash contributed by TIE Acquisition Co.................. 2,353 -- -- --
Proceeds from note with affiliate....................... -- 1,515 4,500 --
Proceeds from borrowing from former majority
stockholder........................................... 400 -- -- --
Repayment of note with affiliate........................ -- -- (300) --
Repayment of term loan.................................. -- -- -- (7,000)
Repayment of bridge loan facility....................... -- (20,000) -- --
Return of equity to TIE Acquisition Co.................. -- (80) -- --
Capitalized lease payments.............................. -- (28) (894) (568)
Payment of long-term tax liability...................... (296) -- -- --
------- ------------- ------------ -------------
Cash provided by (utilized for) financing activities...... 2,457 (2,755) 2,999 (182)
Net increase/(decrease) in cash........................... 1,239 (1,343) (143) 324
------- ------------- ------------ -------------
Cash at beginning of the period........................... 573 1,812 469 326
------- ------------- ------------ -------------
Cash at end of the period................................. $ 1,812 $ 469 $ 326 $ 650
------- ------------- ------------ -------------
------- ------------- ------------ -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE>
TIE/COMMUNICATIONS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TIE ACQUISITION CO. AND A DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996, 1997 AND JULY 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT SHARE RELATED DATA)
1. NATURE OF BUSINESS AND GOING CONCERN UNCERTAINTY
NATURE OF BUSINESS
Tie/communications, Inc. (together with its subsidiaries, the "Company") is
engaged in the sale, installation and servicing of telecommunications products
and services including the resale of long distance services. The Company's
principal products are multi-featured, fully electronic, digitally controlled
key systems, private automated branch exchange ("PABX") systems and hybrid
telephone systems, voice response and processing products with computer
telephone integration hardware and software, video conferencing systems and
network services including long distance products as well as pre-owned phone
systems, which are primarily for business use. The Company's products also
include other peripheral data and telecommunications products.
The Company resells long distance services to its customers under separate
reseller agreements with certain major interexchange carriers. By offering both
premise-based telecommunications equipment and services along with competitive
resold long distance services, the Company delivers a single point of contact
for the telecommunications needs of its customers which is a valuable and
beneficial service for its small to medium commercial customers.
The Company's core business sells, installs and services its products
through a U.S. network of approximately 40 sales, service and warehouse
facilities located throughout major U.S. metropolitan areas.
GOING CONCERN UNCERTAINTY
The accompanying consolidated financial statements have been prepared
assuming that the Company continues as a going concern, which contemplates
continuity of operations and realization of assets and liquidation of
liabilities in the ordinary course of business. The Company was not in
compliance with certain of the restrictive covenants contained in the loan and
security agreement with one of its lenders throughout 1996, 1997 and 1998. These
events of noncompliance indicated that the related obligations were callable by
the lender. Additionally, the Company has a working capital deficit of $49,272
as of July 31, 1998 and has generated net losses of $33,842 since its inception
in October 1995 resulting in a stockholder's deficit of $26,089 as of July 31,
1998.
On April 10, 1998, the Company filed a voluntary petition for relief under
Chapter 11 of Title 11 of the United States Bankruptcy Code (the Bankruptcy
Code) in the United States Bankruptcy Court for the Central District of
California (the Bankruptcy Court), Case No. SA 98-15547-JB. The Company is
currently operating its business as a debtor-in-possession pursuant to Sections
1107(a) and 1108 of the Bankruptcy Code and is subject to the jurisdiction of
the Bankruptcy Court. Since filing the petition for relief, the Company has
reported reorganization expenses relating to professional and legal fees of
$1,439.
On June 16, 1998, the Company entered into an asset purchase agreement with
Convergent Communications Services, Inc. for the acquisition of substantially
all of the assets and the assumption of certain liabilities for a cash payment
of $40 million. The agreement was subject to the approval of the Bankruptcy
Court, which was obtained on July 20, 1998. Pursuant to the asset purchase
agreement, on July 31, 1998, the purchase price for the acquisition was
delivered to an escrow agent and was partially used to repay the
F-30
<PAGE>
TIE/COMMUNICATIONS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TIE ACQUISITION CO. AND A DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, 1997 AND JULY 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT SHARE RELATED DATA)
1. NATURE OF BUSINESS AND GOING CONCERN UNCERTAINTY (CONTINUED)
Company's indebtedness under the loan and security agreement referred to above.
The sale transaction closed effective August 1, 1998. See Note 15.
As a result of the filing under Chapter 11 of the Bankruptcy Code and
related circumstances, including the Company's leveraged financial structure,
the substantial recurring net losses and working capital and stockholder's
deficits and the disposition of substantially all of the Company's assets, the
realization of any remaining assets and liquidation of remaining liabilities is
subject to significant uncertainty.
While under the protection of Chapter 11 of the Bankruptcy Code, the Company
may sell or otherwise dispose of assets, and liquidate or settle liabilities,
for amounts other than those reflected in the accompanying financial statements.
Further, a plan of reorganization could materially change the amounts reported
in such financial statements, which do not give effect to all adjustments of the
carrying value of assets or liabilities that might be necessary as a consequence
of a confirmed plan of reorganization.
2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of TIE and its
majority-owned subsidiaries. During 1996, all of the Company's active
subsidiaries merged into the Company. All significant intercompany accounts and
transactions have been eliminated.
BASIS OF PRESENTATION
The accompanying financial statements do not reflect sale of substantially
all of the assets to and the assumption of certain liabilities by Convergent
Communications Services, Inc. effective August 1, 1998. See Note 15.
RECLASSIFICATIONS
Certain amounts in 1995 financial statements have been reclassified to
conform to the current year's presentation.
REVENUE RECOGNITION
Revenue from equipment sales and installation service work to end users is
recognized at the time of its completion. Deferred service revenue from
maintenance contracts is amortized in equal increments over the terms of the
contracts which are generally for one year. Revenue from the reselling of long
distance service is recognized at the time of the performance and the cost
associated for providing those services is charged to cost of sales.
F-31
<PAGE>
TIE/COMMUNICATIONS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TIE ACQUISITION CO. AND A DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, 1997 AND JULY 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT SHARE RELATED DATA)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
ACCOUNTS RECEIVABLE
Accounts receivable represent billed and accrued receivables for equipment
sales, installation service work and long distance reseller services. These
receivables are unsecured. The Company provides allowances for returns, billing
adjustments and doubtful accounts equal to the estimated losses expected to be
sustained.
INVENTORIES
Inventories, which consist primarily of new and refurbished equipment for
resale, are valued at the lower of cost or net realizable value, using the
first-in, first-out method. The Company provides reserves for estimated losses
related to excess and obsolete inventory.
WARRANTY CLAIMS
The Company provides for warranty expense in the year that the related
revenue is recognized based upon historical experience.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. At the time fixed assets are
sold or otherwise disposed of, the cost and related accumulated depreciation are
removed from the accounts and the resulting gain or loss, if any, is included in
the determination of income. Maintenance and repair costs are expensed as
incurred.
Depreciation and amortization are provided on the straight-line method over
the estimated useful lives of the assets. Leasehold improvements and equipment
under capital leases are capitalized and amortized over the lesser of their
estimated useful lives or the lives of the related leases.
<TABLE>
<CAPTION>
ASSIGNED
LIFE
-----------
<S> <C>
Building......................................................................... 30 years
Equipment........................................................................ 3-9 years
Leasehold improvements........................................................... 1-5 years
Furniture and fixtures........................................................... 3-10 years
</TABLE>
F-32
<PAGE>
TIE/COMMUNICATIONS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TIE ACQUISITION CO. AND A DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, 1997 AND JULY 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT SHARE RELATED DATA)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LIABILITIES SUBJECT TO COMPROMISE
In accordance with Statement of Position 90-7 (SOP 90-7), FINANCIAL
REPORTING BY ENTITIES IN REORGANIZATION UNDER THE BANKRUPTCY CODE, prepetition
liabilities which are unsecured or estimated to be undersecured are classified
as liabilities subject to compromise. The accrual of interest on such
liabilities has been discontinued for periods after April 10, 1998.
INTANGIBLE ASSETS
Excess purchase price over fair value of net assets acquired is being
amortized over an average estimated life of 10 years. The principal identifiable
intangible assets are the Company's installed customer base and its tradename.
Accumulated amortization as of December 31, 1995, December 31, 1996, December
31, 1997 and July 31, 1998 was $384, $3,336, $6,195 and $7,863, respectively.
The Company periodically assesses the realizability of the excess purchase price
over fair value of net assets acquired based upon estimated fair value.
DEBT ISSUANCE COSTS
Debt issuance costs are capitalized and amortized as interest expense using
the effective interest method over the lives of the related debt. Accumulated
amortization as of December 31, 1995, December 31, 1996, December 31, 1997 and
July 31, 1998 was $188, $894, $1,496 and $1,541, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company assesses its long-lived assets to be held and used for
impairment whenever events or changes in circumstances indicate that the
carrying amount of such assets (or group of assets) may not be recoverable.
Impairment is determined to exist if the estimated future cash flows
(undiscounted and without interest charges) is less than carrying value. The
amount of any impairment then recognized would be calculated as the difference
between carrying value and fair value. With respect to assets to be disposed of,
impairment is measured as the excess of carrying value over fair value less cost
of disposal.
INCOME TAXES
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS No. 109),
which is an asset and liability method of accounting for income taxes. Under
this method, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply in the years in which those temporary differences are expected
to be recovered or settled. A valuation allowance is recorded for deferred tax
assets which management determines are more likely than not unrealizable. The
Company joins in the filing of a consolidated federal income tax return with TIE
Acquisition Co., with the tax liability allocated on a separate company basis.
STOCK OPTIONS
The Company accounts for stock options granted to employees and non-employee
directors using the intrinsic value method as prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
25). In October 1995, the Financial Accounting Standards Board issued
F-33
<PAGE>
TIE/COMMUNICATIONS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TIE ACQUISITION CO. AND A DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, 1997 AND JULY 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT SHARE RELATED DATA)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123) which permits companies to use either the APB 25
intrinsic value method or the fair value method as prescribed by SFAS No. 123,
but encourages companies to adopt the fair value method. Companies electing to
use the APB 25 method are required to disclose pro forma net income (if
materially different from net income as reported) in the notes to the financial
statements, as if they had adopted the SFAS No. 123 fair value method. The
Company accounts for stock options issued to parties other than employees and
non-employee directors using the SFAS No. 123 fair value method.
3. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments," requires disclosure of fair value information
about financial instruments, whether or not recognized in the balance sheet, for
which it is practicable to estimate that value. Fair values are based on
settlements using present value or other valuation techniques.
The Company's financial instruments include cash, accounts receivable and
payable, debt and irrevocable standby letters of credit ($172, $464, $685 and $0
as of December 31, 1995, December 31, 1996, December 31, 1997 and July 31, 1998,
respectively). Management believes the fair values of the cash and accounts
receivable and payable approximate their respective carrying values because of
their short term nature. Management does not believe that it is practicable to
estimate the fair values of the debt or irrevocable standby letters of credit
because of the uncertainty surrounding the Company's financial status as
described in Note 1.
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31, JULY 31,
1995 1996 1997 1998
------------- ------------- ------------- ---------
<S> <C> <C> <C> <C>
Land........................................................ $ 10 $ 10 $ 10 $ 10
Buildings................................................... 123 123 123 123
Equipment................................................... 1,316 2,101 1,790 1,814
Leasehold improvements...................................... 52 91 426 436
Furniture and fixtures...................................... 235 232 239 239
Equipment under capital leases.............................. -- 145 4,629 4,629
Construction in progress.................................... -- 139 20 20
------ ------ ------ ---------
1,736 2,841 7,237 7,271
Less accumulated depreciation and amortization (including
$0, $12, $1,007 and $1,915 of accumulated amortization
related to equipment under capital leases)................ 140 1,049 2,640 3,843
------ ------ ------ ---------
$ 1,596 $ 1,792 $ 4,597 $ 3,428
------ ------ ------ ---------
------ ------ ------ ---------
</TABLE>
F-34
<PAGE>
TIE/COMMUNICATIONS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TIE ACQUISITION CO. AND A DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, 1997 AND JULY 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT SHARE RELATED DATA)
Depreciation expense (including amortization of equipment under capital
leases) aggregated $140, $921, $1,704 and $1,193 for the period from November 1,
1995 through December 31, 1995, and the years ended December 31, 1996 and
December 31, 1997 and the seven months ended July 31, 1998, respectively.
5. DEBT
Debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31, JULY 31,
1995 1996 1997 1998
------------ ------------ ------------ ---------
<S> <C> <C> <C> <C>
Subordinated promissory note to related party.............. $ 10,000 $ 10,000 $ 10,000 $ 10,000
Bank revolving credit facility............................. -- 8,838 8,531 --
Bank term loan facility.................................... 20,000 7,000 7,000 --
Subordinated demand notes payable to related party......... -- 1,515 5,734 5,734
Capitalized lease obligations.............................. -- 117 3,707 3,139
------------ ------------ ------------ ---------
30,000 27,470 34,972 18,873
Less current maturities of long-term debt.................. -- 17,411 22,647 17,378
------------ ------------ ------------ ---------
Long-term debt............................................. $ 30,000 $ 10,059 $ 12,325 $ 1,495
------------ ------------ ------------ ---------
------------ ------------ ------------ ---------
</TABLE>
In connection with the acquisition discussed in Note 9, TIE Acquisition Co.
borrowed $20,000 under a bank loan facility agreement, as amended, which bore
interest at the prime rate, as defined, plus 2.5% and was secured by the
Company's stock acquired by TIE Acquisition Co. The principal and interest on
the loan were due and repaid 90 days after the stock tender offer (January 16,
1996).
Concurrent with the merger described in Note 9, the Company entered into a
$10,000 subordinated promissory note payable to TIE Acquisition Co. Interest is
payable monthly at the rate of 10%. The note is due and payable in full on
February 15, 1999. Interest expense was $53, $1,017, $1,014 and $281 for the
period from November 1, 1995 through December 31, 1995, and the years ended
December 31, 1996 and December 31, 1997 and the seven months ended July 31,
1998, respectively. In accordance with SOP 90-7, the accrual of interest on this
note was discontinued after April 10, 1998. The unrecorded interest expense was
$308 for the period from April 10 through July 31, 1998.
In January 1996, the Company entered into a Loan and Security Agreement with
a bank (the "Agreement"), which consisted of two facilities: a $20,000 revolving
credit facility and a $5,000 term loan facility. The Agreement was subsequently
amended to decrease the revolving credit facility to $18,000 and increase the
term loan facility to $7,000. The revolving credit facility terminates on
December 1, 1998, but shall be automatically extended for successive one-year
periods unless either the lender or the borrower provides to the other written
notice of termination not less than 60 days prior to the then effective
termination date. The revolving credit facility bears interest, at the Company's
option, at either the prime rate plus 1% or LIBOR plus 3.25% (9.5% at December
31, 1997). The advances available under this facility are limited to specified
percentages of eligible accounts receivable and inventory. The term loan
facility expired on January 31, 1998 and bore interest at LIBOR plus 4% (9.6875%
at December 31, 1997). The proceeds from these two facilities were used to
retire the $20,000 bank bridge loan utilized for the acquisition in November
1995. The obligations under this Agreement are secured by substantially all of
the
F-35
<PAGE>
TIE/COMMUNICATIONS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TIE ACQUISITION CO. AND A DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, 1997 AND JULY 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT SHARE RELATED DATA)
5. DEBT (CONTINUED)
Company's assets as well as TIE Acquisition Co.'s stockholdings in the Company
and other assets which have been pledged by certain related parties. Effective
February 1, 1998, the interest rate of each of these facilities increased 2% due
to the Company's failure to pay the term loan when it became due.
The Agreement contains numerous financial and operating covenants,
including, among other things, requirements that the Company maintain certain
financial ratios and restrictions on the ability of the Company to (i) incur
indebtedness or create liens, (ii) make certain capital expenditures and lease
payments, and (iii) make certain restricted distributions and payments. During
1996, 1997 and 1998, the Company violated certain financial covenants of the
Agreement. See Note 1.
In accordance with the bankruptcy filing, the Company repaid the term loan
and the revolving credit facility with operating cash receipts during the second
quarter of 1998. A debtor-in-possession loan was established with the bank on
April 10, 1998 to provide for the Company's operating expenses. The loan was
secured by the Company's accounts receivable and bore interest at 10.5%.
Pursuant to the asset purchase agreement on July 31, 1998 the purchase price for
the acquisition was delivered to an escrow account and was partially used to
repay the Company's indebtedness under the debtor-in-possession loan.
In February 1996, the Company entered into a $1,515 subordinated demand note
payable to SP Investments, Inc., a related party. Interest on this note was
initially payable quarterly in arrears at an annual rate equal to the greater of
12% or the prime rate plus 5%. Effective January 1997 and July 1997, the note
was amended to increase the interest rate to 20% and 30%, respectively. Interest
expense for the years ended December 31, 1996 and 1997 and for the seven months
ended July 31, 1998 was $185, $444 and $126, respectively. Also in 1997, the
Company entered into three additional demand notes payable to SP Investments,
Inc. totaling $4,500. Interest on these notes is payable at an annual rate of
30% and is payable on demand. Interest expense related to these notes aggregated
$507 and $344 for the year ended December 31, 1997 and for the seven months
ended July 31, 1998 . In accordance with SOP 90-7, the accrual of interest on
these notes was discontinued after April 10, 1998. The unrecorded interest
expense was $530 for the period from April 10 through July 31, 1998.
During 1997, the Company also entered into various collateral guarantee fee
arrangements with certain members of management and shareholders of TIE
Acquisition Co. The agreements call for individuals to be compensated for
personal assets used to guarantee certain debt of the Company. As of December
31, 1997 and July 31, 1998, a liability of $1,005 and $1,086 has been recorded
for these fees and the related expense has been recorded in interest expense.
Interest expense included in the Consolidated Statements of Operations for
the period from November 1, 1995 through December 31, 1995, for the years ended
December 31, 1996 and 1997, and for the seven months ended July 31, 1998
includes non-cash interest expense of $188, $528, $602 and $45, respectively,
representing amortization of debt issuance costs as described in Note 2.
The Company entered into various capital lease agreements during 1997 of
which each had a lease period of three years. Three agreements were entered into
for the sale and simultaneous leaseback of equipment and software, with
aggregate lease payments totaling $1,798. Three lease agreements were entered
into for the purchase of office furniture and other equipment, with aggregate
lease payments
F-36
<PAGE>
TIE/COMMUNICATIONS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TIE ACQUISITION CO. AND A DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, 1997 AND JULY 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT SHARE RELATED DATA)
5. DEBT (CONTINUED)
totaling $698. In addition, the Company entered into six lease agreements for
equipment with aggregate lease payments totaling $1,988. At July 31, 1998, the
future minimum lease payments under capital leases are as follows:
<TABLE>
<CAPTION>
<S> <C>
Five months ending December 31, 1998................................................. $ 939
Year ending December 31:
1999............................................................................... 1,645
2000............................................................................... 899
---------
Total minimum rentals................................................................ 3,483
Less amount representing interest.................................................... 344
---------
Present value of minimum rentals..................................................... $ 3,139
---------
---------
</TABLE>
6. LIABILITIES SUBJECT TO COMPROMISE
Certain prepetition liabilities, which may be impaired, have been classified
as liabilities subject to compromise in the Chapter 11 reorganization
proceedings and include the following estimated amounts at July 31, 1998:
<TABLE>
<CAPTION>
<S> <C>
Debt instruments:
Subordinated promissory note payable to TIE Acquisition Co....................... $ 10,000
Subordinated demand notes payable to a related party............................. 5,734
---------
Total debt instruments......................................................... 15,734
Accounts payable................................................................. 12,490
Other accrued expenses:
Related party.................................................................. 3,478
Other.......................................................................... 2,947
Deferred service revenue......................................................... 2,716
Restructuring reserve............................................................ 486
Income taxes payable............................................................. 928
---------
Total.......................................................................... $ 38,779
---------
---------
</TABLE>
F-37
<PAGE>
TIE/COMMUNICATIONS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TIE ACQUISITION CO. AND A DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, 1997 AND JULY 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT SHARE RELATED DATA)
7. INCOME TAXES
The components of the income tax provision for the period from November 1,
1995 through December 31, 1995, for the years ended December 31, 1996 and 1997,
and for the seven months ended July 31, 1998 are as follows:
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 1, 1995 SEVEN MONTHS
THROUGH YEAR ENDED YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, JULY 31,
1995 1996 1997 1998
------------------- --------------- --------------- -------------
<S> <C> <C> <C> <C>
Current tax expense (benefit):
Federal.......................................... $ -- $ -- $ -- $ --
State............................................ 8 36 35 21
Deferred tax expense (benefit):
Federal.......................................... -- -- -- (3,472)
State............................................ -- -- -- (613)
----- ----- ----- -------------
$ 8 $ 36 $ 35 $ (4,064)
----- ----- ----- -------------
----- ----- ----- -------------
</TABLE>
The differences between the Company's provision for income taxes and income
taxes based upon the federal statutory rate are:
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 1, 1995 SEVEN MONTHS
THROUGH YEAR ENDED YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, JULY 31,
1995 1996 1997 1998
----------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Income tax (benefit) computed at the statutory
federal rate..................................... $ (193) $ (1,150) $ (6,070) $ (3,753)
Changes resulting from:
Changes in the valuation allowance for deferred
income tax assets allocated to income taxes.... 54 796 5,563 (697)
Nondeductible amortization of excess purchase price
over fair value of net assets acquired........... 130 353 457 226
Other.............................................. 17 37 85 160
----- ------------ ------------ -------------
$ 8 $ 36 $ 35 $ (4,064)
----- ------------ ------------ -------------
----- ------------ ------------ -------------
</TABLE>
F-38
<PAGE>
TIE/COMMUNICATIONS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TIE ACQUISITION CO. AND A DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, 1997 AND JULY 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT SHARE RELATED DATA)
7. INCOME TAXES (CONTINUED)
The significant components of the Company's deferred income tax balances are
as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31, JULY 31,
1995 1996 1997 1998
------------ ------------ ------------ ----------
<S> <C> <C> <C> <C>
Net operating loss carryover.............................. $ 3,728 $ 5,747 $ 17,787 $ 21,551
Accounts and notes receivable............................. 749 536 766 978
Inventories............................................... 2,556 2,523 1,346 1,499
Property and equipment.................................... 8 105 145 160
Accrued expenses and other liabilities.................... 2,420 1,773 1,468 1,612
Deferred revenue.......................................... 109 80 -- --
Equipment credit receivable............................... (600) -- -- --
Other..................................................... -- (48) -- --
------------ ------------ ------------ ----------
8,970 10,716 21,512 25,800
Valuation allowance....................................... (8,970) (10,716) (21,512) (18,908)
------------ ------------ ------------ ----------
Net deferred income tax balance........................... $ -- $ -- $ -- $ 6,892
------------ ------------ ------------ ----------
------------ ------------ ------------ ----------
</TABLE>
The Company has net operating loss carryovers of $53,060. The Company's
ability to utilize these operating loss carryovers incurred prior to the
acquisition was materially limited due to the change of ownership which occurred
in 1995. Due to these limitations, the amount of future taxable income which can
be offset by federal operating losses incurred prior to November 1, 1995, is
approximately $533 annually ($7,018 in the aggregate).
In addition to the annual limitation on the utilization of the
pre-acquisition operating loss carryforwards, taxable gains on the sale of
assets whose value exceeded their tax bases at November 1, 1995 can be offset by
the pre-acquisition operating loss carryforwards to the extent that such
built-in gains are recognized during a period of five years following the
acquisition (see Note 9). The Company has unrecognized built-in gains in excess
of its net operating loss at the time of the acquisition. Federal operating loss
carryforwards are scheduled to expire between 2005 and 2018.
Pursuant to SFAS No. 109, excess purchase price over the fair value of net
assets acquired was reduced by $2,807 for the tax benefit recognized due to the
reduction of the valuation allowance for the future utilization of
pre-acquisition operating loss carryforwards.
The Company has a $912 tax liability recorded relating to a negotiated
settlement with the Internal Revenue Service and with certain states for tax
years through December 31, 1986. The Company was entitled to make payments of
the federal and state tax liabilities over a period of six years due to a
Chapter 11 bankruptcy reorganization in 1991. The outstanding balance accrues
interest at the six month U.S. Treasury Bill rate.
F-39
<PAGE>
TIE/COMMUNICATIONS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TIE ACQUISITION CO. AND A DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, 1997 AND JULY 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT SHARE RELATED DATA)
8. EMPLOYEE BENEFIT PLAN
The Company's Profit Sharing and Savings Plan (the "Plan") allows
participating employees to authorize payroll deferrals of up to 16% of their
total compensation and to contribute such amounts to the Plan. Under the Plan,
the Company matches a portion of a participant's contribution equal to 50% of
that portion of a participant's deferred compensation which does not exceed 6%
of the participant's eligible compensation. During the period from November 1,
1995 through December 31, 1995, the Company's contributions were $75. During the
years ended December 31, 1996 and December 31, 1997 and the seven months ended
July 31, 1998, the Company did not meet its contribution requirements due to
financial difficulties. As of December 31, 1996, December 31, 1997, and July 31,
1998, $461, $933 and $1,200, respectively, were due to the Plan and have been
recorded in the accompanying financial statements.
9. STOCKHOLDER'S EQUITY/(DEFICIT)
ACQUISITION AND MERGER
On October 18, 1995, TIE Acquisition Co. entered into a stock tender offer
with the former stockholders of the Company and acquired 3,749,587 shares
(approximately 94%) of the outstanding common stock for $8.60 per share (the
"Acquisition").
The aggregate consideration for TIE amounted to $36,125 including financing
debt issuance and acquisition costs and $8.60 per share for untendered shares.
The purchase price exceeded the estimated fair market value of the net
identifiable assets by $28,501, and the Acquisition has been accounted for under
the purchase method of accounting.
On December 13, 1995, TIE Acquisition Co. contributed cash and the TIE
common stock it held to TIE Merger Co. (a wholly-owned subsidiary of TIE
Acquisition Co.). In conjunction with the contributions, TIE Acquisition Co.
made a payment of $1,800 to repay TIE's note payable to the former majority
stockholder and TIE Merger Co. assumed certain TIE Acquisition Co. accrued
liabilities, including liabilities amounting to $1,992 for untendered TIE common
stock (the shares were converted into the right to receive $8.60 per share upon
surrender of the corresponding stock certificates) and TIE Acquisition Co.'s
$20,000 bank debt, which is secured by all the Company's outstanding stock. In
addition, TIE Merger Co. entered into a long-term note payable with TIE
Acquisition Co. for $10,000. The note payable corresponds with the notes payable
entered into by TIE Acquisition Co. in connection with the tender offer for the
Company's stock.
Also effective December 13, 1995, TIE Merger Co. was merged into TIE (the
"Merger"). In conjunction with the Merger, all shares of the Company's common
stock were canceled and extinguished. After the Merger, the Company had 100
shares of $0.01 par value common stock authorized, issued and outstanding, all
of which were owned by TIE Acquisition Co.
RECAPITALIZATION
In January 1997, the Company amended its Restated Certificate of
Incorporation to increase the number of authorized shares of common stock, par
value of one cent ($.01), to fifteen million shares and authorized five million
shares of preferred stock, par value of one cent ($.01). The amendment further
F-40
<PAGE>
TIE/COMMUNICATIONS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TIE ACQUISITION CO. AND A DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, 1997 AND JULY 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT SHARE RELATED DATA)
9. STOCKHOLDER'S EQUITY/(DEFICIT) (CONTINUED)
designated one million shares of the preferred stock to be Series A 8.0785%
Cumulative Preferred Stock (the Series A Preferred Stock), without voting
rights.
In connection with the increase in authorized shares of stock, the Company
was recapitalized by substituting, for the 100 shares of the Company's then
issued and outstanding common stock, 10,200,000 shares of common stock, par
value of one cent ($.01) and 940,000 shares of Series A 8.0785% Cumulative
Preferred Stock.
Dividends on the Series A Preferred Stock accrue at a rate per annum of
8.0785% of the liquidation preference thereof ($10.51 per share) and are payable
semi-annually on October 18 and April 18 of each year.
Each Series A Preferred Stock dividend shall be fully cumulative and shall
accrue (whether or not earned or declared) without interest from the first day
of issuance of the Series A Preferred Stock. No dividends on the Series A
Preferred Stock were declared or paid during 1997 or 1998. As of December 31,
1997 and July 31, 1998, the accumulated dividends on the Series A Preferred
Stock approximated $713 and $1,156.
Upon a liquidation, winding up or dissolution of the affairs of the Company,
whether voluntary or involuntary, the holders of the Series A Preferred Stock
are entitled to be paid $10.51 per share, plus all accrued and unpaid dividends
(whether or not earned or declared) before any assets of the Company shall be
distributed to holders of Company common stock.
Additionally, at the option of the Company, the Series A Preferred Stock may
be redeemed at any time in whole or in part at a cash redemption price of $10.51
per share plus accrued and unpaid dividends to the scheduled redemption date.
STOCK OPTIONS
In January 1997, the Company established the Tie Communications, Inc.
Employees' Stock Incentive Plan (National Plan), the Tie Communications, Inc.
Employees' Stock Incentive Plan (California Plan) and the Tie Communications,
Inc. Non-Employee Directors' Stock Option Plan which provide for the
availability of 1,800,000; 180,000 and 220,000 shares, respectively, of the
Company's common stock for the grant of awards to Company employees or
non-employee directors. Awards granted under these plans may take the form of
stock options or stock appreciation rights (SAR). The option exercise price and
SAR initial value under these plans must be at least equal to the fair market
value of the underlying shares of common stock on the date of grant (110% of the
underlying fair market value in the case of a ten percent shareholder). Plan
participants vest in their awards (generally over five years) and such awards
expire (generally 10 years after the grant date) as determined by a committee of
the Company's board of directors.
F-41
<PAGE>
TIE/COMMUNICATIONS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TIE ACQUISITION CO. AND A DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, 1997 AND JULY 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT SHARE RELATED DATA)
9. STOCKHOLDER'S EQUITY/(DEFICIT) (CONTINUED)
A summary of stock option activity under these plans is presented in the
table below:
<TABLE>
<CAPTION>
SHARES UNDERLYING
SHARES UNDERLYING OPTIONS FOR THE SEVEN
OPTIONS FOR THE YEAR MONTHS ENDED JULY 31,
ENDED DECEMBER 31, 1997 1998
----------------------- -----------------------
<S> <C> <C>
Outstanding at January 1................... -- 966,500
Granted.................................... 1,324,000 --
Exercised.................................. -- --
Canceled................................... (357,500) (134,000)
---------- --------
Outstanding................................ 966,500 832,500
---------- --------
---------- --------
Exercisable................................ 88,800 232,500
---------- --------
---------- --------
</TABLE>
The exercise price for all options outstanding and vested is $1.00 per
share.
Under SFAS No. 123, companies must either record compensation expense based
on the estimated grant date fair value of stock options granted or disclose the
impact (if material) on net income as if they had adopted the fair value method.
The Company's pro forma net loss as if expense was recorded using SFAS No. 123
was $19,168 and $9,424 for the year ended December 31, 1997 and the seven months
ended July 31, 1998.
The weighted average fair value of options granted in 1997 was $.27 per
share. The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted average
assumptions:
<TABLE>
<S> <C>
Expected option term............................................... 5 years
Dividend yield..................................................... 0%
Risk free interest rate............................................ 6.29%
</TABLE>
Due to the fact that the Company's common stock is not publicly traded,
volatility was not considered in the Company's calculations of fair value of
stock options issued to employees and non-employee directors.
The weighted average remaining life of the options at July 31, 1998 was 8.75
years.
During 1997, the Company entered into a consulting agreement with Burton
Training Group (Burton), which is owned by a former member of the Company's
Board of Directors. The agreement, which expired June 30, 1998, calls for Burton
to provide consulting services to the Company. Under this agreement, Burton was
paid $272 during the year ended December 31, 1997, and is eligible to earn
options to purchase up to 60,000 shares of the Company's common stock based on
the formula specified in the agreement. As of July 31, 1998, none of these
options had been earned.
F-42
<PAGE>
TIE/COMMUNICATIONS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TIE ACQUISITION CO. AND A DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, 1997 AND JULY 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT SHARE RELATED DATA)
10. RESTRUCTURING RESERVE
On November 1, 1995, the Company announced a restructuring plan in which
numerous field activities would be centralized in order to streamline operations
and increase productivity. The restructuring involved the centralization of all
accounting, dispatch, order entry and customer service related functions. As of
November 1, 1995, the Company established a restructuring reserve of $2,500,
which was increased by $1,226 in 1996 and decreased by $170 in 1997 to complete
the previously announced restructuring. Amounts reserved for restructuring at
November 1, 1995 and December 31, 1996 resulted in adjustments to goodwill from
the purchase of the Company. The reserve was established primarily to support
severance, outplacement, relocation, travel and legal fees associated with
centralization. The centralization, under which the Company terminated 153
employees, was completed during 1997. The amounts remaining in the reserve
relate to termination benefits to be paid. The following amounts had been
charged against the reserve:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
-------------------- SEVEN MONTHS ENDED JULY
1996 1997 31, 1998
--------- --------- -----------------------
<S> <C> <C> <C>
Termination benefits................................... $ 1,200 $ 714 $ 37
Relocation............................................. 364 65 --
Early termination of lease and service agreements...... 346 178 --
Other.................................................. 132 35 --
</TABLE>
11. DISCONTINUED OPERATIONS
On May 1, 1996, the Company sold the assets and liabilities of its TAI
Telecommunications Accessories division in Canada to Norelco Telecom LTD. for
$529. On May 23, 1996, the Company sold the assets and liabilities of its TIE
Repair division to Aztec East, Inc. for $1,700. In addition, the Company
received deferred payments over a six month period totaling $134. On August 29,
1996, the Company sold the stock of its TIE/telecommunications Canada Limited
subsidiary to 3280993 Canada Inc. for $6,536. In connection with the Canadian
sale, the Company retained the right to receive the proceeds of a liquidated
pension plan of $535 which was received during 1997.
The discontinued operations recorded revenues for the period January 1, 1996
through the sale dates of $16,999, and net income during the same period of
$782. Interest costs allocated to net assets held for sale for the period
January 1, 1996 through the sale date was $692. A loss of $1,721 on the
disposition of these operations was recorded as an adjustment of the original
purchase price allocation during 1996.
12. RELATED PARTY TRANSACTIONS
The Company agreed to pay Security Properties Real Estate Services Inc.
("Security Properties"), which is a subsidiary of SP Investments Inc. (owned by
the majority stockholders of TIE Acquisition Co.), a management fee aggregating
$240 annually beginning December 1, 1995 and amended to $300 annually beginning
January 1, 1997. The Company also agreed to reimburse Security Properties for
all reasonable expenses it incurs in connection with services to the Company.
The Company recorded expense of $20 for the period from November 1, 1995 through
December 31, 1995, $220 for the year ended December 31, 1996, $300 for the year
ended December 31, 1997 and $83 for the seven months ended July 31, 1998 related
to the management agreement.
F-43
<PAGE>
TIE/COMMUNICATIONS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TIE ACQUISITION CO. AND A DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, 1997 AND JULY 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT SHARE RELATED DATA)
13. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information for the period from November 1, 1995
through December 31, 1995, for the years ended December 31, 1996 and 1997, and
for the seven months ended July 31, 1998.
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 1,
1995 THROUGH YEAR ENDED YEAR ENDED SEVEN MONTHS
DECEMBER 31, DECEMBER 31, DECEMBER 31, ENDED JULY 31,
1995 1996 1997 1998
--------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
Supplemental cash flow information:
Cash paid during the period for:
Interest.......................................... $ 24 $ 1,810 $ 923 $ --
Income taxes...................................... $ 272 $ 1,672 $ 194 $ --
Reorganization expenses........................... $ -- $ -- $ -- $ 1,251
Supplemental noncash investing and financing
activities:
Capital asset and lease obligation additions...... $ -- $ 145 $ 4,484 $ --
</TABLE>
14. COMMITMENTS AND CONTINGENCIES
PURCHASE COMMITMENTS
The Company has entered into several long term contracts to purchase long
distance services and equipment. A summary of those commitments is as follows:
<TABLE>
<CAPTION>
VENDOR MINIMUM COMMITMENT PENALTIES
- -------------------------------------------- ------------------------------ ---------------------------------
<S> <C> <C>
MCI......................................... $6,000 of long distance Difference between actual usage
services annually and annual minimum.
Phoenix..................................... $1,000 of long distance 25% of difference between monthly
services monthly minimum and actual usage.
Northern Telecom............................ $8,000 in equipment purchases Termination of agreement or $30
penalty plus the difference in
discount rates.
</TABLE>
During 1997 and 1998, the Company's resales of Phoenix long distance service
were below the required monthly minimum of the contract. The Company accrued
penalties of $179 and $736 at December 31, 1997 and July 31, 1998, respectively,
for the differences.
The Company had purchased $2,824 of long distance services under the MCI
contract and has recorded a liability of $676 for estimated penalties based on
usage during the first seven months of 1998.
The Company had purchased $5 million of equipment leases under the Northern
Telecom agreement through the seven months ended July 31, 1998.
F-44
<PAGE>
TIE/COMMUNICATIONS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TIE ACQUISITION CO. AND A DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, 1997 AND JULY 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT SHARE RELATED DATA)
14. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The long-term contracts for MCI, Phoenix, and Northern Telecom expire on
December 31, 2000, December 31, 1999 and December 31, 2000, respectively. The
MCI commitment increases to $9,000 and $12,000 in January 1999 and January 2000,
respectively, and the minimum commitment for Northern Telecom is adjusted
annually every October 1.
OPERATING LEASES
The Company leases office and warehouse space under noncancellable operating
leases expiring at various dates through 2003, and leases certain equipment
under operating lease agreements expiring in 1998. At July 31, 1998, the future
minimum lease payments under operating leases are as follows:
<TABLE>
<S> <C>
5 months ending December 31, 1998................................... $ 1,067
Year ending December 31,
1999.............................................................. 1,740
2000.............................................................. 696
2001.............................................................. 480
2002.............................................................. 182
2003.............................................................. 37
---------
Total minimum rentals............................................... $ 4,202
---------
---------
</TABLE>
Rent expense charged to operations for the period from November 1, 1995
through December 31, 1995, the years ended December 31, 1996 and 1997 and for
the seven months ended July 31, 1998 was $627, $3,591, $2,931 and $1,654,
respectively. In the ordinary course of business, leases expire and are replaced
or renewed, therefore, the rent expense in future periods may exceed the minimum
annual rentals noted above.
LITIGATION
The Company is party to various lawsuits, proceedings and other matters
arising from the conduct of its business. It is management's opinion that the
final resolution of these matters will not have a material effect upon the
business, financial condition or results of operations of the Company.
15. SUBSEQUENT EVENTS
As discussed in Note 1, the Company entered into an asset purchase agreement
with Convergent Communications Services, Inc. (Convergent) for the acquisition
of substantially all of the operating assets and the assumption of certain
liabilities for a cash payment of approximately $40 million. The sale was
consummated on August 1, 1998 and the proceeds were used to pay off the
Company's advance from Convergent. The remainder of the proceeds were placed
into a trust until the plan of reorganization is approved by the Bankruptcy
Court. The following unaudited condensed proforma balance sheet reflects
F-45
<PAGE>
TIE/COMMUNICATIONS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TIE ACQUISITION CO. AND A DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996, 1997 AND JULY 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT SHARE RELATED DATA)
15. SUBSEQUENT EVENTS (CONTINUED)
the sale of operating assets, the pay-off of the advance from Convergent,
receipt of sale proceeds and the assumption of certain liabilities by Convergent
subsequent to the closing.
<TABLE>
<CAPTION>
UNAUDITED
-------------------------
HISTORICAL PROFORMA
JULY 31, PROFORMA JULY 31,
1998 ADJUSTMENTS 1998
------------ ----------- ------------
<S> <C> <C> <C>
ASSETS
Cash................................................................ $ 650 $ 23,942(a) $ 24,592
Deferred tax assets................................................. 6,892 (6,892)(b) --
Other current assets................................................ 15,504 (15,504)(c) --
Noncurrent assets................................................... 24,678 (24,678)(c) --
------------ ----------- ------------
Total assets...................................................... $ 47,724 $ (23,132) $ 24,592
------------ ----------- ------------
------------ ----------- ------------
LIABILITIES AND STOCKHOLDER'S DEFICIT
Notes payable....................................................... $ 17,378 $ -- $ 17,378
Other current liabilities........................................... 54,940 (26,151)(d) 28,789
Noncurrent liabilities.............................................. 1,495 (1,495)(d) --
------------ ----------- ------------
Total liabilities................................................. 73,813 (27,646) 46,167
Stockholder's deficit................................................. (26,089) 4,514(e) (21,575)
------------ ----------- ------------
Total liabilities and stockholder's deficit....................... $ 47,724 $ (23,132) $ 24,592
------------ ----------- ------------
------------ ----------- ------------
</TABLE>
- ------------------------
(a) Represents the receipt of sales proceeds net of the advance from Convergent.
(b) Represents utilization of the deferred tax asset.
(c) Represents assets purchased by Convergent.
(d) Represents the assumption of certain liabilities by Convergent and payoff of
the advance from Convergent.
(e) Represents gain on sale of assets net of income taxes.
F-46
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
PRO FORMA COMBINED FINANCIAL STATEMENTS
Effective August 1, 1998, the Company acquired substantially all of the
assets and certain liabilities of Tie Communications, Inc. ("Tie").
Consideration for the purchase consisted of (i) $40.0 million in cash (ii) the
assumption of certain liabilities, which, together with legal and professional
and other costs resulted in a total purchase price of approximately $51.4
million. The acquisition has been accounted for using the purchase method of
accounting.
The following unaudited Pro Forma Combined Statements of Operations for the
year ended December 31, 1997 and the six months ended June 30, 1998 assume that
the Tie acquisition occurred on January 1, 1997. The information for Tie
consists of historical amounts for all periods presented in the Pro Forma
Combined Financial Statements as the closing date of the acquisition is
subsequent to the periods presented. Although the Company has completed or is
completing other acquisitions, the operations of those businesses are not
significant to the pro forma combined total assets or operations and,
accordingly, the effects of these acquisitions have not been included in the
accompanying Pro Forma Combined Financial Statements. In addition, the Pro Forma
Combined Statements of Operations assume that the sale of the Units occurred at
the beginning of each of the periods presented.
The unaudited Pro Forma Combined Balance Sheet as of June 30, 1998 assumes
that the Tie Acquisition occurred on June 30, 1998 and includes the Consolidated
Balance Sheet of the Company as of June 30, 1998 and the Consolidated Balance
Sheet of Tie as of July 31, 1998.
The unaudited Pro Forma Combined Financial Statements should be read in
conjunction with the historical audited financial statements and related notes
thereto of the Company and Tie included elsewhere herein. The unaudited Combined
Pro Forma Financial Statements are not necessarily indicative of the results
that actually would have occurred had the pro forma transactions been
consummated at the dates indicated, nor are they necessarily indicative of
future operating results of the Company.
F-47
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
PRO FORMA COMBINED FINANCIAL STATEMENTS
PRO FORMA COMBINING BALANCE SHEET
AS OF JUNE 30, 1998 (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
---------------------------------
TIE
CONVERGENT COMMUNICATIONS, PRO FORMA PRO FORMA
COMMUNICATIONS INC.(1) ADJUSTMENTS(2) COMBINED
--------------- ---------------- -------------- -----------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $ 4,304 $ 650 $ (650)(a) $ 4,304
Short-term investments................................ 81,410 -- (42,302)(b) 39,108
Restricted cash....................................... 20,800 -- -- 20,800
Trade accounts receivable, net........................ 5,640 8,508 -- 14,148
Prepaid expense and other current assets.............. 2,570 2,214 -- 4,784
Inventory............................................. -- 4,782 -- 4,782
Deferred tax asset.................................... -- 6,892 (6,892)(c) --
--------------- -------- -------------- -----------
Total current assets................................ 114,724 23,046 (49,844) 87,926
Property and equipment:................................. 14,641 7,271 (3,843)(c) 18,069
Less accumulated depreciation......................... (1,919) (3,843) 3,843(c) (1,919)
--------------- -------- -------------- -----------
Total property and equipment........................ 12,722 3,428 -- 16,150
Restricted cash....................................... 39,084 -- -- 39,084
Goodwill and other intangible assets, net............. 18,342 20,731 11,196(d) 50,269
Investments and other assets.......................... 1,007 519 -- 1,526
--------------- -------- -------------- -----------
Total assets........................................ $ 185,879 $ 47,724 $ (38,648) $ 194,955
--------------- -------- -------------- -----------
--------------- -------- -------------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable................................ $ 5,058 $ 16,948 $ (16,948)(e) $ 5,058
Accrued compensation.................................. 2,005 2,507 (2,150)(e) 2,362
Accrued interest...................................... 5,200 160 -- 5,360
Other accrued liabilities............................. 2,135 13,059 (10,576)(e) 4,618
Deferred service revenue.............................. -- 4,902 (1,225)(e) 3,677
Income taxes payable.................................. -- 961 (961)(e) --
Restructuring reserve................................. -- 486 (486)(e) --
Current portion of notes payable
Related party......................................... -- 15,734 (15,734)(e) --
Other................................................. 748 -- -- (e) 748
Advance from Convergent Communications Services,
Inc................................................. -- 15,917 (15,917) --
Current portion of capital leases..................... 2,183 1,644 (524)(e) 3,303
Liability related to business acquisition............. 1,700 -- -- 1,700
--------------- -------- -------------- -----------
Total current liabilities........................... 19,029 72,318 (64,521) 26,826
Non-current portion of notes payable.................. 153,585 -- -- 153,585
Non-current portion of capital leases................. 2,020 1,495 (216)(e) 3,299
--------------- -------- -------------- -----------
Total liabilities................................... 174,634 73,813 (64,737) 183,710
Shareholders' equity:
Preferred stock....................................... -- 9 (9)(f) --
Common stock.......................................... 25,595 102 (102)(f) 25,595
Additional paid-in capital............................ -- 7,642 (7,642) --
Warrants.............................................. 11,660 -- -- 11,660
Treasury stock........................................ (502) -- -- (502)
Deferred compensation obligation...................... 502 -- -- 502
Other comprehensive income............................ 275 -- -- 275
Unearned compensation................................. (177) -- -- (177)
Accumulated deficit................................... (26,108) (33,842) 33,842(f) (26,108)
--------------- -------- -------------- -----------
Total shareholders' equity.......................... 11,245 (26,089) 26,089 11,245
--------------- -------- -------------- -----------
Total liabilities and shareholders' equity.......... $ 185,879 $ 47,724 $ (38,648) $ 194,955
--------------- -------- -------------- -----------
--------------- -------- -------------- -----------
</TABLE>
See the accompanying notes to pro forma combined financial statements
F-48
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
PRO FORMA COMBINED FINANCIAL STATEMENTS
PRO FORMA COMBINING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997 (UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL
---------------------------------------
CONVERGENT TIE COMMUNICATIONS, PRO FORMA PRO FORMA
COMMUNICATIONS INC.(1) ADJUSTMENTS(2) COMBINED
--------------- ---------------------- -------------- -----------
<S> <C> <C> <C> <C>
Revenue.......................................... $ 10,210 $ 95,374 $ -- $ 105,584
Operating costs.................................. 7,368 69,359 -- 76,727
Selling, general and administrative.............. 10,983 33,667 -- 44,650
Depreciation and amortization.................... 1,453 4,851 333(g) 6,637
Other operating expense.......................... -- 893 -- 893
------- -------- -------------- -----------
Operating loss................................. (9,594) (13,396) (333) (23,323)
Interest income (expense) and other.............. (61) (5,672) (18,102)(h) (23,835)
------- -------- -------------- -----------
Income (loss) from continuing operations before
income taxes................................... (9,655) (19,068) (18,435) (47,158)
Income tax expense............................... -- (35) -- (35)
------- -------- -------------- -----------
Income (loss) from continuing operations......... $ (9,655) $ (19,103) $ (18,435) $ (47,193)
------- -------- -------------- -----------
------- -------- -------------- -----------
Net loss per share (basic and diluted)........... $ (0.46) $ (2.26)
------- -----------
------- -----------
Weighted average shares outstanding (basic and
diluted)....................................... 20,922 20,922
------- -----------
------- -----------
</TABLE>
See the accompanying notes to pro forma combined financial statements.
F-49
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
PRO FORMA COMBINED FINANCIAL STATEMENTS
PRO FORMA COMBINING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL
---------------------------------------
CONVERGENT TIE COMMUNICATIONS, PRO FORMA PRO FORMA
COMMUNICATIONS INC.(1) ADJUSTMENTS(2) COMBINED
--------------- ---------------------- -------------- -----------
<S> <C> <C> <C> <C>
Revenues......................................... $ 14,505 $ 41,383 $ -- $ 55,888
Operating costs.................................. 10,570 31,976 -- 42,546
Selling, general and administrative.............. 13,772 13,756 -- 27,528
Depreciation and amortization.................... 1,953 2,498 167(d) 4,618
Other operating expense.......................... -- 1,000 -- 1,000
--------------- -------- ------- -----------
Operating loss................................. (11,790) (7,847) (167) (19,804)
Interest income (expense) and other.............. (4,489) (1,824) (4,336) (10,649)
Restructuring.................................... -- (1,082) -- (1,082)
--------------- -------- ------- -----------
Income (loss) from continuing operations before
income taxes................................... (16,279) (10,753) (4,503) (31,535)
Income tax expense............................... -- (18) -- (18)
--------------- -------- ------- -----------
Income (loss) from continuing operations......... $ (16,279) $ (10,771) $ (4,503) $ (31,553)
--------------- -------- ------- -----------
--------------- -------- ------- -----------
Net loss per share (basic and diluted)........... $ (0.60) $ (1.16)
--------------- -----------
--------------- -----------
Weighted average shares outstanding (basic and
diluted)....................................... 27,131 27,131
--------------- ------- -----------
--------------- ------- -----------
</TABLE>
See the accompanying notes to pro forma combined financial statements.
F-50
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
PRO FORMA COMBINED FINANCIAL STATEMENTS
NOTES TO PRO FORMA COMBINING STATEMENTS
BASIS OF PRESENTATION:
(1) The pro forma information reflects the acquisition of Tie Communications
Inc. ("Tie") and reflects the effects of the sale of the Units.
The unaudited Pro Forma Balance Sheet information for the Company is as of
June 30, 1998 and for Tie is July 31, 1998.
The unaudited Pro Forma Combined Statement of Operations for the year ended
December 31, 1997 includes historical results of operations for the Company
and Tie for the entire year. Also included are the effects of the sale of
the Units as if it occurred and January 1, 1997. The Pro Forma Combined
Statement of Operations for the six months ended June 30, 1998 includes
historical results of operations for the Company and Tie. Also included are
the effects of the sale of the Units as if it occurred on January 1, 1998.
(2) The following Pro Forma adjustments have been made to the unaudited combined
pro forma financial statements of the Company and Tie.
(a) Represents the elimination of cash which was not acquired in the Tie
acquisition.
(b) Represents $40.0 million cash paid as a portion of the purchase and the
payment of certain liabilities assumed in the acquisition of Tie.
(c) To record assets acquired at fair value.
(d) Represents the net of: 1) the elimination of approximately $20.7 million
of goodwill on the balance sheet of Tie which was not purchased in the
Tie acquisition, and 2) the addition of approximately $31.9 million
representing the excess purchase price over the net assets acquired in
the Company's acquisition of Tie.
(e) Represents the elimination of liabilities which were not assumed by the
Company in the Tie acquisition.
(f) Elimination entries necessary upon the combining of the financial
statements of the Company and Tie to eliminate Tie equity owned by Tie's
shareholder on a pro forma basis.
(g) Amortization of step-up goodwill recorded on the acquisition of Tie net
of the amortization expense for goodwill and capitalized organizational
costs not purchased in the Tie acquisition for the year ended December
31, 1997 and for the six months ended June 30, 1998. No pro forma
adjustment has been made to reflect the change in lives from Tie's policy
to the Company's policy as the change is not significant.
(h) Interest expense on the 13% Notes, accretion of the original issue
discount and amortization of deferred finance costs for the year ended
December 31, 1997 and the six months ended June 30, 1998.
F-51
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE INITIAL
PURCHASERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF ANY OFFER TO BUY ANY SECURITY OTHER THAN THOSE TO WHICH IT
RELATES, NOR DOES IT CONSTITUTE AN OFFER TO SELL TO, OR THE SOLICITATION OF ANY
OFFER TO BUY, ANY SECURITIES OTHER THAN THE UNITS OFFERED HEREBY OR TO ANY
PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary................................................................... 4
Risk Factors.............................................................. 16
Exchange Offer............................................................ 24
Use of Proceeds........................................................... 31
Capitalization............................................................ 32
Selected Financial Data................................................... 33
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 35
Business.................................................................. 44
The Tie Acquisition....................................................... 61
Management................................................................ 65
Executive Compensation.................................................... 68
Principal Shareholders.................................................... 72
Certain Relationships and Related Transactions............................ 74
Certain Indebtedness...................................................... 74
Description of the Notes.................................................. 75
Book-Entry; Delivery and Form............................................. 103
United States Federal Income Tax Considerations........................... 105
Plan of Distribution...................................................... 108
Legal Matters............................................................. 109
Experts................................................................... 109
Glossary.................................................................. A-1
Index to Consolidated Financial Statements................................ F-1
</TABLE>
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Reference is made to C.R.S. Section 7-108-102 (1994), which provides for
indemnification of directors, officers and other employees in certain
circumstances, and to C.R.S. Section 7-108-402 (1994), which provides for the
elimination or limitation of the personal liability for monetary damages of
directors under certain circumstances. The Articles of Incorporation of the
Company eliminates the personal liability for monetary damages of directors
under certain circumstances and provides indemnification to directors and
officers of the Company to the fullest extent permitted by the Colorado Business
Corporation Act. Among other things, these provisions provide indemnification
for officers and directors against liabilities for judgments in and settlements
of lawsuits and other proceedings and for the advance and payment of fees and
expenses reasonably incurred by the director or officer in defense of any such
lawsuit or proceeding.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NUMBER
- ----------- -------------------------------------------------------------------------------------- ---------------
<C> <S> <C>
3.1 Amended and Restated Articles of Incorporation of the Company
3.2 Bylaws of the Company
4.1+ Form of Old Note (See Exhibit 10.1)
4.2+ Form of New Note (See Exhibit 10.1)
4.3+ Indenture (See Exhibit 10.1)
4.4+ Notes Registration Rights Agreement
4.5+ Purchase Agreement, dated as of March 26, 1998, by and among Merrill Lynch & Co., Bear
Stearns & Co., Inc. BT Alex. Brown Incorporated, and the Company
5.1* Opinion of Gibson, Dunn & Crutcher LLP
8.1* Opinion of Gibson, Dunn & Crutcher LLP as to tax matters
10.1+ Indenture, dated as of April 2, 1998, by and among the Company and Norwest Bank
Colorado, N.A.
10.2+ Warrant Agreement, dated as of April 2, 1998
10.3+ Warrant Registration Rights Agreement, dated as of April 2, 1998
10.4+ Collateral Account Control Agreement, dated as of April 2, 1998
10.5+ Custody and Security Agreement, dated as of April 2, 1998
10.6 Asset Purchase Agreement, dated June 16, 1998 (as amended July 20, 1998) by and
between Convergent Communications Services, Inc. and Tie Communications, Inc.,
Debtor-in-Possession
10.7 Asset Purchase Agreement, dated June 30, 1998 by and between Convergent
Communications, Inc. and CMB Holdings, Inc.
10.8+ Program Agreement, dated November 19, 1997, among Comdisco, Inc., Convergent
Communications Services, Inc. and the Company
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NUMBER
- ----------- -------------------------------------------------------------------------------------- ---------------
<C> <S> <C>
10.9+ Stock Purchase Agreement, dated October 31, 1996, between SONeTech and the Company
10.10+ Stock Purchase Agreement dated March 1, 1997, among Integrated Communication Networks,
Inc., Communications Services of Iowa, Inc., John Shlepphorst and the Company
10.11+ Agreement and Plan of Merger, dated August 29, 1997, among Convergent Communications
Services, Inc., A.T.T.Ex Corporation and the Company
10.12+ Agreement and Plan of Merger, dated September 1, 1997, among Convergent Communications
Services, Inc., Vital Integration Solutions and the Company
10.13+ Asset Purchase Agreement, dated October 1, 1997, between Big Planet, Inc. and
Convergent Communications Services, Inc.
10.14+ Asset Purchase Agreement, dated December 3, 1997, between Sigmacom Corporation and
Convergent Communications Services, Inc.
10.15+ Asset Purchase Agreement, dated February 1, 1998, between Peak Comm, Inc. d/b/a
Telephone Communications Company and Convergent Communications Services, Inc.
10.16+ Agreement and Plan of Merger, dated March 13, 1998, among Convergent Communications
Services, Inc., Communication Services of Colorado, Inc., Donna Sipes and the
Company
10.17+ Asset Purchase Agreement, dated March 27, 1998, between Network Computing Solutions,
LLC and Convergent Communications Services, Inc.
10.18+ Employment Agreement, dated December 15, 1996, between Keith V. Burge and the Company,
as amended April 13, 1998
10.19+ Employment Agreement, dated December 15, 1996, between John R. Evans and the Company,
as amended April 13, 1998
10.20+ Employment Agreement, dated December 15, 1996, between Philip G. Allen and the
Company, as amended April 13, 1998
10.21+ Employment Agreement, dated August 7, 1997, between Martin E. Freidel and the Company
10.22+ Employment Agreement, dated March 3, 1997, between John J. Phibbs and the Company, as
amended on April 13, 1998
10.23+ Asset Purchase Agreement, dated May 15, 1990, among Convergent Communications
Services, Inc. and H, H & H Communications Technologies, Inc.
10.24+ Telephone Company Acquisition Agreement between Convergent Communications, Inc., First
Continental Group, L.C., and ICN, LLC dated July 1996
12.1 Schedule of Calculation of Ratio of Earnings to Fixed Charges
21.1+ Subsidiaries of the Company
23.1 Consent of PricewaterhouseCoopers LLP on Convergent Communications, Inc.
23.2 Consent of PricewaterhouseCoopers LLP on Tie Communications, Inc.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NUMBER
- ----------- -------------------------------------------------------------------------------------- ---------------
<C> <S> <C>
23.3* Consent of Gibson, Dunn & Crutcher LLP (included in Exhibit 5.1)
24.1+ Power of Attorney
25.1+ Form T-1 Statement of Eligibility and Qualification under the Trust Indenture Act of
1939 of Norwest Bank Colorado, N.A.
27.1 Financial Data Schedule, restated as of and for the year ended December 31, 1997
27.2 Financial Data Schedule, as of and for the six months ended June 30, 1998
99.1+ Form of Letter of Transmittal with respect to the Exchange Offer
99.2+ Form of Notice of Guaranteed Delivery
</TABLE>
- ------------------------
* To be filed by amendment
+ Previously filed
ITEM 22.
(a) 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 begin
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.
(b) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(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.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Englewood, State of
Colorado, on September 18, 1998.
<TABLE>
<S> <C> <C>
CONVERGENT COMMUNICATIONS, INC.
By: /s/ JOHN R. EVANS*
-----------------------------------------
John R. Evans
CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act, this registration
statement has been signed on September 18, 1998 by the following persons in the
respective capacities indicated opposite their names.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
Chairman, Chief Executive
/s/ JOHN R. EVANS* Officer and Director
- ------------------------------ (Principal Executive September 18, 1998
John R. Evans Officer)
Chief Financial Officer
/s/ JOHN J. PHIBBS and Treasurer (Principal
- ------------------------------ Financial and Principal September 18, 1998
John J. Phibbs Accounting Officer)
/s/ KEITH V. BURGE*
- ------------------------------ President, Chief Operating September 18, 1998
Keith V. Burge Officer and Director
/s/ PHILIP G. ALLEN*
- ------------------------------ Executive Vice President, September 18, 1998
Philip G. Allen Secretary and Director
/s/ ROLAND E. CASATI*
- ------------------------------ Director September 18, 1998
Roland E. Casati
/s/ RICHARD G. TOMLINSON*
- ------------------------------ Director September 18, 1998
Richard G. Tomlinson
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ ROGER W. CHRISTOPH*
- ------------------------------ Director September 18, 1998
Roger W. Christoph
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ MARTIN E. FREIDEL
-------------------------
Martin E. Freidel
ATTORNEY-IN-FACT
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NUMBER
- ----------- ------------------------------------------------------------------------------------------- ---------------
<C> <S> <C>
3.1 Amended and Restated Articles of Incorporation of the Company
3.2 Bylaws of the Company
4.1+ Form of Old Note (See Exhibit 10.1)
4.2+ Form of New Note (See Exhibit 10.1)
4.3+ Indenture (See Exhibit 10.1)
4.4+ Notes Registration Rights Agreement
4.5+ Purchase Agreement, dated as of March 26, 1998, by and among Merrill Lynch & Co., Bear
Stearns & Co., Inc. BT Alex. Brown Incorporated, and the Company
5.1* Opinion of Gibson, Dunn & Crutcher LLP
8.1* Opinion of Gibson, Dunn & Crutcher LLP as to tax matters
10.1+ Indenture, dated as of April 2, 1998, by and among the Company and Norwest Bank Colorado,
N.A.
10.2+ Warrant Agreement, dated as of April 2, 1998
10.3+ Warrant Registration Rights Agreement, dated as of April 2, 1998
10.4+ Collateral Account Control Agreement, dated as of April 2, 1998
10.5+ Custody and Security Agreement, dated as of April 2, 1998
10.6 Asset Purchase Agreement, dated June 16, 1998 (as amended July 20, 1998) by and between
Convergent Communications Services, Inc. and Tie Communications, Inc.,
Debtor-in-Possession
10.7 Asset Purchase Agreement, dated June 30, 1998 by and between Convergent Communications,
Inc. and CMB Holdings, Inc.
10.8+ Program Agreement, dated November 19, 1997, among Comdisco, Inc., Convergent Communications
Services, Inc. and the Company
10.9+ Stock Purchase Agreement, dated October 31, 1996, between SONeTech and the Company
10.10+ Stock Purchase Agreement dated March 1, 1997, among Integrated Communication Networks,
Inc., Communications Services of Iowa, Inc., John Shlepphorst and the Company
10.11+ Agreement and Plan of Merger, dated August 29, 1997, among Convergent Communications
Services, Inc., A.T.T.Ex Corporation and the Company
10.12+ Agreement and Plan of Merger, dated September 1, 1997, among Convergent Communications
Services, Inc., Vital Integration Solutions and the Company
10.13+ Asset Purchase Agreement, dated October 1, 1997, between Big Planet, Inc. and Convergent
Communications Services, Inc.
10.14+ Asset Purchase Agreement, dated December 3, 1997, between Sigmacom Corporation and
Convergent Communications Services, Inc.
10.15+ Asset Purchase Agreement, dated February 1, 1998, between Peak Comm, Inc. d/ b/a Telephone
Communications Company and Convergent Communications Services, Inc.
10.16+ Agreement and Plan of Merger, dated March 13, 1998, among Convergent Communications
Services, Inc., Communication Services of Colorado, Inc., Donna Sipes and the Company
</TABLE>
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<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NUMBER
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<C> <S> <C>
10.17+ Asset Purchase Agreement, dated March 27, 1998, between Network Computing Solutions, LLC
and Convergent Communications Services, Inc.
10.18+ Employment Agreement, dated December 15, 1996, between Keith V. Burge and the Company, as
amended April 13, 1998
10.19+ Employment Agreement, dated December 15, 1996, between John R. Evans and the Company, as
amended April 13, 1998
10.20+ Employment Agreement, dated December 15, 1996, between Philip G. Allen and the Company, as
amended April 13, 1998
10.21+ Employment Agreement, dated August 7, 1997, between Martin E. Freidel and the Company
10.22+ Employment Agreement, dated March 3, 1997, between John J. Phibbs and the Company, as
amended on April 13, 1998
10.23+ Asset Purchase Agreement, dated May 15, 1990, among Convergent Communications Services,
Inc. and H, H & H Communications Technologies, Inc.
10.24+ Telephone Company Acquisition Agreement between Convergent Communications, Inc., First
Continental Group, L.C., and ICN, LLC dated July 1996
12.1 Schedule of Calculation of Ratio of Earnings to Fixed Charges
21.1+ Subsidiaries of the Company
23.1 Consent of PricewaterhouseCoopers LLP on Convergent Communications, Inc.
23.2 Consent of PricewaterhouseCoopers LLP on Tie Communications, Inc.
23.3* Consent of Gibson, Dunn & Crutcher LLP (included in Exhibit 5.1)
24.1+ Power of Attorney
25.1+ Form T-1 Statement of Eligibility and Qualification under the Trust Indenture Act of 1939
of Norwest Bank Colorado, N.A.
27.1 Financial Data Schedule, restated as of and for the year ended December 31, 1997
27.2 Financial Data Schedule, as of and for the six months ended June 30, 1998
99.1+ Form of Letter of Transmittal with respect to the Exchange Offer
99.2+ Form of Notice of Guaranteed Delivery
</TABLE>
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* To be filed by amendment
+ Previously filed
<PAGE>
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
CONVERGENT COMMUNICATIONS, INC.
Pursuant to the provisions of the Colorado Business Corporation Act,
Sections 7-110-103 and 107, C.R.S. 1994, as amended, Convergent Communications,
Inc. (the "Corporation") hereby adopts the following Amended and Restated
Articles of Incorporation:
ARTICLE I
NAME
The name of the Corporation is CONVERGENT COMMUNICATIONS, INC.
ARTICLE II
AUTHORIZED CAPITAL
The aggregate number of shares of stock the Corporation is authorized to
issue is 100,000,000 shares of a class designated as common stock, no par
value, and 1,000,000 shares of a class designated as preferred stock, no par
value, and the relative rights of the shares of each class are as follows:
1. PREFERRED STOCK. The Corporation may divide and issue the
preferred stock in series. Preferred shares of each series when issued shall
be designated to distinguish them from the shares of all other series. The
Board of Directors hereby is expressly vested with authority to divide the
class of preferred stock into series and to fix and determine the relative
rights, limitations and preferences of the shares of any such series so
established to the full extent permitted by these Articles of Incorporation
and the laws of the state of Colorado in respect of the following:
(a) The number of shares to constitute such series, and the
distinctive designations thereof;
(b) The rate and preference of any dividends and the time of
payment of any dividends, whether dividends are cumulative and the date from
which any dividends shall accrue;
(c) Whether shares may be redeemed and, if so, the redemption
price and the terms and conditions of redemption;
(d) The amount payable upon shares in event of involuntary
liquidation;
(e) The amount payable upon shares in event of voluntary
liquidation;
(f) Sinking fund or other provisions, if any, for the redemption
or purchase of shares;
(g) The terms and conditions on which shares may be converted, if
the shares of any series are issued with the privilege of conversion;
<PAGE>
(h) Voting rights, if any; and
(i) Any other relative rights and preferences of shares of such
series, including without limitation any restriction on an increase in the
number of shares of any series theretofore authorized and any limitation or
restriction of rights or powers to which shares of any future series shall be
subject.
There shall be no preemptive rights with respect to any shares of
preferred stock, unless designated by the Board of Directors.
2. COMMON STOCK.
(a) The holders of common stock shall have and possess all rights
as shareholders of the Corporation except as such rights may be limited by
the preferences, privileges and voting powers, and the restrictions and
limitations of the outstanding preferred stock. All common stock, when duly
issued, shall be fully paid and nonassessable.
(b) Each shareholder of record shall have one vote for each share
of stock standing in his name on the books of the Corporation and entitled to
vote, except that in the election of directors each shareholder of common
stock shall have as many votes for each share held by him as there are
directors to be elected by the common shareholders and for whose election the
shareholder has a right to vote. Cumulative voting shall not be permitted in
the election of directors or otherwise.
(c) The holders of the shares of common stock shall be entitled to
receive the net assets of the Corporation upon dissolution or liquidation,
subject to the payment of any preferences thereto applicable to outstanding
preferred stock. The holders of common stock shall be entitled to receive
dividends as may be declared from time to time by the board of directors.
There shall be no preemptive rights with respect to any shares of common
stock.
ARTICLE III
OFFICES AND REGISTERED AGENT
1. The street address of the registered office of the Corporation is
67 Inverness Drive East, Suite 110, Englewood, Colorado 80112, and the name
of the registered agent at that address is Martin E. Freidel. The written
consent of the registered agent to the appointment as such is stated below.
2. The address of the Corporation's principal office is 67 Inverness
Drive East, Suite 110, Englewood, Colorado 80112.
ARTICLE IV
INCORPORATORS
The names and address of the incorporators are Philip G. Allen and
Thomas M. Kennedy, 67 Inverness Drive East, Suite 110, Englewood, Colorado
80112.
2
<PAGE>
ARTICLE V
PURPOSES
The Corporation shall have and may exercise all of the rights, powers
and privileges now or hereafter conferred upon corporations organized under
the laws of Colorado. In addition, the Corporation may do everything
necessary, suitable or proper for the accomplishment of any of its corporate
purposes. The Corporation may conduct part or all of its business in any
part of Colorado, the United States or the world and may hold, purchase,
mortgage, lease and convey real and personal property in any of such places.
ARTICLE VI
BOARD OF DIRECTORS
1. The corporate powers shall be exercised by or under the authority
of, and the business and affairs of the Corporation shall be managed under
the direction of, a board of directors.
2. The number of directors of the Corporation shall be fixed by
resolution adopted from time to time by the board of directors.
3. The board of directors is divided into three classes, Class I,
Class II and Class III. Such classes shall be as nearly equal in number of
directors as possible. Each director shall serve for a term ending on the
third annual meeting of shareholders at which such director was elected;
provided, however, that the directors first elected to Class I shall serve
for a term ending on the third annual meeting next following the end of the
calendar year 1998, the directors first elected to Class II shall serve for a
term ending on the second annual meeting next following the end of the
calendar year 1998 and the directors first elected to Class III shall serve
for a term ending on the annual meeting next following the end of the
calendar year 1998. The foregoing notwithstanding, each director shall serve
until his successor shall have been duly elected and qualified unless he
shall resign, become disqualified, disabled or shall otherwise be removed.
4. At each annual election, the directors chosen to succeed those
whose terms then expire shall be of the same class as the directors they
succeed, unless, by reason of any intervening changes in the authorized
number of directors, the board of directors shall designate one or more
directorships whose term then expire as directorships of another class in
order more nearly to achieve equality of the number of directors among the
classes of directors.
5. Notwithstanding the rule that the three classes of directors shall
be as nearly equal in number of directors as possible, in the event of any
change in the authorized number of directors, each director then continuing
to serve as such shall continue nevertheless as a director of the class of
directors of which he is a member until the expiration of his current term or
his prior death, resignation, disqualification or removal. If any newly
created directorship may be allocated to one of two or more classes of
directors consistent with the rule that the three classes of directors shall
be as nearly equal in number of directors as possible, the board of directors
shall allocate it to that of the available classes whose term of office is
due to expire at the earliest date following such allocation.
3
<PAGE>
6. Removal. A director may be removed from office only for cause and
only by the affirmative vote of the holders of not less than a majority of
the number of shares of common stock then outstanding. Except as otherwise
provided by law or fixed by, or pursuant to, the provisions of Article II
hereof relating to the rights of holders of any class or series of stock
having a preference over the common stock as to dividends or upon
liquidation, this section 6 shall not apply with respect to any director
elected by the holders of any such class or series having a preference.
7. Vacancies. Except as otherwise provided for or fixed by, or
pursuant to, the provisions of Articles II hereof relating to the rights of
holders of any class or series of stock having a preference over the common
stock as to dividends or upon liquidation to elect directors under specified
circumstances, newly created directorships resulting from any increase in the
number of directors and any vacancies on the board of directors resulting
from death, resignation, disqualification, removal or other cause shall be
filled by the affirmative vote of a majority of the remaining directors then
in office, even though less than a quorum of the board of directors. Any
director elected in accordance with the preceding sentence shall hold office
for the remainder of the full term of the class of directors in which the new
directorship was created or the vacancy occurred and until such director's
successor shall have been elected an qualified. No decrease in the number of
directors constituting the board of directors shall shorten the term of any
incumbent director.
ARTICLE VII
LIMITATION ON DIRECTOR LIABILITY
A director of the Corporation shall not be personally liable to the
Corporation or to its shareholders for monetary damages for breach of
fiduciary duty as a director; except that this provision shall not eliminate
or limit the liability of a director to the Corporation or to its
shareholders for monetary damages otherwise existing for (i) any breach of
the director's duty of loyalty to the Corporation or to its shareholders;
(ii) acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law; (iii) acts specified in Section
7-108-403 of the Colorado Business Corporation Act, as it may be amended from
time to time; or (iv) any transaction from which the director directly or
indirectly derived any improper personal benefit. If the Colorado Business
Corporation Act is hereafter amended to eliminate or limit further the
liability of a director, then, in addition to the elimination and limitation
of liability provided by the preceding sentence, the liability of each
director shall be eliminated or limited to the fullest extent permitted by
the Colorado Business Corporation Act as so amended. Any repeal or
modification of this ARTICLE VII shall not adversely affect any right or
protection of a director of the Corporation under this ARTICLE VII, as in
effect immediately prior to such repeal or modification, with respect to any
liability that would have accrued, but for this ARTICLE VII, prior to such
repeal or modification. Nothing contained herein will be construed to deprive
any director of his right to all defenses ordinarily available to a director
nor will anything herein be construed to deprive any director of any he may
have for contribution from any other director or other person.
4
<PAGE>
ARTICLE VIII
CONFLICTING INTEREST TRANSACTIONS AND INDEMNIFICATION
The following provisions are inserted for the management of the business
and for the conduct of the affairs of the Corporation, and the same are in
furtherance of and not in limitation or exclusion of the powers conferred by
law.
1. CONFLICTING INTEREST TRANSACTIONS. As used in this paragraph,
"conflicting interest transaction" means any of the following: (i) a loan or
other assistance by the Corporation to a director of the Corporation or to an
entity in which a director of the Corporation is a director or officer or has
a financial interest; (ii) a guaranty by the Corporation of an obligation of
a director of the Corporation or of an obligation of an entity in which a
director of the Corporation is a director or officer or has a financial
interest; or (iii) a contract or transaction between the Corporation and a
director of the Corporation or between the Corporation and an entity in which
a director of the Corporation is a director or officer or has a financial
interest. No conflicting interest transaction shall be void or voidable, be
enjoined, be set aside, or give rise to an award of damages or other
sanctions in a proceeding by a shareholder or by or in the right of the
Corporation, solely because the conflicting interest transaction involves a
director of the Corporation or an entity in which a director of the
Corporation is a director or officer or has a financial interest, or solely
because the director is present at or participates in the meeting of the
Corporation's Board of Directors or of the committee of the Board of
Directors which authorizes, approves or ratifies a conflicting interest
transaction, or solely because the director's vote is counted for such
purpose if: (A) the material facts as to the director's relationship or
interest and as to the conflicting interest transaction are disclosed or are
known to the Board of Directors or the committee, and the Board of Directors
or committee in good faith authorizes, approves or ratifies the conflicting
interest transaction by the affirmative vote of a majority of the
disinterested directors, even though the disinterested directors are less
than a quorum; or (B) the material facts as to the director's relationship or
interest and as to the conflicting interest transaction are disclosed or are
known to the shareholders entitled to vote thereon, and the conflicting
interest transaction is specifically authorized, approved or ratified in good
faith by a vote of the shareholders; or (C) the conflicting interest
transaction is fair as to the Corporation as of the time it is authorized,
approved or ratified by the Board of Directors, a committee thereof, or the
shareholders. Common or interested directors may be counted in determining
the presence of a quorum at a meeting of the Board of Directors or of a
committee which authorizes, approves or ratifies the conflicting interest
transaction.
2. LOANS AND GUARANTIES FOR THE BENEFIT OF DIRECTORS. Neither the
Board of Directors nor any committee thereof shall authorize a loan by the
Corporation to a director of the Corporation or to an entity in which a
director of the Corporation is a director or officer or has a financial
interest, or a guaranty by the Corporation of an obligation of a director of
the Corporation or of an obligation of an entity in which a director of the
Corporation is a director or officer or has a financial interest, until at
least ten days after written notice of the proposed authorization of the loan
or guaranty has been given to the shareholders who would be entitled to vote
thereon if the issue of the loan or guaranty were submitted to a vote of the
shareholders. The requirements of this paragraph 2 are in addition to, and
not in substitution for, the provisions of paragraph 1 of this ARTICLE VIII.
5
<PAGE>
3. INDEMNIFICATION. The Corporation shall, to the fullest extent
permitted by the Colorado Business Corporation Act, as amended from time to
time, indemnify all persons whom it may indemnify pursuant thereto. Expenses
(including attorneys' fees) incurred by an officer or director of the
Corporation or any of its direct or indirect wholly-owned subsidiaries in
defending any civil, criminal, administrative or investigative action, suit
or proceeding, shall be paid by the Corporation in advance of the final
disposition of such action, suit or proceeding upon receipt of an undertaking
by or on behalf of such director or officer to repay such amount if it shall
ultimately be determined that he or she is not entitled to be indemnified by
the Corporation as authorized above. In the event that an officer or
director incurs expenses (including attorneys' fees) in connection with a
successful action to enforce the above indemnification rights, such officer
or director shall be entitled to indemnification for such expenses. The
foregoing right of indemnification shall inure to each such director and
officer, whether or not he or she is such director or officer at the time
such cost or expenses are imposed or incurred, and whether or not the claim
asserted against him or her is based on matters which antedate the adoption
of these revised articles, and in the event of his or her death shall extend
to his legal representatives. Such right of indemnification shall not be
exclusive of any other rights to which such director or officer may be
entitled to as a matter of law. Such expenses (including attorneys' fees)
incurred by other employees and agents may be so paid upon such terms and
conditions, if any, as the Board of Directors deems appropriate. The
Corporation shall further have the authority to the maximum extent permitted
by law to purchase and maintain insurance providing such indemnification.
4. NEGATION OF EQUITABLE INTERESTS IN SHARES OR RIGHTS. Unless a
person is recognized as a shareholder through procedures established by the
Corporation pursuant to Section 7-107-204 of the Colorado Business
Corporation Act or any similar law, the Corporation shall be entitled to
treat the registered holder of any shares of the corporation as the owner
thereof for all purposes permitted by the Colorado Business Corporation Act,
including without limitation all rights deriving from such shares, and the
Corporation shall not be bound to recognize any equitable or other claim to,
or interest in, such shares or rights deriving from such shares on the part
of any other person including without limitation, a purchaser, assignee or
transferee of such shares, unless and until such other person becomes the
registered holder of such shares or is recognized as such, whether or not the
Corporation shall have either actual or constructive notice of the claimed
interest of such other person. By way of example and not of limitation,
until such other person has become the registered holder of such shares or is
recognized pursuant to Section 7-107-204 of the Colorado Business Corporation
Act or any similar applicable law, he shall not be entitled: (i) to receive
notice of the meetings of the shareholders; (ii) to vote at such meetings;
(iii) to examine a list of the shareholders; (iv) to be paid dividends or
other distributions payable to shareholders; or (v) to own, enjoy and
exercise any other rights deriving from such shares against the Corporation.
Nothing contained herein will be construed to deprive any beneficial
shareholder, as defined in Section 7-113-101(1) of the Colorado Business
Corporation Act, as amended from time to time, of any right he may have
pursuant to Article 113 of the Colorado Business Corporation Act or any
similar law subsequently enacted.
6
<PAGE>
ARTICLE IX
BYLAWS
The Board of Directors is authorized to make, alter or repeal the Bylaws
of the Corporation. Election of directors need not be by ballot.
ARTICLE X
EXISTENCE
The Corporation, if not dissolved, shall have perpetual existence.
The foregoing Amended and Restated Articles of Incorporation were
adopted on June 26, 1998 by the affirmative vote of holders of a majority of
the outstanding shares of common stock, the only voting group entitled to
vote separately on the matter. The number of votes cast was sufficient for
approval.
DATED the 26th day of June, 1998.
/s/ Philip G. Allen
---------------------------------------
Philip G. Allen
Secretary
THE UNDERSIGNED CONSENTS TO THE APPOINTMENT AS THE REGISTERED AGENT.
Signature of registered agent: /s/ Martin E. Freidel
---------------------------------------
Martin E. Freidel
Executive Vice President, General
Counsel and Assistant Secretary
7
<PAGE>
EXHIBIT 3.2
BYLAWS
OF
CONVERGENT COMMUNICATIONS, INC.
ARTICLE I
1. OFFICES.
1.1 The principal office of the corporation shall be designated
from time to time by the corporation and may be within or outside of Colorado.
1.2 The corporation may have such other offices, either within
or outside Colorado, as the board of directors may designate or as the
business of the corporation may require from time to time.
1.3 The registered office of the corporation required by the
Colorado Business Corporation Act to be maintained in Colorado may be, but
need not be, identical with the principal office, and the address of the
registered office may be changed from time to time by the board of directors.
ARTICLE II
SHAREHOLDERS
1. ANNUAL MEETING.
1.1 The annual meeting of the shareholders shall be held during
the first or second fiscal quarters of the corporation of each year on a date
and at a time fixed by the board of directors of the corporation (or by the
president in the absence of action by the board of directors), beginning with
the year 1997, for the purpose of electing directors and for the transaction
of such other business as may come before the meeting. If the election of
directors is not held on the day fixed as provided herein for any annual
meeting of the shareholders, or any adjournment thereof, the board of
directors shall cause the election to be held at a special meeting of the
shareholders as soon thereafter as it may conveniently be held.
1.2 A shareholder may apply to the district court in the county in
Colorado where the corporation's principal office is located or, if the
corporation has no principal office in Colorado, to the district court of the
county in which the corporation's registered office is located to seek an order
that a shareholder meeting be held (i) if an annual meeting was not held within
six months after the close of the corporation's most recently ended fiscal year
or fifteen months after its last annual meeting, whichever is earlier, or (ii)
if the shareholder participated in a proper
<PAGE>
call of or proper demand for a special meeting and notice of the special
meeting was not given within thirty days after the date of the call or the
date the last of the demands necessary to require calling of the meeting was
received by the corporation pursuant to Section 7-107-102(1)(b) of the
Colorado Business Corporation Act, or the special meeting was not held in
accordance with the notice.
2. SPECIAL MEETINGS. Unless otherwise prescribed by statute,
special meetings of the shareholders may be called for any purpose by the
chairman of the board, the chief executive officer, the president, the
secretary or by the board of directors. The president or secretary shall
call a special meeting of the shareholders if the corporation receives one or
more written demands for the meeting, stating the purpose or purposes for
which it is to be held, signed and dated by holders of shares representing at
least ten percent of all the votes entitled to be cast on any issue proposed
to be considered at the meeting.
3. PLACE OF MEETING. The board of directors may designate any
place, either within or outside Colorado, as the place for any annual meeting
or any special meeting called by the board of directors. A waiver of notice
signed by all shareholders entitled to vote at a meeting may designate any
place, either within or outside Colorado, as the place for such meeting. If
no designation is made, or if a special meeting is called other than by the
board, the place of meeting shall be the principal office of the corporation.
4. NOTICE OF MEETING.
4.1 Written notice stating the place, date, and hour of the
meeting shall be given not less than ten nor more than sixty days before the
date of the meeting, except that (i) if the number of authorized shares is to
be increased, at least thirty days' notice shall be given, or (ii) any other
longer notice period is required by the Colorado Business Corporation Act.
Notice of a special meeting shall include a description of the purpose or
purposes of the meeting. Notice of an annual meeting need not include a
description of the purpose or purposes of the meeting except the purpose or
purposes shall be stated with respect to (i) an amendment to the articles of
incorporation of the corporation, (ii) a merger or share exchange in which
the corporation is a party and, with respect to a share exchange, in which
the corporation's shares will be acquired, (iii) a sale, lease, exchange or
other disposition, other than in the usual and regular course of business, of
all or substantially all of the property of the corporation or of another
entity which this corporation controls, in each case with or without the
goodwill, (iv) a dissolution of the corporation, or (v) any other purpose for
which a statement of purpose is required by the Colorado Business Corporation
Act. Notice shall be given personally or by mail, private carrier,
telegraph, teletype, electronically transmitted facsimile or other form of
wire or wireless communication by or at the direction of the president, the
secretary, or the officer or persons calling the meeting, to each shareholder
of record entitled to vote at such meeting. If mailed and if in a
comprehensible form, such notice shall be deemed to be given and effective
when deposited in the United States mail, addressed to the shareholder at his
address as it appears in the corporation's current record of shareholders,
with postage prepaid. If notice is given other than by mail, and provided
that such notice is in a comprehensible form, the notice is given and
effective on the date received by the shareholder.
2
<PAGE>
4.2 If requested by the person or persons lawfully calling such
meeting, the secretary shall give notice thereof at the corporation's
expense. No notice need be sent to any shareholder if three successive
notices mailed to the last known address of such shareholder have been
returned as undeliverable until such time as another address for such
shareholder is made known to the corporation by such shareholder. In order
to be entitled to receive notice of any meeting, a shareholder shall advise
the corporation in writing of any change in such shareholder's mailing
address as shown on the corporation's books and records.
4.3 When a meeting is adjourned to another date, time or place,
notice need not be given of the new date, time or place if the new date, time
or place of such meeting is announced before adjournment at the meeting at
which the adjournment is taken. At the adjourned meeting the corporation may
transact any business which may have been transacted at the original meeting.
If the adjournment is for more than 120 days, or if a new record date is
fixed for the adjourned meeting, a new notice of the adjourned meeting shall
be given to each shareholder of record entitled to vote at the meeting as of
the new record date.
4.4 A shareholder may waive notice of a meeting before or after
the time and date of the meeting by a writing signed by such shareholder.
Such waiver shall be delivered to the corporation for filing with the
corporate records. Further, by attending a meeting either in person or by
proxy, a shareholder waives objection to lack of notice or defective notice
of the meeting unless the shareholder objects at the beginning of the meeting
to the holding of the meeting or the transaction of business at the meeting
because of lack of notice or defective notice. By attending the meeting, the
shareholder also waives any objection to consideration at the meeting of a
particular matter not within the purpose or purposes described in the meeting
notice unless the shareholder objects to considering the matter when it is
presented.
5. FIXING OF RECORD DATE.
5.1 For the purpose of determining shareholders entitled to (i)
notice of or vote at any meeting of shareholders or any adjournment thereof,
(ii) receive distributions or share dividends, or (iii) demand a special
meeting, or to make a determination of shareholders for any other proper
purpose, the board of directors may fix a future date as the record date for
any such determination of shareholders, such date in any case to be not more
than seventy days, and, in case of a meeting of shareholders, not less than
ten days, prior to the date on which the particular action requiring such
determination of shareholders is to be taken. If no record date is fixed by
the directors, the record date shall be the date on which notice of the
meeting is mailed to shareholders, or the date on which the resolution of the
board of directors providing for a distribution is adopted, as the case may
be. When a determination of shareholders entitled to vote at any meeting of
shareholders is made as provided in this Section, such determination shall
apply to any adjournment thereof unless the board of directors fixes a new
record date, which it must do if the meeting is adjourned to a date more than
120 days after the date fixed for the original meeting.
3
<PAGE>
5.2 Notwithstanding the above, the record date for determining
the shareholders entitled to take action without a meeting or entitled to be
given notice of action so taken shall be the date a writing upon which the
action is taken is first received by the corporation. The record date for
determining shareholders entitled to demand a special meeting shall be the
date of the earliest of any of the demands pursuant to which the meeting is
called.
6. VOTING LISTS.
6.1 The secretary shall make, at the earlier of ten days before
each meeting of shareholders or two business days after notice of the meeting
has been given, a complete list of the shareholders entitled to be given
notice of such meeting or any adjournment thereof. The list shall be
arranged by voting groups and within each voting group by class or series of
shares, shall be in alphabetical order within each class or series, and shall
show the address of and the number of shares of each class or series held by
each shareholder. For the period beginning the earlier of ten days prior to
the meeting or two business days after notice of the meeting is given and
continuing through the meeting and any adjournment thereof, this list shall
be kept on file at the principal office of the corporation, or at a place
(which shall be identified in the notice) in the city where the meeting will
be held. Such list shall be available for inspection on written demand by
any shareholder (including for the purpose of this Section 6 any holder of
voting trust certificates) or his agent or attorney during regular business
hours and during the period available for inspection. The original stock
transfer books shall be prima facie evidence as to the shareholders entitled
to examine such list or to vote at any meeting of shareholders.
6.2 Any shareholder, his agent or attorney may copy the list
during regular business hours and during the period it is available for
inspection, provided (i) the shareholder has been a shareholder for at least
three months immediately preceding the demand or holds at least five percent
of all outstanding shares of any class of shares as of the date of the
demand, (ii) the demand is made in good faith and for a purpose reasonably
related to the demanding shareholder's interest as a shareholder, (iii) the
shareholder describes with reasonable particularity the purpose and the
records the shareholder desires to inspect, (iv) the records are directly
connected with the described purpose, and (v) the shareholder pays a
reasonable charge covering the costs of labor and material for such copies,
not to exceed the estimated cost of production and reproduction.
7. RECOGNITION PROCEDURE FOR BENEFICIAL OWNERS. The board of
directors may adopt by resolution a procedure whereby a shareholder of the
corporation may certify in writing to the corporation that all or a portion
of the shares registered in the name of such shareholder are held for the
account of a specified person or persons. The resolution may set forth (i)
the types of nominees to which it applies, (ii) the rights or privileges that
the corporation will recognize in a beneficial owner, which may include
rights and privileges other than voting, (iii) the form of certification and
the information to be contained therein, (iv) if the certification is with
respect to a record date, the time within which the certification must be
received by the corporation, (v) the period for which the nominee's use of
the procedure is effective, and (vi) such other provisions with respect to
the procedure as the board deems necessary or desirable. Upon receipt by the
corporation of a certificate complying with the procedure established by the
board of directors,
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the persons specified in the certification shall be deemed, for the purpose
or purposes set forth in the certification, to be the registered holders of
the number of shares specified in place of the shareholder making the
certification.
8. QUORUM AND MANNER OF ACTING.
8.1 A majority of the votes entitled to be cast on a matter by
a voting group shall constitute a quorum of that voting group for action on
the matter. If less than a majority of such votes are represented at a
meeting, a majority of the votes so represented may adjourn the meeting from
time to time without further notice, for a period not to exceed 120 days for
any one adjournment. If a quorum is present at such adjourned meeting, any
business may be transacted which might have been transacted at the meeting as
originally noticed. The shareholders present at a duly organized meeting may
continue to transact business until adjournment, notwithstanding the
withdrawal of enough shareholders to leave less than a quorum, unless the
meeting is adjourned and a new record date is set for the adjourned meeting.
8.2 If a quorum exists, action on a matter other than the
election of directors by a voting group is approved if the votes cast within
the voting group favoring the action exceed the votes cast within the voting
group opposing the action, unless the vote of a greater number or voting by
classes is required by law or the articles of incorporation.
9. PROXIES.
9.1 At all meetings of shareholders, a shareholder may vote by
proxy by signing an appointment form or similar writing, either personally or
by his duly authorized attorney-in-fact. A shareholder may also appoint a
proxy by transmitting or authorizing the transmission of a telegram,
teletype, or other electronic transmission providing a written statement of
the appointment to the proxy, a proxy solicitor, proxy support service
organization, or other person duly authorized by the proxy to receive
appointments as agent for the proxy, or to the corporation. The transmitted
appointment shall set forth or be transmitted with written evidence from
which it can be determined that the shareholder transmitted or authorized the
transmission of the appointment. The proxy appointment form or similar
writing shall be filed with the secretary of the corporation before or at the
time of the meeting. The appointment of a proxy is effective when received
by the corporation and is valid for eleven months unless a different period
is expressly provided in the appointment form or similar writing.
9.2 Any complete copy, including an electronically transmitted
facsimile, of an appointment of a proxy may be substituted for or used in
lieu of the original appointment for any purpose for which the original
appointment could be used.
9.3 Revocation of a proxy does not affect the right of the
corporation to accept the proxy's authority unless (i) the corporation had
notice that the appointment was coupled with an interest and notice that such
interest is extinguished is received by the secretary or other officer or
agent authorized to tabulate votes before the proxy exercises his authority
under the appointment, or (ii) other notice of the revocation of the
appointment is received by the secretary
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or other officer or agent authorized to tabulate votes before the proxy
exercises his authority under the appointment. Other notice of revocation
may, in the discretion of the corporation, be deemed to include the
appearance at a shareholders' meeting of the shareholder who granted the
proxy and his voting in person on any matter subject to a vote at such
meeting.
9.4 The death or incapacity of the shareholder appointing a
proxy does not affect the right of the corporation to accept the proxy's
authority unless notice of the death or incapacity is received by the
secretary or other officer or agent authorized to tabulate votes before the
proxy exercises his authority under the appointment.
9.5 The corporation shall not be required to recognize an
appointment made irrevocable if it has received a writing revoking the
appointment signed by the shareholder (including a shareholder who is a
successor to the shareholder who granted the proxy) either personally or by
his attorney-in-fact, notwithstanding that the revocation may be a breach of
an obligation of the shareholder to another person not to revoke the
appointment.
9.6 Subject to Article II, Section 11 and any express
limitation on the proxy's authority appearing on the appointment form, the
corporation is entitled to accept the proxy's vote or other action as that of
the shareholder making the appointment.
10. VOTING OF SHARES.
10.1 Each outstanding share, regardless of class, shall be
entitled to one vote, except in the election of directors, and each
fractional share shall be entitled to a corresponding fractional vote on each
matter submitted to a vote at a meeting of shareholders, except to the extent
that the voting rights of the shares of any class or classes are limited or
denied by the articles of incorporation as permitted by the Colorado Business
Corporation Act. Cumulative voting shall not be permitted in the election of
directors or for any other purpose. Each record holder of stock shall be
entitled to vote in the election of directors and shall have as many votes
for each of the shares owned by him as there are directors to be elected and
for whose election he has the right to vote.
10.2 At each election of directors, that number of candidates
equaling the number of directors to be elected, having the highest number of
votes cast in favor of their election, shall be elected to the board of
directors.
10.3 Except as otherwise ordered by a court of competent
jurisdiction upon a finding that the purpose of this Section would not be
violated in the circumstances presented to the court, the shares of the
corporation are not entitled to be voted if they are owned, directly or
indirectly, by a second corporation, domestic or foreign, and the first
corporation owns, directly or indirectly, a majority of the shares entitled
to vote for directors of the second corporation except to the extent the
second corporation holds the shares in a fiduciary capacity.
10.4 Redeemable shares are not entitled to be voted after notice of
redemption is mailed to the holders and a sum sufficient to redeem the shares
has been deposited with a
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bank, trust company or other financial institution under an irrevocable
obligation to pay the holders the redemption price on surrender of the shares.
11. CORPORATION'S ACCEPTANCE OF VOTES.
11.1 If the name signed on a vote, consent, waiver, proxy
appointment, or proxy appointment revocation corresponds to the name of a
shareholder, the corporation, if acting in good faith, is entitled to accept
the vote, consent, waiver, proxy appointment or proxy appointment revocation
and give it effect as the act of the shareholder. If the name signed on a
vote, consent, waiver, proxy appointment or proxy appointment revocation does
not correspond to the name of a shareholder, the corporation, if acting in
good faith, is nevertheless entitled to accept the vote, consent, waiver,
proxy appointment or proxy appointment revocation and to give it effect as
the act of the shareholder if:
(i) the shareholder is an entity and the name signed purports to be
that of an officer or agent of the entity;
(ii) the name signed purports to be that of an administrator, executor,
guardian or conservator representing the shareholder and, if the
corporation requests, evidence of fiduciary status acceptable to the
corporation has been presented with respect to the vote, consent, waiver,
proxy appointment or proxy appointment revocation;
(iii) the name signed purports to be that of a receiver or trustee in
bankruptcy of the shareholder and, if the corporation requests, evidence
of this status acceptable to the corporation has been presented with
respect to the vote, consent, waiver, proxy appointment or proxy
appointment revocation;
(iv) the name signed purports to be that of a pledgee, beneficial owner
or attorney-in-fact of the shareholder and, if the corporation requests,
evidence acceptable to the corporation of the signatory's authority to
sign for the shareholder has been presented with respect to the vote,
consent, waiver, proxy appointment or proxy appointment revocation;
(v) two or more persons are the shareholder as co-tenants or
fiduciaries and the name signed purports to be the name of at least one of
the co-tenants or fiduciaries, and the person signing appears to be acting
on behalf of all the co-tenants or fiduciaries; or
(vi) the acceptance of the vote, consent, waiver, proxy appointment or
proxy appointment revocation is otherwise proper under rules established
by the corporation that are not inconsistent with this Section 11.
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11.2 The corporation is entitled to reject a vote, consent,
waiver, proxy appointment or proxy appointment revocation if the secretary or
other officer or agent authorized to tabulate votes, acting in good faith,
has reasonable basis for doubt about the validity of the signature on it or
about the signatory's authority to sign for the shareholder.
11.3 Neither the corporation nor its officers nor any agent who
accepts or rejects a vote, consent, waiver, proxy appointment or proxy
appointment revocation in good faith and in accordance with the standards of
this Section is liable in damages for the consequences of the acceptance or
rejection.
12. INFORMAL ACTION BY SHAREHOLDERS.
12.1 Any action required or permitted to be taken at a meeting
of the shareholders may be taken without a meeting if a written consent (or
counterparts thereof) that sets forth the action so taken is signed by all of
the shareholders entitled to vote with respect to the subject matter thereof
and received by the corporation. Such consent shall have the same force and
effect as a unanimous vote of the shareholders and may be stated as such in
any document. Action taken under this Section is effective as of the date
the last writing necessary to effect the action is received by the
corporation, unless all of the writings specify a different effective date,
in which case such specified date shall be the effective date for such
action. If any shareholder revokes his consent as provided for herein prior
to what would otherwise be the effective date, the action proposed in the
consent shall be invalid. The record date for determining shareholders
entitled to take action without a meeting is the date the corporation first
receives a writing upon which the action is taken.
12.2 Any shareholder who has signed a writing describing and
consenting to action taken pursuant to this Section may revoke such consent
by a writing signed by the shareholder describing the action and stating that
the shareholder's prior consent thereto is revoked, if such writing is
received by the corporation before the effectiveness of the action.
13. MEETINGS BY TELECOMMUNICATION. Any or all of the shareholders
may participate in an annual or special shareholders' meeting by, or the
meeting may be conducted through the use of, any means of communication by
which all persons participating in the meeting may hear each other during the
meeting. A shareholder participating in a meeting by this means is deemed to
be present in person at the meeting.
ARTICLE III
BOARD OF DIRECTORS
1. GENERAL POWERS. All corporate powers shall be exercised by or
under the authority of, and the business and affairs of the corporation shall
be managed under the direction of its board of directors, except as otherwise
provided in the Colorado Business Corporation Act or the articles of
incorporation.
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2. NUMBER, QUALIFICATIONS AND TENURE.
2.1 The number of directors of the corporation shall be fixed
from time to time by the board of directors, within a range of no fewer than
one or more than nine. A director shall be a natural person who is eighteen
years of age or older. A director need not be a resident of Colorado or a
shareholder of the corporation.
2.2 Directors shall be elected at each annual meeting of
shareholders. Each director shall hold office until the next annual meeting
of shareholders following his election and thereafter until his successor
shall have been elected and qualified. Directors shall be removed in the
manner provided by the Colorado Business Corporation Act.
3. VACANCIES. Any director may resign at any time by giving written
notice to the corporation. Such resignation shall take effect at the time
the notice is received by the corporation unless the notice specifies a later
effective date. Unless otherwise specified in the notice of resignation, the
corporation's acceptance of such resignation shall not be necessary to make
it effective. Any vacancy on the board of directors may be filled by the
affirmative vote of a majority of the shareholders or the board of directors.
If the directors remaining in office constitute fewer than a quorum of the
board, the directors may fill the vacancy by the affirmative vote of a
majority of all the directors remaining in office. If elected by the
directors, the director shall hold office until the next annual shareholders'
meeting at which directors are elected. If elected by the shareholders, the
director shall hold office for the unexpired term of his predecessor in
office; except that, if the director's predecessor was elected by the
directors to fill a vacancy, the director elected by the shareholders shall
hold office for the unexpired term of the last predecessor elected by the
shareholders.
4. REGULAR MEETINGS. A regular meeting of the board of directors
shall be held without notice immediately after and at the same place as the
annual meeting of shareholders. The board of directors may provide by
resolution the time and place, either within or outside Colorado, for the
holding of additional regular meetings without other notice.
5. SPECIAL MEETINGS. Special meetings of the board of directors may
be called by or at the request of the president or any two directors. The
person or persons authorized to call special meetings of the board of
directors may fix any place, either within or outside Colorado, as the place
for holding any special meeting of the board of directors called by them,
provided that no meeting shall be called outside the State of Colorado unless
a majority of the board of directors has so authorized.
6. NOTICE.
6.1 Notice of any special meeting shall be given at least two
days prior to the meeting by written notice either personally delivered or
mailed to each director at his business address, or by notice transmitted by
telegraph, telex, electronically transmitted facsimile or other form of wire
or wireless communication. If mailed, such notice
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shall be deemed to be given and to be effective on the earlier of (i) three
days after such notice is deposited in the United States mail, properly
addressed, with postage prepaid, or (ii) the date shown on the return
receipt, if mailed by registered or certified mail return receipt requested.
If notice is given by telex, electronically transmitted facsimile or other
similar form of wire or wireless communication, such notice shall be deemed
to be given and to be effective when sent, and with respect to a telegram,
such notice shall be deemed to be given and to be effective when the telegram
is delivered to the telegraph company. If a director has designated in
writing one or more reasonable addresses or facsimile numbers for delivery of
notice to him, notice sent by mail, telegraph, telex, electronically
transmitted facsimile or other form of wire or wireless communication shall
not be deemed to have been given or to be effective unless sent to such
addresses or facsimile numbers, as the case may be.
6.2 A director may waive notice of a meeting before or after
the time and date of the meeting by a writing signed by such director. Such
waiver shall be delivered to the corporation for filing with the corporate
records. Further, a director's attendance at or participation in a meeting
waives any required notice to him of the meeting unless at the beginning of
the meeting, or promptly upon his later arrival, the director objects to
holding the meeting or transacting business at the meeting because of lack of
notice or defective notice and does not thereafter vote for or assent to
action taken at the meeting. Neither the business to be transacted at, nor
the purpose of, any regular or special meeting of the board of directors need
be specified in the notice or waiver of notice of such meeting.
7. QUORUM.
7.1 A majority of the number of directors fixed by the board of
directors or, if no number is fixed, a majority of the number in office
immediately before the meeting begins, shall constitute a quorum for the
transaction of business at any meeting of the board of directors.
7.2 If less than such majority is present at a meeting, a
majority of the directors present may adjourn the meeting from time to time
without further notice, for a period not to exceed sixty days at any one
adjournment.
8. MANNER OF ACTING. The act 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.
9. COMPENSATION. By resolution of the board of directors, any
director may be paid any one or more of the following: his expenses, if any,
of attendance at meetings, a fixed sum for attendance at each meeting, a
stated salary as director, or such other compensation as the corporation and
the director may reasonably agree upon. No such payment shall preclude any
director from serving the corporation in any other capacity and receiving
compensation therefor.
10. PRESUMPTION OF ASSENT. A director of the corporation who is
present at a meeting of the board of directors or committee of the board at
which action on any
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corporate matter is taken shall be presumed to have assented to the action
taken unless (i) the director objects at the beginning of the meeting, or
promptly upon his arrival, to the holding of the meeting or the transaction
of business at the meeting and does not thereafter vote for or assent to any
action taken at the meeting, (ii) the director contemporaneously requests
that his dissent or abstention as to any specific action taken be entered in
the minutes of the meeting, or (iii) the director causes written notice of
his dissent or abstention as to any specific action to be received by the
presiding officer of the meeting before its adjournment or by the corporation
promptly after the adjournment of the meeting. A director may dissent to a
specific action at a meeting, while assenting to others. The right to
dissent to a specific action taken at a meeting of the board of directors or
a committee of the board shall not be available to a director who voted in
favor of such action.
11. COMMITTEES.
11.1 By resolution adopted by a majority of all the directors in
office when the action is taken, the board of directors may designate from
among its members an executive committee and one or more other committees,
and appoint one or more members of the board of directors to serve on them.
To the extent provided in the resolution, each committee shall have all the
authority of the board of directors, except that no such committee shall have
the authority to (i) authorize distributions, (ii) approve or propose to
shareholders actions or proposals required by the Colorado Business
Corporation Act to be approved by shareholders, (iii) fill vacancies on the
board of directors or any committee thereof, (iv) amend articles of
incorporation, (v) adopt, amend or repeal the bylaws, (vi) approve a plan of
merger not requiring shareholder approval, (vii) authorize or approve the
reacquisition of shares unless pursuant to a formula or method prescribed by
the board of directors, or (viii) authorize or approve the issuance or sale
of shares, or contract for the sale of shares or determine the designations
and relative rights, preferences and limitations of a class or series of
shares, except that the board of directors may authorize a committee or
officer to do so within limits specifically prescribed by the board of
directors. The committee shall then have full power within the limits set by
the board of directors to adopt any final resolution setting forth all
preferences, limitations and relative rights of such class or series and to
authorize an amendment of the articles of incorporation stating the
preferences, limitations and relative rights of a class or series for filing
with the Secretary of State under the Colorado Business Corporation Act.
11.2 Sections 4, 5, 6, 7, 8, 12 and 13 of Article III, which
govern meetings, notice, waiver of notice, quorum, voting requirements,
action without a meeting of the board of directors and telephonic meetings,
shall apply to committees and their members appointed under this Section 11.
11.3 Neither the designation of any such committee, the
delegation of authority to such committee, nor any action by such committee
pursuant to its authority shall alone constitute compliance by any member of
the board of directors or a member of the committee in question with his
responsibility to conform to the standard of care set forth in Article III,
Section 14 of these bylaws.
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12. INFORMAL ACTION BY DIRECTORS. Any action required or permitted
to be taken at a meeting of the directors or any committee designated by the
board of directors may be taken without a meeting if a written consent (or
counterparts thereof) that sets forth the action so taken is signed by all of
the directors entitled to vote with respect to the action taken. Such
consent shall have the same force and effect as a unanimous vote of the
directors or committee members and may be stated as such in any document.
Unless the consent specifies a different effective date, action taken under
this Section 12 is effective at the time the last director signs a writing
describing the action taken, unless, before such time, any director has
revoked his consent by a writing signed by the director and received by the
president or the secretary of the corporation.
13. TELEPHONIC MEETINGS. The board of directors may permit any
director (or any member of a committee designated by the board) to
participate in a regular or special meeting of the board of directors or a
committee thereof through the use of any means of communication by which all
directors participating in the meeting can hear each other during the
meeting. A director participating in a meeting in this manner is deemed to
be present in person at the meeting.
14. STANDARD OF CARE.
14.1 A director shall perform his duties as a director,
including without limitation his duties as a member of any committee of the
board, in good faith, in a manner he reasonably believes to be in the best
interests of the corporation, and with the care an ordinarily prudent person
in a like position would exercise under similar circumstances. In performing
his duties, a director shall be entitled to rely on information, opinions,
reports or statements, including financial statements and other financial
data, in each case prepared or presented by the persons herein designated.
However, he shall not be considered to be acting in good faith if he has
knowledge concerning the matter in question that would cause such reliance to
be unwarranted. A director shall not be liable to the corporation or its
shareholders for any action he takes or omits to take as a director if, in
connection with such action or omission, he performs his duties in compliance
with this Section 14.
14.2 The designated persons on whom a director is entitled to
rely are (i) one or more officers or employees of the corporation whom the
director reasonably believes to be reliable and competent in the matters
presented, (ii) legal counsel, public accountant, or other person as to
matters which the director reasonably believes to be within such person's
professional or expert competence, or (iii) a committee of the board of
directors on which the director does not serve if the director reasonably
believes the committee merits confidence.
ARTICLE IV
OFFICERS AND AGENTS
1. GENERAL. The officers of the corporation shall be a president and a
secretary, each of whom shall be a natural person eighteen years of age or
older. The board of directors or an
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officer or officers authorized by the board may appoint such other officers,
assistant officers, committees and agents, including a chairman of the board,
chief executive officer, chief operating officer, chief financial officer,
vice presidents, treasurer, controller, assistant secretaries and assistant
treasurers, as they may consider necessary. The board of directors or the
officer or officers authorized by the board shall from time to time determine
the procedure for the appointment of officers, their term of office, their
authority and duties and their compensation. One person may hold more than
one office. In all cases where the duties of any officer, agent or employee
are not prescribed by the bylaws or by the board of directors, such officer,
agent or employee shall follow the orders and instructions of the president
of the corporation.
2. APPOINTMENT AND TERM OF OFFICE. The officers of the corporation
shall be appointed by the board of directors at each annual meeting of the
board held after each annual meeting of the shareholders. If the appointment
of officers is not made at such meeting or if an officer or officers are to
be appointed by another officer or officers of the corporation, such
appointments shall be made as soon thereafter as conveniently may be. Each
officer shall hold office until the first of the following occurs: his
successor shall have been duly appointed and qualified, his death, his
resignation, or his removal in the manner provided in Section 3.
3. RESIGNATION AND REMOVAL.
3.1 An officer may resign at any time by giving written notice
of resignation to the corporation. The resignation is effective when the
notice is received by the corporation unless the notice specifies a later
effective date.
3.2 Any officer or agent may be removed at any time with cause
by the board of directors or an officer or officers authorized by the board.
Such removal does not affect the contract rights, if any, of the corporation
or of the person so removed. The appointment of an officer or agent shall
not in itself create contract rights.
4. VACANCIES. A vacancy in any office, however occurring, may be
filled by the board of directors, or by the officer or officers authorized by
the board, for the unexpired portion of the officer's term. If an officer
resigns and his resignation is made effective at a later date, the board of
directors, or officer or officers authorized by the board, may permit the
officer to remain in office until the effective date and may fill the pending
vacancy before the effective date if the board of directors or officer or
officers authorized by the board provide that the successor shall not take
office until the effective date. In the alternative, the board of directors,
or officer or officers authorized by the board of directors, may remove the
officer at any time before the effective date and may fill the resulting
vacancy.
5. PRESIDENT. Subject to the direction and supervision of the board
of directors and unless a chief executive officer has been appointed, the
president shall be the chief executive officer of the corporation, and shall
have general and active control of its affairs and business and general
supervision of its officers, agents and employees. Unless otherwise directed
by the board of directors, the president shall attend in person or by
substitute appointed by him, or shall execute on behalf of the corporation
written instruments appointing a
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proxy or proxies to represent the corporation, at all meetings of the
stockholders of any other corporation in which the corporation holds any
stock. On behalf of the corporation, the president may in person or by
substitute or by proxy execute written waivers of notice and consents with
respect to any such meetings. At all such meetings and otherwise, the
president, in person or by substitute or proxy, may vote the stock held by
the corporation, execute written consents and other instruments with respect
to such stock, and exercise any and all rights and powers incident to the
ownership of said stock, subject to the instructions, if any, of the board of
directors. The president shall have custody of the treasurer's bond, if any.
All powers of the president shall be conferred on the chief executive
officer if one shall be appointed.
6. VICE PRESIDENTS. When and if appointed, the vice presidents
shall assist the president and shall perform such duties as may be assigned
to them by the president or by the board of directors. In the absence of the
president, the vice president, if any (or, if more than one, the vice
presidents in the order designated by the board of directors, or if the board
makes no such designation, then the vice president designated by the
president, or if neither the board nor the president makes any such
designation, the senior vice president as determined by first election to
that office), shall have the powers and perform the duties of the president.
7. SECRETARY.
7.1 The secretary shall (i) prepare and maintain as permanent
records the minutes of the proceedings of the shareholders and the board of
directors, a record of all actions taken by the shareholders or board of
directors without a meeting, a record of all actions taken by a committee of
the board of directors in place of the board of directors on behalf of the
corporation, and a record of all waivers of notice of meetings of
shareholders and of the board of directors or any committee thereof, (ii) see
that all notices are duly given in accordance with the provisions of these
bylaws and as required by law, (iii) serve as custodian of the corporate
records and of the seal of the corporation and affix the seal to all
documents when authorized by the board of directors, (iv) keep at the
corporation's registered office or principal place of business a record
containing the names and addresses of all shareholders in a form that permits
preparation of a list of shareholders arranged by voting group and by class
or series of shares within each voting group, that is alphabetical within
each class or series and that shows the address of, and the number of shares
of each class or series held by, each shareholder, unless such a record shall
be kept at the office of the corporation's transfer agent or registrar, (v)
maintain at the corporation's principal office the originals or copies of the
corporation's articles of incorporation, bylaws, minutes of all shareholders'
meetings and records of all action taken by shareholders without a meeting
for the past three years, all written communications within the past three
years to shareholders as a group or to the holders of any class or series of
shares as a group, a list of the names and business addresses of the current
directors and officers, a copy of the corporation's most recent corporate
report filed with the Secretary of State, and financial statements showing in
reasonable detail the corporation's assets and liabilities and results of
operations for the last three years, (vi) have general charge of the stock
transfer books of the corporation, unless the corporation has a transfer
agent, (vii) authenticate records of the corporation, and (viii) in general,
perform all duties incident to the office of secretary and such
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other duties as from time to time may be assigned to him by the president or
by the board of directors. Assistant secretaries, if any, shall have the
same duties and powers, subject to supervision by the secretary. The
directors and/or shareholders may however respectively designate a person
other than the secretary or assistant secretary to keep the minutes of their
respective meetings.
7.2 Any books, records, or minutes of the corporation may be in
written form or in any form capable of being converted into written form
within a reasonable time.
8. TREASURER.
8.1 When and if appointed, the treasurer shall be the principal
financial officer of the corporation, shall have the care and custody of all
funds, securities, evidences of indebtedness and other personal property of
the corporation and shall deposit the same in accordance with the
instructions of the board of directors. He shall receive and give receipts
and acquittances for money paid in on account of the corporation, and shall
pay out of the corporation's funds on hand all bills, payrolls and other just
debts of the corporation of whatever nature upon maturity. He shall perform
all other duties incident to the office of the treasurer and, upon request of
the board, shall make such reports to it as may be required at any time. He
shall, if required by the board, give the corporation a bond in such sums and
with such sureties as shall be satisfactory to the board, conditioned upon
the faithful performance of his duties and for the restoration to the
corporation of all books, papers, vouchers, money and other property of
whatever kind in his possession or under his control belonging to the
corporation. He shall have such other powers and perform such other duties
as may from time to time be prescribed by the board of directors or the
president. The assistant treasurers, if any, shall have the same powers and
duties, subject to the supervision of the treasurer.
8.2 The treasurer shall also be the principal accounting
officer of the corporation. He shall prescribe and maintain the methods and
systems of accounting to be followed, keep complete books and records of
account as required by the Colorado Business Corporation Act, prepare and
file all local, state and federal tax returns, prescribe and maintain an
adequate system of internal audit and prepare and furnish to the president
and the board of directors statements of account showing the financial
position of the corporation and the results of its operations.
ARTICLE V
STOCK
1. CERTIFICATES. The board of directors shall be authorized to
issue any of its classes of shares with or without certificates. The fact
that the shares are not represented by certificates shall have no effect on
the rights and obligations of shareholders. If the shares are represented by
certificates, such shares shall be represented by consecutively numbered
certificates signed, either manually or by facsimile, in the name of the
corporation by one or more persons designated by the board of directors. In
case any officer who has signed or
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whose facsimile signature has been placed upon such certificate shall have
ceased to be such officer before such certificate is issued, such certificate
may nonetheless be issued by the corporation with the same effect as if he
were such officer at the date of its issue. Certificates of stock shall be
in such form and shall contain such information consistent with law as shall
be prescribed by the board of directors. If shares are not represented by
certificates, within a reasonable time following the issue or transfer of
such shares, the corporation shall send the shareholder a complete written
statement of all of the information required to be provided to holders of
uncertificated shares by the Colorado Business Corporation Act.
2. CONSIDERATION FOR SHARES. Certificated or uncertificated shares
shall not be issued until the shares represented thereby are fully paid. The
board of directors may authorize the issuance of shares for consideration
consisting of any tangible or intangible property or benefit to the
corporation, including cash, promissory notes, services performed or other
securities of the corporation. Future services shall not constitute payment
or partial payment for shares of the corporation. The promissory note of a
subscriber or an affiliate of a subscriber shall not constitute payment or
partial payment for shares of the corporation unless the note is negotiable
and is secured by collateral, other than the shares being purchased, having a
fair market value at least equal to the principal amount of the note. For
purposes of this Section 2, "promissory note" means a negotiable instrument
on which there is an obligation to pay independent of collateral and does not
include a non-recourse note.
3. LOST CERTIFICATES. In case of the alleged loss, destruction or
mutilation of a certificate of stock, the board of directors may direct the
issuance of a new certificate in lieu thereof upon such terms and conditions
in conformity with law as the board may prescribe. The board of directors
may in its discretion require an affidavit of lost certificate and/or a bond
in such form and amount and with such surety as it may determine before
issuing a new certificate.
4. TRANSFER OF SHARES.
4.1 Upon surrender to the corporation or to a transfer agent of
the corporation of a certificate of stock duly endorsed or accompanied by
proper evidence of succession, assignment or authority to transfer, and
receipt of such documentary stamps as may be required by law and evidence of
compliance with all applicable securities laws and other restrictions, the
corporation shall issue a new certificate to the person entitled thereto, and
cancel the old certificate. Every such transfer of stock shall be entered on
the stock books of the corporation which shall be kept at its principal
office or by the person and the place designated by the board of directors.
4.2 Except as otherwise expressly provided in Article II,
Sections 7 and 11, and except for the assertion of dissenters' rights to the
extent provided in Article 113 of the Colorado Business Corporation Act, the
corporation shall be entitled to treat the registered holder of any shares of
the corporation as the owner thereof for all purposes, and the corporation
shall not be bound to recognize any equitable or other claim to, or interest
in, such shares or rights deriving from such shares on the part of any person
other than the registered holder, including
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without limitation any purchaser, assignee or transferee of such shares or
rights deriving from such shares, unless and until such other person becomes
the registered holder of such shares, whether or not the corporation shall
have either actual or constructive notice of the claimed interest of such
other person.
5. TRANSFER AGENT, REGISTRARS AND PAYING AGENTS. The board may at
its discretion appoint one or more transfer agents, registrars and agents for
making payment upon any class of stock, bond, debenture or other security of
the corporation. Such agents and registrars may be located either within or
outside Colorado. They shall have such rights and duties and shall be
entitled to such compensation as may be agreed.
ARTICLE VI
INDEMNIFICATION OF CERTAIN PERSONS
1. INDEMNIFICATION.
1.1 For purposes of Article VI, a "Proper Person" means any
person who was or is a party or is threatened to be made a party to any
threatened, pending, or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, and whether formal or informal, by
reason of the fact that he is or was a director, officer, employee, fiduciary
or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, partner, trustee, employee, fiduciary or
agent of any foreign or domestic profit or nonprofit corporation or of any
partnership, joint venture, trust, profit or nonprofit unincorporated
association, limited liability company, or other enterprise or employee
benefit plan. The corporation shall indemnify any Proper Person against
reasonably incurred expenses (including attorneys' fees), judgments,
penalties, fines (including any excise tax assessed with respect to an
employee benefit plan) and amounts paid in settlement reasonably incurred by
him in connection with such action, suit or proceeding if it is determined by
the groups set forth in Section 4 of this Article that he conducted himself
in good faith and that he reasonably believed (i) in the case of conduct in
his official capacity with the corporation, that his conduct was in the
corporation's best interests, or (ii) in all other cases (except criminal
cases), that his conduct was at least not opposed to the corporation's best
interests, or (iii) in the case of any criminal proceeding, that he had no
reasonable cause to believe his conduct was unlawful. A Proper Person will
be deemed to be acting in his official capacity while acting as a director,
officer, employee or agent on behalf of this corporation and not while acting
on this corporation's behalf for some other entity.
1.2 No indemnification shall be made under this Article VI to a
Proper Person with respect to any claim, issue or matter in connection with a
proceeding by or in the right of a corporation in which the Proper Person was
adjudged liable to the corporation or in connection with any proceeding
charging that the Proper Person derived an improper personal benefit, whether
or not involving action in an official capacity, in which he was adjudged
liable on the basis that he derived an improper personal benefit. Further,
indemnification under this Section in
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connection with a proceeding brought by or in the right of the corporation
shall be limited to reasonable expenses, including attorneys' fees, incurred
in connection with the proceeding.
2. RIGHT TO INDEMNIFICATION. The corporation shall indemnify any
Proper Person who was wholly successful, on the merits or otherwise, in
defense of any action, suit, or proceeding as to which he was entitled to
indemnification under Section l of this Article VI against expenses
(including attorneys' fees) reasonably incurred by him in connection with the
proceeding without the necessity of any action by the corporation other than
the determination in good faith that the defense has been wholly successful.
3. EFFECT OF TERMINATION OF ACTION. The termination of any action,
suit or proceeding by judgment, order, settlement or conviction, or upon a
plea of nolo contendere or its equivalent shall not of itself create a
presumption that the person seeking indemnification did not meet the
standards of conduct described in Section l of this Article VI. Entry of a
judgment by consent as part of a settlement shall not be deemed an
adjudication of liability, as described in Section 2 of this Article VI.
4. GROUPS AUTHORIZED TO MAKE INDEMNIFICATION DETERMINATION. Except
where there is a right to indemnification as set forth in Sections 1 or 2 of
this Article or where indemnification is ordered by a court in Section 5, any
indemnification shall be made by the corporation only as authorized in the
specific case upon a determination by a proper group that indemnification of
the Proper Person is permissible under the circumstances because he has met
the applicable standards of conduct set forth in Section l of this Article.
This determination shall be made by the board of directors by a majority vote
of those present at a meeting at which a quorum is present, which quorum
shall consist of directors not parties to the proceeding ("Quorum"). If a
Quorum cannot be obtained, the determination shall be made by a majority vote
of a committee of the board of directors designated by the board, which
committee shall consist of two or more directors not parties to the
proceeding, except that directors who are parties to the proceeding may
participate in the designation of directors for the committee. If a Quorum
of the board of directors cannot be obtained and the committee cannot be
established, or even if a Quorum is obtained or the committee is designated
and a majority of the directors constituting such Quorum or committee so
directs, the determination shall be made by (i) independent legal counsel
selected by a vote of the board of directors or the committee in the manner
specified in this Section 4 or, if a Quorum of the full board of directors
cannot be obtained and a committee cannot be established, by independent
legal counsel selected by a majority vote of the full board (including
directors who are parties to the action) or (ii) a vote of the shareholders.
5. COURT-ORDERED INDEMNIFICATION. Any Proper Person may apply for
indemnification to the court conducting the proceeding or to another court of
competent jurisdiction for mandatory indemnification under Section 2 of this
Article, including indemnification for reasonable expenses incurred to obtain
court-ordered indemnification. If the court determines that such Proper
Person is fairly and reasonably entitled to indemnification in view of all
the relevant circumstances, whether or not he met the standards of conduct
set forth in Section l of this Article or was adjudged liable in the
proceeding, the court may order such
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indemnification as the court deems proper except that if the Proper Person
has been adjudged liable, indemnification shall be limited to reasonable
expenses incurred in connection with the proceeding and reasonable expenses
incurred to obtain court-ordered indemnification.
6. ADVANCE OF EXPENSES. Reasonable expenses (including attorneys'
fees) incurred in defending an action, suit or proceeding as described in
Section 1 may be paid by the corporation to any Proper Person in advance of
the final disposition of such action, suit or proceeding upon receipt of (i)
a written affirmation of such Proper Person's good faith belief that he has
met the standards of conduct prescribed by Section l of this Article VI, (ii)
a written undertaking, executed personally or on the Proper Person's behalf,
to repay such advances if it is ultimately determined that he did not meet
the prescribed standards of conduct (the undertaking shall be an unlimited
general obligation of the Proper Person but need not be secured and may be
accepted without reference to financial ability to make repayment), and (iii)
a determination is made by the proper group (as described in Section 4 of
this Article VI) that the facts as then known to the group would not preclude
indemnification. Determination and authorization of payments shall be made
in the same manner specified in Section 4 of this Article VI.
7. WITNESS EXPENSES. The sections of this Article VI do not limit
the corporation's authority to pay or reimburse expenses incurred by a
director in connection with an appearance as a witness in a proceeding at a
time when he has not been made a named defendant or respondent in the
proceeding.
8. REPORT TO SHAREHOLDERS. Any indemnification of or advance of
expenses to a director in accordance with this Article VI, if arising out of
a proceeding by or on behalf of the corporation, shall be reported in writing
to the shareholders with or before the notice of the next shareholders'
meeting. If the next shareholder action is taken without a meeting at the
instigation of the board of directors, such notice shall be given to the
shareholders at or before the time the first shareholder signs a writing
consenting to such action.
ARTICLE VII
PROVISION OF INSURANCE
1. INSURANCE. By action of the board of directors, notwithstanding
any interest of the directors in the action, the corporation may purchase and
maintain insurance, in such scope and amounts as the board of directors deems
appropriate, on behalf of any person who is or was a director, officer,
employee, fiduciary or agent of the corporation, or who, while a director,
officer, employee, fiduciary or agent of the corporation, is or was serving
at the request of the corporation as a director, officer, partner, trustee,
employee, fiduciary or agent of any other foreign or domestic corporation or
of any partnership, joint venture, trust, profit or nonprofit unincorporated
association, limited liability company or other enterprise or employee
benefit plan, against any liability asserted against, or incurred by, him in
that capacity or arising out of his status as such, whether or not the
corporation would have the power to indemnify him against such liability
under the provisions of Article VI or applicable law. Any such insurance may
be
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procured from any insurance company designated by the board of directors of
the corporation, whether such insurance company is formed under the laws of
Colorado or any other jurisdiction of the United States or elsewhere,
including any insurance company in which the corporation has an equity
interest or any other interest, through stock ownership or otherwise.
ARTICLE VIII
MISCELLANEOUS
1. SEAL. The corporate seal of the corporation shall be circular in
form and shall contain the name of the corporation and the words, "Seal,
Colorado."
2. FISCAL YEAR. The fiscal year of the corporation shall be as
established by the board of directors.
3. AMENDMENTS. The board of directors shall have power, to the
maximum extent permitted by the Colorado Business Corporation Act, to make,
amend and repeal the bylaws of the corporation at any regular or special
meeting of the board unless the shareholders, in making, amending or
repealing a particular bylaw, expressly provide that the directors may not
amend or repeal such bylaw. The shareholders also shall have the power to
make, amend or repeal the bylaws of the corporation at any annual meeting or
at any special meeting called for that purpose.
4. GENDER. The masculine gender is used in these bylaws as a matter
of convenience only and shall be interpreted to include the feminine and
neuter genders as the circumstances indicate.
5. CONFLICTS. In the event of any irreconcilable conflict between
these bylaws and either the corporation's articles of incorporation or
applicable law, the latter shall control.
6. DEFINITIONS. Except as otherwise specifically provided in these
bylaws, all terms used in these bylaws shall have the same definition as in
the Colorado Business Corporation Act.
7. RULES OF ORDER. At any meeting of shareholders or directors of
the Corporation at which a question of procedure arises, the person presiding
at the meeting may rely upon the Robert's Rules of Order, Newly Revised as
then in effect to resolve any such question.
ADOPTED: June 26, 1998.
/s/ Philip G. Allen
------------------------------
Secretary
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EXHIBIT 10.6
ASSET PURCHASE AGREEMENT
This Asset Purchase Agreement (the "Agreement") is made and entered
into as of this 16th day of June, 1998, by and between Convergent
Communications Services, Inc., a Colorado corporation (the "Buyer"), on the
one hand, and Tie/Communications, Inc., a Delaware corporation and Debtor and
Debtor in Possession (the "Seller") under Case No. SA 98-15547-JB (the
"Case") in the United States Bankruptcy Court for the Central District of
California (the "Bankruptcy Court").
RECITALS
A. Seller is engaged in the business of distributing, maintaining and
supporting telephone systems and of selling blocks of long distance telephone
time (collectively, the "Business").
B. Seller wishes to sell to Buyer the assets described herein which it
uses in connection with the Business at the price and on the other terms and
conditions specified in detail below and Buyer wishes to so purchase and
acquire such assets from Seller.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties agree as follows:
1. TRANSFER OF ASSETS
1.1 PURCHASE AND SALE OF ASSETS. On the Closing Date, as
hereinafter defined, in consideration of the covenants, representations and
obligations of Buyer hereunder, and subject to the conditions hereinafter set
forth. Seller shall sell, assign, transfer, convey and deliver to Buyer, and
Buyer shall purchase from Seller, free and clear of all liens, claims,
interests and encumbrances, the following assets, wherever located, whether
or not identified or disclosed on Seller's books and records (collectively,
the "Property");
1.1.1 LEASES AND CONTRACTS. Seller's right, title and
interest (i) as lessee under those real property leases described on Exhibit
"A-1" to this Agreement and incorporated herein by this reference
(collectively, the "Real Property Leases"), (ii) as lessee under those
equipment, personal property and intangible property leases, rental
agreements, licenses, contracts, agreements and similar arrangements
described on Exhibit "A-2" to this Agreement and incorporated herein by this
reference (collectively, the "Other Leases"), and (iii) as a party to those
other contracts, leases, orders, purchase orders, licenses, contracts,
agreements and similar arrangements described On Exhibit "A-3" (collectively,
the "Other Contracts" and together with the Other Leases, the "Other Leases
and Contracts").
1.1.2 IMPROVEMENTS. All improvements, and all
appurtenances to such improvements, located on the real property
(collectively, the "Real Property") occupied by Seller under the Real
Property Leases assumed by Buyer and assigned by Seller at the Closing,
including, without limitation, buildings, outside storage areas, driveways,
walkways and parking
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areas, but in all events only to the extent of Seller's interest in the same
(collectively, the "improvements").
1.1.3 PERSONAL PROPERTY. All of those items of equipment
and tangible personal property now or hereafter owned by Seller and used in
connection with the Business, including, without limitation, all such
furniture, vehicles, machinery, equipment, tools, spare parts, computers,
fixtures and furnishings located at or on the Real Property (collectively,
the "Personal Property"). As used in this Agreement, the Personal Property
shall not include the Inventory. The Personal Property shall also expressly
exclude any equipment or other tangible property held by Seller pursuant to a
lease, rental agreement, contract, license or similar arrangement (a
"Contract") where Buyer does not assume the underlying Contract relating to
such personal property at the Closing.
1.1.4 INTANGIBLE PROPERTY. All intangible personal
property owned or held by Seller and used in connection with the Business,
but in all cases only to the extent of Seller's interest and only to the
extent transferable, together with all books, records and like items
pertaining to the Business, including, without limitation, any interest in
the name "Tie Communications," the goodwill of the Business, trademarks,
trade names, service marks, all plans and specifications for the
Improvements, all appraisals, engineering, soils, pest control, and other
reports relating to the Real Property, catalogues, customer lists and files
and other data bases, correspondence with present or prospective customers
and suppliers, advertising materials, software programs, telephone exchange
numbers identified with the Business, employment records and any confidential
information or other documentation (including, without limitation, all
operator and user manuals, training materials, guides, listings,
specifications, and other materials for use in conjunction with, or related
to the Property) that has been reduced to writing relating to or arising out
of the Business (collectively, the "Intangible Property"). As used in this
Agreement, Intangible Property shall in all events exclude, (i) any materials
containing privileged communications or information about employees,
disclosure of which would violate an employee's reasonable expectation of
privacy and any other materials which are subject to attorney-client or any
other privilege, and (ii) any software or other item of intangible property
held by Seller pursuant to a license or other Contract where Buyer does not
assume the underlying Contract relating to such intangible personal property
at the Closing.
1.1.5 RECEIVABLES. All instruments, receivables, accounts
receivable and unbilled costs and fees and, subject to Section 1.2, all
causes of action relating or pertaining to the foregoing (collectively, the
"Receivables").
1.1.6 INVENTORY. All supplies, goods, materials, work in
process, inventory and stock in trade owned by Seller (collectively, the
"Inventory").
1.1.7 WARRANTIES. All rights of Seller under express or
implied warranties from the suppliers of Seller with respect to the Property;
1.1.8 ADDITIONAL ASSETS. Except as specifically provided
in Section 1.2 or Exhibit "A-4" hereof, all other assets and properties of
Seller which exist on the Closing Date
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whether tangible or intangible, real or personal which are used in the
Business, excluding Seller's rights under any Contract which is not assigned
to Buyer at the Closing; and
1.1.9 NON-EXECUTORY CONTRACTS. All non-executory
contracts and contractual rights, relating to the enforcement of proprietary
rights and confidentiality provisions, including, but not limited to all
non-executory contracts with customers.
1.2 EXCLUDED ASSETS. Notwithstanding anything to the contrary in
this Agreement, the Property shall be limited to the items identified or
described in Section 1.1 above and shall not include (i) those items excluded
pursuant to the provisions of Section 1.1 above; (ii) all cash or cash
equivalents; (iii) all preference or avoidance claims and actions of Seller,
including, without limitation, any such claims and actions arising under
Sections 544, 547, 548, 549, and 550 of the United States Bankruptcy Code;
(iv) Seller's rights under this Agreement and all cash and non-cash
consideration payable or deliverable to Seller pursuant to the terms and
provisions hereof; (v) insurance proceeds, claims and causes of action with
respect to or arising in connection with (A) any Contract which is not
assigned to Buyer at the Closing, or (B) any item of tangible or intangible
property not acquired by Buyer at the Closing; (vi) any Contract to which
Seller is a party which is not listed or described in Section 1.1.9 or on
Exhibit "A-1," "A-2" or "A-3," and (vii) any Contract or asset which is
listed or described on Exhibit "A-4".
1.3 INSTRUMENTS OF TRANSFER. The sale, assignment, transfer,
conveyance and delivery of the Property to Buyer shall be made by
assignments, bill of sale, and other instruments of assignment, transfer and
conveyance provided for in Section 3 below and such other instruments as may
reasonably be requested by Buyer and which do not increase in any material
way the burdens imposed by this Agreement upon Seller.
2. CONSIDERATION.
2.1 PURCHASE PRICE
(a) The cash consideration to be paid by Buyer to Seller for
the Property (the "Purchase Price") shall be $40,000,000.
(b) The Purchase Price shall be paid as follows:
(i) Within two days (the "Deposit Date") following the
mutual execution and delivery of this Agreement (the date of such
mutual execution and delivery is sometimes referred to herein as
the "Execution Date"), Buyer shall deposit into an escrow (the
"Escrow") with an escrow agent or company (the "Escrow Holder")
reasonably designated by Seller $1,500,000 (the "Deposit") in
immediately available, good funds (funds delivered in this manner
are referred to herein as "Good Funds"), pursuant to joint escrow
instructions to be delivered to the Escrow Holder on or before the
Deposit Date. In turn, the Escrow Holder shall immediately deposit
the Deposit into an interest-bearing account. The Deposit shall
become nonrefundable upon the earlier of (x) the approval of Buyer
as the approved buyer at the hearing on the Sale Motion (as defined
in Section 8.4.2
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below), or (y) the termination of this Agreement by Seller by
reason of Buyer's default in the performance of any material
obligation of Buyer hereunder (a "Buyer Default Termination"). At
the Closing, the Deposit (and any interest accrued thereon) shall
be credited and applied toward payment of the Purchase Price. In
the event the Deposit becomes non-refundable by reason of a Buyer
Default Termination, Escrow Holder shall immediately disburse the
Deposit and all interest accrued thereon to Seller to be retained
by Seller for its own account. If the transactions contemplated
herein terminate by reason of (A) the termination of this Agreement
by reason of Seller's default in the performance of any material
obligation of Seller hereunder, (B) the termination of this
Agreement pursuant to and in accordance with Section 8.4.2 hereof,
(C) the termination of this Agreement by Buyer pursuant to and in
accordance with the provisions of Sections 3.2, 4.3, 8.4.1, 9.1 or
9.8 hereof, (D) the approval by the Bankruptcy Court of a sale to a
third party other than Buyer, or (E) any other termination of this
Agreement other than a Buyer Default Termination, the Escrow Holder
shall return to Buyer the Deposit (together with all interest
thereon);
(ii) Buyer shall receive a credit against the Purchase Price
EQUAL TO 50% OF THE FUNDS PAID PURSUANT TO SECTION 8.3; AND
(iii) On the Closing Date, Buyer shall pay and deliver,
in Good Funds, the balance of the Purchase Price.
2.2 ASSUMED LIABILITIES. Buyer shall, effective as of the Closing
Date, be assigned Seller's interest under the Real Property Leases and Other
Leases and Contracts to be assigned to Seller under this Agreement and shall
assume all liabilities of Seller accruing under the Real Property Leases and
under the Other Leases and Contracts on and after the Closing Date; provided
that, except as set forth in the following sentence, Seller shall pay all
cure amounts owing under any of the Real Property Leases and Other Leases and
Contracts as of the Closing Date which the Bankruptcy Court may order to be
paid as a condition to Seller's assumption and assignment of any Real
Property Lease or Other Lease or Contract. Except as provided in the
following sentence, Seller shall not be required to pay any such cure amounts
owing with respect to the contracts listed as items 6, 8, 13 and 18 on
Exhibit "A-3" and Seller shall not be required to pay 50% of such cure amount
owing with respect to the contract listed as item 4 on Exhibit "A-3," all of
which cure amounts not being paid by Seller will be satisfied by and be the
sole responsibility of Buyer. Buyer's obligation to make the cure payments
described in the preceding sentence shall not exceed (i) 100% of the amounts
set forth with respect to such creditors on the List of Creditors Holding
Twenty Largest Unsecured Claims filed by Seller in the Case on April 8, 1998
as to items 6 and 18 described above (50% as to item 4), (ii) $650,000 as to
such item 8 and (iii) $100,000 as to such item 13; and any amounts by which
the required cure payments exceed the amounts described in this sentence
shall be satisfied by and shall be the sole responsibility of Seller. Buyer
shall also assume all of Seller's liability for vacation, sick and personal
days accrued under Seller's current policies relating to the accrual of such
items as to all employees of Seller who become employees of Buyer on the
Closing Date; provided, however, the liability assumed by Buyer pursuant to
this sentence shall not exceed $650,000. Other than
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the liabilities and obligations of Seller expressly assumed by Buyer
hereunder, Buyer is not assuming and shall not be liable for any liabilities
or obligations of Seller.
3. CLOSING TRANSACTIONS.
3.1 CLOSING CONFERENCE. The Closing of the transactions provided
for herein (the "Closing") shall take place at the offices of Pachulski,
Stang, Ziehl & Young, PC., 10100 Santa Monica Boulevard, Suite 1100, Los
Angeles, California 90067.
3.2 CLOSING DATE. The Closing shall be held on the later of (i)
eleven (11) days after entry of the Sale Approval Order (as defined in
Section 8.4.2, below) or (ii) the first business day after all conditions to
Closing have been satisfied or waived (the "Closing Date"), or such other
date as the parties may mutually agree, but in no event later than August 31,
1998 (the "Outside Date"). In the event the conditions to Closing have not
been satisfied or waived by the Outside Date, then any party who is not in
default hereunder may terminate this Agreement; provided, however, that if
Buyer is not in default on the Outside Date with respect to the conditions to
Closing it must satisfy, Buyer may extend the Outside Date for up to 30 days
during which period Seller shall not have the right to terminate this
Agreement pursuant to this Section 3.2; provided further that neither party
shall have the right to terminate the Agreement during the thirty days
following the Outside Closing Date if the only conditions not satisfied or
waived are the conditions set forth in Sections 4.1.5 and 4.2.5.
Alternatively, the parties may mutually agree to an extended Closing Date.
Until this Agreement is either terminated or the parties have agreed upon an
extended Closing Date, the parties shall diligently continue to work to
satisfy all conditions to Closing and the transaction contemplated herein
shall close as soon as such conditions are satisfied or waived.
3.3 SELLER'S DELIVERIES TO BUYER AT CLOSING. On the Closing Date,
Seller shall make the following deliveries to Buyer:
3.3.1 An Assignment and Assumption of Leases substantially
in form and content mutually satisfactory to Seller and Buyer, duly executed
by Seller, pursuant to which Seller assigns the Real Property Leases and the
Other Leases and Contracts (the "Assignments of Leases"); provided, however,
that the Assignments of Leases need not be delivered by Seller if the
Bankruptcy Court has issued an order prior to the Closing Date authorizing
the assumption and assignment of such Leases and the Other Leases and
Contracts.
3.3.2 A bill of sale, duly executed by Seller, in form and
content mutually satisfactory to Seller and Buyer pursuant to which Seller
transfers the Personal Property and the Inventory to Buyer (the "Bill of
Sale").
3.3.3 A counterpart assignment of intangible property,
duly executed by Seller, in form and content mutually satisfactory to Seller
and Buyer, pursuant to which Seller assigns to Buyer its interest, if any, in
and to the Intangible Property to Buyer (the "Assignment of Intangible
Property").
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3.3.4 Any such other documents, funds or other things
reasonably contemplated by this Agreement to be delivered by Seller to Buyer
at the Closing.
3.4 BUYER'S DELIVERIES TO SELLER AT CLOSING. On the Closing Date,
Buyer shall make or cause the following deliveries to Seller:
3.4.1 That portion of the Purchase Price to be delivered
by Buyer directly to Seller at the Closing under Section 2.1 (and Buyer shall
cause Escrow Holder to deliver the Deposit to Seller).
3.4.2 A counterpart of the Assignment of Leases, duly
executed by Buyer.
3.4.3 A counterpart of the Assignment of Intangible
Property, duly executed by Buyer.
3.4.4 Any such other documents, funds or other things
reasonably contemplated by this Agreement to be delivered by Buyer to Seller
at the Closing.
3.5 PRORATIONS. Rent, current taxes, prepaid advertising and
other items of expense (including, without limitation, any prepaid insurance
under the Real Property Leases or Other Leases and Contracts, or any of them)
under the Real Property Leases or the Other Leases and Contracts shall be
prorated between Seller and Buyer as of the Closing Date. Except as provided
in Section 2.2, all obligations due in respect of periods prior to Closing
shall be paid in full or otherwise satisfied by Seller and all obligations
due in respect of periods after Closing shall be paid in full or otherwise
satisfied by Buyer. Except as provided in Section 2.2, rent shall be
prorated on the basis of a thirty (30) day month.
3.6 SALES, USE AND OTHER TAXES. Any sales, purchases, transfer,
stamp, documentary stamp, use or similar taxes under the laws of the states
in which any portion of the Property is located, or any subdivision of any
such state, which may be payable by reason of the sale of the Property under
this Agreement or the transactions contemplated herein shall be borne and
timely paid by Buyer.
3.7 POSSESSION. Right to possession of the Property shall
transfer to Buyer on the Closing Date. Seller shall transfer and deliver to
Buyer on the Closing Date such keys, lock and safe combinations and other
similar items as Buyer shall require to obtain immediate and full occupation
and control of the Property, and shall also make available to Buyer at their
then existing locations the originals of all documents in Seller's possession
that are required to be transferred to Buyer by this Agreement.
3.8 CLOSING PAYMENTS. At the Closing, Seller shall deliver to
Seller's employees payment for all accrued wages and benefits (except those
specifically assumed by Buyer pursuant to Section 2.2) through the Closing
Date.
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4. CONDITIONS PRECEDENT TO CLOSING.
4.1 CONDITIONS TO SELLER'S OBLIGATIONS. Seller's obligation to
make the deliveries required of Seller at the Closing Date shall be subject
to the satisfaction or waiver by Seller of each of the following conditions.
4.1.1 All of the representations and warranties of Buyer
contained herein shall be true and correct as of the date when made and shall
be deemed to be made again as of the Closing Date and shall be true and
correct in all material respects at and as of such time.
4.1.2 Buyer shall have executed and delivered to Seller
the Assignment of Leases.
4.1.3 Buyer shall have delivered, or shall be prepared to
deliver at the Closing, all cash and other documents required of Buyer to be
delivered at the Closing.
4.1.4 Buyer shall have delivered to Seller appropriate
evidence of all necessary corporate action by Buyer in connection with the
transactions contemplated hereby, including, without limitation: (i)
certified copies of resolutions duly adopted by Buyer's directors approving
the transactions contemplated by this Agreement and authorizing the
execution, delivery, and performance by Buyer of this Agreement; and (ii) a
certificate as to the incumbency of officers of Buyer executing this
Agreement and any instrument or other document delivered in connection with
the transactions contemplated by this Agreement.
4.1.5 All applicable waiting periods relating to the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 shall have expired or
been terminated and any proceedings that may have been filed or instituted
thereunder shall have been satisfactorily concluded.
4.1.6 No action, suit or other proceedings shall be
pending before any court, tribunal or governmental authority seeking to
restrain or prohibit the consummation of the transactions contemplated by
this Agreement, or seeking to obtain substantial damages in respect thereof,
or involving a claim that consummation thereof would result in the violation
of any law, decree or regulation of any governmental authority having
appropriate jurisdiction.
4.1.7 The Bankruptcy Court shall have entered the
Procedure Order in accordance with Section 8.4.1 below and the Sale Approval
Order as contemplated by and defined in Section 8.4.2 below and the Sale
Approval Order shall not have been stayed as of the Closing Date.
4.1.8 Buyer shall have performed or tendered performance
in all material respects of the covenants on Buyer's part to be performed
which, by their terms, are intended to be performed before the Closing.
4.1.9 Buyer shall have offered employment to at least 90%
of the employees who are employed by Seller on the Closing Date, on
substantially similar terms to those under which they are employed on the
Execution Date; provided that nothing contained herein shall (i) obligate
Buyer to assume any collective bargaining agreements or any obligations
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thereunder or (ii) be interpreted to constitute an employment agreement with
any such employees.
4.2 CONDITIONS TO BUYER'S OBLIGATIONS. Buyer's obligation to make
the deliveries required of Buyer at the Closing Date shall be subject to the
satisfaction or waiver by Buyer of each of the following conditions:
4.2.1 Buyer shall have performed or tendered performance
in all material respects of the covenants on Buyer's part to be performed
which, by their terms, are intended to be performed before the Closing.
4.2.2 All representations and warranties of Seller
contained herein shall be true and correct as of the date when made and shall
be deemed to be made again as of the Closing Date and shall be true and
correct in all material respects at and as of such time.
4.2.3 Seller shall have executed and be prepared to
deliver to Buyer the Assignment of Leases.
4.2.4 Seller shall have delivered, or shall be prepared to
deliver at the Closing, all other documents required of Seller to be
delivered at the Closing.
4.2.5 All applicable waiting periods relating to the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 shall have expired or
been terminated and any proceedings that may have been filed or instituted
thereunder shall have been satisfactorily concluded.
4.2.6 No action, suit or other proceedings shall be
pending before any court, tribunal or governmental authority seeking to
restrain or prohibit the consummation of the transactions contemplated by
this Agreement, or seeking to obtain substantial damages in respect thereof,
or involving a claim that consummation thereof would result in the violation
of any law, decree or regulation of any governmental authority having
appropriate jurisdiction.
4.2.7 The Bankruptcy Court shall have entered the
Procedure Order in accordance with Section 8.4.1 below and the Sale Approval
Order in accordance with Section 8.4.2 below and the Sale Approval Order
shall not have been stayed as of the Closing Date.
4.2.8 Buyer shall have entered into employment contracts
in form and substance satisfactory to it in its reasonable judgment which
will become effective upon the consummation of the Closing with the following
current employees of Seller: Michael Dozier, Greg McGraw, R. Dan Baker, D.
Randall Hake and Thomas Francis; provided however that this condition will be
deemed to have been satisfied if Buyer has not delivered, at least two days
prior to the hearing on the Procedure Order, a written notice to Seller that
such condition has not been satisfied.
4.2.9 NOTICE TO CREDITORS. Seller shall have provided all
notices required under applicable bankruptcy law and to such parties as Buyer
may reasonably request.
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4.2.10 ADEQUACY OF THE PROPERTY. The Property shall
constitute all of the assets and contract rights required to conduct in all
material respects the Business as it is presently being conducted; provided,
however, that Buyer shall use reasonable efforts to investigate the matters
described in this Section and that this condition shall be deemed satisfied
with respect to any matter of which Buyer has knowledge and fails to provide
written notice to Seller within two business days of discovering such matter.
4.2.11 COMPLIANCE WITH TELECOMMUNICATIONS REGULATIONS.
Seller shall have at all times operated the Business in compliance with all
applicable laws, rules and regulations applicable to the provision of
telecommunication services, except to the extent that any failure to do so
would not have a material adverse effect on the Business; provided, however,
that Buyer shall use reasonable efforts to investigate the matters described
in this Section and that this condition shall be deemed satisfied with
respect to any matter of which Buyer has knowledge and fails to provide
written notice to Seller within two business days of discovering such matter.
4.3 TERMINATION. If any of the above conditions to the
obligations of a party is neither satisfied nor waived on or before the date
by which the condition is required to be satisfied or, if no such date is
specified, on or before the Outside Date (including any extension of the
Outside Date as permitted pursuant to Section 3.2), such party, provided it
is not then in default hereunder, may terminate this Agreement by delivering
to the other party written notice of termination. Any waiver of a condition
shall be effective only if such waiver is stated in writing and signed by the
waiving party; provided, however, that the consent of a party to the Closing
shall constitute a waiver by such party of any conditions to Closing not
satisfied as of the Closing Date.
5. SELLER'S REPRESENTATIONS AND WARRANTIES. Seller hereby makes the
following representations and warranties to Buyer:
5.1 VALIDITY OF AGREEMENT. Subject only to the obtaining of the
Sale Approval Order, this Agreement constitutes the valid and binding
obligation of Seller enforceable in accordance with its terms.
5.2 ORGANIZATION, STANDING AND POWER. Subject to the applicable
provisions of bankruptcy law, Seller has all requisite corporate power and
authority to own, lease and operate its properties, to carry on its business
as now being conducted and, subject to Seller's obtaining the Sale Approval
Order, to execute, deliver and perform this Agreement and all writings
relating hereto.
5.3 AUTHORIZATION OF SELLER. Subject only to the obtaining of the
Sale Approval Order, the execution and delivery of this Agreement, the
consummation of the transactions herein contemplated, and the performance of,
fulfillment of and compliance with the terms and conditions hereof by Seller
do not and will not: (i) conflict with or result in a breach of the articles
of incorporation or the by-laws of Seller; (ii) violate any statute, law,
rule or regulation, or any order, writ, injunction or decree of any court or
governmental authority; or (ii) violate or conflict with or constitute a
default under any agreement, instrument or writing of any nature to which
Seller is a party or by which Seller or its assets or properties may be bound.
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5.4 TITLE TO PROPERTY. To Seller's knowledge (which consists only
of matters actually known to Seller's senior management), Seller has good and
marketable title to the Property; provided, however, Seller makes no
representation whatsoever as the title to the Intangible Property.
6. BUYER'S WARRANTIES AND REPRESENTATIONS. In addition to the
representations and warranties contained elsewhere in this Agreement, Buyer
hereby makes the following representations and warranties to Seller:
6.1 VALIDITY OF AGREEMENT. All action on the part of Buyer
necessary for the authorization, execution, delivery and performance of this
Agreement by Buyer, including, but not limited to. the performance of Buyer's
obligations hereunder, has been taken. This Agreement, when executed and
delivered by Buyer, shall constitute the valid and binding obligation of
Buyer enforceable in accordance with its terms.
6.2 ORGANIZATION, STANDING AND POWER. Buyer is a corporation duly
organized, validly existing and in good standing under the laws of the State
of Colorado. Buyer has all requisite corporate power and authority to own,
lease and operate its properties, to carry on its business as now being
conducted and to execute, deliver and perform this Agreement and all writings
relating hereto.
6.3 AUTHORIZATION OF BUYER. The execution, delivery and
performance of this Agreement and all writings relating hereto by Buyer have
been duly and validly authorized. The execution and delivery of this
Agreement, the consummation of the transactions herein contemplated, and the
performance of, fulfillment of and compliance with the terms and conditions
hereof by Buyer do not and will not; (i) conflict with or result in a breach
of the articles of incorporation or by-laws of Buyer; (ii) violate any
statute, law, rule or regulation, or any order, writ, injunction or decree of
any court or governmental authority; or (iii) violate or conflict with or
constitute a default under any agreement, instrument or writing of any nature
to which Buyer is a party or by which Buyer or its assets or properties may
be bound.
7. "AS IS" TRANSACTION. Buyer hereby acknowledges and agrees that,
except as otherwise expressly provided in Section 5 above, Seller makes no
representations or warranties whatsoever, express or implied, with respect to
any matter relating to the Property (including, without limitation, income to
be derived or expenses to be incurred in connection with the Property, the
physical condition of any personal property comprising a part of the Property
or which is the subject of any Other Lease or Contract to be assumed by Buyer
at the Closing, the environmental condition or other matter relating to the
physical condition of any real property or improvements which are the subject
of any Real Property Lease to be assumed by Buyer at the Closing, the zoning
of any such real property or improvements, the value of the Property (or any
portion thereof), the terms, amount, validity or enforceability of any
assumed liabilities, the merchantability or fitness of the Personal Property
or any other portion of the Property for any particular purpose, or any other
matter or thing relating to the Property or any portion thereof). Without in
any way limiting the foregoing, Seller hereby disclaims any warranty (express
or implied) of merchantability or fitness for any particular purpose as to
any portion of the Property. Buyer further acknowledges that Buyer has
conducted an independent inspection and
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investigation of the physical condition of all portions the Property and all
such other matters relating to or affecting the Property as Buyer deemed
necessary or appropriate and that in proceeding with its acquisition of the
Property, except for any representations and warranties set forth in Section
5 which by their specific terms survive the Closing, Buyer is doing so based
solely upon such independent inspections and investigations. Accordingly,
except only for such surviving representations, Buyer will accept the
Property at the Closing "AS IS, "WHERE IS," and "WITH ALL FAULTS."
8. CONDUCT AND TRANSACTION PRIOR TO CLOSING.
8.1 ACCESS TO RECORDS AND PROPERTIES OF SELLER. From and after
the date of this Agreement until the Closing Date, Seller shall afford to
Buyer's officers, independent public accountants, counsel, lenders,
consultants and other representatives, free and full access at all reasonable
times to the Property and all records pertaining to the Property or the
Business. Buyer, however, shall not be entitled to access to any materials
containing privileged communications or information about employees,
disclosure of which might violate an employee's reasonable expectation of
privacy. Buyer expressly acknowledges that nothing in this Section 8.1 is
intended to give rise to any contingency to Buyer's obligations to proceed
with the transactions contemplated herein, provided Seller is in material
compliance with the provisions of this Section 8.1.
8.2 OPERATION OF SELLER'S BUSINESS PENDING CLOSING. Unless Buyer
otherwise consents, during the period prior to the Closing Date, Seller shall
operate the Business as currently operated and only in the ordinary course
and, consistent with such operation, shall use commercially reasonable
efforts to preserve intact its current business organization and its
relationships with employees and persons having dealings with it.
8.3 HART-SCOTT-RODINO COOPERATION. Buyer and Seller shall
cooperate with each other (at their respective sole cost and expense) to
comply with, and provide the information required by, the premerger
notification and waiting period rules of the Hart-Scott-Rodino Antitrust
Improvements Act of 1976 (codified in Section 18(a) of Title 15, U.S. Code),
in any Federal Trade Commission regulations, and in any provisions or
regulations of or relating to the Clayton Act. In that connection, Buyer and
Seller shall use diligent efforts to make their joint pre-merger notification
filing with the Federal Trade Commission no later than two (2) business days
following the entry of the Procedure Order. Buyer shall pay 100% of the
filing fee to be paid in connection with such pre-merger notification and
Buyer shall be entitled to a credit against the Purchase Price of 50% of such
amount.
8.4 BANKRUPTCY COURT APPROVALS.
8.4.1. BANKRUPTCY COURT APPROVAL OF SALE PROCEDURES. Promptly
following the Execution Date (and in no event later than ten (10) business
days thereafter), Seller will file with the Bankruptcy Court (and personally
serve counsel for the official creditors' committee, the members of the
official creditors' committee, the creditors listed on the 20 largest list,
all creditors requesting special notice and all other parties required by law
to receive such notice) a motion (the "Sale Procedure Motion"), in form and
substance acceptable to Buyer, for an order
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(the "Procedure Order") from the Bankruptcy Court which provides that: (i) if
(x) this Agreement has not been terminated (a) due to a breach by Buyer or
(b) by Buyer due to the failure of the condition set forth in Section 4.2.8
and (y) the Bankruptcy Court enters its order approving the sale of the
Property (or any material portion thereof) to any party other than Buyer,
Seller will on the next business day following entry of such order pay to
Buyer a flat fee payment (not dependent on amounts actually expended or
incurred by Buyer) in cash or other immediately available good funds in the
amount of $1,500,000 (the "Break-Up Fee"); (ii) all third party offers to be
considered at the hearing on the Sale Motion (as defined below in Section
8.4.2 below) shall be in writing and delivered to Seller and Buyer no later
than forty-eight (48) hours prior to such hearing, together with satisfactory
evidence of such third party's financial ability to perform its obligations
under such offer and shall be accompanied by a deposit of $1,500,000; which
funds such third party shall agree may be used by Seller to pay the Break-Up
Fee to Buyer in the situation described in clause (i) above; (iii) no
prospective purchaser will be permitted to bid at the Hearing on the Sale
Motion unless such party has been deemed "financially qualified" by Houlihan
Lokey Howard & Zukin Capital ("HLHZ"), Seller's investment banker; (iv) no
prospective purchaser who bids for the Property at the hearing on Buyer's
acquisition of the Property shall be entitled to purchase the Property unless
such prospective purchaser offers to purchase the Property for consideration
which is at least $4,000,000 greater than the consideration set forth in this
Agreement (including all cash, non-cash consideration and assumed
liabilities) and otherwise on terms at least as favorable to Seller as those
set forth in this Agreement, and (v) after any initial overbid, all further
overbids must include cash increments of at least $1,000,000. Should
overbidding take place, Buyer shall have the right, but not the obligation,
to participate in the overbidding and to be approved as the overbidder at the
hearing on the Sale Motion based upon any such overbid. If the Bankruptcy
Court approves a sale to Buyer based on an overbid by Buyer, Buyer shall
receive credit against the purchase price in the amount of the Break-Up Fee.
Should an overbidder other than Buyer be approved at the hearing on the Sale
Motion, Buyer shall, the day after such hearing and concurrently with the
payment of the Break-Up Fee to Buyer, deliver to the person designated by
Seller all reports, studies and the like materials obtained by Buyer from
third party consultants in connection with Buyer's due diligence
investigation.
Following the filing of the Sale Procedure Motion, Seller shall use
reasonable efforts to obtain the Procedure Order (the date on which the
Procedure Order is entered is referred to herein as the "Sale Procedure
Date"). If (i) the Bankruptcy Court declines to enter the Procedure Order, or
(ii) the Procedure Order is not entered on or before the date which is 20
days following the Execution Date (the "Procedure Order Entry Period"), then
in either such event, Buyer shall have the right, upon written notice
delivered to Seller not later than two (2) business days following the
earlier of the declination of the Court or expiration of the Procedure Order
Entry Period to terminate this Agreement. Delivery of such notice of
termination may be made by facsimile addressed to counsel for Seller. If
Buyer timely gives written notice of termination, this Agreement and the
transactions contemplated herein shall terminate and Buyer and Seller shall
be relieved of any further liability or obligation hereunder other than the
obligation to pay to Buyer the Deposit (together with interest) pursuant to
Section 2.1(b). Should Buyer decline to timely deliver to Seller written
notice of termination, Buyer shall conclusively be deemed to have waived the
condition provided for in this Section 8.4.1. Upon the timely entry of the
Procedure
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Order in form and substance acceptable to Buyer, the condition set forth in
this Section 8.4.1 shall be deemed satisfied.
8.4.2. BANKRUPTCY COURT'S APPROVAL OF SALE. In the event that
the condition provided for in Section 8.4.1 above is either satisfied or
waived (or deemed waived), Seller shall promptly, but not more than 10 days
following the Sale Procedure Date, make a motion (the "Sale Motion") for an
order (the "Sale Approval Order") from the Bankruptcy Court (which order
shall be in form and substance acceptable to Buyer) which
(i) approves the sale of the Property to Buyer on the terms
and conditions set forth in this Agreement and authorizes Seller to proceed
with this transaction;
(ii) includes a specific finding that Buyer is a good faith
purchaser of the Property;
(iii) states that the sale of the Property to Buyer shall
be free and clear of all liens, claims, interests and encumbrances
whatsoever;
(iv) approves Seller's assumption and assignment of the
pre-petition leases and contracts to be assumed hereunder (collectively, the
"Section 365 Contracts") pursuant to Section 365 of the United States
Bankruptcy Code and, except as provided in Section 2.2 hereof, orders Seller
to pay any cure amounts payable to the other parties to the Section 365
Contracts as a condition to such assumption and assignment; provided,
however, in no event shall Buyer have the right to disapprove the Sale
Approval Order or terminate this transaction by reason of the failure to
assign all of the Section 365 Contracts so long as (a) the Sale Approval
Order authorizes Seller to assume and assign not less than ninety percent
(90%) of the Section 365 Contracts and (b) included in such 90% are the
contracts listed as items 4, 5 and 6 on Exhibit "A-3"; and
(v) contains the following findings of fact and conclusions
of law by the Bankruptcy Court in form and substance satisfactory to Buyer
establishing that:
(a) the notice of sale, assignment and transfer of the
Property free and clear of liens, and the parties who were served with
copies of this notice, was in compliance with Bankruptcy Code Sections 102,
363 and 365 and Federal Rules of Bankruptcy Procedure 2002, 6004, 6006,
9014 and any other provisions of the Bankruptcy Code, the Federal Rules of
Bankruptcy Procedure or any local bankruptcy rules governing the sale of
the Property free and clear of liens and the assignment of executory
contracts and leases, if any;
(b) upon the closing of the sale of the Property to Buyer,
the Property shall be transferred, sold and delivered to Buyer free and
clear of all encumbrances, obligations, liabilities, contractual
commitments, claims, including, without limitation, any theory of successor
liability, DE FACTO merger, or substantial continuity, whether based in law
or equity, ERISA and employee benefit obligations, collective bargaining
agreements, environmental liabilities, any security interest,
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mortgage, lien, charge against or interest in property, adverse claim,
claim of possession, license, restriction of any kind, including, but
not limited to, any restriction on the use, voting, transfer, receipt of
income or other exercise of any attributes of ownership or any option to
purchase, option, charge, retention agreement which is intended as
security or other matters (collectively, "Liens") of any person or
entity that encumber or relate to, or purport to encumber or relate to,
the Property, except as specifically provided in this Agreement.
(c) all requirements imposed by Bankruptcy Code Section 363
and applicable case law for the sale of assets free and clear of Liens have
been satisfied;
(d) Buyer is a purchaser in "good faith" of the Property
pursuant to Bankruptcy Code Section 363(m);
(e) Buyer and Seller did not engage in any conduct which
would allow this Agreement to be set aside pursuant to Bankruptcy Code
Section 363(n);
(f) all of the requirements imposed by Bankruptcy Code
Section 365 and applicable case law for the assumption and assignment of
executory contracts and leases in connection with the sale of assets free
and clear of Liens have been satisfied;
(g) any other provisions of the Bankruptcy Code governing
the sale of assets free and clear of Liens have been satisfied;
(h) the transactions consummated pursuant to this Agreement
are entitled to the protections of Section 363(m) of the Bankruptcy Code;
(i) pursuant to Section 105 of the Bankruptcy Code, any
creditors of Seller are prohibited from taking any actions against Buyer or
the Property, except in connection with liabilities expressly assumed by
Buyer;
(j) the transfers made pursuant to this Agreement are made
under the Bankruptcy Code and not subject to any taxes under applicable
laws; and
(k) the terms and provisions of this Agreement are fair and
reasonable.
Moreover, the order approving the sale shall state as follows:
(aa) This Order is and shall be effective as a determination
that, upon transfer of the Property to Buyer, all Liens existing as to the
Property conveyed to Buyer have been and hereby are adjusted and declared
to be unconditionally released, discharged and terminated, and shall be
binding upon and govern the acts of all entities, including, all filing
agents, filing officers, administrative agencies or units, governmental
departments or units, secretaries of state, federal, state and local
officials and all other persons and entities who may be required by
operation of law, the duties of their office, or
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contract, to accept, file, register or otherwise record or release any
documents or instruments, or who may be required to report or insure any
title or state of title in or to the Property conveyed to Buyer. All
Liens of record as of the date of this Order, except as otherwise
provided in this order, shall be forthwith removed and stricken as
against the Property. All such entities described in paragraph (bb)
immediately below are authorized and specifically directed to strike all
such recorded Liens against the Property from their records, official
and otherwise.
(bb) If any person or entity which has filed statements or other
documents or agreements evidencing Liens on, or interests in, any of the
Property does not deliver to the Buyer prior to the closing of the sale of
the Property to Buyer, in proper form for filing and executed by the
appropriate parties, termination statements, instruments of satisfaction,
releases of Liens and easements, and any other documents necessary for the
purpose of documenting the release of all Liens which the person or entity
has or may assert with respect to any of the Property, Buyer is hereby
authorized and directed to execute and file such statements, instruments,
releases and other documents on behalf of such persons or entity with
respect to any of the Property.
Following the filing of the Sale Motion, Seller shall use reasonable
efforts to obtain the Sale Approval Order. Both Buyer's and Seller's
obligations contemplated in this Agreement (other than the payment of the
Break-Up Fee and as to repayment of the Deposit under Section 2.1 hereof)
shall be conditioned upon the Bankruptcy Court's entry of the Sale Approval
Order on or before the date 30 days following the entry of the Procedure
Order. If (xx) the Bankruptcy Court refuses to issue the Sale Approval Order
(except for the failure addressed in the proviso to clause (iv) above) or
(yy) a third party purchaser for the Property or any material portion thereof
is approved by the Bankruptcy Court at the hearing on the Sale Motion, or
(zz) the Sale Approval Order is for any other reason not entered on or before
the Outside Date (or the date to which the Outside Date is extended by Buyer
pursuant to Section 3.2 hereof), then in any such event, this Agreement shall
automatically terminate and Seller and Buyer shall be relieved of any further
liability or obligation thereunder (other than the return of the Deposit
(plus interest) pursuant to Section 2.1(b) hereof and the payment of the
Break-Up Fee). Upon timely entry of the Sale Approval Order in form and
substance acceptable to Buyer (such entry date being referred to herein as
the "Sale Approval Date"), the condition set forth in this Section 8.4.2
shall conclusively be deemed satisfied.
9. MISCELLANEOUS.
9.1 DAMAGE AND DESTRUCTION: CONDEMNATION. Seller shall notify
Buyer immediately of the occurrence of any material damage to or destruction
of the Property which occurs prior to the Closing Date, or the institution or
maintenance of any condemnation or similar proceedings with respect to any of
the Property. In the event of any material damage to or destruction of the
Property which is not fully covered by insurance, or in the event any such
condemnation or other proceedings are instituted or maintained, Buyer, at its
option, may either (i) terminate this Agreement, or (ii) consummate the
purchase provided for by this Agreement. In all other events or in the event
that Buyer elects to consummate the purchase pursuant to (ii) above, all
insurance or condemnation proceeds, including business interruption and
rental
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loss proceeds, collected by Seller prior to the Closing Date, together with
an amount equal to all deductible amounts under the insurance policies
covering such damage or destruction and amounts of damage or destruction not
covered by insurance (which amounts shall be agreed upon in good faith by
Seller and Buyer and approved by the Bankruptcy Court), shall be credited
against the Purchase Price on Buyer's account, and Buyer shall be entitled to
and Seller shall pay to Buyer all other insurance or condemnation proceeds
arising out of such damage or destruction or proceedings and collected
following the Closing Date.
9.2 ATTORNEYS' FEES. In the event that either party hereto brings
an action or other proceeding to enforce or interpret the terms and
provisions of this Agreement, the prevailing party in that action or
proceeding shall be entitled to have and recover from the non-prevailing
party all such fees, costs and expenses (including, without limitation, all
court costs and reasonable attorneys' fees) as the prevailing party may
suffer or incur in the pursuit or defense of such action or proceeding.
9.3 REASONABLE ACCESS TO RECORDS AND CERTAIN PERSONNEL;
COOPERATION. So long as the Case is pending, (i) Buyer shall permit Seller's
counsel and other professionals employed in the Case reasonable access to the
financial and other books and records relating to the Property or the
Business (whether in documentary or data form) for the purpose of the
continuing administration of the Case (including, without limitation, the
pursuit of any avoidance, preference or similar action), which access shall
include (xx) the right of such professionals to copy, at Seller's expense,
such documents and records as they may request in furtherance of the purposes
described above, and (yy) Buyer's copying and delivering to such
professionals such documents or records as they may request, but only to the
extent such professionals furnish Buyer with reasonably detailed written
descriptions of the materials to be so copied and reimburse Buyer for the
reasonable costs and expenses thereof), and (ii) Buyer shall provide Seller
and such professionals with reasonable access to persons still employed by
Buyer as follows: (1) for the first 90 days after the Closing Date, Seller
shall have access to Senior Management (consisting of Mike Dozier, Dan Baker,
Greg McGraw, Tom Franzen, Randy Hake) for up to an aggregate of 60 hours;
Accounting (Jeff Brademeyer, Connie Lane, Greg Freese) for up to an aggregate
of 50 hours; Personnel/Human Resources (Joan Chick & staff) for up to an
aggregate of 25 hours; Tax (Roger Henpeck & staff) for up to an aggregate of
20 hours; Accounts Payable (Barbara Bailey & staff) for up to an aggregate of
120 hours); Long Distance (Rick Hagerman) for up to an aggregate of 10 hours;
Other (Disney Reese) for up to an aggregate of 15 hours; provided that such
access to such employees shall not exceed for each employee 8 hours per week
(unless Buyer, in its sole discretion, consents to provide additional time);
(2) after 90 days after the Closing Date, Seller and such professionals shall
have reasonable access to the aforementioned employees for an aggregate of up
to 20 hours per week, provided that such access shall not exceed for each
employee 4 hours per week; provided further that, Seller shall reimburse
Buyer for the out of pocket expenses incurred by Buyer (including the
salaries of such employees for the time devoted by such employees to
fulfilling such requirement) (except during the first 90 days after the
Closing for salaries with respect to the first 200 hours of access to such
employees). Seller shall cooperate (at no cost to Seller) with Buyer in
making joint application to have all regulatory permits, approvals, licenses
or similar items held by Seller with respect to the providing of
telecommunication services transferred to Buyer.
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9.4 NOTICES. Unless otherwise provided herein, any notice,
tender, or delivery to be given hereunder by either party to the other may be
effected by personal delivery in writing, or by registered or certified mail,
postage prepaid, return receipt requested, and shall be deemed communicated
as o the date of mailing. Mailed notices shall be addressed as set forth
below, but each party may change his address by written notice in accordance
with this paragraph.
To Seller: Tie Communications, Inc.
10975 Grandview Drive
Overland Park, Kansas
Attn.: D. Randall Hake
With a copy to: Pachulski, Stang, Ziehl & Young
10100 Santa Monica Blvd., Suite 1100
Los Angeles, California 90067-4102
Attn.: Ira D. Kharasch
To Buyer: Convergent Communications, Inc.
400 Inverness Drive South, Suite 400
Englewood, Colorado 80112
Attn.: General Counsel
With a copy to: Gibson, Dunn & Crutcher LLP
1801 California Street, Suite 4100
Denver, Colorado 80202
Attn.: Richard M. Russo
9.5 ENTIRE AGREEMENT. This instrument and the documents to be
executed pursuant hereto contain the entire agreement between the parties
relating to the sale of the Property. Any oral representations or modifications
concerning this Agreement or any such other document shall be of no force and
effect excepting a subsequent modification in writing, signed by the party to be
charged.
9.6 MODIFICATION. This Agreement may be modified, amended or
supplemented only by a written instrument duly executed by all the parties
hereto.
9.7 CLOSING DATE. All actions to be taken on the Closing pursuant to
this Agreement shall be deemed to have occurred simultaneously, and no act,
document or transaction shall be deemed to have been taken, delivered or
effected until all such actions, documents and transactions have been taken,
delivered or effected.
17
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9.8 SEVERABILITY. Should any term, provision or paragraph of this
Agreement be determined to be illegal or void or of no force and effect, the
balance of the Agreement shall survive except that, if Buyer cannot acquire
and Seller cannot assign, after using diligent efforts, including, but not
limited to, making any required cure payments, at least ninety percent (90%)
of the Section 365 Contracts, which 90% must include the assumption of the
contracts listed as items 4, 5, and 6 on Exhibit "A-3," Buyer may terminate
this Agreement, and it shall be of no further force and effect, unless Buyer
agrees in writing to the contrary.
9.9 CAPTIONS. All captions and headings contained in this
Agreement arc for convenience of reference only and shall not be construed to
limit or extend the terms or conditions of this Agreement.
9.10 FURTHER ASSURANCES. Each party hereto will execute,
acknowledge and deliver any further assurance, documents and instruments
reasonably requested by any other party hereto for the purpose of giving
effect to the transactions contemplated herein or the intentions of the
parties with respect thereto.
9.11 WAIVER. No waiver of any of the provisions of this Agreement
shall be deemed, or shall constitute, a waiver of other provisions, whether
or not similar, nor shall any waiver constitute a continuing waiver. No
waiver shall be binding unless executed in writing by the party making the
waiver.
9.12 BROKERAGE OBLIGATIONS. Seller is represented by HLHZ as its
exclusive sale agent with respect to the transactions contemplated herein
pursuant to that certain order entered by the Bankruptcy Court on May 7, 1998
and HLHZ's commission, fees and expenses are to be paid by Seller in
accordance with the terms and provisions of such order. Seller and Buyer each
represent and warrant to the other that, except for HLHZ, such party has
incurred no liability to any investment banker, broker or agent with respect
to the payment of any commission regarding the consummation of the
transaction contemplated hereby. Except for any claims of HLHZ (which are to
be handled and satisfied by Seller in accordance with the above referenced
order), it is agreed that if any claims for commissions, fees or other
compensation, including, without limitation, brokerage fees, finder's fees,
or commissions are ever asserted against Buyer or Seller in connection with
this transaction, all such claims shall be handled and paid by the party
whose actions with respect to such banker, broker or agent form the basis of
such claim and such party shall indemnify, defend (with counsel reasonably
satisfactory to the party entitled to indemnification), protect and save and
hold the other harmless from and against any and all such claims or demands
asserted by any person, firm or corporation in connection with the
transaction contemplated hereby.
9.13 PAYMENT OF FEES AND EXPENSES. Except as provided in Section
9.2 above, each party to this Agreement shall be responsible for, and shall
pay, all of its own fees and expenses, including those of its counsel,
incurred in the negotiation, preparation and consummation of the Agreement
and the transaction described herein.
9.14 INVESTIGATIONS AND SURVIVAL. The respective representations,
warranties, covenants and agreements of Seller and Buyer herein, or in any
certificates or other documents
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delivered prior to or at the Closing, shall not be deemed waived or otherwise
affected by any investigation made by any party hereto nor shall they be
affected by the Closing.
9.15 ASSIGNMENTS. This Agreement shall not be assigned by either
party hereto without the prior written consent of the other party hereto.
9.16 BINDING EFFECT. Subject to the provisions of Section 9.15
above, this Agreement shall bind and inure to the benefit of the respective
heirs, personal representatives, successors, and assigns of the parties
hereto.
9.17 APPLICABLE LAW. This Agreement shall be governed by and
construed in accordance with the laws of Delaware.
9.18 GOOD FAITH. All parties hereto agree to do all acts and
execute all documents required to carry out the terms of this Agreement and
to act in good faith with respect to the terms and conditions contained
herein before and after Closing.
9.19 CONSTRUCTION. In the interpretation and construction of this
Agreement, the parties acknowledge that the terms hereof reflect extensive
negotiations between the parties and that this Agreement shall not be deemed,
for the purpose of construction and interpretation, drafted by either party
hereto.
9.20 COUNTERPARTS. This Agreement may be signed in counterparts.
The parties further agree that this Agreement may be executed by the exchange
of facsimile signature pages provided that by doing so the parties agree to
undertake to provide original signatures as soon thereafter as reasonable in
the circumstances.
9.21 TIME IS OF THE ESSENCE. Time is of the essence in this
Agreement, and all of the terms, covenants and conditions hereof.
9.22 BANKRUPTCY COURT JURISDICTION. BUYER AND SELLER AGREE THAT THE
BANKRUPTCY COURT SHALL HAVE EXCLUSIVE JURISDICTION OVER ALL DISPUTES AND
OTHER MATTERS RELATING TO (i) THE INTERPRETATION AND ENFORCEMENT OF THIS
AGREEMENT OR ANY ANCILLARY DOCUMENT EXECUTED PURSUANT HERETO; AND/OR (ii) THE
PROPERTY AND/OR ASSUMED LIABILITIES, AND BUYER EXPRESSLY CONSENTS TO AND
AGREES NOT TO CONTEST SUCH EXCLUSIVE JURISDICTION.
19
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IN WITNESS WHEREOF, the parties hereto have executed this Asset Purchase
Agreement as of the day and year first above written.
Convergent Communications Services, Inc.,
a Colorado corporation
By: /s/ John R. Evans
--------------------------------------------
Name: John R. Evans
Its: Chairman and Chief Executive
Officer
Tie/Communications, Inc., a Delaware corporation,
Debtor and Debtor in Possession
By: /s/ Michael R. Dozier
--------------------------------------------
Name: Michael R. Dozier
--------------------------------------
Its: President & COO
--------------------------------------
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AMENDMENT TO
ASSET PURCHASE AGREEMENT
This Amendment to Asset Purchase Agreement (the "Amendment") is made and
entered into as of this 20th day of July 1998 and amends the Asset Purchase
Agreement (the "Agreement") entered into as of the 16th day of June, 1998, by
and between Convergent Communications Services, Inc., a Colorado corporation
(the "Buyer"), on the one hand, and Tie/Communications, Inc., a Delaware
corporation and Debtor and Debtor in Possession (the "Seller") under Case No.
SA 98-15547-JB (the "Case") in the United States Bankruptcy Court for the
Central District of California (the "Bankruptcy Court").
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties agree to amend the
Agreement as follows:
1. AMENDMENT OF SECTION 1.1.4. Section 1.1.4 of the Agreement is
hereby amended by adding the following clause to the end of the last sentence:
provided, however, that Intangible Property shall be deemed to include any
claim or chose in action relating to payments by Buyer to
PricewaterhouseCoopers (or its predecessors) for audit work performed in
connection with the proposed acquisition contemplated by the letter
agreement between Claricom, Inc., Seller and others, dated as of February
17, 1998; provided further, however, that Buyer shall not be deemed to
assume any liabilities in connection with such letter agreement.
2. AMENDMENT OF SECTION 4.2.1. Section 4.2.1 of the Agreement is
hereby amended and restated in its entirety as follows:
4.2.1 Seller shall have performed or tendered performance in
all material respects of the covenants on Seller's part to be
performed which, by their terms, are intended to be performed before
the Closing.
3. AMENDMENT OF SECTION 8.4.1. Section 8.4.1 of the Agreement is
hereby amended as follows:
by replacing the reference to "Section 4.2.8" with "Section 4.2.5";
by replacing the figure "$1,500,000" each time it appears with
"$1,250,000"; and
by replacing the figure "$4,000,000" with "$3,000,000".
4. AMENDMENT OF EXHIBITS A-2 AND A-3. Exhibit A-2 of the Agreement
shall be amended by adding the leases listed on Exhibit B-2 hereof to Exhibit
A-2. Exhibit A-3 of the Agreement shall be amended by adding the contracts
listed on Exhibit B-3 to Exhibit A-3.
5. ASSIGNMENT OF ADDITIONAL EXECUTORY CONTRACTS. In addition to the
Contracts assigned pursuant to the Agreement, Seller shall assume and assign
to Buyer any Contracts agreed to in writing by Buyer and Seller.
<PAGE>
6. CLOSING DATE. The Closing Date shall be effective at 12:01 a.m.
July 27, 1998, or such other date as the parties shall mutually agree.
7. AMENDMENT OF SECTION 9.14. Section 9.14 of the Agreement is hereby
amended and restated in its entirety as follows:
9.14 INVESTIGATIONS AND SURVIVAL. The respective representations,
warranties, covenants and agreements of Seller and Buyer herein, or in any
certificates or other documents delivered prior to or at the Closing, shall
not be deemed waived or otherwise affected by any investigation made by any
party hereto nor shall they be affected by the Closing; provided however
that all representations and warranties (but not covenants or agreements,
including without limitation the provisions of Sections 3.6 and 9.3) of
both parties (including without limitation any statements and
representations regarding title to the Property contained in Section 1.1
and 5.4 of the Agreement) shall expire 60 days after the Closing (except
with respect to claims that have been asserted in writing prior to the
expiration of such period for breaches of such representations and
warranties).
8. AMENDMENT OF SECTION 4.1.9. Section 4.1.9 of the Agreement is
hereby amended and restated in its entirety as follows:
4.1.9 Buyer shall have offered employment to (A) at least 90%
of the employees who are employed by Seller on the Closing Date, and (B) at
least 90% of the employees who are employed by Seller on the Closing Date
at Seller's Overland Park, Kansas facility; provided that nothing contained
herein shall (i) obligate Buyer to assume any collective bargaining
agreements or any obligations thereunder or (ii) be interpreted to
constitute an employment agreement with any such employees.
9. LIMITED INDEMNIFICATION. Without limiting any other rights of
Seller in the Agreement, Buyer agrees to indemnify Seller with respect to any
and all expenses or payments for claims, reasonable attorneys fees or other
out-of-pocket expenses, in each case actually incurred by Seller ("Payments")
due to a breach of Buyer's obligation to assume the Contracts described in
Item 21 of Exhibit A-3 to the Agreement; provided, however, that Buyer shall
not indemnify Seller with respect to any Payments arising out of any act or
omission by Seller; provided, further, that Buyer shall not indemnify Seller
with respect to (i) Payments relating to any matter of which Seller fails to
provide Buyer with written notice within three business days of Seller
becoming aware of such matter, and (ii) Payments paid by Seller to any person
without Buyer's written consent (which consent shall not be unreasonably
withheld).
10. DEFINED TERMS. All capitalized terms used but not defined herein
shall have the meanings given to them in the Agreement.
11. NO OTHER CHANGES. Except as specifically set forth in this Amendment,
the Agreement shall remain in full force and effect.
[INTENTIONALLY BLANK -- SIGNATURES FOLLOW]
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the day and year first above written.
Convergent Communications Services, Inc.,
a Colorado corporation
By: /s/ Keith V. Burge
-----------------------------------
Name: Keith V. Burge
Its: President and Chief Operating
Officer
Tie/Communications, Inc., a Delaware corporation,
Debtor and Debtor in Possession
By: /s/ Michael R. Dozier
-----------------------------------
Name: Michael R. Dozier
Its: President & Chief Operating Officer
3
<PAGE>
EXHIBIT 10.7
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT ("Agreement") is made effective this 30th
day of June, 1998 by and between CONVERGENT CAPITAL CORPORATION, a Colorado
corporation ("C3") whose address is 400 Inverness Drive South, Suite 450,
Englewood, Colorado 80112, CONVERGENT COMMUNICATIONS, INC. , a Colorado
corporation ("Convergent") whose address is 400 Inverness Drive South, Suite
400, Englewood, Colorado 80112 and CMB HOLDINGS, INC. D/B/A INDEPENDENT
EQUIPMENT COMPANY, a Florida corporation ("IEC"), whose address is 2471
McMullen Booth Road, Suite 309, Clearwater, Florida 34619 (hereinafter
collectively referred to as "the parties").
RECITALS
A. C3 is desirous of buying certain of IEC's assets and IEC is
desirous of selling certain of IEC's assets to C3;
B. This Agreement is intended to comply with the requirements of
Internal Revenue Code Section 368(a)(1)(C) for the deferral of gain
recognition.
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein, both parties agree as follows:
1. IDENTIFICATION AND TRANSFER OF ASSETS AND ASSUMPTION OF LIABILITIES.
1.1 IDENTIFICATION OF ASSETS TO BE TRANSFERRED TO C3. The assets
described in EXHIBIT 1.1 shall collectively constitute the "Identified
Assets."
1.2 ASSUMPTION OF CERTAIN LIABILITIES. Except for those
liabilities set forth on EXHIBIT 1.2 (the "Assumed Liabilities"), which are
hereby expressly assumed by C3, C3 shall assume no other liabilities and
obligations relating to the Identified Assets. IEC agrees to hold C3
harmless from any other liabilities or obligations incurred by IEC, or
accruing with respect to the Identified Assets, and all other assets of IEC,
with respect to any period prior to and including the Closing Date and from
liabilities or obligations with respect to all other assets of IEC with
respect to any period after the Closing Date.
1.3 TRANSFER OF IDENTIFIED ASSETS. IEC shall take all actions
reasonably requested by C3 to transfer the Identified Assets to C3 including,
but not limited to, the execution of a bill of sale and assignment in the
form attached hereto as EXHIBIT 1.3 ("Bill of Sale"), and all other bills of
sale, assignment and transfer forms, amendments, applications to governmental
agencies, licenses, and reports reasonably required by C3 of IEC to
effectuate the transfer of the Identified Assets.
1.4 RECONCILIATION OF OBLIGATIONS. All obligations regarding the
Identified Assets and the Assumed Liabilities shall be determined as of June 30,
1998 ("Reconciliation
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<PAGE>
Date"). The parties agree to cooperate in the preparation of a
reconciliation schedule ("Reconciliation Schedule") showing the obligations
and benefits accruing to each party as of the Reconciliation Date. The
Reconciliation Schedule shall be delivered at the Closing.
2. CONSIDERATION. The consideration ("Consideration") for the
purchase and sale of the Identified Assets shall be paid by Convergent, on
behalf of C3, to IEC on the Closing Date. On the Closing Date, Convergent
will deliver a treasury request to Convergent's transfer agent requesting the
issuance of Three Hundred Forty Thousand (340,000) shares of Convergent's no
par value common stock ("Convergent Stock") to IEC at the Closing.
3. CLOSING DATE DOCUMENTATION. In addition to the other documents
required hereunder, as a predicate to the closing of the transactions
hereunder, IEC shall supply C3 with the following on or before the Closing
Date.
3.1 TRANSFER DOCUMENTS. Transfer Documents, in form and substance
reasonably satisfactory to C3 and IEC to effect the transfer of the
Identified Assets to C3 pursuant to the terms of this Agreement.
3.2 CONSENTS. Any and all consents, in a form and substance
reasonably satisfactory to C3 and IEC, from any person or entity not a party
to this Agreement whose consent is necessary or desirable for the execution
and performance of this Agreement by C3 and IEC.
3.3 COMPLIANCE CERTIFICATE. All corporate and other proceedings,
including approval by the members and managers of IEC, required to be taken
by or on the part of IEC to authorize IEC to execute, deliver and carry out
this Agreement shall have been duly and properly taken. C3 shall have
received a certificate of authorized individuals of IEC in the form of
EXHIBIT 3.3, dated as of the Closing, certifying to the fulfillment of the
conditions specified in this Agreement.
3.4 RECONCILIATION SCHEDULE. The Reconciliation Schedule pursuant
to Section 1.4 of this Agreement.
3.5 CONSULTING AGREEMENT. C3 and Clay M. Biddinger shall enter
into a consulting agreement ("Consulting Agreement") in substantially the
same form as EXHIBIT 3.5 attached hereto.
4. REPRESENTATIONS OF IEC. As material representations to induce C3
to enter into this transaction, IEC represents to C3 as follows:
4.1 OWNERSHIP. The Identified Assets transferred pursuant hereto
are owned by IEC, free and clear of all liens, encumbrances, agreements and
claims with or of third parties.
4.2 CORPORATE STATUS AND AUTHORITY. IEC is a corporation duly
organized and existing in good standing under the laws of the state of its
incorporation and is fully
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<PAGE>
authorized to carry on its business as it is now being conducted and to enter
into the transactions herein set forth. IEC is duly qualified to transact
business as a foreign corporation and is in good standing in each of the
jurisdictions requiring such qualification whether by reason of the ownership
or leasing of its properties or the conduct or nature of its business. All
director or shareholder approvals required have been secured to the extent
required. Except as set forth on EXHIBIT 4.2, no consents, approvals, or
filings from or with any person or entity other than those delivered to C3
herewith are necessary for the execution, delivery and performance by IEC of
this Agreement and the transactions contemplated hereby. IEC has all
requisite power and authority to execute this Agreement and carry out all the
actions required of it herein. This Agreement is the legal, valid and
binding agreement of IEC enforceable against IEC in accordance with its terms.
4.3 PENDING CLAIMS. IEC is not presently subject to any claim
which would materially and adversely affect the Identified Assets such as:
litigation; disclosed or undisclosed claims or liabilities; or pending
governmental investigations or complaints of any kind or description. The
Identified Assets are subject to no contracts, claims or liens other than as
set forth in EXHIBIT 4.3.
4.4 COMPLIANCE WITH OTHER INSTRUMENTS. The execution, delivery
and performance of and compliance with this Agreement, or any agreement or
instrument contemplated hereby, by IEC will not result in any violation of
its Articles of Incorporation or By-laws or be in material conflict with or
constitute a default in any material respect under any term of any agreement,
instrument, judgment, decree, or, to the knowledge of IEC, any order,
statute, rule or governmental regulation applicable to IEC, or result in the
creation of any lien, charge or encumbrance of any kind or nature on the
Identified Assets.
4.5 UNDISCLOSED LIABILITIES. IEC does not have, with respect to
its current operation, any material and undisclosed liabilities or
obligations of any nature affecting the Identified Assets.
4.6 TAX LIENS. There are no tax liens on any of the Identified
Assets. IEC has duly filed all federal, state and local tax returns and
reports (including, without limitation, returns for estimated tax), and all
returns and reports for any other governmental units or taxing authorities
having jurisdiction with respect to any taxes required to be paid by IEC,
except where extensions have been applied for and granted, and where such
extensions have not expired; all such returns and all such reports show the
correct and proper amounts due, and all taxes shown on such returns and
reports and all assessments received by IEC have been paid to the extent that
such taxes or any estimates thereon have become due. From the date of this
Agreement until the Closing, IEC shall pay all taxes as and when the same
become due and payable.
4.7 LIQUIDATION. IEC has not adopted any plan of liquidation or
dissolution affecting the Identified Assets.
4.8 STOCK REPRESENTATIONS. IEC (i) intends to acquire the Convergent
Stock pursuant to Section 1 hereof solely for the purpose of investment and not
for the resale and
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<PAGE>
distribution thereof, and has no present intention to offer, sell, pledge,
hypothecate, assign or otherwise dispose of the same, other than as
contemplated by this Agreement; (ii) understands and acknowledges that the
issuance of the Convergent Stock will not be registered under the Securities
Act of 1933, as amended (the "Securities Act"), the shares of Convergent
Stock being acquired pursuant to this Agreement constitute "restricted
securities" as that term is defined under Rule 144 promulgated under the
Securities Act and may not be sold except pursuant to a registration
statement under the Securities Act or pursuant to an exemption available
under federal and applicable Securities laws, and such shares may be required
to be held indefinitely unless the shares are subsequently registered under
the Securities Act or an exemption from such registration is available, (iii)
agrees that it will not offer, sell, pledge, hypothecate, transfer, assign or
otherwise dispose of any such shares of Convergent Stock unless such shares
and such offer, pledge, hypothecation, transfer, assignment or other
disposition shall be registered or exempt from registration under the
Securities Act and shall comply with all applicable federal and state
securities laws, and (iv) agrees and acknowledges that the stock certificates
representing the shares of Convergent Stock which will be issued to IEC under
this Agreement will contain a legend restricting the transferability of the
shares as provided herein and that stop order instructions may be imposed by
Convergent's transfer agent restricting the transferability of the shares.
4.9 ACCURACY OF DOCUMENTS AND INFORMATION. The copies of all
instruments, agreements, other documents and written information set forth
as, or referenced in, Exhibits and attachments to this Agreement or
specifically required to be furnished pursuant to this Agreement to C3 by IEC
are and will be complete and correct in all material respects. There have
been no material changes, and will be no material changes as of the Closing
Date, in the information set forth in the Exhibits and attachments between
the date of the Exhibits and attachments and the date of this Agreement. No
representations or warranties made by IEC in this Agreement, nor any
document, written information, statement, financial statement, certificate,
Exhibit or attachment furnished to C3 pursuant to the requirements of this
Agreement contains any untrue statement of a material fact, or omits to state
a material fact necessary to make the statements or facts contained therein
not misleading. There is no fact which materially and adversely affects the
Identified Assets known to IEC which has not been expressly and fully set
forth in this Agreement or the Exhibits and attachments hereto.
4.10 DISCLOSURE. No representation or warranty whether contained
in this Agreement or in any certificates provided to C3 pursuant to this
Agreement contains or will contain any materially untrue statement or omits,
or will omit, to state a material fact necessary to make any such
statement(s) not misleading.
4.11 ACCURACY OF REPRESENTATIONS. In the event that any of the
foregoing representations or warranties should be inaccurate as of the
Closing Date, IEC shall have thirty (30) days after written notice from C3 in
which to cure such inaccuracy.
5. IEC'S EMPLOYEES AND CUSTOMERS. C3 is not a successor business to
IEC nor any operation of IEC. C3 shall not be liable for any obligations
which IEC has on any contracts including employment contracts, existing or
future workers compensation claims, employment
-4-
<PAGE>
discrimination claims, unfair labor practice claims, or compensation claims
except those obligations, if any, specifically identified on EXHIBITS 1.1 and
1.2 and any obligations of which C3 hereby specifically assumes in writing.
C3 is purchasing the Identified Assets and Assumed Liabilities only, and it
is not taking over any employment contracts for any employees or any
obligations under agreements entered into by IEC in its own right and C3
shall not be liable for any sums owed to customers by IEC.
6. REPRESENTATIONS OF C3. As material representations to induce IEC
to enter into this transactions, C3 represents to IEC as follows:
6.1 CORPORATE STATUS AND AUTHORITY. C3 is a corporation duly
organized and existing in good standing under the laws of the state of its
incorporation and is fully authorized to carry on its business as it is now
being conducted and to enter into the transactions herein set forth. C3 is
duly qualified to transact business as a foreign corporation and is in good
standing in each of the jurisdictions requiring such qualification whether by
reason of the ownership or leasing of its properties or the conduct or nature
of its business. All corporate approvals required have been secured. No
consents, approvals, or filings from or with any person or entity other than
those delivered to IEC herewith are necessary for the execution, delivery and
performance by C3 of this Agreement and the transactions contemplated hereby.
C3 has all requisite power and authority to execute this Agreement and carry
out all the actions required of it herein. This Agreement is the legal,
valid and binding agreement of C3 enforceable against C3 in accordance with
its terms.
6.2 COMPLIANCE WITH OTHER INSTRUMENTS. The execution, delivery
and performance of and compliance with this Agreement, or any agreement or
instrument contemplated hereby, by C3 will not result in any violation of its
Certificate of Incorporation or Bylaws or be in material conflict with or
constitute a default in any material respect under any term of any agreement,
instrument, judgment, decree, or, to the knowledge of C3, any order, statute,
rule or governmental regulation applicable to C3.
6.3 DISCLOSURE. No representation or warranty whether contained
in this Agreement or in any certificates provided to IEC pursuant to this
Agreement contains or will contain any materially untrue statement or omits,
or will omit, to state a material fact necessary to make any such
statement(s) not misleading.
7. OBLIGATIONS PRIOR TO THE CLOSING DATE. The following conditions
and obligations shall be satisfactorily performed prior to the Closing Date.
7.1 GOVERNMENTAL AGENCY APPROVALS. Any governmental agencies
whose approval is required prior to the consummation of the transactions
contemplated by this Agreement shall have approved such sale on the terms
contemplated by this Agreement.
7.2 NOTICES TO CUSTOMERS AND SUPPLIERS. IEC, with the cooperation of
C3 and at IEC's sole expense, shall have provided any notice(s) to its
customers, suppliers, vendors and others required by its contracts, federal or
state laws, rules or regulations, if any, with respect
-5-
<PAGE>
to the transfer of the Identified Assets to C3. The content of such notice(s)
shall be approved by C3.
7.3 PERFORMANCE. Both parties shall have executed and delivered
to the other party this Agreement and the other documents required hereby and
shall have performed and complied in all material respects with all
agreements and conditions required by this Agreement to be performed or
complied with by the parties prior to the Closing Date.
7.4 OPINION OF COUNSEL FOR IEC. C3 shall have been furnished with
an opinion of IEC's counsel, dated the date of the Closing, in substantially
the form of EXHIBIT 7.4 attached hereto.
7.5 OPINION OF COUNSEL FOR C3 AND CONVERGENT. IEC shall have been
furnished with an opinion of C3's and Convergent's counsel, dated the date of
the Closing, in substantially the form of EXHIBIT 7.5 attached hereto.
7.6 NO ACTION TO PREVENT COMPLETION. There shall not have been
instituted and be continuing or threatened any claim, action or proceeding
that would materially adversely affect the Identified Assets, nor shall there
have been instituted and be continuing or threatened any claim, action or
proceeding by or before any court or other governmental body to restrain,
prohibit or invalidate, or to obtain damages in respect of, the transactions
contemplated by this Agreement or which might materially and adversely affect
the rights of C3.
8. CONDUCT OF BUSINESS AND CERTAIN COVENANTS. Prior to the Closing
Date, IEC agrees that, with respect only to the Identified Assets, unless
otherwise specifically provided for in this Agreement or unless otherwise
consented to in writing by C3:
8.1 ORDINARY COURSE. IEC shall conduct its business in the
ordinary course.
8.2 CERTAIN CHANGES. IEC shall not: (i) grant any security
interest to or in connection with the Identified Assets; (ii) make or offer
to make any disposition, including any sale or transfer, of any of the
Identified Assets; (iii) make any change in any method of accounting,
billing, rates, rate structure, tariffs, payment of fees and expenses related
in any way to the Identified Assets; and, (iv) enter into any material
contract, agreement, or commitment relating to the Identified Assets.
9. CLOSING DATE. Closing will occur within three (3) business days
after the completion of due diligence and the receipt of any and all
necessary board, shareholder, governmental or other approvals, but not later
than July 17, 1998, unless extended by mutual agreement of the parties, and
will take place at the offices of C3.
10. NOTICES. Notices required or allowed hereunder shall be deemed
given when hand delivered or when deposited in the United States mail,
postage prepaid, return receipt requested, to the parties at the following
addresses:
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<PAGE>
If to C3: Convergent Capital Corporation
Convergent Communications, Inc.
400 Inverness Drive South, Suite 450
Englewood, Colorado 80112
Attn.: Legal Department
If to IEC: CMB Holdings, Inc. d/b/a Independent Equipment
Company
2471 McMullen Booth Road, Suite 309
Clearwater, Florida 34619
Attn.: Mr. Clay Biddinger
with a copy to: Temple H. Drummond, Esq.
Kass Hodges, P.A.
1505 N. Florida Avenue
Tampa, Florida 33602
or to such other addresses as may from time to time be supplied.
11. INDEMNITY.
11.1 IEC'S INDEMNIFICATION. Notwithstanding the Closing and
regardless of any investigation at any time made by or on behalf of C3 or of
any information C3 may have in respect thereof, IEC will indemnify, defend
and save and hold each of C3 and Convergent harmless from and against any
costs, expenses, damages, liabilities, losses or deficiencies, including,
without limitation, reasonable attorneys' fees and other costs and expenses
incident to any suit, action or proceeding (collectively "Losses") suffered
or incurred by C3 and/or Convergent arising out of or resulting from, and
will pay C3 and/or Convergent on demand the full amount of any such amounts
which either of C3 or Convergent may pay or may become obligated to pay in
respect of:
(a) any material inaccuracy in any representation or document
delivered under or pursuant to this Agreement or the material breach of any
warranty made by IEC in or pursuant to this Agreement;
(b) any material misrepresentations in or omission from any
Exhibit, schedule, or other attachment to this Agreement;
(c) any failure by IEC duly to perform or observe any term,
provision, covenant, or agreement in this Agreement to be performed or
observed on the part of IEC;
(d) acts or omissions in connection with business activities
conducted or to be conducted by IEC, including, without limitation, the sale
of goods or provision of services, prior to the Closing Date; or
-7-
<PAGE>
(e) any action, suit, investigation, proceeding, demand,
assessment, audit, judgment and claim, including any employment-related
claim, arising out of the foregoing (collectively "Claims"), even though such
Claims may not be filed or come to light until after the Closing Date.
C3 hereby covenants and agrees to immediately provide to IEC any and
all notifications or other correspondence it receives related to matters
which may affect this indemnity and hereby agrees to allow IEC to defend any
and all actions affecting this indemnity and shall not settle any action or
dispute affecting this indemnity without obtaining the prior written consent
of IEC.
All statements of fact contained in any written statement, certificate,
schedule or other document delivered to C3 by or on behalf of IEC attached to
this Agreement shall be deemed representations and warranties by IEC
hereunder.
11.2 C3'S INDEMNIFICATION. C3 agrees that notwithstanding the
Closing and regardless of any investigation at any time made by or on behalf
of IEC or any information IEC may have in respect thereof, C3 will
indemnify, defend and save and hold IEC harmless from and against any Losses
suffered or incurred by IEC arising out of or resulting from, and will pay
IEC on demand the full amount of any such amounts which IEC may pay or may
become obligated to pay in respect of:
(a) any material inaccuracy in any representation or the
breach of any warranty made by C3 in or pursuant to this Agreement;
(b) any failure by C3 duly to perform or observe any item,
provision, covenant or agreement in this Agreement to be performed or
observed on the part of C3, as applicable; or
(c) acts or omissions in connection with business activities
conducted or to be conducted by C3, including, without limitation, the sale
of goods or provision of services, following the Closing Date.
12. NO THIRD PARTY BENEFICIARIES. This Agreement shall be for and
inure to the benefit of C3 and IEC and there shall be no third party
beneficiaries hereto. Specifically excluded from any beneficial status
hereunder are IEC's creditors, employees, customers and suppliers.
13. GOVERNING LAW AND FORUM. This Agreement shall be construed under
the laws of the state of Colorado, without regard to its choice of law
provisions (except as to the applicable bulk sales laws, where it is agreed
that to the extent the parties' ability to so designate is restricted, the
laws of the applicable state shall apply) and any action to enforce, construe
or modify this Agreement shall be brought in an appropriate court of
competent jurisdiction in Colorado.
-8-
<PAGE>
14. BINDING NATURE. This Agreement shall be binding upon and inure to
the benefit of the parties hereto and their respective heirs, successors and
assigns. This Agreement shall not be assigned by either party without the
express written consent of the other party.
15. PARAGRAPH HEADINGS. The section and paragraph headings contained
in this Agreement are for reference purposes only and shall not affect in any
way the meaning or interpretation of this Agreement.
16. TIME OF THE ESSENCE. Time is of the essence of this Agreement and
the obligations of the parties hereunder.
17. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations,
warranties, indemnifications and agreements of C3 and IEC provided herein
shall survive the Closing for a period of two (2) years following the Closing
Date.
18. WAIVER. The failure of either of the parties hereto to enforce any
provision of this Agreement shall not be construed to be a waiver of such
provision or of the right thereafter to enforce the same, and no waiver of
any breach shall be construed as an agreement to waive any subsequent breach
of the same or any other provisions.
19. EXPENSES. Except as expressly provided herein, each party will pay
their own expenses, including fees of their respective attorneys, accountants
and consultants in connection with this transaction.
20. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
21. NO BROKERS OR AGENTS. IEC represents that it has not used the
services of any brokers or agents in the negotiation or consummation of this
Agreement such that any commissions or fees are due to any such broker or
agent based upon the transactions herein set forth. C3 represents that it has
not used the services of any brokers or agents in the negotiation or
consummation of this Agreement such that any commissions or fees are due to
any such broker or agent based upon the transactions herein set forth.
Should any such claim be advanced by any such foregoing broker or agent, it
is agreed that the satisfaction of such claim shall be the sole
responsibility of the party which it is claimed utilized the services of such
broker or agent.
22. CONFIDENTIALITY. IEC and C3 agree to not disclose the terms and
conditions of this Agreement except (i) as may be required to fulfill
obligations hereunder; (ii) as may be required by law, regulation, custom or
judicial or administrative proceeding; or, (iii) as and to the extent such
information becomes known to the general public through no fault of either
party in tangible, demonstrable form. Both parties shall take reasonable
precautions to insure that their respective employers, employees and agents
also treat such information in a confidential manner. The obligations of
confidentiality shall survive the consummation of the transactions herein set
forth.
-9-
<PAGE>
23. TAXES. C3 shall be responsible for and shall pay all federal,
state and municipal taxes or other charges, if any, on the sale of the
Identified Assets except income taxes payable by IEC on the Consideration.
24. SEVERABILITY. It is agreed and understood that should any of the
provisions of this Agreement be determined by any court of competent
jurisdiction to be invalid or void for any reason, then the parties consent
that this Agreement shall be amended retroactive to the date of its execution
to include all terms and conditions other than those found by the court to be
invalid or void in order to give effect to the parties intent.
25. PUBLIC ANNOUNCEMENT. Each party acknowledges and agrees that
either may make a public announcement of the transactions contemplated by
this Agreement any time after the date of execution of this Agreement
provided that the other party approves the form and substance of any such
public announcement prior to its release, which approval shall not be
unreasonably withheld or delayed.
26. FORCE MAJEURE. This Agreement and the obligations of the parties
hereunder shall not be impaired or invalidated and a party shall not be in
breach hereof if such party is unable to fulfill any of its obligations
hereunder or is delayed in doing so by reason of strike, labor troubles, acts
of God or any other cause beyond the reasonable control of such party.
27. ATTACHMENTS. All Exhibits and attachments to this Agreement are
made a part of this Agreement by this reference. Any information disclosed
in an Exhibit or attachment shall be deemed to be disclosed and incorporated
into any other Exhibit or attachment where such disclosure would be
appropriate.
28. ADDITIONAL DOCUMENTATION. IEC shall from time to time, subsequent
to Closing, at C3's request and without further consideration, execute and
deliver such other instruments of conveyance, assignment and transfer and
take such other action as C3 reasonably may require in order more effectively
to effectuate the purchase of the Identified Assets.
29. ARBITRATION. Notwithstanding anything to the contrary herein, any
dispute arising pursuant to or in any way related to this Agreement or the
transactions contemplated hereby shall be settled by arbitration at a
mutually agreed upon location in Denver, Colorado; provided, however, that
nothing in this Section shall restrict the right of any party to apply to a
court of competent jurisdiction for emergency relief pending final
determination of a claim by arbitration in accordance with this Section. All
arbitration shall be conducted in accordance with the Commercial Arbitration
Rules of the American Arbitration Association, in force at the time of any
such dispute. Each party shall pay its own expenses associated with such
arbitration, provided that the prevailing party in any arbitration shall be
entitled to reimbursement of reasonable attorneys' fees and expenses
(including, without limitation, arbitration expenses) relating to such
arbitration. The decision of the arbitrators, based upon written findings of
fact and conclusions of law, shall be binding upon the parties; and judgment
in accordance with that decision may be entered in any court having
jurisdiction thereof. In no event shall the arbitrators
-10-
<PAGE>
be authorized to grant any punitive, incidental or consequential damages of
any nature or kind whatsoever.
30. TERMINATION.
30.1 This Agreement may be terminated, and the transactions
contemplated hereby abandoned (i) by the mutual consent of C3 and IEC; (ii)
by C3 or IEC at any time after June 30, 1998 (or such later date as shall
have been agreed to in writing by the parties) if the conditions and
obligations set forth in this Agreement shall not have been fulfilled (or
waived by the party entitled to the benefit thereof) by such date, with no
further liability on the part of any party hereto; provided, however, that no
party shall be released from liability hereunder if any such condition is not
fulfilled by reason of the breach by such party of its obligations hereunder.
30.2 Notwithstanding anything contained in the foregoing to the
contrary, if this Agreement is terminated by C3 due to a failure of IEC to
perform the conditions precedent to the Closing hereunder, IEC shall
immediately refund to C3 all amounts paid to IEC, including, without
limitation, the Earnest Money.
31. ENTIRE AGREEMENT; AMENDMENT. This Agreement, together with the
Exhibits, schedules and attachments hereto, contains the entire understanding
between the parties hereto with respect to the subject matter hereof and no
prior or collateral promises or conditions in connection with or with respect
to the subject matter hereof not incorporated herein shall be binding upon
the parties. No modification, extension, renewal, rescission, termination or
waiver of any of the provisions contained herein or any future
representation, promise or condition in connection with the subject matter
hereof, shall be binding upon either of the parties hereto unless made in
writing and duly executed by both the parties.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their duly authorized representatives on the day and year first
above written.
CONVERGENT CAPITAL CORPORATION,
a Colorado corporation
By: /s/ Philip G. Allen
-----------------------------------------
Philip G. Allen, Secretary
CONVERGENT COMMUNICATIONS, INC.,
a Colorado corporation
By: /s/ Philip G. Allen
-----------------------------------------
Philip G. Allen, Executive Vice President
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<PAGE>
CMB HOLDINGS, INC. D/B/A INDEPENDENT
EQUIPMENT COMPANY,
a Florida corporation
By: /s/ Clay M. Biddinger
-----------------------------------------
Clay M. Biddinger, President
-12-
<PAGE>
Exhibit 12.1
Computation of Ratio of Earnings to Fixed Charges
<TABLE>
<CAPTION>
For the Period
For the Period from
For the Year For the Year For the Year January 1, 1996 Inception For the Year
Ended Ended Ended through through Ended
December 31, December 31, December 31, December 16, December 31, December 31,
1993 1994 1995 1996 1996 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net loss $(56,158) $(388,000) $(79,201) $(221,300) $(575,392) $(9,654,779)
Add:
Interest 1,195 14,781 17,457 20,588 884 155,450
Interest portion of rentals 2,910 6,858 9,586 15,276 5,970 143,833
--------- --------- -------- --------- --------- -----------
Earnings (loss) available for
fixed charges (52,053) (366,361) (52,158) (185,436) (568,538) (9,355,496)
--------- --------- -------- --------- --------- -----------
Fixed charges:
Interest 1,195 14,781 17,457 20,588 884 155,450
Interest portion of rentals 2,910 6,858 9,586 15,276 5,970 143,833
--------- --------- -------- --------- --------- -----------
Total fixed charges 4,105 21,639 27,043 35,864 6,854 299,283
Excess of fixed charges
over earnings $ (56,158) $(388,000) $(79,201) $(221,300) $(575,392) $(9,654,779)
--------- --------- -------- --------- --------- -----------
</TABLE>
<TABLE>
<CAPTION>
Pro Forma For the Pro Forma
For the Year Six Months Ended Six Months
Ended ----------------- Ended
December 31, June 30, June 30, June 30,
1997 1997 1998 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net loss $(47,158,000) $(2,670,177) $(16,279,387) $(31,535,000)
Add:
Interest 20,384,450 8,475 5,882,591 15,732,591
Interest portion of rentals 1,119,856 27,411 182,933 655,127
------------ ----------- ------------ ------------
Earnings (loss) available for
fixed charges (25,653,694) (2,634,291) (10,213,863) (15,147,282)
------------ ----------- ------------ ------------
Fixed charges:
Interest 20,384,450 8,475 5,882,591 15,732,591
Interest portion of rentals 1,119,856 27,411 182,933 655,127
------------ ----------- ------------ ------------
Total fixed charges 21,504,306 35,886 6,065,524 16,387,718
Excess of fixed charges
over earnings $(47,158,000) $(2,670,177) $(16,279,387) $(31,535,000)
------------ ----------- ------------ ------------
</TABLE>
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Registration Statement on Form S-4 (File
No. 333-53953) of our report dated March 4, 1998, on our audits of the
consolidated financial statements of Convergent Communications, Inc. We also
consent to the reference to our firm under the captions "Summary Consolidated
Financial and Operating Data", "Selected Financial Data" and "Experts."
PricewaterhouseCoopers LLP
Denver, Colorado
September 17, 1998
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Registration Statement on Form S-4 (File
No. 333-53953) of our report dated September 4, 1998, on our audits of the
consolidated financial statements of Tie Communications, Inc. We also
consent to the reference to our firm under the captions "Tie Historical
Results of Operations" and "Experts."
PricewaterhouseCoopers LLP
Kansas City, Missouri
September 17, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SUMMARY CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS CONTAINED IN THE REGISTRATION STATEMENT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,073,160
<SECURITIES> 0
<RECEIVABLES> 20,772,889
<ALLOWANCES> 21,389
<INVENTORY> 0
<CURRENT-ASSETS> 10,562,955
<PP&E> 5,448,183
<DEPRECIATION> (610,386)
<TOTAL-ASSETS> 24,922,169
<CURRENT-LIABILITIES> 5,228,728
<BONDS> 965,711
0
0
<COMMON> 24,004,297
<OTHER-SE> 5,276,567
<TOTAL-LIABILITY-AND-EQUITY> 24,922,169
<SALES> 7,415,247
<TOTAL-REVENUES> 10,210,024
<CGS> 6,090,243
<TOTAL-COSTS> 7,368,509
<OTHER-EXPENSES> 12,435,788
<LOSS-PROVISION> 5,709
<INTEREST-EXPENSE> 152,071
<INCOME-PRETAX> (9,654,779)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,654,779)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,654,779)
<EPS-PRIMARY> (0.46)
<EPS-DILUTED> (0.46)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SUMMARY CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS CONTAINED IN THE REGISTRATION STATEMENT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JAN-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 64,187,814
<SECURITIES> 0
<RECEIVABLES> 5,805,273
<ALLOWANCES> 165,569
<INVENTORY> 0
<CURRENT-ASSETS> 114,724,096
<PP&E> 14,641,986
<DEPRECIATION> (1,919,902)
<TOTAL-ASSETS> 185,878,540
<CURRENT-LIABILITIES> 19,027,624
<BONDS> 156,353,085
0
0
<COMMON> 25,595,104
<OTHER-SE> (14,349,946)
<TOTAL-LIABILITY-AND-EQUITY> 185,878,540
<SALES> 10,275,084
<TOTAL-REVENUES> 14,504,703
<CGS> 8,315,327
<TOTAL-COSTS> 10,569,675
<OTHER-EXPENSES> 15,725,561
<LOSS-PROVISION> 115,829
<INTEREST-EXPENSE> 5,882,591
<INCOME-PRETAX> (16,279,387)
<INCOME-TAX> 0
<INCOME-CONTINUING> (16,279,387)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (16,279,387)
<EPS-PRIMARY> (0.60)
<EPS-DILUTED> (0.60)
</TABLE>
