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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
---------------------------
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1998
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From ___________ to _______________.
Commission File Number: 0-24509
-------
ALLEGIANCE TELECOM, INC.
(Exact name of registrant as specified in its certificate)
Delaware 75-2721491
- ---------------------------- ---------------------------------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
1950 STEMMONS FREEWAY
SUITE 3026
DALLAS, TEXAS 75207
(Address of principal executive offices)
(Zip Code)
(214) 853-7100
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
[ ] Yes [X] No
AS OF AUGUST 1, 1998, THE REGISTRANT HAS 50,341,554 SHARES OF COMMON
STOCK, PAR VALUE $0.01 PER SHARE OUTSTANDING.
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ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
FORM 10-Q INDEX
<TABLE>
<CAPTION>
Page No.
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of December 31, 1997
and June 30, 1998 .............................................. 3
Condensed Consolidated Statements of Operations for the Three
and Six Months Ended June 30, 1998 ............................. 4
Condensed Consolidated Statement of Cash Flows for the Six
Months Ended June 30, 1998 ..................................... 5
Notes to Condensed Consolidated Financial Statements .............. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ...................................... 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ................................................. 18
Item 2. Changes in Securities and Use of Proceeds ......................... 18
Item 3. Defaults upon Senior Securities ................................... 19
Item 4. Submission of Matters to a Vote of Security Holders ............... 19
Item 5. Other Information ................................................. 19
Item 6. Exhibits and Reports on Form 8-K .................................. 19
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share amounts)
ASSETS
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
---------- -----------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 5,726.4 $177,669.1
Short-term investments -- 62,494.8
Accounts receivable, net of allowance for doubtful accounts of $0
and $62.5 at December 31, 1997 and June 30, 1998, respectively 4.3 1,678.7
Prepaid expenses and other current assets 245.2 460.8
---------- ----------
Total current assets 5,975.9 242,303.4
PROPERTY AND EQUIPMENT:
Property and equipment 23,912.6 50,821.2
Accumulated depreciation and amortization (12.7) (1,226.2)
---------- ----------
Property and equipment, net 23,899.9 49,595.0
OTHER NON-CURRENT ASSETS:
Deferred debt issuance costs (net of accumulated amortization of $252.0) -- 9,948.1
Other assets 171.2 425.2
---------- ----------
Total other non-current assets 171.2 10,373.3
---------- ----------
Total assets $ 30,047.0 $302,271.7
========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 2,261.7 $ 4,569.0
Accrued liabilities and other 1,668.0 8,100.7
---------- ----------
Total current liabilities 3,929.7 12,669.7
LONG-TERM DEBT -- 254,883.2
REDEEMABLE CUMULATIVE CONVERTIBLE PREFERRED STOCK:
Redeemable cumulative convertible preferred stock - 40,498,062 and
40,771,424 shares issued and outstanding at December 31, 1997 and
June 30, 1998, respectively 33,409.4 65,810.6
Preferred stock subscriptions receivable -- --
---------- ----------
Total redeemable cumulative preferred stock 33,409.4 65,810.6
REDEEMABLE WARRANTS -- 8,381.2
COMMITMENTS AND CONTIGENCIES
STOCKHOLDERS' DEFICIT:
Common stock - 426 shares issued and outstanding at December 31, 1997
and June 30, 1998 -- --
Additional paid-in capital 3,008.4 19,500.2
Deferred compensation (2,798.4) (16,921.4)
Accumulated deficit (7,502.1) (42,051.8)
---------- ----------
Total stockholders' deficit (7,292.1) (39,473.0)
---------- ----------
Total liabilities and stockholders' deficit $ 30,047.0 $302,271.7
========== ==========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
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ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1998 June 30, 1998
--------------- ---------------
<S> <C> <C>
REVENUES $ 1,212.0 $ 1,414.9
OPERATING EXPENSES:
Network 1,350.9 1,585.7
Selling 1,771.2 2,461.0
General and administrative 6,303.8 10,315.1
Non-cash deferred compensation 1,389.9 2,368.8
Depreciation and amortization 1,005.1 1,213.5
--------------- ---------------
Total operating expenses 11,820.9 17,944.1
--------------- ---------------
Loss from operations (10,608.9) (16,529.2)
OTHER (EXPENSE) INCOME:
Interest income 3,401.9 5,596.1
Interest expense (7,229.0) (11,898.1)
--------------- ---------------
Total other (expense) income (3,827.1) (6,302.0)
NET LOSS (14,436.0) (22,831.2)
ACCRETION OF REDEEMABLE PREFERRED STOCK AND WARRANT VALUES (6,453.8) (11,718.5)
--------------- ---------------
NET LOSS APPLICABLE TO COMMON STOCK $ (20,889.8) $ (34,549.7)
=============== ===============
NET LOSS PER SHARE, basic and diluted $ (49,037) $ (81,102)
=============== ===============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING, basic and diluted 426 426
=============== ===============
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
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ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months
Ended June 30,
1998
--------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (22,831.2)
Adjustments to reconcile net loss to net cash used in operating
activities --
Depreciation and amortization 1,213.5
Accretion of senior discount notes 11,646.1
Amortization of deferred debt issuance costs 252.0
Deferred compensation 2,368.8
Changes in assets and liabilities --
Accounts receivable (1,674.4)
Prepaid expenses and other current assets (215.6)
Other assets (254.0)
Accounts payable 1,085.0
Accrued liabilities and other 3,106.7
--------------
Net cash used in operating activities (5,303.1)
--------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (21,416.9)
Short-term investments (62,494.8)
--------------
Net cash used in investing activities (83,911.7)
--------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of senior discount notes 242,293.6
Proceeds from issuance of warrants 8,183.6
Debt issuance costs (10,200.1)
Proceeds from issuance of redeemable preferred stock 62.5
Proceeds from redeemable capital contributions 20,542.9
Proceeds from preferred stock subscriptions receivable 275.0
--------------
Net cash provided by financing activities 261,157.5
--------------
INCREASE IN CASH AND CASH EQUIVALENTS 171,942.7
CASH AND CASH EQUIVALENTS, beginning of period 5,726.4
--------------
CASH AND CASH EQUIVALENTS, end of period $ 177,669.1
==============
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
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ALLEGIANCE TELECOM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JUNE 30, 1998
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
1. GENERAL:
Allegiance Telecom, Inc., a competitive local exchange carrier ("CLEC"),
seeks to become a leading provider of voice, data, and Internet services to
business, government, and other institutional users in major metropolitan areas
across the United States. Allegiance Telecom, Inc. and its subsidiaries are
referred to herein as the "Company."
The Company plans two phases of development, the first to offer services in
12 of the largest U.S. metropolitan areas ("Phase I markets") and the second to
offer services in 12 additional large metropolitan areas ("Phase II markets") in
the U.S. As of June 30, 1998, Allegiance is operational in three Phase I
markets: New York City, Dallas and Atlanta; and is in the process of deploying
networks in six additional Phase I markets: Chicago, Los Angeles, San Francisco,
Boston, Fort Worth and Washington D.C. Initial facilities-based service for the
New York City market began in the first quarter of 1998, and for the Dallas and
Atlanta markets in the second quarter of 1998. Initial facilities-based service
for the Fort Worth and Chicago markets is scheduled to begin in the third
quarter of 1998, and for the Los Angeles, San Francisco and Boston markets in
the fourth quarter of 1998. The Company is planning to begin providing services
in an additional twelve markets in 1999 and 2000.
Until December 16, 1997, the Company was in the development stage. Since
August 1997, at which time the Company received its initial funding, its
principal activities have included developing its business plans, procuring
governmental authorizations, raising capital, hiring management and other key
personnel, working on the design and development of its local exchange telephone
networks and operations support systems ("OSS"), acquiring equipment and
facilities and negotiating interconnection agreements. Accordingly, the Company
has incurred operating losses and operating cash flow deficits.
The Company's success will be affected by the problems, expenses, and delays
encountered in connection with the formation of any new business, and the
competitive environment in which the Company intends to operate. The Company's
performance will further be affected by its ability to assess potential markets,
secure financing or raise additional capital, implement expanded interconnection
and collocation with incumbent local exchange carrier ("ILEC") facilities, lease
adequate trunking capacity from the ILECs or other CLECs, purchase and install
switches in additional markets, implement efficient OSS and other back office
systems, develop a sufficient customer base, and attract, retain, and motivate
qualified personnel. The Company's networks and the provisioning of
telecommunications services are subject to significant regulation at the
federal, state, and local levels. Delays in receiving required regulatory
approvals or the enactment of new adverse regulation or regulatory requirements
may have a material adverse effect upon the Company. Although management
believes that the Company will be able to successfully mitigate these risks,
there is no assurance that the Company will be able to do so or that the Company
will ever operate profitably.
Expenses are expected to exceed revenues in each location in which the
Company offers service until a sufficient customer base is established. It is
anticipated that obtaining a sufficient customer base will take a number of
years, and positive cash flows from operations are not expected in the near
future.
2. BASIS OF PRESENTATION:
The accompanying unaudited condensed consolidated financial statements have
been prepared by the Company in accordance with generally accepted accounting
principles for interim financial information and are in the form prescribed by
the Securities and Exchange Commission in instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. The interim unaudited financial statements should be read
in conjunction with the audited financial statements of the Company as of March
31, 1998 and for the year ended December 31, 1997. In the opinion of management,
all adjustments (consisting only of normal recurring accruals)
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considered necessary for a fair presentation have been included. Operating
results for the three months ended June 30, 1998 are not necessarily indicative
of the results that may be expected for the year ending December 31, 1998.
Because the Company did not commence operations until August 1997, no
comparative condensed consolidated statements of operations or cash flows are
available.
The accompanying consolidated financial statements include the accounts of
Allegiance Telecom, Inc. and its wholly owned subsidiaries Allegiance Telecom
Service Corporation, Allegiance Telecom of California, Inc., Allegiance Telecom
of the District of Columbia, Inc., Allegiance Telecom of Georgia, Inc.,
Allegiance Telecom of Illinois, Inc., Allegiance Telecom of Maryland, Inc.,
Allegiance Telecom of Massachusetts, Inc., Allegiance Telecom of New Jersey,
Inc., Allegiance Telecom of New York, Inc., Allegiance Telecom of Texas, Inc.,
and Allegiance Telecom International, Inc. All significant intercompany balances
and transactions have been eliminated.
Certain amounts in the prior period's consolidated financial statements have
been reclassified to conform with the current period presentation.
3. SHORT-TERM INVESTMENTS:
Short-term investments consist primarily of commercial paper with original
maturities at date of purchase beyond three months and less than 12 months. Such
short-term investments are carried at their accreted value, which approximates
fair value, due to the short period of time to maturity.
4. PROPERTY AND EQUIPMENT:
Property and equipment includes network equipment, leasehold improvements,
office equipment, furniture and fixtures, and construction-in-progress of
network equipment and leasehold improvements. These assets are stated at cost,
which includes direct costs and interest expense capitalized and are depreciated
once placed in service using the straight-line method. Interest expense for the
three and six months ended June 30, 1998 was $7,704.9 and $12,841.5 before the
capitalization of $475.9 and $943.4 of interest expense related to
construction-in-progress for the three and six months ended June 30, 1998,
respectively. Repair and maintenance costs are expensed as incurred. Property
and equipment at December 31, 1997 and June 30, 1998, consisted of the
following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, USEFUL LIVES
1997 1998 (IN YEARS)
----------- ----------- -----------
<S> <C> <C> <C>
Network equipment .................................. $ -- $ 24,558.6 5-7
Leasehold improvements ............................. 37.5 3,652.1 5-10
Furniture and fixtures ............................. 150.2 545.3 5
Office equipment and other ......................... 89.9 1,007.6 2
----------- -----------
Property and equipment, in service ............... 277.6 29,763.6
Less: Accumulated depreciation ..................... (12.7) (1,226.2)
----------- -----------
Property and equipment in service, net ........... $ 264.9 $ 28,537.4
Construction-in-progress network
equipment ..................................... 19,989.9 14,801.8
Construction-in-progress leasehold
improvements................................... 2,458.7 4,556.4
Construction-in-progress office
equipment and other ........................... 1,186.4 1,699.4
----------- -----------
Property and equipment, net ................. $ 23,899.9 $ 49,595.0
=========== ===========
</TABLE>
5. REPORTING ON THE COST OF START-UP ACTIVITIES:
On April 3, 1998, the American Institute of Certified Public Accountants
issued Statement of Position No. 98-5, "Reporting on the Costs of Start-up
Activities" ("SOP 98-5"). SOP 98-5 requires start-up activities and organization
costs to be expensed as incurred and that start-up cost capitalized prior to the
adoption of SOP 98-5 to be reported as the cumulative effect of a change in
accounting principle. The Company adopted SOP 98-5 during the second quarter of
1998. Adoption of SOP 98-5 did not have an affect on the Company, inasmuch as
the Company had previously expensed all such costs.
6. EARNINGS PER SHARE:
The net loss per share amounts reflected on the statements of operations and
the number of shares outstanding on the balance sheets reflect a 426.2953905
for-one stock split, which occurred in connection with the initial public
offering of Common Stock (the "IPO") (see Note 12). The preferred shares,
warrants and options were not included
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in the net loss per share calculation as the effect from the conversion would be
antidilutive. The net loss applicable to common stock includes the accretion of
redeemable preferred stock and warrant values of $6,453.8 and $11,718.5 for the
three months and six months ended June 30, 1998, respectively.
7. COMPREHENSIVE INCOME:
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"). SFAS 130 establishes reporting and disclosure requirements for
comprehensive income and its components within the financial statements. The
Company's comprehensive income components were immaterial as of June 30, 1998
and the Company had no comprehensive income components as of December 31, 1997;
therefore, comprehensive income is the same as net income for both periods.
8. CAPITAL LEASE:
On May 29, 1998, the Company signed a capital lease agreement for three,
four-fiber rings at an expected total cost of $3,485.0, all of which is expected
to be paid in 1998, for a term of ten years with a renewal term of ten years.
The fiber rings are expected to be placed in service before the end of 1998.
9. LONG-TERM DEBT:
On February 3, 1998, the Company raised gross proceeds of approximately
$250,477.2 in an offering of 445,000 Units (the "Unit Offering"), each of which
consisted of one 11 3/4% Senior Discount Note due 2008 (the "11 3/4% Notes") and
one warrant to purchase .0034224719 shares of Common Stock (the "Redeemable
Warrants") at an exercise price of $.01 per share, subject to certain
antidilution provisions. Of the gross proceeds, $242,293.6 was allocated to the
initial accreted value of the 11 3/4% Notes and $8,183.6 was allocated to the
Redeemable Warrants. The Redeemable Warrants became exercisable in connection
with the IPO (see Note 12) in July 1998, and each warrant may now purchase
1.45898399509 shares of Common Stock.
A Registration Statement on Form S-4 (File No. 333-49013) registering the
Company's 11 3/4% Notes, and offering to exchange (the "Exchange Offer") any and
all of the outstanding 11 3/4% Notes for Series B 11 3/4% Notes due 2008 (the
"Series B Notes"), was declared effective by the Securities and Exchange
Commission on May 22, 1998. The Exchange Offer terminated on June 23, 1998 after
substantially all of the outstanding 11 3/4% Notes were exchanged. The terms and
conditions of the Series B Notes are identical to those of the 11 3/4% Notes in
all material respects.
The Series B Notes have a principal amount at maturity of $445,000.0 and an
effective interest rate of 12.45%. The Series B Notes mature on February 15,
2008. From and after February 15, 2003, interest on the Series B Notes will be
payable semi-annually in cash at the rate of 11 3/4% per annum.
The Company must make an offer to purchase the Redeemable Warrants for
cash at the Relevant Value upon the occurrence of a Repurchase Event. A
Repurchase Event is defined to occur when (i) the Company consolidates with or
merges into another person if the Common Stock thereafter issuable upon
exercise of the Redeemable Warrants is not registered under the Securities
Exchange Act of 1934, as amended (the "Exchange Act") or (ii) the Company sells
all or substantially all of its assets to another person, if the Common Stock
thereafter issuable upon the exercise of the Redeemable Warrants is not
registered under the Exchange Act, unless the consideration for such a
transaction is cash. The Relevant Value is defined to be the fair market value
of the Common Stock as determined by the trading value of the securities if
publicly traded or at an estimated fair market value without giving effect to
any discount for lack of liquidity, lack of registered securities, or the fact
that the securities represent a minority of the total shares outstanding. As
required by SEC accounting standards the Company is recognizing the potential
future redemption value of the Redeemable Warrants by recording accretion of
the Redeemable Warrants to their estimated fair market value at February 3,
2008 using the effective interest method. In the event the Redeemable Warrants
are exercised and used to purchase the Common Stock of the Company or expires,
the redemption provisions terminate and amounts accreted would be reversed as a
reduction of the losses applicable to Common Stock in measuring results of
operations of the Company. Accretion recorded in the three and six months ended
June 30, 1998 was $123.7 and $197.7, respectively.
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The Series B Notes are redeemable by the Company, in whole or in part,
anytime on or after February 15, 2003, at 105.875% of their principal amount at
maturity, plus accrued and unpaid interest, declining to 100% of their principal
amount at maturity, plus accrued and unpaid interest on and after February 15,
2006. In addition, at any time prior to February 15, 2001, the Company may, at
its option, redeem up to 35% of the principal amount at maturity of the Series B
Notes in connection with a public IPO at 111.750% of the accreted value on the
redemption date; provided that at least $289.3 million aggregate principal
amount at maturity of the Series B Notes remains outstanding after such
redemption.
The Series B Notes carry certain restrictive covenants that, among other
things, limit the ability of the Company to incur indebtedness, pay dividends,
issue or sell capital stock, create liens, sell assets, and enter into
transactions with any holder of 5% or more of any class of capital stock of the
Company or any of its affiliates. The Company was in compliance with all such
restrictive covenants at June 30, 1998.
10. LEGAL MATTERS:
On August 29, 1997, WorldCom, Inc. ("WorldCom") sued the Company and two
individual employees. In its complaint, WorldCom alleges that these employees
violated certain noncompete and nonsolicitation agreements by accepting
employment with the Company and by soliciting then current WorldCom employees to
leave WorldCom's employment and join the Company. In addition, WorldCom claims
that the Company tortiously interfered with WorldCom's relationships with its
employees, and that the Company's behavior constituted unfair competition.
WorldCom seeks injunctive relief and damages, although it has filed no motion
for a temporary restraining order or preliminary injunction. The Company denies
all claims and will vigorously defend itself. The Company does not expect the
ultimate outcome to have a material adverse effect on the results of operations
or financial condition of the Company and an estimate of possible loss cannot be
made at this time.
On October 7, 1997, the Company filed a counterclaim against WorldCom for,
among other things, attempted monopolization of the "one stop shopping"
telecommunications market, abuse of process, and unfair competition. WorldCom
did not move to dismiss the attempted monopolization claim, but has moved to
dismiss the abuse of process and unfair competition claims. On March 4, 1998,
the court dismissed the claim for unfair competition.
11. COMMITMENTS AND CONTINGENCIES:
The Company has entered into various operating lease agreements, with
expirations through 2007, for office space and equipment. Future minimum lease
obligations related to the Company's operating leases as of June 30, 1998 are as
follows:
<TABLE>
<S> <C> <C>
1998........ $ 4,492.9
1999........ 4,101.8
2000........ 4,139.0
2001........ 3,539.5
2002........ 3,373.7
Thereafter.. 17,397.2
</TABLE>
Total rent expense for the three and six months ended June 30, 1998, was
$305.5 and $760.3, respectively.
In October 1997, the Company entered into a five-year general agreement with
Lucent Technologies, Inc. ("Lucent") establishing terms and conditions for the
purchase of Lucent products, services, and licensed materials. This agreement
includes a three-year exclusivity commitment for the purchase of products and
services related to new switches. The agreement contains no minimum purchase
requirements.
12. SUBSEQUENT EVENTS:
CAPITALIZATION
In connection with an initial public offering of common stock, the Company
increased the number of authorized common shares and preferred shares to 150
million and 1 million, respectively, and effected a 426.2953905 for-one stock
split which is reflected in the net loss per share amounts and the weighted
number of shares outstanding reflected on the statements of operations, and the
shares outstanding on the balance sheets.
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INITIAL PUBLIC OFFERING
On July 7, 1998, the Company raised $150,000.0 of gross proceeds in the IPO.
The Company sold 10,000,000 shares of its Common Stock at a price of $15 per
share.
On July 7, 1998, certain venture capital investors (the "Fund Investors")
and certain management investors (the "Management Investors") owned 95.0% and
5.0%, respectively, of the ownership interests of Allegiance LLC, an entity that
owned substantially all of the Company's outstanding capital stock. As a result
of the successful IPO, Allegiance LLC will dissolve and its assets (which
consisted almost entirely of such capital stock) have been distributed to the
Fund Investors and the Management Investors in accordance with Allegiance LLC's
Limited Liability Company Agreement (the "LLC Agreement"). The LLC Agreement
provided that the equity allocation between the Fund Investors and the
Management Investors be 66.7% and 33.3%, respectively, based upon the valuation
implied by the IPO. Under generally accepted accounting principles, the Company
will record the increase in the assets of Allegiance LLC allocated to the
Management Investors as a $193,536.6 increase in additional paid-in capital, of
which $122,475.5 will be recorded as a non-cash, non-recurring charge to
operating expense and $71,061.1 will be recorded as a deferred management
ownership allocation charge. The deferred charge will be amortized at $38,058.9,
$6,777.5, $18,870.2, $7,175.7 and $178.8 during the third quarter of 1998, the
fourth quarter of 1998, and the years 1999, 2000, 2001, respectively, which is
the period over which the Company has the right to repurchase the securities (at
the lower of fair market value or the price paid by the employee) in the event
the management employee's employment with the Company is terminated.
In connection with the consummation of the IPO, the outstanding shares of the
Company's Redeemable Cumulative Convertible Preferred Stock (the "Preferred
Stock") have been converted to Common Stock and the obligation of Allegiance LLC
to make additional capital contributions to the Company (and the obligation of
the members of Allegiance LLC to make capital contributions to it) has
terminated. Upon such conversion of the Preferred Stock, the obligation of the
Company to redeem the Preferred Stock also terminated and, therefore, the
accretion of the Preferred Stock value recorded to the date of the IPO will be
reclassified to additional paid-in capital in the stockholders' equity section
of the balance sheet in the third quarter of 1998.
Had the IPO occurred on June 30, 1998, excluding the deferred management
ownership allocation charge to operating expense of $160,534.4 which will be
booked during the third quarter of 1998, the basic net loss per share for the
three and six months ended June 30, 1998 would have been $0.41 and $0.69,
respectively. The diluted net loss per share for the three and six months ended
June 30, 1998 would have been $0.40 and $0.67, respectively. The basic and
diluted shares outstanding would have been 50,341,554 and 51,883,466,
respectively.
NOTE OFFERING
In July 1998, the Company raised approximately $200,918.5 of gross proceeds
from the sale of its 12 7/8% Senior Notes due 2008 (the "July 1998 Debt
Offering") of which approximately $69,033.4 was used to purchase U.S. government
securities, which were placed in a pledged account to secure and fund the first
six scheduled payments of interest on the notes.
The 12 7/8% Senior Notes due 2008 (the "12 7/8% Notes") have a principal
amount at maturity of $205,000.0 with an initial accreted value of $200,918.5.
The 12 7/8% Notes mature on May 15, 2008. Interest on the 12 7/8% Notes will be
payable semi-annually in cash at the rate of 12 7/8% on May 15 and November 15
of each year, commencing November 15, 1998.
The 12 7/8% Notes are redeemable by the Company, in whole or in part, at any
time on or after May 15, 2003, at 106.438% of their principal amount, plus
accrued interest, declining to 100% of their principal amount, plus accrued
interest, on or after May 15, 2006. In addition, prior to May 15, 2001, the
Company may redeem up to 35% of the aggregate principal amount of the 12 7/8%
Notes with the proceeds of one or more public offerings (as defined in the
indenture relating to the 12 7/8% Notes) at 112.875% of their principal amount,
plus accrued
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interest, provided, however, that after any such redemption at least 65% of the
aggregate principal amount of the 12 7/8% Notes originally issued remain
outstanding.
The 12 7/8% Notes carry certain restrictive covenants that, among other
things, limit the ability of the Company to incur indebtedness, create liens,
engage in sale-leaseback transactions, pay dividends or make distributions in
respect of their capital stock, redeem capital stock, make investments or
certain other restricted payments, sell assets, issue or sell stock of
restricted subsidiaries (as defined in the indenture relating to the 12 7/8%
Notes), enter into transactions with stockholders or affiliates or effect a
consolidation or merger. However, these limitations are subject to a number of
important qualifications and exceptions (as defined in the indenture relating to
the 12 7/8% Notes).
RELATED PARTIES
In connection with the IPO and the July 1998 Debt Offering, the Company
incurred approximately $5,250.0 and $3,264.9, respectively, in fees to an
affiliate of an investor in Allegiance LLC.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
Allegiance seeks to be a premier provider of telecommunications services to
business, government and other institutional users in major metropolitan areas
across the United States. As a CLEC, Allegiance anticipates offering an
integrated set of telecommunications products and services including local
exchange, local access, domestic and international long distance, enhanced
voice, data and a full suite of Internet services.
Since the initiation of operations in August 1997, the Company's principal
activities have included developing its business plans, procuring governmental
authorizations, raising capital, hiring management and other key personnel,
working on the design and development of its local exchange telephone networks
and operations support systems ("OSS"), acquiring equipment and facilities and
negotiating interconnection agreements. The Company does not expect to achieve
positive earnings before interest, taxes, depreciation, amortization and
non-cash deferred compensation ("EBITDA") in any market until at least two to
three years after it commences initial service in such market. As a result of
its development activities, the Company has experienced significant operating
losses and negative EBITDA to date.
Allegiance is currently operational in three Phase I markets: New York City,
Dallas and Atlanta; and is in the process of deploying networks in six
additional Phase I markets: Chicago, Los Angeles, San Francisco, Boston, Fort
Worth and Washington D.C. The Company expects to continue to experience
increasing operating losses and negative EBITDA as it expands its operations.
At July 7, 1998, the Fund Investors and Management Investors owned 95.0% and
5.0%, respectively, of the ownership interests of Allegiance LLC, an entity that
owned substantially all of the Company's outstanding capital stock. As a result
of the successful IPO, Allegiance LLC will dissolve and its assets (which
consisted almost entirely of such capital stock) have been distributed to the
Fund Investors and the Management Investors in accordance with the LLC
Agreement. The LLC Agreement provides that the equity allocation between the
Fund Investors and the Management Investors be 66.7%/33.3%, respectively, based
upon the valuation implied by the IPO.
Under generally accepted accounting principles, the Company will be required
to record the $193.5 million increase in the assets of Allegiance LLC allocated
to the Management Investors as an increase in additional paid-in capital, of
which the Company will be required to record $122.4 million as a non-cash,
non-recurring charge to operating expense and $71.1 million will be recorded as
a deferred management ownership allocation charge. The deferred charge will be
amortized at $38.1 million, $6.8 million, $18.9 million, $7.1 million and $.2
million during the third quarter of 1998, the fourth quarter of 1998, and the
years 1999, 2000 and 2001, respectively, which is the period over which the
Company has the right to repurchase the securities (at the lower of fair market
value or the price paid by the employee) in the event the management employee's
employment with the Company is terminated.
Revenues
The Company generated $1.2 million and $1.4 million in revenue during the
three months and six months ended June 30, 1998, respectively. As of June 30,
1998, the Company had sold approximately 21,100 access lines, of which
approximately 11,000 were installed. Comparable numbers as of March 31, 1998
were approximately 4,700 lines sold and approximately 3,000 lines installed.
Revenues realized to date have been derived exclusively from sales of
telecommunications services, principally local service. There have been no sales
of customer premise equipment, no revenue from installation of customer premise
equipment, no revenue from system integration activities, no wireless revenue
and no data or internet service provider (ISP) revenue. The Company expects to
initiate data and ISP services during the fourth quarter of 1998. The Company
has no plans to sell customer premise equipment, install customer premise
equipment or sell system integration or wireless services in the foreseeable
future. Allegiance generates sales through its direct sales force, which
numbered less than five at December 31, 1997 but represents about 100 of
Allegiance's total staff at June 30, 1998. The Company does not use agents to
sell its services, and has no plans to do so in the future.
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Operating Expenses
The Company's primary operating expenses will consist of network, selling,
general and administrative expenses.
Network Costs (Cost of Services). Under its "smart build" strategy,
Allegiance plans to deploy digital switching platforms with local and long
distance capability and initially lease fiber trunking capacity from the ILECs
and other CLECs to connect the Company's switch with its transmission equipment
collocated in ILEC central offices. Allegiance will lease unbundled copper loop
lines and high capacity digital lines from the ILECs to connect the Company's
customers and other carriers' networks to the Company's network. Allegiance
plans to lease capacity or overbuild specific network segments as economically
justified by traffic volume growth. The Company is moving to the next stage of
its "smart build" strategy in New York City where the Company has entered into a
lease agreement with Metromedia Fiber Network, Inc. for three "dark fiber" rings
in Manhattan with an extension into Brooklyn. In addition, Allegiance expects to
increase the capacity of its switches, and may add additional switches, in a
market as demand warrants.
In October 1997, the Company entered into a five-year general agreement with
Lucent establishing terms and conditions for the purchase of Lucent products,
services and licensed materials. The agreement includes a three-year exclusivity
commitment for the purchase of products and services related to new switches.
The agreement contains no minimum purchase requirements.
The Company expects switch site lease costs will be a significant part of
the Company's ongoing cost of services. The costs to lease unbundled copper loop
lines and high capacity digital lines from the ILECs will vary by ILEC and are
regulated by state authorities pursuant to the Telecommunications Act. The
Company believes that in most of the markets it plans to enter there are
multiple carriers in addition to the ILEC from which it could lease trunking
capacity. The Company expects that the costs associated with these leases will
increase with customer volume and will be a significant part of the Company's
ongoing cost of services.
Collocation costs are also expected to be a significant part of the
Company's network development and ongoing cost of services. Under the
Telecommunications Act, carriers like the Company must be allowed to place their
equipment within the central offices of the ILEC for the purposes of
interconnecting its network with that of the ILEC ("collocation"). For example,
Allegiance will use collocation to access the ILECs unbundled networks elements.
This collocation can be a physical space or cage within the ILEC central office
where the Company would place its equipment. In some cases, virtual collocation
would be used where the ILEC places equipment within the central office and
would maintain the equipment on behalf of the Company. In this virtual
collocation scenario, the Company would not have physical access to the ILEC's
central office. For use of their central offices for collocation, ILECs
typically charge both a start-up fee as well as a monthly recurring fee. The
Company will be required to invest a significant amount of funds to develop the
central office collocation sites and to deploy the transmission and distribution
electronics. As of June 30, 1998, the Company was physically collocated in seven
ILEC central offices, and had hubbing arrangements in seven additional central
offices. In a hubbed central office, the Company connects its switching
equipment to an ILEC central office via a leased, high capacity circuit. The
Company also purchases, from the ILEC, multiplexing services and high capacity
circuits to customer premises in order to connect the customer to the Allegiance
network. Typically, the hubbing arrangement is implemented in advance of
collocation; it may continue indefinitely depending upon the quantity and type
of services provided over that facility.
In order to enter a market, Allegiance must enter into an interconnection
agreement with the ILEC to make ubiquitous calling available to its customers.
Typically these agreements set the cost per minute to be charged by each party
for the calls which have traversed between each carrier's network. These costs
will grow in proportion to the Company's customers outbound call volume and are
expected to be a major portion of the Company's cost of services. However, the
Company does expect to generate increased revenue from the ILECs as the
Company's customers inbound calling volume increases. To the extent the
Company's customers' outbound call volume is equivalent to their inbound call
volume, the Company expects that its interconnection costs paid to the ILECs
will be substantially offset by the interconnection revenues received from the
ILECs.
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The Company has entered into one resale agreement with a long distance
carrier to provide the Company with transmission services and expects to enter
into resale agreements with other carriers in the future. Such agreements
typically provide for the resale of long distance services on a per-minute basis
and may contain minimum volume commitments; however, the existing resale
agreement does not contain any minimum volume commitments. In the event the
Company fails to meet its minimum volume commitments, it may be obligated to pay
underutilization charges and in the event it underestimates its need for
transmission capacity, the Company may be required to obtain capacity through
more expensive means. These costs will increase as the Company's customers' long
distance calling volume increases, and the Company expects that these costs will
be a significant portion of its cost of long distance services. As traffic on
specific routes increases, the Company may lease long distance trunk capacity.
Selling, General and Administrative Expenses. The Company's selling, general
and administrative expenses will include its infrastructure costs, including
selling and marketing costs, customer care, billing, corporate administration,
personnel and network maintenance.
The Company plans to employ a large direct sales force in each market and to
build a national sales force as the Company grows. To attract and retain a
highly qualified sales force, the Company plans to offer its sales and customer
care personnel a compensation package emphasizing commissions and stock options.
The Company expects to incur significant selling and marketing costs as it
continues to expand its operations. In addition, Allegiance plans to offer sales
promotions to win customers, especially in the first few years as its
establishes its market presence.
Allegiance has acquired and integrated back office systems to facilitate a
smooth, efficient order management, provisioning, installation, trouble
management, billing and collection, and customer service process. Allegiance has
licensed and is using MetaSolv software for order management and customer
provisioning, Lucent's ConnectVu for switch provisioning and Intertech for
billing. The Company is actively working toward "electronic bonding" between the
Allegiance operating support systems and those of the ILEC which will permit
creation of service requests on-line and real-time monitoring of the
provisioning and installation process.
During the second quarter of 1998, Allegiance achieved permanent local
number portablilty in New York with Bell Atlantic and in Texas with Southwestern
Bell. Allegiance entered into an agreement with DSET Corporation to utilize
DSET's Service Order Administration Gateway for local number portability
implementation.
Along with the development cost of the systems, the Company will also incur
ongoing expenses for customer care and billing. As the Company's strategy
stresses the importance of personalized customer care, the Company expects that
its customer care department will become a larger part of the Company's ongoing
administrative expenses. The Company also expects billing costs to increase as
its number of customers, and the call volume, increases. Billing is expected to
be a significant part of the Company's ongoing administrative expenses.
Allegiance will incur other costs and expenses, including the costs
associated with the maintenance of its network, administrative overhead, office
leases and bad debt. The Company expects that these costs will grow
significantly as its expands its operations and that administrative overhead
will be a large portion of these expenses during the start-up phase of the
Company's business. However, the Company expects these expenses to become
smaller as a percentage of the Company's revenue as the Company builds its
customer base.
RESULTS OF OPERATIONS
Because the Company did not commence operations until August 1997, no
comparative data for the periods presented herein is available.
For the three months and six months ended June 30, 1998, the Company
generated revenues of $1.2 million and $1.4 million, respectively, from local
and long distance services. As of June 30, 1998, the Company had sold
approximately 21,100 access lines, of which approximately 11,000 were installed.
Access lines sold increased approximately 350% and lines installed increased
approximately 265% from March 31, 1998 levels. At the beginning of 1998, there
were limited numbers of lines installed.
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The Company expects to continue to experience increasing operating losses
and negative EBITDA as it expands its operations. The net loss (after accreting
redeemable preferred stock and warrant values) for the second quarter was $20.9
million and was $34.5 million for the six months ended June 30, 1998. EBITDA for
the same periods was a negative $8.2 million and negative $12.9 million,
respectively. EBITDA excludes the non-cash deferred compensation charge to
operations of $1.4 million and $2.4 million for the three and six months ended
June 30, 1998, respectively.
For the three and six months ended June 30, 1998, the Company incurred
network costs of approximately $1.4 million and $1.6 million. The Company also
incurred $8.1 million and $12.8 million for selling and general and
administrative expenses during the same periods, respectively. These expenses
primarily result from an expansion of the Company's staffing from less than 50
at December 31, 1997, to approximately 250 full-time staff at June 30, 1998.
Approximately 40% of the staff at June 30, 1998 are sales personnel.
In addition to the above expenses, the Company recognized $1.4 million and
$2.4 million amortization of deferred stock compensation expense for the three
and six months periods ended June 30, 1998, a non-cash charge. Interest expense
for the three months then ended was $7.2 million, and for the six months ending
at the same date, it was $11.9 million. These amounts reflect the issuance of
the 11 3/4% Notes during February 1998. Interest income during such periods was
$3.4 million and $5.6 million, respectively, resulting from the investment of
the net proceeds from equity contributions and the sale of the 11 3/4% Notes and
Redeemable Warrants.
As required by accounting principles promulgated by the Securities and
Exchange Commission, the Company has recorded the potential redemption values of
the Redeemable Convertible Preferred Stock and the Redeemable Warrants in the
potential event that they are redeemed at fair market value in August 2004 and
February 2008, respectively. Amounts are accreted using the effective interest
method and management's estimates of the future fair market value of these
securities when redemption is first permitted. Amounts accreted increase the
recorded value of the Redeemable Convertible Preferred Stock and Redeemable
Warrants on the balance sheet and result in a non-cash charge to increase the
net loss applicable to Common Stock. Upon consummation of the Company's initial
public offering in July 1998, such preferred stock was converted into Common
Stock. Accordingly, the amounts accreted for the Redeemable Convertible
Preferred Stock will be reclassified as an increase to additional paid-in
capital in the stockholders' equity section of the balance sheet, and there will
be no additional accretion of Redeemable Convertible Preferred Stock values
beyond that point in time.
FINANCIAL CONDITION
The balance sheet of Allegiance at June 30, 1998 reflects additional cash,
short-term investments, deferred debt issuance costs, long-term debt and
redeemable warrants compared to the December 31, 1997 balance sheet as a result
of the Unit Offering in February 1998 wherein 11 3/4% Notes and Redeemable
Warrants were sold. Accounts receivable increased during the same period as the
Company's networks in New York City, Dallas and Atlanta became operational.
Property and Equipment, net of accumulated depreciation, increased between
June 30, 1998 and December 31, 1997 from capital expenditures incurred in
building out the Company's networks in New York City, Dallas, Atlanta, Chicago,
Los Angeles, San Francisco, Boston, Fort Worth and Washington, D.C., from
developing operations support and other systems required to effectively manage
the business and to provide general office space and equipment for employees.
Accounts payable and accrued liabilities have increased consistent with
operations and the Company's policy to make use of working capital in funding
network buildouts and operations. Redeemable cumulative convertible preferred
stock increased as a result of additional contributions from Management
Investors and Fund Investors received during the period.
Stockholders' deficit increased consistent with the net loss for the six
months ending June 30, 1998, and from the recognition of deferred compensation
(consistent with accounting rules promulagated by the SEC) from the issuance of
options and shares in Allegiance LLC purchased by Management Investors at prices
below fair market value.
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LIQUIDITY AND CAPITAL RESOURCES
Allegiance plans to establish networks in 24 Tier I U.S. markets. The
Company plans to deploy its networks principally in two phases of development,
each to contain 12 major U.S. metropolitan markets.
At June 30, 1998, Allegiance was operational in three Phase I markets: New
York City, Dallas and Atlanta; and in the process of deploying networks in six
additional Phase I markets: Chicago, Los Angeles, San Francisco, Boston, Fort
Worth and Washington, D.C. As part of this effort, in October 1997, the Company
acquired two Lucent Series 5ESS(R)-2000 digital switches in New York City and
Atlanta and certain furniture and fixtures in Dallas from US ONE Communications,
Inc. for an aggregate purchase price of $19.3 million. The Company has also
purchased from Lucent, switches for the Dallas, Chicago, Los Angeles, San
Francisco, Boston and Washington, D.C. markets. The cost of these switches and
related equipment and installation will be approximately $41.6 million.
Allegiance's financing plan is predicated on the pre-funding of each
market's expansion to Positive Free Cash Flow (operating cash flow from a market
sufficient to fund such market's operating costs and capital expenditures). This
approach is designed to allow the Company to be opportunistic and raise capital
on more favorable terms and conditions.
To pre-fund each Phase I market's expansion, the Company raised
approximately $50.1 million from Management Investors and Fund Investors
("Equity Contributions") and received approximately $240.7 million of net
proceeds, after deducting estimated underwriting discounts and commissions and
other expenses payable by the Company, from the sale of 11 3/4% Notes due
2008 and attached Redeemable Warrants in February 1998. Following completion of
the Unit Offering, the Company increased the scope of its business plan to
accommodate (i) an expansion of the Company's network buildout in certain Phase
I markets to include additional central offices, thereby giving the Company
access to a larger number of potential customers in those markets, (ii) an
accelerated and expanded deployment of data, Internet and enhanced services in
the Company's markets and (iii) the acceleration of network deployment in Phase
II markets.
The Company estimates that its cumulative cash requirements to fund its
modified business plan, including pre-funding each Phase I and Phase II market's
expansion to Positive Free Cash Flow, will be between $650 million and $700
million. To supplement the funds raised from Equity Contributions and the Unit
Offering, the Company registered the IPO and the sale of additional notes (the
"July 1998 Debt Offering") during the second quarter of 1998. These
registrations became effective on June 30, 1998, and the consummation of the
transactions occurred on July 7, 1998. Net proceeds of approximately $263.3
million were raised from the combined offerings. The Company has raised
approximately $550 million through the Equity Contributions, the Unit Offering,
the IPO and the July 1998 Debt Offering.
The Company believes, based on its modified business plan, that the net
proceeds from the capital raising activities completed thus far will be
sufficient to pre-fund its Phase I market deployment, including an expansion in
four of these markets, New York, Chicago, Los Angeles and San Francisco, the
complete deployment of the Company's data and ISP plan, and six Phase II
markets, to Positive Free Cash Flow. The Company will require an estimated
additional $100 to $150 million to completely fund its modified business plan.
Sources of additional financing may include commercial bank borrowings, vendor
financing, or the private or public sale of equity or debt securities. There can
be no assurance that such financing will be available on terms acceptable to the
Company or at all, or that the Company's estimate of additional funds required
is accurate.
The actual amount and timing of the Company's future capital requirements
may differ materially from the Company's estimates as a result of, among other
things, the demand for the Company's services and regulatory, technological and
competitive developments (including additional market developments and new
opportunities) in the Company's industry. The Company also expects that it will
require additional financing (or require financing sooner than anticipated) if:
(i) the Company's development plans or projections change or prove to be
inaccurate; (ii) the Company engages in any acquisitions; or (iii) the Company
alters the schedule or targets of its roll-out plan. Sources of additional
financing may include commercial bank borrowings, vendor financing, or the
private or public sale of equity or debt securities. There can be no assurance
that such financing will be available on terms acceptable to the Company or at
all.
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Because the Company's cost of rolling out its networks and operating its
business, as well as the Company's revenues, will depend on a variety of factors
(including the ability of the Company to meet its roll-out schedules, negotiate
favorable prices for purchases of equipment, and develop, acquire and integrate
the necessary OSS and other back office systems, as well as the number of
customers and the services for which they subscribe, the nature and penetration
of new services that may be offered by the Company, regulatory changes and
changes in technology), actual costs and revenues will vary from expected
amounts, possibly to a material degree, and such variations are likely to affect
the Company's future capital requirements. Accordingly, there can be no
assurance that the Company's actual capital requirements will not exceed the
anticipated amounts described above. Further, the exact amount of the Company's
future capital requirements will depend upon many factors, including the cost of
the development of its networks in each of its markets, the extent of
competition and pricing of telecommunications services in its markets, and the
acceptance of the Company's services. Also, the Company expects that the
expansion into additional markets will require additional financing, which may
include commercial bank borrowing, vendor financing, or the public or private
sale of equity or debt securities. There can be no assurance that the Company
will be successful in raising sufficient additional capital at all or on terms
acceptable to the Company.
For the six month period ending June 30, 1998, the proceeds of the Unit
Offering, together with additional Equity Contributions received in 1998, as
well as cash in bank at the beginning of 1998, have been used, in part, to fund
the buildout of networks in New York City, Dallas and Atlanta, each of which is
operational, as well as networks under development in Chicago, Los Angeles, San
Francisco, Boston, Fort Worth and Washington, D.C., to fund the development of
operations support and other systems required to effectively manage the business
and to provide general office space and equipment for its employees. Capital
resources not required for the above purposes were used to fund the operations
of the Company; excess amounts available were used to purchase short-term
investments or money market investments.
On February 3, 1998, the Company raised gross proceeds of approximately
$250.5 million in an offering of 445,000 Units, each of which consists of one 11
3/4% Note and one warrant to purchase .0034224719 shares of Common Stock at an
exercise price of $.01 per share, subject to certain antidilution provisions. Of
the gross proceeds, $242.3 million was allocated to the initial accreted value
of the 11 3/4% Notes and $8.2 million was allocated to the Redeemable Warrants.
The 11 3/4% Notes were the subject of an Exchange Offer during the second
quarter of 1998 and were exchanged for Series B Notes which contain
substantially identical terms and conditions. The Redeemable Warrants became
exercisable in connection with the IPO in July 1998, and each warrant may now
purchase 1.45898399509 shares of Common Stock as a result of a
426.2953905 for-one stock split in connection with the IPO.
The Series B Notes have a principal amount at maturity of $445.0 million and
an effective interest rate of 12.45%. The Series B Notes mature on February 15,
2008. From and after February 15, 2003, interest on the Series B will be payable
semi-annually in cash at the rate of 11 3/4% per annum. The accretion of
original issue discount will cause an increase in indebtedness from June 30,
1998 to February 15, 2008 of $190.1 million. The net proceeds from the sale of
the Series B Notes have been, and are continuing to be, used to fund the
completion of networks in the Phase I markets. See Note 9 to the financial
statements contained in Part I which includes a summary of the terms and
conditions related to the Series B Notes and the Redeemable Warrants.
The 12 7/8% Notes due 2008 issued July 1998, mature May 15, 2008. Interest
is payable in cash semi-annually, commencing November 15, 1998. Gross proceeds
of approximately $200.9 million were realized from the sale. The 12 7/8% Notes
were sold at less than par, resulting in an effective rate of 13 1/4%, and the
value of the notes is being accreted (using the effective interest method
prescribed by SEC) from the $200.9 million gross proceeds realized at the time
of the sale to the aggregate value at maturity, $205.0 million, over the period
ending May 15, 2008. In connection with the sale of the 12 7/8% Notes, the
Company purchased U.S. government securities for approximately $69.0 million and
placed them in a pledged account to fund interest payments for the first three
years the 12 7/8% Notes are outstanding. The remaining proceeds will be used, in
conjunction with the net proceeds of the IPO, to fund the development of
networks and operations in six Phase II markets and the complete data and ISP
plan, as well as an expansion of the New York City, Chicago, Los Angeles and San
Francisco markets. See Note 12 to the financial statements contained in Part I
which includes a summary of the terms and conditions related to the 12 7/8%
Notes.
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YEAR 2000
The Company has reviewed its computer systems to identify those areas that
could be affected by the "Year 2000" issue. The Company believes that its
systems are Year 2000 compliant. In addition, the Company believes that many of
its customers and suppliers, particularly the ILECs and long distance carriers,
are also impacted by the Year 2000 issue, which in turn could affect the
Company. The Company is assessing the compliance effort of its major customers
and suppliers. If the systems of certain of the Company's customers and
suppliers, particularly the ILECs, long distance carriers and others on whose
services the Company depends or with whom the Company's systems interface, are
not Year 20000 compliant, it would have a material adverse effect on the
Company.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On August 29, 1997, WorldCom, Inc. ("WorldCom") sued the Company and two
individual employees. In its complaint, WorldCom alleges that these employees
violated certain noncompete and nonsolicitation agreements by accepting
employment with the Company and by soliciting then current WorldCom employees to
leave WorldCom's employment and join the Company. In addition, WorldCom claims
that the Company tortiously interfered with WorldCom's relationships with its
employees, and that the Company's behavior constituted unfair competition.
WorldCom seeks injunctive relief and damages, although it has filed no motion
for a temporary restraining order or preliminary injunction. The Company denies
all claims and will vigorously defend itself. The Company does not expect the
ultimate outcome to have a material adverse effect on the results of operations
or financial condition of the Company and an estimate of possible loss cannot be
made at this time.
On October 7, 1997, the Company filed a counterclaim against WorldCom for,
among other things, attempted monopolization of the "one stop shopping"
telecommunications market, abuse of process, and unfair competition. WorldCom
did not move to dismiss the attempted monopolization claim, but has moved to
dismiss the abuse of process and unfair competition claims. On March 4, 1998,
the court dismissed the claim for unfair competition.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
A Registration Statement on Form S-1 (File No. 333-53475) (the "IPO
Registration Statement") registering shares of the Company's Common Stock, par
value $0.01 per share, the Company's IPO of common shares, was declared
effective by the Securities and Exchange Commission on June 30, 1998. The IPO
commenced on the effective date and terminated after 10 million shares of Common
Stock were sold by the Company for pursuant to the IPO Registration Statement,
for an aggregate offering price of $150 million. The managing underwriters of
the IPO were Morgan Stanley Dean Witter and Salomon Smith Barney.
In connection with the IPO, the Company incurred expenses of approximately
$11.3 million, including underwriting discounts and commissions of $10.5 million
and other expenses of $.8 million. After such expenses, the Company's net
proceeds from the IPO were $138.7 million.
A Registration Statement on Form S-1 (File No. 333-53479) registering the
Company's 12 7/8% Notes was declared effective by the Securities and Exchange
Commission on June 30, 1998. The offering of the 12 7/8% Notes commenced on
July 1, 1998 and terminated after $205.0 million aggregate principal amount of
the 12 7/8% Notes registered under such registration statement were sold for
gross proceeds of $200.9 million. The managing underwriters of the sale were
Morgan Stanley Dean Witter and Salomon Smith Barney.
In connection with the sale of the 12 7/8% Notes, the Company purchased
approximately $69.0 million U.S. Treasury securities and placed them in a
pledged account to be used solely to fund interest payments for the first three
years the 12 7/8% Notes are outstanding. In addition, the Company incurred
expenses of approximately $7.3
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million, including underwriting discounts and commissions of $6.5 million and
other expenses of $.8 million. After such purchase and expenses, the Company's
net proceeds from the sale of the 12 7/8% Notes were $124.6 million.
The total net proceeds from the IPO and the sale of the 12 7/8% Notes were
$263.3 million, which will be used to fund the data and ISP plan, the expansion
of four Phase I markets, New York City, Chicago, Los Angels and San Francisco,
and the first six Phase II markets.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
Pursuant to Section 228 of the General Corporation Law of the State of
Delaware, on June 18, 1998, Allegiance Telecom, L.L.C., the sole stockholder of
the Company, by written consent adopted the following resolutions:
1. Approving the Amended and Restated Certificate of Incorporation and
the Amended and Restated By-Laws of the Company.
2. Electing as Directors the following persons: (i) John J. Callahan,
Paul J. Finnegan, Paul D. Carbery and John B. Ehrenkranz to serve
until the annual meeting of stockholders in 1999; (ii) C. Daniel Yost,
Thomas M. Lord, James E. Crawford, III and Richard D. Frisbie to serve
until the annual meeting of stockholders in 2000 and (iii) Royce J.
Holland, Reed E. Hundt, James N. Perry, Jr. and Robert H. Niehaus to
serve until the annual meeting of stockholders in 2001.
3. Approving a form of Indemnification Agreement for directors and
officers of the Company.
4. Approving the adoption of the Company's 1998 Stock Incentive Plan and
Employee Stock Discount Purchase Plan.
5. Approving the conversion of the Company's 12% Cumulative Convertible
Preferred Stock into shares of Common Stock.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibit Index
Exhibit No. Description of Exhibit
----------- ----------------------
3.1 Amended and Restated Certificate of Incorporation of
Allegiance Telecom, Inc.
3.2 Amended and Restated By-Laws of Allegiance Telecom,
Inc.
27.1 Financial Data Schedule
(B) No reports on Form 8-K were filed by the Registrant during the three
months ended June 30, 1998.
19
<PAGE> 20
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
ALLEGIANCETELECOM,INC.
Dated: August 12, 1998 By: /s/ ROYCE J. HOLLAND
----------------------------------------
Name: Royce J. Holland
Title: Chairman and Chief Executive Officer
By: /s/ THOMAS M. LORD
----------------------------------------
Name: Thomas M. Lord
Title: Executive Vice President and
Chief Financial Officer
20
<PAGE> 21
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
3.1 Amended and Restated Certificate of Incorporation of
Allegiance Telecom, Inc.
3.2 Amended and Restated By-Laws of Allegiance Telecom, Inc.
27.1 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 3.1
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
ALLEGIANCE TELECOM, INC.
ARTICLE I - Name
The name of the corporation is Allegiance Telecom, Inc. (hereinafter
referred to as the "Corporation").
ARTICLE II - Registered Office
The address of the registered office of the Corporation in the State of
Delaware is 1209 Orange Street, in the City of Wilmington, County of New Castle,
Delaware 19801. The name of the registered agent of the Corporation at that
address is The Corporation Trust Company.
ARTICLE III - Purpose
The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware (the "Delaware General Corporation Law").
ARTICLE IV - Capital Stock
Part A. General. The maximum number of shares of capital stock that
the Corporation is authorized to have outstanding at any one time is 151,000,000
shares, consisting of: (i) 1,000,000 shares of Preferred Stock, par value $0.01
per share (the "Preferred Stock"); and (ii) 150,000,000 shares of Common Stock,
par value $0.01 per share (the "Common Stock").
Part B. Preferred Stock. Authority is hereby expressly vested in the
Board of Directors of the Corporation (each member thereof, a "Director," and
collectively, the "Board of Directors" or the "Board"), without further action
by the Corporation's stockholders, subject to the provisions of this ARTICLE IV
and to the limitations prescribed by law, to authorize the issuance from time to
time of one or more series of Preferred Stock. The authority of the Board of
Directors with respect to each series shall include, but not be limited to, the
determination or fixing of the following by resolution or resolutions adopted by
the affirmative vote of a majority of the total number of the Directors then in
office:
1
<PAGE> 2
(1) The designation of such series;
(2) The dividend rate of such series, the conditions and dates upon
which such dividends shall be payable, the relation which such dividends shall
bear to the dividends payable on any other class or classes or series of the
Corporation's capital stock and whether such dividends shall be cumulative or
non-cumulative;
(3) Whether the shares of such series shall be subject to redemption
for cash, property or rights, including securities of any other corporation, by
the Corporation or upon the happening of a specified event and, if made subject
to any such redemption, the times or events, prices, rates, adjustments and
other terms and conditions of such redemptions;
(4) The terms and amount of any sinking fund provided for the
purchase or redemption of the shares of such series;
(5) Whether or not the shares of such series shall be convertible
into, or exchangeable for, at the option of either the holder or the Corporation
or upon the happening of a specified event, shares of any other class or classes
or of any other series of the same class of the Corporation's capital stock and,
if provision be made for conversion or exchange, the times or events, prices,
rates, adjustments and other terms and conditions of such conversions or
exchanges;
(6) The restrictions, if any, on the issue or reissue of any
additional Preferred Stock;
(7) The rights of the holders of the shares of such series upon the
voluntary or involuntary liquidation, dissolution or winding up of the
Corporation; and
(8) The provisions as to voting, optional and/or other special rights
and preferences, if any, including, without limitation, the right to elect one
or more Directors.
Part C. Common Stock. Except as otherwise provided by the Delaware
General Corporation Law or this Restated Certificate of Incorporation (the
"Restated Certificate"), and subject to the rights of holders of any series of
Preferred Stock, the holders of record of Common Stock shall share ratably in
all dividends payable in cash, stock or otherwise and other distributions,
whether in respect of liquidation or dissolution (voluntary or involuntary) or
otherwise and, are subject to all the powers, rights, privileges, preferences
and priorities of any series of Preferred Stock as provided herein or in any
resolution or resolutions adopted by the Board of Directors pursuant to
authority expressly vested in it by the provisions of Section B of this ARTICLE
IV.
(1) The Common Stock shall not be convertible into, or exchangeable
for, shares of any other class or classes or of any other series of the same of
the Corporation's capital stock.
(2) No holder of Common Stock shall have any preemptive,
subscription, redemption, conversion or sinking fund rights with respect to the
Common Stock, or to any
2
<PAGE> 3
obligations convertible (directly or indirectly) into stock of the Corporation
whether now or hereafter authorized.
(3) Except as otherwise provided by the Delaware General Corporation
Law, or the Restated Certificate and subject to the rights of holders of any
series of Preferred Stock, all of the voting power of the stockholders of the
Corporation shall be vested in the holders of the Common Stock, and each holder
of Common Stock shall have one vote for each share held by such holder on all
matters voted upon by the stockholders of the Corporation.
ARTICLE V - Existence
The Corporation is to have perpetual existence.
ARTICLE VI - By-laws
In furtherance and not in limitation of the powers conferred by the
Delaware General Corporation Law, the Board of Directors of the Corporation is
expressly authorized to make, alter, amend, change, add to or repeal the By-laws
of the Corporation by the affirmative vote of a majority of the total number of
Directors then in office. Any alteration or repeal of the By-laws of the
Corporation by the stockholders of the Corporation shall require the affirmative
vote of at least a majority of the voting power of the then outstanding shares
of capital stock of the Corporation entitled to vote on such alteration or
repeal, subject to ARTICLE IX hereof and ARTICLE VII of the Corporation's
By-laws.
ARTICLE VII - Stockholders and Directors
Part A. Stockholder Action. Election of Directors need not be by
written ballot unless the By-laws of the Corporation so provide. Subject to any
rights of holders of any series of Preferred Stock, from and after the date on
which the Common Stock of the Corporation is registered pursuant to the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), (i) any action
required or permitted to be taken by the stockholders of the Corporation must be
effected at an annual or special meeting of stockholders of the Corporation and
may not be effected in lieu thereof by any consent in writing by such
stockholders, (ii) special meetings of stockholders of the Corporation may be
called only by either the Board of Directors pursuant to a resolution adopted by
the affirmative vote of the majority of the total number of Directors then in
office or by the chief executive officer of the Corporation and (iii) advance
notice of stockholder nominations of persons for election to the Board of
Directors of the Corporation and of business to be brought before any annual
meeting of the stockholders by the stockholders of the Corporation shall be
given in the manner provided in the By-laws of the Corporation.
Part B. Number of Directors and Term of Office. Subject to any
rights of holders of any series of Preferred Stock to elect additional Directors
under specified circumstances, the number of Directors which shall constitute
the Board of Directors of the Corporation shall be
3
<PAGE> 4
fixed from time to time in the manner set forth in the By-laws of the
Corporation. The Directors of the Corporation shall be divided into three
classes: Class I, Class II and Class III. Membership in each such class shall be
as nearly equal in number as possible. The term of office of the initial Class I
Directors shall expire at the annual election of Directors by the stockholders
of the Corporation in 1999, the term of office of the initial Class II Directors
shall expire at the annual election of Directors by the stockholders of the
Corporation in 2000 and the term of office of the initial Class III Directors
shall expire at the annual election of Directors by the stockholders of the
Corporation in 2001, or thereafter when their respective successors in each case
are elected by the stockholders and qualified, subject however, to prior death,
resignation, retirement, disqualification or removal from office for cause. At
each succeeding annual election of Directors by the stockholders of the
Corporation beginning in 1999, the Directors chosen to succeed those whose terms
then expire shall be identified as being of the same class as the Directors they
succeed and shall be elected for a term expiring at the third succeeding annual
election of Directors by the stockholders of the Corporation, or thereafter when
their respective successors in each case are elected by the stockholders and
qualified. If the number of Directors is changed, any increase or decrease shall
be apportioned among the classes so as to maintain the number of Directors in
each class as nearly equal as possible, and any additional Director of any class
elected to fill a vacancy resulting from an increase in such class shall hold
office for a term that shall coincide with the remaining term of that class, but
in no case shall a decrease in the number of Directors shorten the term of any
incumbent Director.
Part C. Removal and Resignation. No Director may be removed from
office without cause and without the affirmative vote of the holders of a
majority of the voting power of the then outstanding shares of capital stock of
the Corporation entitled to vote generally in the election of Directors voting
together as a single class; provided, however, that if the holders of any class
or series of capital stock are entitled by the provisions of this Restated
Certificate (it being understood that any references to this Restated
Certificate shall include any duly authorized certificate of designation) to
elect one or more Directors, such Director or Directors so elected may be
removed without cause only by the vote of the holders of a majority of the
outstanding shares of that class or series entitled to vote. Any Director may
resign at any time upon written notice to the Corporation.
Part D. Vacancies and Newly Created Directorships. Subject to any
rights of holders of any series of Preferred Stock to fill such newly created
Directorships or vacancies, any newly created Directorships resulting from any
increase in the authorized number of Directors and any vacancies in the Board of
Directors resulting from death, resignation, disqualification or removal from
office for cause shall, unless otherwise provided by law or by resolution
approved by the affirmative vote of a majority of the total number of Directors
then in office, be filled only by resolution approved by the affirmative vote of
a majority of the total number of Directors then in office. Any Director so
chosen shall hold office until the next election of the class for which such
Director shall have been chosen, and until his successor shall have been duly
elected and qualified, unless he shall resign, die, become disqualified or be
removed for cause.
4
<PAGE> 5
ARTICLE VIII - General Provisions
Part A. Dividends. The Board of Directors shall have authority from
time to time to set apart out of any assets of the Corporation otherwise
available for dividends a reserve or reserves as working capital or for any
other purpose or purposes, and to abolish or add to any such reserve or reserves
from time to time as said board may deem to be in the interest of the
Corporation; and said Board shall likewise have power to determine in its
discretion, except as herein otherwise provided, what part of the assets of the
Corporation available for dividends in excess of such reserve or reserves shall
be declared in dividends and paid to the stockholders of the Corporation.
Part B. Issuance of Stock. The shares of all classes of stock of the
Corporation may be issued by the Corporation from time to time for such
consideration as from time to time may be fixed by the Board of Directors of the
Corporation, provided that shares of stock having a par value shall not be
issued for a consideration determined by the Board to be less than such par
value. At any time, or from time to time, the Corporation may grant rights or
options to purchase from the Corporation any shares of its stock of any class or
classes to run for such period of time, for such consideration, upon such terms
and conditions, and in such form as the Board of Directors may determine. The
Board of Directors shall have authority, as provided by law, to determine that
only a part of the consideration which shall be received by the Corporation for
the shares of its stock which it shall issue from time to time, shall be
capital; provided, however, that, if all the shares issued shall be shares
having a par value, the amount of the part of such consideration so determined
to be capital shall be equal to the aggregate par value of such shares. The
excess, if any, at any time, of the total net assets of the Corporation over the
amount so determined to be capital, as aforesaid, shall be surplus. All classes
of stock of the Corporation shall be and remain at all times nonassessable.
The Board of Directors is hereby expressly authorized, in its
discretion, in connection with the issuance of any obligations or stock of the
Corporation (but without intending hereby to limit its general power so to do in
other cases), to grant rights or options to purchase stock of the Corporation of
any class upon such terms and during such period as the Board of Directors shall
determine, and to cause such rights to be evidenced by such warrants or other
instruments as it may deem advisable.
Part C. Inspection of Books and Records. The Board of Directors
shall have power from time to time to determine to what extent and at what times
and places and under what conditions and regulations the accounts and books of
the Corporation, or any of them, shall be open to the inspection of the
stockholders; and no stockholder shall have any right to inspect any account or
book or document of the Corporation, except as conferred by the laws of the
State of Delaware, unless and until authorized so to do by resolution of the
Board of Directors or of the stockholders of the Corporation.
Part D. Location of Meetings, Books and Records. Except as otherwise
provided in the By-laws, the stockholders of the Corporation and the Board of
Directors may hold their meetings and have an office or offices outside of the
State of Delaware and, subject to the provisions of the laws of said State, may
keep the books of the Corporation outside of said State at such places as may,
from time to time, be designated by the Board of Directors.
5
<PAGE> 6
ARTICLE IX - Amendments
The Corporation reserves the right to amend, alter, change or repeal
any provision contained in this Restated Certificate in the manner now or
hereinafter prescribed herein and by the laws of the State of Delaware, and all
rights conferred upon stockholders herein are granted subject to this
reservation. Notwithstanding anything contained in this Restated Certificate to
the contrary, ARTICLE IV, ARTICLE VII, ARTICLE X, and this ARTICLE IX of this
Restated Certificate shall not be altered, amended or repealed and no provision
inconsistent therewith shall be adopted without the affirmative vote of the
holders of at least 66 2/3% of the voting power of the then outstanding shares
of capital stock of the Corporation entitled to vote on such alteration,
amendment or repeal, voting together as a single class (other than any
alteration or amendment to Part A of ARTICLE IV that increases the authorized
number of shares of Preferred Stock or Common Stock).
ARTICLE X - Liability
Part A. Limitation of Liability.
(1) To the fullest extent permitted by the Delaware General
Corporation Law as it now exists or may hereafter be amended (but, in the case
of any such amendment, only to the extent that such amendment permits the
Corporation to provide broader indemnification rights than permitted prior
thereto), and except as otherwise provided in the Corporation's By-laws, no
Director of the Corporation shall be liable to the Corporation or its
stockholders for monetary damages arising from a breach of fiduciary duty owed
to the Corporation or its stockholders.
(2) Any repeal or modification of the foregoing paragraph by the
stockholders of the Corporation shall not adversely affect any right or
protection of a Director of the Corporation existing at the time of such repeal
or modification.
Part B. Right to Indemnification. Each person who was or is made a
party or is threatened to be made a party to or is otherwise involved (including
involvement as a witness) in any action, suit or proceeding, whether civil,
criminal, administrative or investigative (a "proceeding"), by reason of the
fact that he or she is or was a Director or officer of the Corporation or, while
a Director or officer of the Corporation, is or was serving at the request of
the Corporation as a Director, officer, employee or agent of another corporation
or of a partnership, joint venture, trust or other enterprise, including service
with respect to an employee benefit plan (an "indemnitee"), whether the basis of
such proceeding is alleged action in an official capacity as a Director or
officer or in any other capacity while serving as a Director or officer, shall
be indemnified and held harmless by the Corporation to the fullest extent
authorized by the Delaware General Corporation Law, as the same exists or may
hereafter be amended (but, in the case of any such amendment, only to the extent
that such amendment permits the Corporation to provide broader indemnification
rights than permitted prior thereto), against all expense, liability and loss
(including attorneys' fees, judgments, fines, excise exercise taxes or penalties
and amounts paid in settlement) reasonably incurred or suffered by such
indemnitee in connection therewith and such indemnification
6
<PAGE> 7
shall continue as to an indemnitee who has ceased to be a Director, officer,
employee or agent and shall inure to the benefit of the indemnitee's heirs,
executors and administrators; provided, however, that, except as provided in
Part C of this ARTICLE X with respect to proceedings to enforce rights to
indemnification, the Corporation shall indemnify any such indemnitee in
connection with a proceeding (or part thereof) initiated by such indemnitee only
if such proceeding (or part thereof) was authorized by the Board of Directors of
the Corporation. The right to indemnification conferred in this Part B of this
ARTICLE X shall be a contract right and shall include the obligation of the
Corporation to pay the expenses incurred in defending any such proceeding in
advance of its final disposition (an "advance of expenses"); provided, however,
that, if and to the extent that the Delaware General Corporation Law requires,
an advance of expenses incurred by an indemnitee in his or her capacity as a
Director or officer (and not in any other capacity in which service was or is
rendered by such indemnitee, including, without limitation, service to an
employee benefit plan) shall be made only upon delivery to the Corporation of an
undertaking (an "undertaking"), by or on behalf of such indemnitee, to repay all
amounts so advanced if it shall ultimately be determined by final judicial
decision from which there is no further right to appeal (a "final adjudication")
that such indemnitee is not entitled to be indemnified for such expenses under
this Part B or otherwise. The Corporation may, by action of its Board of
Directors, provide indemnification to employees and agents of the Corporation
with the same or lesser scope and effect as the foregoing indemnification of
Directors and officers.
Part C. Procedure for Indemnification. Any indemnification of a
Director or officer of the Corporation or advance of expenses under Part B of
this ARTICLE X shall be made promptly, and in any event within forty-five days
(or, in the case of an advance of expenses, twenty days), upon the written
request of the Director or officer. If a determination by the Corporation that
the Director or officer is entitled to indemnification pursuant to this ARTICLE
X is required, and the Corporation fails to respond within sixty days to a
written request for indemnity, the Corporation shall be deemed to have approved
the request. If the Corporation denies a written request for indemnification or
advance of expenses, in whole or in part, or if payment in full pursuant to such
request is not made within forty-five days (or, in the case of an advance of
expenses, twenty days), the right to indemnification or advances as granted by
this ARTICLE X shall be enforceable by the Director or officer in any court of
competent jurisdiction. Such person's costs and expenses incurred in connection
with successfully establishing his or her right to indemnification, in whole or
in part, in any such action shall also be indemnified by the Corporation. It
shall be a defense to any such action (other than an action brought to enforce a
claim for the advance of expenses where the undertaking required pursuant to
Part B of this ARTICLE X, if any, has been tendered to the Corporation) that the
claimant has not met the standards of conduct which make it permissible under
the Delaware General Corporation Law for the Corporation to indemnify the
claimant for the amount claimed, but the burden of such defense shall be on the
Corporation. Neither the failure of the Corporation (including its Board of
Directors, independent legal counsel or its stockholders) to have made a
determination prior to the commencement of such action that indemnification of
the claimant is proper in the circumstances because he or she has met the
applicable standard of conduct set forth in the Delaware General Corporation
Law, nor an actual determination by the Corporation (including its Board of
Directors, independent legal counsel or its stockholders) that the claimant has
not met such applicable standard of conduct, shall be a defense to the action or
create a presumption that the claimant has not met the applicable standard of
conduct. The procedure for indemnification of other employees and agents for
whom indemnification is provided pursuant to Part B of this ARTICLE
7
<PAGE> 8
X shall be the same procedure set forth in this Part C for Directors or
officers, unless otherwise set forth in the action of the Board of Directors
providing indemnification for such employee or agent.
Part D. Insurance. The Corporation may purchase and maintain
insurance on its own behalf and on behalf of any person who is or was a
Director, officer, employee or agent of the Corporation or was serving at the
request of the Corporation as a Director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against any
expense, liability or loss asserted against him or her and incurred by him or
her in any such capacity, whether or not the Corporation would have the power to
indemnify such person against such expenses, liability or loss under the
Delaware General Corporation Law.
Part E. Service for Subsidiaries. Any person serving as a Director,
officer, employee or agent of another corporation, partnership, limited
liability company, joint venture or other enterprise, at least 50% of whose
equity interests are owned directly or indirectly by the Corporation (a
"subsidiary" for this ARTICLE X) shall be conclusively presumed to be serving in
such capacity at the request of the Corporation.
Part F. Reliance. Persons who after the date of the adoption of this
provision become or remain Directors or officers of the Corporation or who,
while a Director or officer of the Corporation, become or remain a Director,
officer, employee or agent of a subsidiary, shall be conclusively presumed to
have relied on the rights to indemnity, advance of expenses and other rights
contained in this ARTICLE X in entering into or continuing such service. The
rights to indemnification and to the advance of expenses conferred in this
ARTICLE X shall apply to claims made against an indemnitee arising out of acts
or omissions which occurred or occur both prior and subsequent to the adoption
hereof.
Part G. Non-Exclusivity of Rights. The rights to indemnification and
to the advance of expenses conferred in this ARTICLE X shall not be exclusive of
any other right which any person may have or hereafter acquire under this
Restated Certificate or under any statute, by-law, agreement, vote of
stockholders or disinterested Directors or otherwise.
Part H. Merger or Consolidation. For purposes of this ARTICLE X,
references to the "Corporation" shall include, in addition to the resulting
Corporation, any constituent Corporation (including any constituent of a
constituent) absorbed in a consolidation or merger which, if its separate
existence had continued, would have had power and authority to indemnify its
Directors, officers and employees or agents, so that any person who is or was a
Director, officer, employee or agent of such constituent Corporation, or is or
was serving at the request of such constituent Corporation as a Director,
officer, employee or agent of another Corporation, partnership, limited
liability company, joint venture, trust or other enterprise, shall stand in the
same position under this ARTICLE X with respect to the resulting or surviving
Corporation as he or she would have with respect to such constituent Corporation
if its separate existence had continued.
ARTICLE XI - Business Combinations
The Corporation expressly elects to be governed by Section 203 of the
Delaware General Corporation Law.
* * * * *
8
<PAGE> 1
EXHIBIT 3.2
AMENDED AND RESTATED BY-LAWS
OF
ALLEGIANCE TELECOM, INC.
A Delaware Corporation
ARTICLE I
OFFICES
Section 1. Registered Office. The registered office of Allegiance
Telecom, Inc. (the "Corporation") in the State of Delaware shall be located at
1209 Orange Street, in the City of Wilmington, County of New Castle, Delaware
19801. The name of the Corporation's registered agent at such address shall be
The Corporation Trust Company. The registered office and/or registered agent of
the Corporation may be changed from time to time by action of the Board of
Directors.
Section 2. Other Offices. The Corporation may also have offices at such
other places, both within and without the State of Delaware, as the Board of
Directors may from time to time determine or the business of the Corporation may
require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. Annual Meeting. An annual meeting of the stockholders shall
be held each year within 150 days after the close of the immediately preceding
fiscal year of the Corporation or at such other time specified by the Board of
Directors for the purpose of electing Directors and conducting such other proper
business as may come before the annual meeting. At the annual meeting,
stockholders shall elect Directors and transact such other business as properly
may be brought before the annual meeting pursuant to ARTICLE II, Section 11
hereof.
Section 2. Special Meetings. Special meetings of the stockholders may
only be called in the manner provided in the Amended and Restated Certificate of
Incorporation of the Corporation (as the same may be further amended from time
to time, the "Restated Certificate of Incorporation").
Section 3. Place of Meetings. The Board of Directors may designate any
place, either within or without the State of Delaware, as the place of meeting
for any annual meeting or for any special meeting. If no designation is made, or
if a special meeting be otherwise called, the place of meeting shall be the
principal executive office of the Corporation. If for any reason any annual
meeting shall not be held during any year, the business thereof may be
transacted at any special meeting of the stockholders.
<PAGE> 2
Section 4. Notice. Whenever stockholders are required or permitted to
take action at a meeting, written or printed notice stating the place, date,
time and, in the case of special meetings, the purpose or purposes, of such
meeting, shall be given to each stockholder entitled to vote at such meeting not
less than 10 nor more than 60 days before the date of the meeting. All such
notices shall be delivered, either personally or by mail, by or at the direction
of the Board of Directors, the chairman of the board, the president or the
secretary, and if mailed, such notice shall be deemed to be delivered when
deposited in the United States mail, postage prepaid, addressed to the
stockholder at his, her or its address as the same appears on the records of the
Corporation. Attendance of a person at a meeting shall constitute a waiver of
notice of such meeting, except when the person attends for the express purpose
of objecting at the beginning of the meeting to the transaction of any business
because the meeting is not lawfully called or convened.
Section 5. Stockholders List. The officer having charge of the stock
ledger of the Corporation shall make, at least 10 days before every meeting of
the stockholders, a complete list of the stockholders entitled to vote at such
meeting arranged in alphabetical order, showing the address of each stockholder
and the number of shares registered in the name of each stockholder. Such list
shall be open to the examination of any stockholder, for any purpose germane to
the meeting, during ordinary business hours, for a period of at least 10 days
prior to the meeting, either at a place within the city where the meeting is to
be held, which place shall be specified in the notice of the meeting or, if not
so specified, at the place where the meeting is to be held. The list shall also
be produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
Section 6. Quorum. The holders of a majority of the outstanding shares
of capital stock entitled to vote, present in person or represented by proxy,
shall constitute a quorum at all meetings of the stockholders, except as
otherwise provided by the General Corporation Law of the State of Delaware or by
the Restated Certificate of Incorporation. If a quorum is not present, the
holders of a majority of the shares present in person or represented by proxy at
the meeting, and entitled to vote at the meeting, may adjourn the meeting to
another time and/or place. When a specified item of business requires a vote by
a class or series (if the Corporation shall then have outstanding shares of more
than one class or series) voting as a class, the holders of a majority of the
shares of such class or series shall constitute a quorum (as to such class or
series) for the transaction of such item of business.
Section 7. Adjourned Meetings. When a meeting is adjourned to another
time and place, notice need not be given of the adjourned meeting if the time
and place thereof are announced at the meeting at which the adjournment is
taken. At the adjourned meeting the Corporation may transact any business which
might have been transacted at the original meeting. If the adjournment is for
more than 30 days, or if after the adjournment a new record date is fixed for
the adjourned meeting, a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the meeting.
Section 8. Vote Required. When a quorum is present, the affirmative
vote of the majority of shares present in person or represented by proxy at the
meeting and entitled to vote on the subject matter shall be the act of the
stockholders, unless (i) by express provisions of an applicable law or
- 2 -
<PAGE> 3
of the Restated Certificate of Incorporation a different vote is required, in
which case such express provision shall govern and control the decision of such
question, or (ii) the subject matter is the election of Directors, in which case
Section 2 of ARTICLE III hereof shall govern and control the approval of such
subject matter.
Section 9. Voting Rights. Except as otherwise provided by the General
Corporation Law of the State of Delaware, the Restated Certificate of
Incorporation or any amendments thereto or these By-laws, every stockholder
shall at every meeting of the stockholders be entitled to one vote in person or
by proxy for each share of common stock held by such stockholder.
Section 10. Proxies. Each stockholder entitled to vote at a meeting of
stockholders or to express consent or dissent to corporate action in writing
without a meeting may authorize another person or persons to act for him or her
by proxy, but no such proxy shall be voted or acted upon after three years from
its date, unless the proxy provides for a longer period. A duly executed proxy
shall be irrevocable if it states that it is irrevocable and if, and only as
long as, it is coupled with an interest sufficient in law to support an
irrevocable power. A proxy may be made irrevocable regardless of whether the
interest with which it is coupled is an interest in the stock itself or an
interest in the Corporation generally. Any proxy is suspended when the person
executing the proxy is present at a meeting of stockholders and elects to vote,
except that when such proxy is coupled with an interest and the fact of the
interest appears on the face of the proxy, the agent named in the proxy shall
have all voting and other rights referred to in the proxy, notwithstanding the
presence of the person executing the proxy. At each meeting of the stockholders,
and before any voting commences, all proxies filed at or before the meeting
shall be submitted to and examined by the secretary or a person designated by
the secretary, and no shares may be represented or voted under a proxy that has
been found to be invalid or irregular.
Section 11. Business Brought Before an Annual Meeting. At an annual
meeting of the stockholders, only such business shall be conducted as shall have
been properly brought before the meeting. To be properly brought before an
annual meeting, business must be (i) specified in the notice of meeting (or any
supplement thereto) given by or at the direction of the Board of Directors, (ii)
brought before the meeting by or at the direction of the Board of Directors or
(iii) otherwise properly brought before the meeting by a stockholder. For
business to be properly brought before an annual meeting by a stockholder, the
stockholder must have given timely notice thereof in writing to the secretary of
the Corporation. To be timely, a stockholder's notice must be delivered to or
mailed and received at the principal executive offices of the Corporation, not
less than 60 days nor more than 90 days prior to the meeting; provided, however,
that in the event that less than 70 days' notice or prior public announcement of
the date of the meeting is given or made to stockholders, notice by the
stockholder to be timely must be so received not later than the close of
business on the 10th day following the date on which such notice of the date of
the annual meeting was mailed or such public announcement was made. A
stockholder's notice to the secretary shall set forth as to each matter the
stockholder proposes to bring before the annual meeting (i) a brief description
of the business desired to be brought before the annual meeting, (ii) the name
and address, as they appear on the Corporation's books, of the stockholder
proposing such business, (iii) the class and number of shares of the Corporation
which are beneficially owned by the stockholder and (iv) any material interest
of the stockholder in such business. Notwithstanding anything in these By-laws
to the
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contrary, no business shall be conducted at an annual meeting except in
accordance with the procedures set forth in this section. The presiding officer
of an annual meeting shall, if the facts warrant, determine and declare to the
meeting that business was not properly brought before the meeting and in
accordance with the provisions of this section; if he should so determine, he
shall so declare to the meeting and any such business not properly brought
before the meeting shall not be transacted. For purposes of this section,
"public announcement" shall mean disclosure in a press release reported by Dow
Jones News Service, Associated Press or a comparable national news service.
Nothing in this section shall be deemed to affect any rights of stockholders to
request inclusion of proposals in the Corporation's proxy statement pursuant to
Rule 14a-8 under the Securities Exchange Act of 1934, as amended (the "Exchange
Act").
ARTICLE III
Directors
Section 1. General Powers. The business and affairs of the Corporation
shall be managed by or under the direction of the Board of Directors. In
addition to such powers as are herein and in the Restated Certificate of
Incorporation expressly conferred upon it, the Board of Directors shall have and
may exercise all the powers of the Corporation, subject to the provisions of the
laws of Delaware, the Restated Certificate of Incorporation and these By-laws.
Section 2. Number, Election and Term of Office. Subject to any rights
of the holders of any series of Preferred Stock to elect additional Directors
under specified circumstances, the number of Directors which shall constitute
the Board of Directors shall be fixed from time to time by resolution adopted by
the affirmative vote of a majority of the total number of Directors then in
office. The Directors shall be elected by a plurality of the votes of the shares
present in person or represented by proxy at the meeting and entitled to vote in
the election of Directors; provided that, whenever the holders of any class or
series of capital stock of the Corporation are entitled to elect one or more
Directors pursuant to the provisions of the Restated Certificate of
Incorporation (including, but not limited to, for purposes of these By-laws,
pursuant to any duly authorized certificate of designation), such Directors
shall be elected by a plurality of the votes of such class or series present in
person or represented by proxy at the meeting and entitled to vote in the
election of such Directors. The Directors shall be elected and shall hold office
only in the manner provided in the Restated Certificate of Incorporation.
Section 3. Removal and Resignation. No Director may be removed from
office without cause and without the affirmative vote of the holders of a
majority of the voting power of the then outstanding shares of capital stock
entitled to vote generally in the election of Directors voting together as a
single class; provided, however, that if the holders of any class or series of
capital stock are entitled by the provisions of the Restated Certificate of
Incorporation (it being understood that any references to the Restated
Certificate of Incorporation shall include any duly authorized certificate of
designation) to elect one or more Directors, such Director or Directors so
elected may be removed without cause only by the vote of the holders of a
majority of the outstanding shares of
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that class or series entitled to vote. Any Director may resign at any time upon
written notice to the Corporation.
Section 4. Vacancies. Vacancies and newly created directorships
resulting from any increase in the total number of Directors may be filled only
in the manner provided in the Restated Certificate of Incorporation.
Section 5. Nominations.
(a) Only persons who are nominated in accordance with
the procedures set forth in these By-laws shall be eligible to serve as
Directors. Nominations of persons for election to the Board of Directors of the
Corporation may be made at a meeting of stockholders (i) by or at the direction
of the Board of Directors or (ii) by any stockholder of the Corporation who was
a stockholder of record at the time of giving of notice provided for in this
By-law, who is entitled to vote generally in the election of Directors at the
meeting and who shall have complied with the notice procedures set forth below
in Section 5(b).
(b) In order for a stockholder to nominate a person
for election to the Board of Directors of the Corporation at a meeting of
stockholders, such stockholder shall have delivered timely notice of such
stockholder's intent to make such nomination in writing to the secretary of the
Corporation. To be timely, a stockholder's notice shall be delivered to or
mailed and received at the principal executive offices of the Corporation (i) in
the case of an annual meeting, not less than 60 nor more than 90 days prior to
the first anniversary of the preceding year's annual meeting; provided, however,
that in the event that the date of the annual meeting is changed by more than 30
days from such anniversary date, notice by the stockholder to be timely must be
so received not later than the close of business on the 10th day following the
earlier of the day on which notice of the date of the meeting was mailed or
public disclosure of the meeting was made, and (ii) in the case of a special
meeting at which Directors are to be elected, not later than the close of
business on the 10th day following the earlier of the day on which notice of the
date of the meeting was mailed or public announcement of the meeting was made.
Such stockholder's notice shall set forth (i) as to each person whom the
stockholder proposes to nominate for election as a Director at such meeting all
information relating to such person that is required to be disclosed in
solicitations of proxies for election of Directors, or is otherwise required, in
each case pursuant to Regulation 14A under the Exchange Act (including such
person's written consent to being named in the proxy statement as a nominee and
to serving as a Director if elected); (ii) as to the stockholder giving the
notice (A) the name and address, as they appear on the Corporation's books, of
such stockholder and (B) the class and number of shares of the Corporation which
are beneficially owned by such stockholder and also which are owned of record by
such stockholder; and (iii) as to the beneficial owner, if any, on whose behalf
the nomination is made, (A) the name and address of such person and (B) the
class and number of shares of the Corporation which are beneficially owned by
such person. At the request of the Board of Directors, any person nominated by
the Board of Directors for election as a Director shall furnish to the secretary
of the Corporation that information required to be set forth in a stockholder's
notice of nomination which pertains to the nominee.
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(c) No person shall be eligible to serve as a Director
of the Corporation unless nominated in accordance with the procedures set forth
in this section. The presiding officer of the meeting shall, if the facts
warrant, determine and declare to the meeting that a nomination was not made in
accordance with the procedures prescribed by this section, and if he should so
determine, he shall so declare to the meeting and the defective nomination shall
be disregarded. A stockholder seeking to nominate a person to serve as a
Director must also comply with all applicable requirements of the Exchange Act,
and the rules and regulations thereunder with respect to the matters set forth
in this section.
Section 6. Annual Meetings. The annual meeting of the Board of
Directors shall be held without other notice than this By-law immediately after,
and at the same place as, the annual meeting of stockholders.
Section 7. Other Meetings and Notice. Regular meetings, other than the
annual meeting, of the Board of Directors may be held without notice at such
time and at such place as shall from time to time be determined by resolution of
the board. Special meetings of the Board of Directors may be called by the
chairman of the board, the president (if the president is a Director) or, upon
the written request of at least a majority of the Directors then in office, the
secretary of the Corporation, on at least 24 hours notice to each Director,
either personally, by telephone, by mail or by telecopy.
Section 8. Chairman of the Board, Quorum, Required Vote and
Adjournment. The Board of Directors shall elect, by the affirmative vote of a
majority of the total number of Directors then in office, a chairman of the
board, who shall preside at all meetings of the stockholders and Board of
Directors at which he or she is present and shall have such powers and perform
such duties as the Board of Directors may from time to time prescribe. If the
chairman of the board is not present at a meeting of the stockholders or the
Board of Directors, the president (if the president is a Director and is not
also the chairman of the board) shall preside at such meeting, and, if the
president is not present at such meeting, a majority of the Directors present at
such meeting shall elect one of their members to so preside. A majority of the
total number of Directors then in office shall constitute a quorum for the
transaction of business. Unless by express provision of an applicable law, the
Restated Certificate of Incorporation or these By-laws a different vote is
required, the vote of a majority of Directors present at a meeting at which a
quorum is present shall be the act of the Board of Directors. If a quorum shall
not be present at any meeting of the Board of Directors, the Directors present
thereat may adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall be present.
Section 9. Committees. The Board of Directors may, by resolution passed
by a majority of the total number of Directors then in office, designate one or
more committees, each committee to consist of one or more of the Directors of
the Corporation, which to the extent provided in such resolution or these
By-laws shall have, and may exercise, the powers of the Board of Directors in
the management and affairs of the Corporation, except as otherwise limited by
law. The Board of Directors may designate one or more Directors as alternate
members of any committee, who may replace any absent or disqualified member at
any meeting of the committee. Such committee or committees shall have such name
or names as may be determined from time to time by resolution
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adopted by the Board of Directors. Each committee shall keep regular minutes of
its meetings and report the same to the Board of Directors when required.
Section 10. Committee Rules. Each committee of the Board of Directors
may fix its own rules of procedure and shall hold its meetings as provided by
such rules, except as may otherwise be provided by a resolution of the Board of
Directors designating such committee. Unless otherwise provided in such a
resolution, the presence of at least a majority of the members of the committee
shall be necessary to constitute a quorum. Unless otherwise provided in such a
resolution, in the event that a member and that member's alternate, if
alternates are designated by the Board of Directors, of such committee is or are
absent or disqualified, the member or members thereof present at any meeting and
not disqualified from voting, whether or not such member or members constitute a
quorum, may unanimously appoint another member of the Board of Directors to act
at the meeting in place of any such absent or disqualified member.
Section 11. Communications Equipment. Members of the Board of Directors
or any committee thereof may participate in and act at any meeting of such board
or committee through the use of a conference telephone or other communications
equipment by means of which all persons participating in the meeting can hear
and speak with each other, and participation in the meeting pursuant to this
section shall constitute presence in person at the meeting.
Section 12. Waiver of Notice and Presumption of Assent. Any member of
the Board of Directors or any committee thereof who is present at a meeting
shall be conclusively presumed to have waived notice of such meeting except when
such member attends for the express purpose of objecting at the beginning of the
meeting to the transaction of any business because the meeting is not lawfully
called or convened. Such member shall be conclusively presumed to have assented
to any action taken unless his or her dissent shall be entered in the minutes of
the meeting or unless his or her written dissent to such action shall be filed
with the person acting as the secretary of the meeting before the adjournment
thereof or shall be forwarded by registered mail to the secretary of the
Corporation immediately after the adjournment of the meeting. Such right to
dissent shall not apply to any member who voted in favor of such action.
Section 13. Action by Written Consent. Unless otherwise restricted by
the Restated Certificate of Incorporation, any action required or permitted to
be taken at any meeting of the Board of Directors, or of any committee thereof,
may be taken without a meeting if all members of the board or committee, as the
case may be, consent thereto in writing, and the writing or writings are filed
with the minutes of proceedings of the board or committee.
ARTICLE IV
OFFICERS
Section 1. Number. The officers of the Corporation shall be elected by
the Board of Directors and shall consist of a chairman of the board, a chief
executive officer, a president, one or more vice presidents, a secretary, a
chief financial officer and such other officers and assistant
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officers as may be deemed necessary or desirable by the Board of Directors. Any
number of offices may be held by the same person. In its discretion, the Board
of Directors may choose not to fill any office for any period as it may deem
advisable, except that the offices of president and secretary shall be filled as
expeditiously as possible.
Section 2. Election and Term of Office. The officers of the Corporation
shall be elected annually by the Board of Directors at its first meeting held
after each annual meeting of stockholders or as soon thereafter as convenient.
Vacancies may be filled or new offices created and filled at any meeting of the
Board of Directors. Each officer shall hold office until a successor is duly
elected and qualified or until his or her earlier death, resignation or removal
as hereinafter provided.
Section 3. Removal. Any officer or agent elected by the Board of
Directors may be removed by the Board of Directors at its discretion, but such
removal shall be without prejudice to the contract rights, if any, of the person
so removed.
Section 4. Vacancies. Any vacancy occurring in any office because of
death, resignation, removal, disqualification or otherwise may be filled by the
Board of Directors.
Section 5. Compensation. Compensation of all executive officers shall
be approved by the Board of Directors, and no officer shall be prevented from
receiving such compensation by virtue of his or her also being a Director of the
Corporation.
Section 6. Chairman of the Board. The chairman of the board shall
preside at all meetings of the stockholders and of the Board of Directors and
shall have such other powers and perform such other duties as may be prescribed
to him or her by the Board of Directors or provided in these By-laws.
Section 7. Chief Executive Officer. The chief executive officer shall
have the powers and perform the duties incident to that position. Subject to the
powers of the Board of Directors and the chairman of the board, the chief
executive officer shall be in the general and active charge of the entire
business and affairs of the Corporation, and shall be its chief policy making
officer. The chief executive officer shall have such other powers and perform
such other duties as may be prescribed by the Board of Directors or provided in
these By-laws. The chief executive officer is authorized to execute bonds,
mortgages and other contracts requiring a seal, under the seal of the
Corporation, except where required or permitted by law to be otherwise signed
and executed and except where the signing and execution thereof shall be
expressly delegated by the Board of Directors to some other officer or agent of
the Corporation. Whenever the president is unable to serve, by reason of
sickness, absence or otherwise, the chief executive officer shall perform all
the duties and responsibilities and exercise all the powers of the president.
Section 8. The President. The president of the Corporation shall,
subject to the powers of the Board of Directors, the chairman of the board and
the chief executive officer, have general charge of the business, affairs and
property of the Corporation, and control over its officers, agents and
employees. The president shall see that all orders and resolutions of the Board
of Directors are carried into effect. The president is authorized to execute
bonds, mortgages and other contracts
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requiring a seal, under the seal of the Corporation, except where required or
permitted by law to be otherwise signed and executed and except where the
signing and execution thereof shall be expressly delegated by the Board of
Directors to some other officer or agent of the Corporation. The president shall
have such other powers and perform such other duties as may be prescribed by the
chairman of the board, the chief executive officer, the Board of Directors or as
may be provided in these By-laws.
Section 9. Vice Presidents. The vice president, or if there shall be
more than one, the vice presidents in the order determined by the Board of
Directors or the chairman of the board, shall, in the absence or disability of
the president, act with all of the powers and be subject to all the restrictions
of the president. The vice presidents shall also perform such other duties and
have such other powers as the Board of Directors, the chairman of the board, the
chief executive officer, the president or these By-laws may, from time to time,
prescribe. The vice presidents may also be designated as executive vice
presidents, senior vice presidents or regional vice presidents, as the Board of
Directors may from time to time prescribe.
Section 10. The Secretary and Assistant Secretaries. The secretary
shall attend all meetings of the Board of Directors, all meetings of the
committees thereof and all meetings of the stockholders and record all the
proceedings of the meetings in a book or books to be kept for that purpose or
shall ensure that his or her designee attends each such meeting to act in such
capacity. Under the chairman of the board's supervision, the secretary shall
give, or cause to be given, all notices required to be given by these By-laws or
by law; shall have such powers and perform such duties as the Board of
Directors, the chairman of the board, the chief executive officer, the president
or these By-laws may, from time to time, prescribe; and shall have custody of
the corporate seal of the Corporation. The secretary, or an assistant secretary,
shall have authority to affix the corporate seal to any instrument requiring it
and when so affixed, it may be attested by his or her signature or by the
signature of such assistant secretary. The Board of Directors may give general
authority to any other officer to affix the seal of the Corporation and to
attest the affixing by his or her signature. The assistant secretary, or if
there be more than one, any of the assistant secretaries, shall in the absence
or disability of the secretary, perform the duties and exercise the powers of
the secretary and shall perform such other duties and have such other powers as
the Board of Directors, the chairman of the board, the chief executive officer,
the president, or secretary may, from time to time, prescribe.
Section 11. The Chief Financial Officer. The chief financial officer
shall have the custody of the corporate funds and securities; shall keep full
and accurate all books and accounts of the Corporation as shall be necessary or
desirable in accordance with applicable law or generally accepted accounting
principles; shall deposit all monies and other valuable effects in the name and
to the credit of the Corporation as may be ordered by the chairman of the board
or the Board of Directors; shall cause the funds of the Corporation to be
disbursed when such disbursements have been duly authorized, taking proper
vouchers for such disbursements; and shall render to the Board of Directors, at
its regular meeting or when the Board of Directors so requires, an account of
the Corporation; shall have such powers and perform such duties as the Board of
Directors, the chairman of the board, the chief executive officer, the president
or these By-laws may, from time to time, prescribe.
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Section 12. Other Officers, Assistant Officers and Agents. Officers,
assistant officers and agents, if any, other than those whose duties are
provided for in these By-laws, shall have such authority and perform such duties
as may from time to time be prescribed by resolution of the Board of Directors.
Section 13. Absence or Disability of Officers. In the case of the
absence or disability of any officer of the Corporation and of any person hereby
authorized to act in such officer's place during such officer's absence or
disability, the Board of Directors may by resolution delegate the powers and
duties of such officer to any other officer or to any Director, or to any other
person selected by it.
ARTICLE V
CERTIFICATES OF STOCK
Section 1. Form. Every holder of stock in the Corporation shall be
entitled to have a certificate, signed by, or in the name of the Corporation by
the chairman of the board, the chief executive officer or the president and the
secretary or an assistant secretary of the Corporation, certifying the number of
shares owned by such holder in the Corporation. If such a certificate is
countersigned (i) by a transfer agent or an assistant transfer agent other than
the Corporation or its employee or (ii) by a registrar, other than the
Corporation or its employee, the signature of any such chairman of the board,
chief executive officer, president, secretary or assistant secretary may be
facsimiles. In case any officer or officers who have signed, or whose facsimile
signature or signatures have been used on, any such certificate or certificates
shall cease to be such officer or officers of the Corporation whether because of
death, resignation or otherwise before such certificate or certificates have
been delivered by the Corporation, such certificate or certificates may
nevertheless be issued and delivered as though the person or persons who signed
such certificate or certificates or whose facsimile signature or signatures have
been used thereon had not ceased to be such officer or officers of the
Corporation. All certificates for shares shall be consecutively numbered or
otherwise identified. The name of the person to whom the shares represented
thereby are issued, with the number of shares and date of issue, shall be
entered on the books of the Corporation. Shares of stock of the Corporation
shall only be transferred on the books of the Corporation by the holder of
record thereof or by such holder's attorney duly authorized in writing, upon
surrender to the Corporation of the certificate or certificates for such shares
endorsed by the appropriate person or persons, with such evidence of the
authenticity of such endorsement, transfer, authorization and other matters as
the Corporation may reasonably require, and accompanied by all necessary stock
transfer stamps. In that event, it shall be the duty of the Corporation to issue
a new certificate to the person entitled thereto, cancel the old certificate or
certificates and record the transaction on its books. The Board of Directors may
appoint a bank or trust company organized under the laws of the United States or
any state thereof to act as its transfer agent or registrar, or both in
connection with the transfer of any class or series of securities of the
Corporation.
Section 2. Lost Certificates. The Board of Directors may direct a new
certificate or certificates to be issued in place of any certificate or
certificates previously issued by the Corporation alleged to have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the
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person claiming the certificate of stock to be lost, stolen or destroyed. When
authorizing such issue of a new certificate or certificates, the Corporation
may, in its discretion and as a condition precedent to the issuance thereof,
require the owner of such lost, stolen or destroyed certificate or certificates,
or his or her legal representative, to give the Corporation a bond sufficient to
indemnify the Corporation against any claim that may be made against the
Corporation on account of the loss, theft or destruction of any such certificate
or the issuance of such new certificate.
Section 3. Fixing a Record Date for Stockholder Meetings. In order that
the Corporation may determine the stockholders entitled to notice of or to vote
at any meeting of stockholders or any adjournment thereof, the Board of
Directors may fix a record date, which record date shall not precede the date
upon which the resolution fixing the record date is adopted by the Board of
Directors, and which record date shall not be more than 60 nor less than 10 days
before the date of such meeting. If no record date is fixed by the Board of
Directors, the record date for determining stockholders entitled to notice of or
to vote at a meeting of stockholders shall be the close of business on the next
day preceding the day on which notice is first given. A determination of
stockholders of record entitled to notice of or to vote at a meeting of
stockholders shall apply to any adjournment of the meeting; provided, however,
that the Board of Directors may fix a new record date for the adjourned meeting.
Section 4. Fixing a Record Date for Other Purposes. In order that the
Corporation may determine the stockholders entitled to receive payment of any
dividend or other distribution or allotment or any rights or the stockholders
entitled to exercise any rights in respect of any change, conversion or exchange
of stock, or for the purposes of any other lawful action, the Board of Directors
may fix a record date, which record date shall not precede the date upon which
the resolution fixing the record date is adopted, and which record date shall be
not more than 60 days prior to such action. If no record date is fixed, the
record date for determining stockholders for any such purpose shall be at the
close of business on the day on which the Board of Directors adopts the
resolution relating thereto.
Section 5. Registered Stockholders. Prior to the surrender to the
Corporation of the certificate or certificates for a share or shares of stock
with a request to record the transfer of such share or shares, the Corporation
may treat the registered owner as the person entitled to receive dividends, to
vote, to receive notifications and otherwise to exercise all the rights and
powers of an owner. The Corporation shall not be bound to recognize any
equitable or other claim to or interest in such share or shares on the part of
any other person, whether or not it shall have express or other notice thereof.
Section 6. Subscriptions for Stock. Unless otherwise provided for in
the subscription agreement, subscriptions for shares shall be paid in full at
such time, or in such installments and at such times, as shall be determined by
the Board of Directors. Any call made by the Board of Directors for payment on
subscriptions shall be uniform as to all shares of the same class or as to all
shares of the same series. In case of default in the payment of any installment
or call when such payment is due, the Corporation may proceed to collect the
amount due in the same manner as any debt due the Corporation.
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ARTICLE VI
GENERAL PROVISIONS
Section 1. Dividends. Dividends upon the capital stock of the
Corporation, subject to the provisions of the certificate of, if any, may be
declared by the Board of Directors at any regular or special meeting, in
accordance with applicable law. Dividends may be paid in cash, in property or in
shares of the capital stock, subject to the provisions of the Restated
Certificate of Incorporation. Before payment of any dividend, there may be set
aside out of any funds of the Corporation available for dividends such sum or
sums as the Directors from time to time, in their absolute discretion, think
proper as a reserve or reserves to meet contingencies, or for equalizing
dividends, or for repairing or maintaining any property of the Corporation, or
any other purpose and the Directors may modify or abolish any such reserve in
the manner in which it was created.
Section 2. Checks, Drafts or Orders. All checks, drafts or other orders
for the payment of money by or to the Corporation and all notes and other
evidences of indebtedness issued in the name of the Corporation shall be signed
by such officer or officers, agent or agents of the Corporation, and in such
manner, as shall be determined by resolution of the Board of Directors or a duly
authorized committee thereof.
Section 3. Contracts. In addition to the powers otherwise granted to
officers pursuant to ARTICLE IV hereof, the Board of Directors may authorize any
officer or officers, or any agent or agents, of the Corporation to enter into
any contract or to execute and deliver any instrument in the name of and on
behalf of the Corporation, and such authority may be general or confined to
specific instances.
Section 4. Loans. The Corporation may lend money to, or guarantee any
obligation of, or otherwise assist any officer or other employee of the
Corporation or of its subsidiaries, including any officer or employee who is a
Director of the Corporation or its subsidiaries, whenever, in the judgment of
the Directors, such loan, guaranty or assistance may reasonably be expected to
benefit the Corporation. The loan, guaranty or other assistance may be with or
without interest, and may be unsecured, or secured in such manner as the Board
of Directors shall approve, including, without limitation, a pledge of shares of
stock of the Corporation. Nothing in this section shall be deemed to deny, limit
or restrict the powers of guaranty or warranty of the Corporation at common law
or under any statute.
Section 5. Fiscal Year. The fiscal year of the Corporation shall be
fixed by resolution of the Board of Directors.
Section 6. Corporate Seal. The Board of Directors may provide a
corporate seal which shall be in the form of a circle and shall have inscribed
thereon the name of the Corporation and the words "Corporate Seal, Delaware."
The seal may be used by causing it or a facsimile thereof to be impressed or
affixed or reproduced or otherwise.
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Section 7. Voting Securities Owned By Corporation. Voting securities in
any other Corporation held by the Corporation shall be voted by the chief
executive officer, the president or a vice president, unless the Board of
Directors specifically confers authority to vote with respect thereto, which
authority may be general or confined to specific instances, upon some other
person or officer. Any person authorized to vote securities shall have the power
to appoint proxies, with general power of substitution.
Section 8. Inspection of Books and Records. The Board of Directors
shall have power from time to time to determine to what extent and at what times
and places and under what conditions and regulations the accounts and books of
the Corporation, or any of them, shall be open to the inspection of the
stockholders; and no stockholder shall have any right to inspect any account or
book or document of the Corporation, except as conferred by the laws of the
State of Delaware, unless and until authorized so to do by resolution of the
Board of Directors or of the stockholders of the Corporation.
Section 9. Section Headings. Section headings in these By-laws are for
convenience of reference only and shall not be given any substantive effect in
limiting or otherwise construing any provision herein.
Section 10. Inconsistent Provisions. In the event that any provision of
these By-laws is or becomes inconsistent with any provision of the Restated
Certificate of Incorporation, the General Corporation Law of the State of
Delaware or any other applicable law, the provision of these By-laws shall not
be given any effect to the extent of such inconsistency but shall otherwise be
given full force and effect.
ARTICLE VII
AMENDMENTS
In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors of the Corporation is expressly authorized to
make, alter, amend, change, add to or repeal these By-laws by the affirmative
vote of a majority of the total number of Directors then in office. Any
alteration or repeal of these By-laws by the stockholders of the Corporation
shall require the affirmative vote of a majority of the outstanding shares of
the Corporation entitled to vote on such alteration or repeal; provided,
however, that Section 11 of ARTICLE II and Sections 2, 3, 4 and 5 of ARTICLE III
and this ARTICLE VII of these By-laws shall not be altered, amended or repealed
and no provision inconsistent therewith shall be adopted without the affirmative
vote of the holders of at least 662/3% of the outstanding shares of the
Corporation entitled to vote on such alteration or repeal.
- 13 -
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AT JUNE 30, 1998 AND FROM THE CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q FOR THE PERIOD
ENDED JUNE 30, 1998.
</LEGEND>
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<PERIOD-END> JUN-30-1998
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<SECURITIES> 62,495
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<BONDS> 254,883
65,811
0
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<INTEREST-EXPENSE> 11,898
<INCOME-PRETAX> (34,550)
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