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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 22, 1998
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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ALLEGIANCE TELECOM, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 4832 75-2721491
(State or other jurisdiction (Primary Standard Industrial (IRS Employer
of incorporation or
organization) Classification Code Number) Identification Number)
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1950 STEMMONS FREEWAY
SUITE 3026
DALLAS, TEXAS 75207
TELEPHONE: (214) 853-7100
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
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ROYCE J. HOLLAND, CHAIRMAN AND
CHIEF EXECUTIVE OFFICER
Allegiance Telecom, Inc.
1950 Stemmons Freeway
Suite 3026
Dallas, Texas 75207
Telephone: (214) 261-7100
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
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MARK B. TRESNOWSKI ANDREW R. SCHLEIDER
Kirkland & Ellis Shearman & Sterling
200 East Randolph Drive 599 Lexington Avenue
Chicago, Illinois 60601 New York, New York 10022
(312) 861-2000 (212) 848-4000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after the effective date of this Registration Statement.
Pursuant to Rule 429 under the Securities Act of 1933, the Prospectus
included in this Registration Statement relates to Registration No. 333-53479
filed by the Registrant and declared effective June 30, 1998. The Registrant is
registering an indeterminate amount of Notes for which no filing fee is
required.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [ ]
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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PROSPECTUS
$205,000,000
[ALLEGIANCE TELECOM, INC. LOGO]
12 7/8% SENIOR NOTES DUE 2008
Interest payable May 15 and November 15
We may, at our option, redeem the Notes, in whole or in part, at any time on or
after May 15, 2003, at the redemption prices set forth herein, plus accrued
interest, if any, to the date of redemption. Other than the $69.0 million of
U.S. Treasury securities placed into a pledge account by us to be used for
payment in full of the first six scheduled interest payments due on the Notes,
the Notes will be our Company's unsecured indebtedness.
The Notes will be unsubordinated and will rank equally in right of payment with
all of our unsubordinated, unsecured indebtedness, including our Series B
11 3/4% Senior Discount Notes due 2008, and will be senior in right of payment
to all of our subordinated indebtedness.
SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
Prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
This Prospectus is to be used by Morgan Stanley & Co. Incorporated ("Morgan
Stanley") and Dean Witter Reynolds Inc. ("Dean Witter" and together with Morgan
Stanley, "Morgan Stanley Dean Witter"), in connection with offers and sales of
the Notes in market-making transactions at negotiated prices related to
prevailing market prices at the time of sale. Morgan Stanley Dean Witter may act
as principal or as agent in such transactions. If Morgan Stanley Dean Witter
conducts any market-making activities, it may be required to deliver a
"market-making prospectus" when effecting offers and sales in the Notes because
of the equity ownership of our Company by certain private investment
partnerships, which are affiliates of Morgan Stanley Dean Witter. As of
September 30, 1998, these investment partnerships owned in the aggregate
approximately 20.5% of the outstanding Common Stock of our Company. For as long
as a market-making prospectus is required to be delivered, the ability of Morgan
Stanley Dean Witter to make a market in the Notes may, in part, be dependent on
the ability of our Company to maintain a current market-making prospectus.
We will not receive any proceeds from the sale of any Notes by
Morgan Stanley Dean Witter.
MORGAN STANLEY DEAN WITTER
December 22, 1998
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TABLE OF CONTENTS
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PAGE
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Prospectus Summary.................. 4
Risk Factors........................ 10
Use of Proceeds..................... 26
Selected Financial Data............. 27
Management's Discussion and Analysis
of Financial Condition and Results
of Operations..................... 32
Business............................ 45
Management.......................... 70
Certain Relationships and Related
Transactions...................... 81
Security Ownership of Certain
Beneficial Owners and
Management........................ 83
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Description of Certain
Indebtedness...................... 85
Description of the Notes............ 86
Description of Capital Stock........ 120
Certain United States Federal Tax
Considerations.................... 124
ERISA Considerations................ 128
Plan of Distribution................ 129
Legal Matters....................... 129
Experts............................. 130
Index to Consolidated Financial
Statements........................ F-1
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You should rely only on the information provided in this Prospectus, any
supplement and the information set forth in the Registration Statement of which
this Prospectus is a part. We have not authorized anyone else to provide you
with different information. We are not making an offer of these Notes in any
state where the offer is not permitted. You should not assume that the
information in this Prospectus or any supplement is accurate as of any date
other than the date on the front of those documents.
This Prospectus includes forward-looking statements (including, but not limited
to, statements concerning the Company's expected financial position, business
and financing plans) which involve risks and uncertainties. Important factors
that could cause actual results to differ materially from such expectations
("Cautionary Statements") are disclosed in this Prospectus, including, without
limitation, in conjunction with the forward-looking statements included in this
Prospectus and under "Risk Factors" herein. All subsequent written and oral
forward-looking statements attributable to the Company, its subsidiaries or
persons acting on their behalf are expressly qualified by the Cautionary
Statements.
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Our principal executive offices are located at 1950 Stemmons Freeway, Suite
3026, Dallas, Texas 75207 and our telephone number is (214) 261-7100.
We file annual, quarterly and current reports and other information with the
SEC. You may read and copy any document we file at the SEC's public reference
rooms in Washington, D.C., New York, New York, and Chicago, Illinois. Please
call the SEC at 1-800-SEC-0330 for further information on the public reference
rooms. Our SEC filings are also available to the public on the SEC internet site
at http://www.sec.gov.
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PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this Prospectus. This
summary is not complete and may not contain all of the information that you
should consider before purchasing Notes. You should read the entire Prospectus
carefully. Unless the context otherwise requires, references herein to
"Allegiance" and the "Company" refer to Allegiance Telecom, Inc., a Delaware
corporation, and its subsidiaries.
THE COMPANY
Allegiance Telecom, Inc. is a competitive local exchange carrier ("CLEC") that
seeks to be a premier provider of telecommunications services to business,
government and other institutional users in major metropolitan areas across the
United States. We expect to offer 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. Our management team is led by Royce J. Holland, the former president,
chief operating officer and co-founder of MFS Communications Company, Inc.
("MFS"), and Thomas M. Lord, former managing director of Bear, Stearns & Co.
Inc., where he specialized in the telecommunications, information services and
technology industries.
We have designed our development plan to cover 24 of the largest metropolitan
areas in the U.S. We estimate that these 24 markets will include more than 20
million non-residential access lines, representing approximately 44.7% of the
total non-residential access lines in the U.S. With a strategy focusing on the
central business districts and suburban commercial districts in these areas, we
plan to address a majority of the non-residential access lines in most of our
targeted markets. As of September 30, 1998, we were operating in six markets:
New York City, Dallas, Atlanta, Fort Worth, Chicago and Los Angeles; and we are
in the process of deploying our networks in seven other markets: San Francisco,
Boston, Washington D.C., Northern New Jersey, Oakland, San Diego and San Jose.
BUSINESS STRATEGY
To accomplish our goal of becoming a premier provider of telecommunications
services to business, government, and other institutional users in U.S.
metropolitan areas, we have developed an end-user-focused business strategy
designed to achieve significant market penetration and deliver superior customer
care while maximizing operating margins. The key components of our strategy
include the following:
Leverage Proven Management Team. Our Chairman and Chief Executive Officer, Royce
J. Holland, has more than 25 years of experience in the telecommunications and
energy industries, including as president, chief operating officer, and
co-founder of MFS. Under his leadership, MFS grew from a start-up operation to
become the largest CLEC with approximately $1.1 billion in revenues before its
acquisition by WorldCom, Inc. ("WorldCom") in 1996. Our other key executives
also have significant experience in the critical functions of network
operations, sales and marketing, back office and operations support systems,
finance and regulatory affairs.
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Target End Users with Integrated Service Offerings. We focus principally on
end-user customers in the business, government and other institutional market
segments. The majority of our customers are and are expected to continue to be
small and medium-sized businesses, to which we offer "one-stop shopping"
consisting of a comprehensive package of communications services with convenient
integrated billing and a single point of contact for sales and service. For
large businesses and government and other institutional users, we focus
primarily on capturing a significant portion of the customers' local exchange,
intraLATA toll and data traffic.
Offer Data, Internet, and Enhanced Services to Enhance Market Penetration and
Reduce Churn. We believe we can accelerate new account penetration and reduce
customer churn by offering Local Area Network ("LAN") interconnection, frame
relay, Internet services, Integrated Services Digital Network ("ISDN"), Digital
Subscriber Line ("DSL"), Web page design, Web server hosting, and other enhanced
services not generally available from the incumbent local exchange carriers
("ILECs") (or available only at high prices), in conjunction with traditional
local and long distance services.
Utilize "Smart Build" Strategy to Maximize Speed to Market and Minimize
Investment Risk. We are initially leasing fiber trunking capacity from the ILECs
and other CLECs. For certain of our networks, we plan to lease dark fiber or
overbuild specific network segments as economically justified by traffic volume
growth and other factors that may make these arrangements more attractive. We
expect that this "smart build" strategy in which we reduce initial capital
expenditure requirements by leasing unbundled network elements allows us to
enter a new market in a six- to nine-month time frame instead of the 18 to 24
months required to construct a metropolitan area fiber network under the "build
first, sell later" approach required before the Telecommunications Act of 1996
(the "Telecommunications Act") established a framework for CLECs to lease these
unbundled network elements.
Achieve Broad Coverage of Attractive Areas within Each Targeted Market. As a
result of the substantial up-front capital requirements necessary to construct
metropolitan area fiber networks, CLECs have traditionally limited their initial
network buildout to highly concentrated downtown areas, limiting their ability
to provide service to customers in other attractive portions of their targeted
markets. Our plan is to leverage the benefits of using a "smart build" strategy
by selectively deploying our facilities to address attractive service areas
throughout each target market.
Maximize Operating Margins by Emphasizing Facilities-Based Services. We believe
that facilities-based solutions where we provide local exchange, local access,
and long distance services using our own facilities should generate
significantly higher gross network margins than we could obtain by reselling
such services. As a result, we focus our marketing activities on areas where we
can serve customers through a direct connection. We plan to resell ILEC services
only to provide comprehensive geographical service coverage to customers with
multiple on-net sites (which can be addressed by our facilities-based services)
and a few off-net sites (which can be addressed only by reselling ILEC
services).
Build Market Share by Focusing on Direct Sales. We believe that the key to
achieving our goals is to capture and retain customers using direct sales, and
offering a full suite of turn-key product offerings and personalized customer
care. We believe that ILECs have generally neglected small and medium-sized
business customers in these areas. We believe
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we will be able to attract and retain highly qualified sales and support
personnel by offering them the opportunity to: (i) work with an experienced and
success-proven management team in building a developing, entrepreneurial
company; (ii) market a comprehensive set of products and services and customer
care options; and (iii) participate in the potential economic returns by
providing a results-oriented compensation package, including sales commissions
and stock options.
Develop Efficient Automated Back Office Systems. We are focusing on developing,
acquiring and integrating back office systems to facilitate a smooth, efficient
order management, provisioning, trouble management, billing and collection, and
customer service process. To address this critical issue, we have hired an
experienced team of engineering and information technology professionals to
develop operations support systems that will synchronize multiple tasks. We
believe that these back office systems, once developed, will provide us with a
significant competitive advantage in terms of cost, processing large order
volumes and customer service as compared to companies using legacy systems.
Expand Customer Base Through Potential Acquisitions. We believe that strategic
acquisitions may produce a number of benefits, including acceleration of market
penetration, providing a customer base for cross-selling additional services,
acquiring experienced management and improving margins by migrating resold
services to our network facilities.
FINANCING PLAN
Allegiance's financing plan is predicated on pre-funding each market's expansion
to the point at which such market's operating cash flow is sufficient to fund
its operating costs and capital expenditures ("Positive Free Cash Flow"). This
approach is designed to allow us to be opportunistic and raise capital on
favorable terms and conditions.
To pre-fund the expansion of our initial markets to Positive Free Cash Flow, we
consummated the following transactions:
(i) we received equity contributions (the "Equity Contributions")
aggregating approximately $50.1 million, of which approximately $47.6
million was from affiliates of four private equity investment funds with
extensive experience in financing telecommunications companies (Madison
Dearborn Capital Partners, Morgan Stanley Capital Partners, Frontenac
Company, and Battery Ventures (collectively, the "Fund Investors")) and
approximately $2.5 million was from certain members of the Allegiance
management team (the "Management Investors");
(ii) we received approximately $240.7 million of net proceeds, after
deducting estimated underwriting discounts and commissions and other
expenses payable by us, from the sale of 445,000 units (the "Units"),
consisting in the aggregate of $445.0 million principal amount at maturity
of our 11 3/4% Senior Discount Notes due 2008 (the "11 3/4% Notes") and
445,000 warrants (the "Warrants") to purchase an aggregate of 649,248 shares
of Common Stock (the "Unit Offering");
(iii) we received approximately $124.8 million of net proceeds, after
deducting underwriting discounts and commissions and other expenses payable
by us, from the
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sale of $205.0 million aggregate principal amount of the Notes (of which
approximately $69.0 million was used to purchase a portfolio of pledged
securities consisting of U.S. government securities); and
(iv) we received approximately $137.8 million of net proceeds, after
deducting underwriting discounts and commissions and other expenses payable
by us, from the sale of 10,000,000 shares of our common stock (the "Equity
Offering").
We estimate that our cumulative cash requirements to fund our business plan,
including pre-funding the expansion of each of our initial 24 markets to
Positive Free Cash Flow, will be approximately $700 million.
We believe, based on our business plan, that the net proceeds from the capital
raising activities completed thus far will be sufficient to pre-fund our market
deployment in our initial 18 target markets to Positive Free Cash Flow. We will
require up to an estimated additional $200 million to completely fund our
business plan covering our remaining six target markets. We recently initiated
discussions with commercial and investment banks, vendors and equipment lease
finance companies for the purposes of evaluating the feasibility of raising up
to an additional $200 million in financing. We do not plan to spend any funds,
other than minimum amounts required to incorporate and become certified to do
business, for our unfunded six markets, until such time as we obtain the
permanent financing required to rollout the network and fund the operations to
Positive Free Cash Flow in these markets. There can be no assurance that such
financing will be available on terms acceptable to us or at all, or that our
estimate of additional funds required is accurate.
The actual amount and timing of our capital requirements to fund market
deployment in our initial 24 target markets to Positive Free Cash Flow may
differ materially from our estimates as a result of, among other things, the
demand for our services and regulatory, technological and competitive
developments (including additional market developments and new opportunities) in
our industry. We also expect that we will require additional financing (or
require financing sooner than anticipated) if: (i) our development plans or
projections change (including the extent of planned penetration in our target
markets) or prove to be inaccurate; (ii) we engage in any acquisitions; or (iii)
we alter the schedule or targets of our roll-out plan or we accelerate the
implementation of our network deployment.
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THE NOTES
The following summary is provided solely for your convenience. This summary is
not intended to be complete. You should read the full text and more specific
details contained elsewhere in this Prospectus. For a more detailed description
of the Notes, see "Description of the Notes."
Securities Offered........... $205,000,000 aggregate principal amount of
12 7/8% Senior Notes due 2008.
Maturity..................... May 15, 2008.
Interest..................... Payable in cash on May 15 and November 15 of
each year, commencing November 15, 1998.
Optional Redemption.......... We may, at our option, redeem the Notes,
beginning on May 15, 2003. The initial
redemption price is 106.438% of their principal
amount, plus accrued interest. The redemption
price will decline each year and will be 100% of
their principal amount, plus accrued interest,
beginning on May 15, 2006.
In addition, before May 15, 2001, we may redeem
up to 35% of the aggregate principal amount of
the Notes with the proceeds of one or more
Public Equity Offerings (as defined under
"Description of the Notes") at 112.875% of their
principal amount, plus accrued interest. We may
make such redemption only if at least 65% of the
aggregate principal amount of the Notes
originally issued remains outstanding.
Security..................... In connection with the sale of the Notes, we
purchased approximately $69.0 million of U.S.
Treasury securities and placed such securities
in a pledge account to be used for payment in
full of the first six scheduled interest
payments due on the Notes.
Change of Control............ Upon a Change of Control (as defined under
"Description of the Notes"), we will be required
to make an offer to purchase the Notes at a
purchase price equal to 101% of their principal
amount plus accrued interest. There can be no
assurance that we will have sufficient funds
available at the time of any Change of Control
to make any required debt repayment (including
repurchases of the Notes).
Ranking...................... The Notes will be unsubordinated, unsecured
(except as described above under "-- Security")
indebtedness. The Notes will rank equally with
all of our unsubordinated, unsecured
indebtedness, including the 11 3/4% Notes. At
September 30, 1998, we had approximately $463.8
million of indebtedness outstanding, all of
which was
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ranked equally with the Notes. See "Risk Factors -- Substantial Leverage and
Possible Inability to Service Indebtedness."
Certain Covenants............ The Indenture contains certain covenants that,
among other things, restrict our ability and the
ability of certain of our subsidiaries to:
- incur additional 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 certain of our
subsidiaries;
- enter into transactions with stockholders or
affiliates; or
- effect a consolidation or merger.
However, these limitations will be subject to a
number of important qualifications and
exceptions.
Use of Proceeds.............. We will not receive any proceeds from the sale
of any Notes by Morgan Stanley Dean Witter.
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RISK FACTORS
You should carefully consider the following risk factors before you decide
whether to invest in the Notes offered in this Prospectus:
LIMITED HISTORY OF OPERATIONS
From our inception on April 22, 1997 through December 16, 1997, we were in the
development stage of operations. Our principal activities during that period
included developing our business plans, initiating applications for governmental
authorizations, acquiring equipment and facilities, hiring management and other
key personnel, raising capital, working on the design and development of our
local exchange telephone networks and operations support systems and other back
office systems and negotiating interconnection agreements. As of September 30,
1998, we have sold approximately 43,400 lines to customers. Because of our
limited operating history, you have limited operating and financial data which
you can use to evaluate our performance and determine whether you should invest
in the Notes. Our ability to provide "one-stop shopping" bundled
telecommunications services on a widespread basis and to generate operating
profits and positive operating cash flow will depend on our ability, among other
things, to:
- - develop our operations support and other back office systems;
- - obtain state authorizations to operate as a CLEC and any other required
governmental authorizations;
- - attract and retain an adequate customer base;
- - raise additional capital;
- - attract and retain qualified personnel;
- - enter into and implement interconnection agreements with ILECs; and
- - work with ILECs to effectively and efficiently provision customers to our
networks.
For further information regarding these issues see "Business -- Business
Strategy" on page 46. We cannot assure you that we will be able to achieve our
business objectives or generate sufficient revenues to make principal and
interest payments on the Notes or our other indebtedness.
PAST AND EXPECTED FUTURE OPERATING LOSSES, NET LOSSES AND NEGATIVE EBITDA
To develop our business and deploy our services and systems, we will need to
make significant capital expenditures. We will need to incur a substantial
portion of these expenditures before the realization of significant revenues. We
also expect to continue to generate operating losses, net losses and negative
earnings before interest, income taxes, depreciation and amortization,
management ownership allocation charge and non-cash deferred compensation
("EBITDA") while we emphasize development, construction, and expansion of our
telecommunications services business and until we establish a sufficient
revenue-generating customer base. For the nine months ended September 30, 1998
and from inception (April 22, 1997) through December 31, 1997, we had operating
losses of $194.4 million and $3.8 million, net losses (after accreting
redeemable preferred stock and warrant values) of $218.4 million and $7.5
million and negative EBITDA of $26.4 million and $3.6 million, respectively. We
expect that each targeted market will generally produce
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negative EBITDA for at least two to three years after operations commence in
such market, and we expect to experience increasing operating losses and
negative EBITDA as we continue to expand our operations. We cannot assure you
that we will achieve or sustain profitability or generate sufficient EBITDA to
meet our working capital and debt service requirements, which could have a
material adverse effect on us and on our ability to meet our obligations under
the Notes.
NEED FOR SIGNIFICANT CAPITAL
The expansion and development of our business and deployment of our networks,
services and systems will require significant capital to fund capital
expenditures, working capital, debt service and cash flow deficits. Our
principal capital expenditure requirements involve the purchase and installation
of collocation equipment, network switches and switch electronics and network
operations center expenditures. We estimate, based on our current business plan,
that our aggregate capital requirements (including requirements to fund capital
expenditures, working capital and cash flow deficits) to fund the deployment and
operation of our networks in all of our initial 24 markets to Positive Free Cash
Flow will total approximately $700 million. Our actual capital requirements may
vary based upon the timing and success of our implementation of our business
plan and changes in our business plan (including the extent of planned
penetration in our target markets). We believe, based on our current business
plan, that the net proceeds from our capital raising activities completed thus
far and funding expected to be available from equipment vendors, commercial
banks or other available sources of capital will be sufficient to pre-fund our
market deployment in our initial 24 markets to Positive Free Cash Flow. If the
additional financing is not obtained in accordance with our plan, we intend to
modify our deployment schedule by developing only 18 of our initial markets. In
such case, we would delay deployment of networks in the remaining six markets
until we obtain additional financing on acceptable terms and conditions. We
cannot assure you that the additional financing we are seeking will be available
on terms acceptable to us or at all.
The actual amount and timing of our capital requirements to fund market
deployment in our initial 24 target markets to Positive Free Cash Flow may
differ materially from our estimates as a result of, among other things, the
demand for our services and regulatory, technological and competitive
developments (including additional market developments and new opportunities) in
our industry. Our revenues and costs are dependent upon factors that are not
within our control, such as regulatory changes, changes in technology, and
increased competition. Due to the uncertainty of these factors, actual revenues
and costs may vary from expected amounts and such variations are likely to
affect our future capital requirements. We also expect that we will require
additional financing (or require financing sooner than anticipated) if:
- - our development plans or projections change or prove to be inaccurate;
- - we engage in any acquisitions; or
- - we alter the schedule or targets of our roll-out plan or we accelerate the
implementation of our network deployment.
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RISK OF INABILITY TO MANAGE RAPID EXPANSION
We are in the early stages of our operations and have only recently begun to
deploy networks in our first 13 target markets. The successful implementation of
our business plan will result in rapid expansion of our operations and the
provision of bundled telecommunications services on a widespread basis. Rapid
expansion of our operations may place a significant strain on our management,
financial and other resources.
Our ability to manage future growth, should it occur, will depend upon our
ability to develop efficient operations support systems and other back office
systems, monitor operations, control costs, maintain regulatory compliance,
maintain effective quality controls and significantly expand our internal
management, technical, information and accounting systems and to attract,
assimilate and retain additional qualified personnel. If we fail to manage our
future growth effectively, we may not be able to expand our customer base and
service offerings as we have planned. We cannot assure you that we will
successfully implement and maintain such operations and financial systems or
successfully obtain, integrate and utilize the employees and management,
operations and financial resources necessary to manage a developing and
expanding business in an evolving, highly regulated and increasingly competitive
industry. Any failure to expand these areas and to implement and improve such
systems, procedures and controls in an efficient manner at a pace consistent
with the growth of our business could have a material adverse effect on us and
on our ability to meet our obligations under the Notes.
If we are unable to hire sufficient qualified personnel or develop, acquire and
integrate successfully our operations and information systems, customers could
experience delays in connection of service and/or lower levels of customer
service. A failure to meet the demands of our customers and manage the expansion
of our business and operations could have a material adverse effect on us and on
our ability to meet our obligations under the Notes.
DEPENDENCE ON KEY PERSONNEL
We are managed by a small number of key executive officers, most notably Royce
J. Holland, our Chairman and Chief Executive Officer. The loss of services of
one or more of these key individuals, particularly Mr. Holland, could materially
and adversely affect our business and our prospects. We believe that our success
will depend in large part on our ability to develop a large and effective sales
force and our ability to attract and retain highly skilled and qualified
personnel. Most of our executive officers, including the regional vice
presidents of our operating subsidiaries, do not have employment agreements, and
we do not maintain key person life insurance for any of our executive officers.
Although we have been successful in attracting and retaining qualified
personnel, the competition for qualified managers in the telecommunications
industry is intense. For this reason, we cannot assure you that we will be able
to hire or retain necessary personnel in the future. We and two of our
executives have been named as defendants in a lawsuit by WorldCom relating to
our hiring of certain former WorldCom employees. For more information about this
lawsuit, see "Business -- Legal Proceedings."
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DEPENDENCE ON BILLING, CUSTOMER SERVICE AND INFORMATION SYSTEMS
Sophisticated back office information and processing systems are vital to our
growth and our ability to monitor costs, bill customers, provision customer
orders and achieve operating efficiencies. Our plans for the development and
implementation of these systems rely, for the most part, on choosing products
and services offered by third-party vendors and integrating such products and
services in-house to produce efficient operations solutions. We cannot assure
you that these systems will be successfully implemented on a timely basis or at
all or will perform as expected. The risks we face in this area include:
- - the risk that our vendors may fail to deliver proposed products and services
in a timely and effective manner and at acceptable costs;
- - the risk that we may fail to adequately identify all of our information and
processing needs;
- - the risk that our related processing or information systems may fail or be
inadequate;
- - the risk that we are unable to effectively integrate such products or
services; and
- - the risk that we may fail to upgrade systems as necessary.
In addition, our right to use these systems depends upon license agreements with
third party vendors. Certain of such agreements may be cancellable by the vendor
and the cancellation or nonrenewal of these agreements may have an adverse
effect on us and on our ability to meet our obligations under the Notes.
RISKS ASSOCIATED WITH YEAR 2000
We have selected and purchased each of our computer and operations support
systems to be year 2000 compliant, including requiring certain conditions,
warranties, and remedies in vendor supply agreements for such systems that such
systems will be year 2000 compliant. While we believe that our systems will be
year 2000 compliant, there can be no assurance until the year 2000 occurs that
all systems will then function adequately. In addition, we are dependent upon
third-party suppliers (including ILECs or other telecommunications operators)
for the delivery of certain services (including interconnection) and on third-
party customers for the purchase of our services. In many cases, our services
and operations require electronic interfacing with the systems and networks of
ILECs and other third-party telecommunication operators. A failure of our
customers or vendors (including ILECs and other telecommunications operators) to
cause their software and systems to be year 2000 compliant could have a material
adverse effect on us and on our ability to meet our obligations under the Notes.
SUBSTANTIAL LEVERAGE AND POSSIBLE INABILITY TO SERVICE INDEBTEDNESS
We are highly leveraged. Our earnings for the nine months ended September 30,
1998 and the period from inception (April 22, 1997) through December 31, 1997
were insufficient to cover fixed charges by $208.4 million and $3.7 million,
respectively. As of September 30, 1998, our aggregate outstanding indebtedness
was $463.8 million, and our stockholders' equity was $142.1 million. In
addition, the accretion of original issue discount on the 11 3/4% Notes will
cause an increase in indebtedness of $187.6 million by February 15, 2008. We
also plan to obtain additional debt financing to fund our business plan. The
Indentures relating to the Notes and the 11 3/4% Notes (the "Indentures") limit,
but do not prohibit,
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the incurrence of additional indebtedness by us. In particular, the Indentures
permit us to incur an unlimited amount of indebtedness to finance the cost of
equipment, inventory and network assets.
Our high degree of leverage could have important consequences to our future
prospects, including but not limited to:
- - impairing our ability to obtain additional financing for working capital,
capital expenditures, acquisitions or general corporate purposes;
- - requiring us to dedicate a substantial portion of our cash flow from
operations to the payment of principal and interest on our indebtedness,
thereby reducing the funds available to us for our operations and other
purposes, including acquisitions and investments in product development and
capital spending;
- - placing us at a competitive disadvantage with those of our competitors which
are not as highly leveraged as we are;
- - impairing our ability to adjust rapidly to changing market conditions; and
- - making us more vulnerable in the event of a downturn in general economic
conditions or in our business or of changing market conditions and
regulations.
We cannot assure you that we will be able to meet our debt service obligations.
If we are unable to generate sufficient cash flow or otherwise obtain funds
necessary to make required payments, or if we otherwise fail to comply with the
various covenants in our debt obligations, the holders of such indebtedness may
have the right to accelerate the maturity of such indebtedness and thus could
cause defaults under our other indebtedness. Our ability to repay or to
refinance our debt obligations will depend on our future financial and operating
performance, which, in turn, will be subject to prevailing economic and
competitive conditions and to certain financial, business and other factors,
many of which are beyond our control. These factors could include operating
difficulties, increased operating costs, pricing pressures, the response of
competitors, regulatory developments, and delays in implementing strategic
projects.
The successful implementation of our business strategy, including deployment of
our networks and obtaining and retaining a significant number of customers, and
significant and sustained growths in our cash flow are necessary for us to be
able to meet our debt service and working capital requirements. We cannot assure
you that we will successfully implement our business strategy, that the
anticipated results of our strategy will be realized, or that we will be able to
generate sufficient cash flow from operating activities to meet our debt service
obligations and working capital requirements. If our cash flow and capital
resources are insufficient to fund our debt service and working capital
obligations, we may be forced to reduce or delay capital expenditures (including
switch and network expenditures), sell assets, or seek to obtain additional
equity capital, or to refinance or restructure our debt. If we are forced to
sell assets to make up for any shortfall in the payments due on our
indebtedness, we may not realize the highest price for such assets. We cannot
assure you that our cash flow and capital resources will be sufficient for
payment of principal of, and premium, if any, and interest on, our indebtedness
in the future, or that any such alternative measures would be successful or
would permit us to meet our debt service and working capital obligations. In
addition, because our obligations under the equipment vendor or commercial bank
financing, if obtained, are expected to
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bear interest at floating rates, an increase in interest rates could adversely
affect, among other things, our ability to meet our debt service obligations.
POTENTIAL CONFLICTS OF INTEREST CAUSED BY FUND INVESTOR CONTROL
Our direction and future operations can be controlled by the investment funds
that provided our initial equity. Certain decisions concerning our operations or
financial structure may present conflicts of interest between these investors
and our management and other holders of the Common Stock. In addition to their
investments in us, these investors or their affiliates currently have
significant investments in other telecommunications companies and may in the
future invest in other entities engaged in the telecommunications business or in
related businesses (including entities which compete with us). Conflicts may
also arise in the negotiation or enforcement of arrangements entered into by us
and entities in which these investors have an interest. In addition, we and
these investors have agreed that such investors are under no obligation to bring
to us any investment or business opportunities of which they become aware, even
if such opportunities are within our scope and objectives. Royce J. Holland, our
Chairman and Chief Executive Officer also has an investment in, and serves on
the boards of directors of WNP Communications, Inc. (which will operate in
certain of our target markets) and CSG Systems (which provides certain software
to us).
LIMITATIONS IMPOSED BY RESTRICTIVE COVENANTS
The Indentures and the agreements entered into in connection with our initial
equity funding contain a number of covenants that will limit the discretion of
our management with respect to certain business matters. These covenants, among
other things, restrict our ability to incur additional indebtedness, pay
dividends and make other distributions, prepay subordinated indebtedness, make
investments and other restricted payments, enter into sale and leaseback
transactions, create liens, sell assets, and engage in certain transactions with
affiliates. In addition, our future financing arrangements will most likely
contain covenants, including financial covenants.
If we fail to comply with any of these covenants and restrictions, the maturity
of the related debt and other debt could be accelerated, and the commitments of
our lenders to make further extensions of credit could terminate.
DIFFICULTIES IN IMPLEMENTING LOCAL AND ENHANCED SERVICES
We have begun, and plan to continue, to deploy high capacity digital switches in
the cities in which we will operate networks. We plan initially to rely on ILEC
or CLEC facilities for certain aspects of transmission. Subject to obtaining
interconnection, this will enable us to offer a variety of switched access
services, enhanced services and local dial tone. Although under the
Telecommunications Act the ILECs will be required to unbundle network elements
and permit us to purchase only the origination and termination services that we
need, thereby decreasing operating expenses, we cannot assure you that such
unbundling will be effected in a timely manner and result in prices favorable to
us. In addition, our ability to implement successfully our switched and enhanced
services will require the negotiation of resale agreements with ILECs and other
CLECs and the
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negotiation of interconnection and collocation agreements with ILECs, which can
take considerable time, effort and expense and are subject to federal, state and
local regulation.
In August 1996, the FCC released a decision implementing the interconnection
portions of the Telecommunications Act (the "Interconnection Decision"). The
Interconnection Decision establishes rules for negotiating interconnection
agreements and guidelines for review of such agreements by state public
utilities commissions. On July 18, 1997, the United States Court of Appeals for
the Eighth Circuit (the "Eighth Circuit") vacated certain portions of the
Interconnection Decision, including provisions establishing a pricing
methodology for unbundled network elements and a procedure permitting new
entrants to "pick and choose" among various provisions of existing
interconnection agreements between ILECs and their competitors. On October 14,
1997, the Eighth Circuit issued a decision vacating additional FCC rules that
will likely have the effect of increasing the cost of obtaining the use of
combinations of an ILEC's unbundled network elements. The Eighth Circuit
decisions create uncertainty about the rules governing pricing, terms and
conditions of interconnection agreements, and could make negotiating and
enforcing such agreements more difficult and protracted and may require
renegotiation of existing agreements. The Supreme Court has granted a writ of
certiorari to review the Eighth Circuit decisions. Oral argument was held on
October 13, 1998 and a decision is expected before July 1999.
Many new carriers have experienced difficulties in working with the ILECs with
respect to provisioning, interconnection, collocation and implementing the
systems used by these new carriers to order and receive unbundled network
elements and wholesale services from the ILECs. Coordination with ILECs is
necessary for new carriers such as us to provide local service to customers on a
timely and competitive basis. The Telecommunications Act created incentives for
regional Bell operating companies ("RBOCs") to cooperate with new carriers and
permit access to their facilities by denying the RBOCs the ability to provide
in-region long distance services until they have satisfied statutory conditions
designed to open their local markets to competition. A federal District Court
recently held these provisions of the Telecommunications Act unconstitutional
and the United States Court of Appeals for the Fifth Circuit (the "Fifth
Circuit") subsequently reversed such District Court decision. SBC Communications
Inc. ("SBC") has sought review in the Supreme Court. The RBOCs in our markets
are not yet permitted by the FCC to offer long distance services and we cannot
assure you that these RBOCs will be accommodating to us once they are permitted
to offer long distance service. If we are unable to obtain the cooperation of an
RBOC in a region, whether or not such RBOC has been authorized to offer long
distance service, our ability to offer local services in such region on a timely
and cost-effective basis would be adversely affected.
ILECs around the country have been contesting whether the obligation to pay
reciprocal compensation to CLECs should apply to local telephone calls from ILEC
customers to ISPs served by CLECs. The ILECs claim that this traffic is
interstate in nature and therefore should be exempt from compensation
arrangements applicable to local, intrastate calls. CLECs have contended that
the interconnection agreements provide no exception for local calls to ISPs and
reciprocal compensation is therefore applicable. The FCC recently held that GTE
Corporation's ("GTE") ADSL service, which provides a dedicated connection
(rather than circuit-switched dial up) that permits an ISP to provide its end
user with high-speed access to the Internet, is a special access service with
more than a de
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minimis amount of interstate traffic. This order ("GTE ADSL Order") determined
that GTE's ADSL service is properly tariffed at the federal level but if GTE or
any other ILECs were to offer an ADSL service that is intrastate in nature, that
service should be tariffed at the state level.
Under the Eighth Circuit decisions, the states have primary jurisdiction
over the determination of reciprocal compensation arrangements and as a
result, the treatment of this issue can vary from state to state. Currently,
23 state commissions, three federal courts and one state court have ruled
that reciprocal compensation arrangements do apply to calls to ISPs. Certain
of these rulings are subject to appeal. Additional disputes over the
appropriate treatment of ISP traffic are pending in other states. The
National Association of Regulatory Utility Commissioners ("NARUC") adopted a
resolution in favor of applying reciprocal compensation to calls to ISPs.
The FCC made clear that its GTE ADSL Order did not determine whether
reciprocal compensation is owed pursuant to existing interconnection
agreements, state arbitration decisions and federal court decisions. The FCC
indicated that it intends to issue a separate order specifically addressing
reciprocal compensation issues. We anticipate that ISPs will be among our
target customers, and adverse decisions in these proceedings could limit our
ability to service this group of customers profitably.
The profitability of our Internet access services, and related services such as
Web site hosting, may be affected by our ability to obtain "peering"
arrangements with ISPs. In recent years, major ISPs routinely exchanged traffic
with other ISPs that met certain technical criteria on a "peering" basis,
meaning that each ISP accepted traffic routed to Internet addresses on their
system from their "peers" on a reciprocal basis, without payment of
compensation. In 1997, however, UUNET Technologies, Inc. ("UUNET"), the largest
ISP, announced that it intends to greatly restrict the use of peering
arrangements with other providers, and would impose charges for accepting
traffic from providers other than its "peers." Other major ISPs have reportedly
adopted similar policies. We cannot assure you that we will be able to negotiate
"peer" status with any of the major nationwide ISPs, or that it will be able to
terminate traffic on ISPs' networks at favorable prices. In addition, the merger
between WorldCom (UUNET's parent) and MCI (another major ISP) is expected to
increase the concentration of market power for ISP backbone services, and may
adversely affect our ability to obtain favorable peering terms.
We are a recent entrant into the newly created competitive local
telecommunications services industry. The local dial tone services market in
most states was only recently opened to competition due to the passage of the
Telecommunications Act and related regulatory rulings. There are numerous
operating complexities associated with providing these services. We will be
required to develop new products, services and systems and will need to develop
new marketing initiatives to sell these services.
Implementation of our switched and enhanced services is also dependent upon
equipment manufacturers' ability to meet our switch deployment schedule. We
cannot assure you that switches will be deployed on the schedule we have
developed or that, if deployed, such switches will be utilized to the degree we
expect.
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DEPENDENCE ON LEASED TRUNKING CAPACITY AND THIRD-PARTY AGREEMENTS
Our ability to replace trunk capacity leased from ILECs with leases of dark
fiber will depend in part on the availability of dark fiber trunking capacity.
We cannot assure you that all such required trunking capacity will be available
to us on a timely basis or on terms acceptable to us. If we fail to obtain such
leased fiber it could delay our ability to penetrate certain market areas or
require us to make additional unexpected up-front capital expenditures to
install our own fiber and could have a material adverse effect on us and on our
ability to meet our obligations under the Notes. If and when we seek to install
our own fiber, we must obtain local franchises and other permits, as well as
rights-of-way to utilize underground conduit and aerial pole space and other
rights-of-way from entities such as ILECs and other utilities, railroads, long
distance companies, state highway authorities, local governments and transit
authorities. We cannot assure you that we will be able to obtain and maintain
the franchises, permits and rights needed to implement our network buildout on
acceptable terms. The failure to enter into and maintain any such required
arrangements for a particular network may affect our ability to develop that
network and may have a material adverse effect on us and on our ability to meet
our obligations under the Notes.
RISKS RELATING TO LONG DISTANCE BUSINESS
As part of our "one-stop shopping" offering of bundled telecommunications
services to our customers, we plan to offer long distance services to our
customers. The long distance business is extremely competitive and prices have
declined substantially in recent years and are expected to continue to decline.
In addition, the long distance industry has historically had a high average
churn rate, as customers frequently change long distance providers in response
to the offering of lower rates or promotional incentives by competitors. We will
initially rely on other carriers to provide transmission and termination
services for all of our long distance traffic. We will need resale agreements
with long distance carriers to provide us with transmission services. Such
agreements typically provide for the resale of long distance services on a
per-minute basis and may contain minimum volume commitments. Negotiation of
these agreements involves estimates of future supply and demand for transmission
capacity as well as estimates of the calling pattern and traffic levels of our
future customers. If we fail to meet our minimum volume commitments, we may be
obligated to pay underutilization charges and if we underestimate our need for
transmission capacity, we may be required to obtain capacity through more
expensive means.
COMPETITION
The telecommunications industry is highly competitive. In each of the markets
targeted by us, we will compete principally with the ILEC serving that area.
ILECs are established providers of local telephone services to all or virtually
all telephone subscribers within their respective service areas. ILECs also have
long-standing relationships with regulatory authorities at the federal and state
levels. While some FCC and state administrative decisions and initiatives
provide increased business opportunities to telecommunications providers such as
us, they also provide the ILECs with pricing flexibility for their private line
and special access and switched access services. In addition, with respect to
competitive access services (as opposed to switched local exchange services),
the FCC recently proposed a rule that would provide for increased ILEC pricing
flexibility and
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deregulation for such access services either automatically or after certain
competitive levels are reached. If the ILECs are allowed by regulators to offer
discounts to large customers through contract tariffs, engage in aggressive
volume and term discount pricing practices for their customers, and/or seek to
charge competitors excessive fees for interconnection to their networks, ILEC
competitors such as us could be materially adversely affected. If future
regulatory decisions afford the ILECs increased access services pricing
flexibility or other regulatory relief, such decisions could also have a
material adverse effect on ILEC competitors such as us.
We also face, and expect to continue to face, competition from other current and
potential market entrants, including long distance carriers seeking to enter,
reenter or expand entry into the local exchange marketplace such as AT&T Corp.
("AT&T"), MCI WorldCom, Inc. ("MCI WorldCom") and Sprint Corporation ("Sprint"),
and from other CLECs, resellers, competitive access providers ("CAPs"), cable
television companies, electric utilities, microwave carriers, wireless telephone
system operators and private networks built by large end users. In addition, the
development of new technologies could give rise to significant new competitors.
We also compete with equipment vendors and installers, and telecommunications
management companies with respect to certain portions of our business. Many of
our current and potential competitors have financial, technical, marketing,
personnel and other resources, including brand name recognition, substantially
greater than ours, as well as other competitive advantages over us.
The Telecommunications Act includes provisions which impose certain regulatory
requirements on all local exchange carriers, including ILEC competitors like us,
while granting the FCC expanded authority to reduce the level of regulation
applicable to any or all telecommunications carriers, including ILECs. The
manner in which these provisions of the Telecommunications Act are implemented
and enforced could have a material adverse effect on our ability to successfully
compete against ILECs and other telecommunications service providers.
As a recent entrant in the integrated telecommunications services industry, we
have not achieved and do not expect to achieve a significant market share for
any of our services. In particular, the ILECs have long-standing relationships
with their customers, have financial, technical, marketing, personnel and other
resources substantially greater than ours, have the potential to subsidize
competitive services with revenues from a variety of businesses and currently
benefit from existing regulations that favor the ILECs over us in certain
respects. Certain federal and state laws and regulations that allow CLECs to
interconnect with ILEC facilities provide increased business opportunities for
us. However, such interconnection opportunities have been accompanied by
increased pricing flexibility for and relaxation of regulatory oversight of the
ILECs.
To the extent we interconnect with and use ILEC networks to service our
customers, we will be dependent upon the technology and capabilities of the
ILECs to meet certain telecommunications needs of our customers and to maintain
our service standards, and we must interface with the ILECs' legacy operations
support systems to properly provision new customers. The Telecommunications Act
imposes interconnection obligations on ILECs, but we cannot assure you that we
will be able to obtain the interconnection we require at rates, and on terms and
conditions, that permit us to offer switched services that are both competitive
and profitable. If we experience difficulties in obtaining high quality,
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reliable and reasonably priced services from the ILECs, the attractiveness of
our services to our customers could be impaired.
The long distance telecommunications market has numerous entities competing for
the same customers and a high average churn rate, as customers frequently change
long distance providers in response to the offering of lower rates or
promotional incentives. Prices in the long distance market have declined
significantly in recent years and are expected to continue to decline. We face
competition from large carriers such as AT&T, Sprint, and MCI WorldCom. Other
competitors are likely to include RBOCs providing out-of-region (and, with the
removal of regulatory barriers, in-region) long distance services, other CLECs,
microwave and satellite carriers and private networks owned by large end users.
We may also increasingly face competition from companies offering local and long
distance data and voice services over the Internet. Such companies could enjoy a
significant cost advantage because they do not currently pay carrier access
charges or universal service fees. In addition, in June 1998, Sprint announced
its intention to offer voice, data and video services over its nationwide
asynchronous transfer mode network, which Sprint anticipates will significantly
reduce its cost to provide such services. Sprint plans to bill its customers
based upon the amount of traffic carried, irrespective of the time required to
send the traffic or the traffic's destination.
The Internet services market is highly competitive and we expect that
competition will continue to intensify. Our competitors in this market include
ISPs, other telecommunications companies, online services providers and Internet
software providers. Many of these competitors have greater financial,
technological, marketing, personnel and other resources than those available to
us.
We believe that the principal competitive factors affecting our business
operations are pricing levels and clear pricing policies, reliable customer
service, accurate billing and, to a lesser extent, variety of services. Our
ability to compete effectively will depend upon our continued ability to
maintain high quality, market-driven services at prices generally equal to or
below those charged by our competitors. To maintain our competitive posture, we
believe that we must be in a position to reduce our prices to meet reductions in
rates, if any, offered by others. Any such reductions could adversely affect us.
The recent World Trade Organization ("WTO") agreement on basic
telecommunications services could increase the level of competition faced by us.
Under this agreement, the United States and 72 other members of the WTO
committed themselves to opening their respective telecommunications markets
and/or foreign ownership and/or to adopting regulatory measures to protect
competitors against anticompetitive behavior by dominant telecommunications
companies, effective in some cases as early as January 1998. We cannot assure
you that the pro-competitive effects of the WTO agreement will not have a
material adverse effect on our business, financial condition and results of
operations.
A continuing trend toward consolidation, mergers, acquisitions and strategic
alliances in the telecommunications industry could also increase the level of
competition faced by us. For example, WorldCom acquired MFS in December 1996,
has recently acquired another CLEC, Brooks Fiber Properties, Inc., and has
merged with MCI. AT&T recently acquired Teleport Communications Group Inc. In
May 1998, SBC Communications Inc. and Ameritech Corporation agreed to merge. On
June 24, 1998, AT&T announced that it has entered into a merger agreement with
Tele-Communications, Inc., a cable, telecommunica-
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tions, and high speed Internet services provider. These types of consolidations
and alliances could put us at a competitive disadvantage.
GOVERNMENT REGULATION
Our networks and the provision 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
us.
The FCC exercises jurisdiction over us with respect to interstate and
international services. Additionally, we file tariffs with the FCC. On October
29, 1996, the FCC approved an order that eliminates the tariff filing
requirements for interstate domestic long distance service provided by
non-dominant carriers such as us. On February 13, 1997, the United States Court
of Appeals for the District of Columbia Circuit stayed the FCC order, and we are
required to continue filing tariffs while this stay remains in effect. If the
stay is lifted and the FCC order becomes effective, we and other
telecommunication carriers will no longer be able to rely on the filing of
tariffs with the FCC as a means of providing notice to customers of prices,
terms, and conditions on which we and they offer interstate services. While
tariffs offered a means of providing notice of prices, terms, and conditions, we
intend to rely primarily on our sales force and direct marketing to provide such
information to our customers. In addition, we must obtain (and have obtained
through our subsidiary, Allegiance Telecom International, Inc.) prior FCC
authorization for installation and operation of international facilities and the
provision (including resale) of international long distance services.
State regulatory commissions exercise jurisdiction over us to the extent we
provide intrastate services. As such a provider, we are required to obtain
regulatory authorization and/or file tariffs at state agencies in most of the
states in which we operate. If and when we seek to overbuild certain network
segments, local authorities regulate our access to municipal rights-of-way.
Network buildouts are also subject to numerous local regulations such as
building codes and licensing. Such regulations vary on a city by city and county
by county basis.
We cannot assure you that the FCC or state commissions will grant required
authority or refrain from taking action against us if we are found to have
provided services without obtaining the necessary authorizations. If authority
is not obtained or if tariffs are not filed, or are not updated, or otherwise do
not fully comply with the tariff filing rules of the FCC or state regulatory
agencies, third parties or regulators could challenge these actions. Such
challenges could cause us to incur substantial legal and administrative
expenses.
The Telecommunications Act provides for a significant deregulation of the
domestic telecommunications industry, including the local exchange, long
distance and cable television industries. The Telecommunications Act remains
subject to judicial review and additional FCC rulemaking, and thus it is
difficult to predict what effect the legislation will have on us and our
operations. There are currently many regulatory actions underway and being
contemplated by federal and state authorities regarding interconnection pricing
and other issues that could result in significant changes to the business
conditions in the telecommunications industry. We cannot assure you that these
changes will not have a material adverse effect upon us.
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On December 31, 1997, the U.S. District Court for the Northern District of Texas
issued a decision (the "SBC Decision") finding that Sections 271 to 275 of the
Telecommunications Act are unconstitutional. These sections of the
Telecommunications Act impose restrictions on the lines of business in which the
RBOCs may engage, including establishing the conditions they must satisfy before
they may provide in-region interLATA telecommunications services. The Fifth
Circuit subsequently reversed the district court decision. SBC has sought review
in the Supreme Court. We cannot predict the likely outcome of that appeal. If
the Supreme Court upholds the SBC Decision, however, the RBOCs would be able to
provide such in-region services immediately without satisfying the statutory
conditions. This would likely have an unfavorable effect on our business for at
least two reasons. First, the SBC Decision removes the incentive RBOCs have to
cooperate with companies like Allegiance to foster competition within their
service areas so that they can qualify to offer in-region interLATA services
because the decision allows RBOCs to offer such services immediately. However,
the SBC Decision does not affect other provisions of the Telecommunications Act
which create legal obligations for all ILECs to offer interconnection and
network access. Second, we are legally able to offer our customers both long
distance and local exchange services, which the RBOCs currently may not do. This
ability to offer "one-stop shopping" gives us a marketing advantage that we
would no longer enjoy if the SBC Decision were upheld on appeal.
In addition to requirements placed on ILECs, the Telecommunications Act subjects
us to certain federal regulatory requirements relating to the provision of local
exchange service in a market. All ILECs and CLECs must interconnect with other
carriers, provide nondiscriminatory access to rights-of-way, offer reciprocal
compensation for termination of traffic, and provide dialing parity and
telephone number portability. The Telecommunications Act also requires all
telecommunications carriers to ensure that their services are accessible to and
usable by persons with disabilities.
On May 8, 1997, the FCC released an order establishing a significantly expanded
federal universal service subsidy regime. For example, the FCC established new
subsidies for telecommunications and information services provided to qualifying
schools and libraries with an annual cap of $2.25 billion and for services
provided to rural health care providers with an annual cap of $400.0 million.
The FCC also expanded the federal subsidies for local exchange telephone service
provided to low-income consumers. Providers of interstate telecommunications
service, such as us, as well as certain other entities, must pay for these
programs. Our share of these federal subsidy funds will be based on our share of
certain defined telecommunications end-user revenues. Currently, the FCC is
assessing such payments on the basis of a provider's revenue for the previous
year; since we had no significant revenues in 1997, we will not be liable for
subsidy payments in any material amount during 1998. With respect to subsequent
years, however, we are currently unable to quantify the amount of subsidy
payments that we will be required to make and the effect that these required
payments will have on our financial condition. In the May 8th order, the FCC
also announced that it will soon revise its rules for subsidizing service
provided to consumers in high cost areas, which may result in further
substantial increases in the overall cost of the subsidy program. Several
parties have appealed the May 8th order. Such appeals have been consolidated and
transferred to the United States Court of Appeals for the Fifth Circuit where
they are currently pending. Oral argument is scheduled for December 1, 1998. In
addition, on July 3, 1997, several ILECs filed a petition for stay
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of the May 8th order with the FCC. That petition is pending, as well as several
petitions for administrative reconsideration of the order.
To the extent we provide interexchange telecommunications service, we are
required to pay access charges to ILECs when we use the facilities of those
companies to originate or terminate interexchange calls. Also, as a CLEC, we
provide access services to other interexchange service providers. The interstate
access charges of ILECs are subject to extensive regulation by the FCC, while
those of CLECs are subject to a lesser degree of FCC regulation but remain
subject to the requirement that all charges be just, reasonable, and not
unreasonably discriminatory. In two orders released on December 24, 1996, and
May 16, 1997, the FCC made major changes in the interstate access charge
structure. In the December 24th order, the FCC removed restrictions on ILECs'
ability to lower access prices and relaxed the regulation of new switched access
services in those markets where there are other providers of access services. If
this increased pricing flexibility is not effectively monitored by federal
regulators, it could have a material adverse effect on our ability to compete in
providing interstate access services. The May 16th order substantially increased
the costs that ILECs subject to the FCC's price cap rules ("price cap LECs")
recover through monthly, non-traffic-sensitive access charges and substantially
decreased the costs that price cap LECs recover through traffic-sensitive access
charges. In the May 16th order, the FCC also announced its plan to bring
interstate access rate levels more in line with cost. The plan will include
rules that may grant price cap LECs increased pricing flexibility upon
demonstrations of increased competition (or potential competition) in relevant
markets. The manner in which the FCC implements this approach to lowering access
charge levels could have a material effect on our ability to compete in
providing interstate access services. Several parties appealed the May 16th
order. On August 19, 1998, the May 16th order was affirmed by the Eighth Circuit
U.S. Court of Appeals. On October 5, 1998, the FCC released a Public Notice
asking parties to refresh the record on access charge reform. It specifically
requested comment on pricing flexibility proposals submitted by two RBOCs and on
changing the 6.5% X-Factor adjustment, which is applied annually to reduce
ILECs' price cap indices.
The FCC released a report to Congress on April 10, 1998 concerning its
implementation of the telecommunications subsidy provisions of the
Telecommunications Act. In that report, the FCC clarified that entities that
provide transmission capacity to ISPs are providing telecommunications services
subject to contribution requirements. The FCC indicated that it would address
the issues of whether ISPs would contribute to the universal service fund based
on the utilization of their own transmission facilities and whether certain ISP
services such as phone-to-phone IP telephony are telecommunications services
subject to universal service fund contributions and access charges at a later
date.
NEED TO ADAPT TO TECHNOLOGICAL CHANGE
The telecommunications industry is subject to rapid and significant changes in
technology, and we rely on third parties for the development of and access to
new technology. The effect of technological changes on our business cannot be
predicted. We believe our future success will depend, in part, on our ability to
anticipate or adapt to such changes and to offer, on a timely basis, services
that meet customer demands. We cannot assure you that we will obtain access to
new technology on a timely basis or on satisfactory terms. Any
23
<PAGE> 24
failure by us to obtain new technology could have a material adverse effect on
us and on our ability to meet our obligations under the Notes.
ACQUISITION RELATED RISKS
We may, as part of our business strategy, acquire other businesses that will
complement our existing business. We are unable to predict whether or when any
prospective acquisitions will occur or the likelihood of a material transaction
being completed on favorable terms and conditions. Our ability to finance
acquisitions may be constrained by, among other things, our high degree of
leverage. Such transactions commonly involve certain risks, including, among
others:
- - the difficulty of assimilating the acquired operations and personnel;
- - the potential disruption of our ongoing business and diversion of resources
and management time;
- - the potential inability of our management to maintain uniform standards,
controls, procedures and policies;
- - the risks of entering markets in which we have little or no direct prior
experience; and
- - the potential impairment of relationships with employees or customers as a
result of changes in management.
We cannot assure you that any acquisition will be made, that we will be able to
obtain additional financing needed to finance such acquisitions and, if any
acquisitions are made, that the acquired business will be successfully
integrated into our operations or that the acquired business will perform as
expected. We have no definitive agreement with respect to any acquisition,
although from time to time we have discussions with other companies and assess
opportunities on an ongoing basis.
We may also enter into joint venture transactions. These transactions present
many of the same risks involved in acquisitions and may also involve the risk
that other joint venture partners may have economic, business or legal interests
or objectives that are inconsistent to ours. Joint venture partners may also be
unable to meet their economic or other obligations, thereby forcing us to
fulfill these obligations.
INVESTMENT COMPANY ACT CONSIDERATIONS
We have substantial short-term investments. This may result in us being treated
as an "investment company" under the Investment Company Act of 1940 (the "1940
Act"). The 1940 Act requires the registration of, and imposes various
substantive restrictions on, certain companies ("investment companies") that
are, or hold themselves out as being, engaged primarily, or propose to engage
primarily in, the business of investing, reinvesting or trading in securities,
or that fail certain statistical tests regarding composition of assets and
sources of income and are not primarily engaged in businesses other than
investing, reinvesting, owning, holding or trading securities.
We believe that we are primarily engaged in a business other than investing,
reinvesting, owning, holding or trading securities and, therefore, that we are
not an investment company within the meaning of the 1940 Act. If we are found to
be an investment company, we currently intend to rely upon a safe harbor from
the 1940 Act for certain
24
<PAGE> 25
"transient" or temporary investment companies. However, such exemption is only
available to us for one year and this one-year period may terminate as soon as
January 1999.
If we were required to register as an investment company under the 1940 Act, we
would become subject to substantial regulation with respect to our capital
structure, management, operations, transactions with affiliated persons (as
defined in the 1940 Act) and other matters. To avoid having to register as an
investment company, beginning in as early as January 1999, we may have to invest
a portion of our liquid assets in cash and demand deposits instead of
securities. The extent to which we will have to do so will depend on the
composition and value of our total assets at that time. Having to register as an
investment company under the 1940 Act or having to invest a material portion of
our liquid assets in cash and demand deposits to avoid such registration, would
have a material adverse effect on our business, financial condition and results
of operations.
CERTAIN ANTI-TAKEOVER EFFECTS
Certain provisions of our Restated Certificate of Incorporation (the "Restated
Certificate") and Amended and Restated By-laws (the "By-laws") may inhibit
changes in control of Allegiance Telecom, Inc. which our board of directors has
not approved. These provisions include:
- - a classified board of directors;
- - a prohibition on stockholder action through written consents;
- - a requirement that special meetings of stockholders be called only by the
board of directors;
- - advance notice requirements for stockholder proposals and nominations;
- - limitations on the ability of stockholders to amend, alter or repeal the
By-laws; and
- - the authority of the board to issue without stockholder approval preferred
stock with such terms as the board may determine.
We will also be afforded the protections of Section 203 of the Delaware General
Corporation Law, which could have similar effects. See "Description of Capital
Stock."
In addition, the Indentures provide that upon a "change of control," each note
holder will have the right to require us to purchase all or a portion of such
holder's notes at a purchase price of 101% of the accreted value thereof (in the
case of the 11 3/4% Notes) and 101% of the principal amount thereof (in the case
of the Notes), together with accrued and unpaid interest, if any, to the date of
such redemption. Such obligation, if it arises, could have a material adverse
effect on us and on our ability to meet our obligations under the Notes. Such
provision could also delay, deter or prevent a takeover attempt.
RISKS REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus contains "forward-looking statements," which generally can be
identified by the use of forward-looking terminology such as "believes,"
"expects," "may," "will," "should," or "anticipates" or the negative thereof or
other variations thereon or comparable terminology, or by discussion of strategy
that involve risks and uncertainties. We caution the reader that these
forward-looking statements, such as our plans and strategies, our anticipation
of revenues from designated markets, and statements regarding the develop-
25
<PAGE> 26
ment of our businesses, the markets for our services and products, our
anticipated capital expenditures, operations support systemsible changes in
regulatory requirements and other statements contained herein regarding matters
that are not historical facts, are only predictions and estimates regarding
future events and circumstances. Cautionary statements are disclosed in this
Prospectus, including, without limitation, in connection with the
forward-looking statements included herein and under "Risk Factors." No
assurance can be given that the future results will be achieved; actual events
or results may differ materially as a result of the risks we face. Such risks
include, but are not limited to our ability to do the following in a timely
manner, at reasonable costs and on satisfactory terms and conditions:
- - successfully market our services to current and new customers;
- - interconnect with ILECs;
- - develop efficient operations support systems and other back office systems;
- - provision new customers and access markets;
- - identify, finance and complete suitable acquisitions;
- - install facilities, including switching electronics; and
- - obtain leased trunking capacity, rights-of-way, building access rights and any
required governmental authorizations, franchises and permits.
Regulatory, legislative and judicial developments could also cause actual
results to differ materially from the future results indicated, expressed or
implied, in such forward-looking statements. All subsequent written and oral
forward-looking statements attributable to us or persons acting on our behalf
are expressly qualified in their entirety by such cautionary statements. We
caution you not to place undue reliance on these forward-looking statements,
which speak only as of their dates. We undertake no obligations to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
USE OF PROCEEDS
The Company raised approximately $124.8 million of net proceeds from the
offering of the Notes, after deducting underwriting discounts and commissions
and other expenses payable by the Company and approximately $137.8 million of
net proceeds from the Equity Offering, after deducting underwriting discounts
and commissions and other expenses payable by the Company. At the closing of the
offering of the Notes, the Company purchased approximately $69.0 million of U.S.
treasury securities for purposes of funding the first six interest payments on
the Notes. The Company has used and intends to use the net proceeds from its
financing activities to date to fund the costs of deploying networks in its
first 18 markets to Positive Free Cash Flow, including the costs to develop,
acquire and integrate the necessary operations support and other back office
systems.
The Company will not obtain any proceeds in connection with the market-making
activities of Morgan Stanley Dean Witter from the sales of the Notes.
26
<PAGE> 27
SELECTED FINANCIAL DATA
The selected consolidated financial data presented below as of and for the nine
months ended September 30, 1998 and as of and for the period from inception
(April 22, 1997) through December 31, 1997 were derived from the audited
consolidated financial statements of the Company and the notes thereto contained
elsewhere in this Prospectus, which statements have been audited by Arthur
Andersen LLP, independent public accountants. The selected pro forma statements
of operations data set forth below is unaudited and gives effect to the offering
of the Notes (the "Debt Offering"), the Equity Offering (including the
conversion of the Redeemable Convertible Preferred Stock and the adjustments to
reflect the Equity Allocation) and the sale of the 11 3/4% Notes in the Unit
Offering as if such transactions had occurred on April 22, 1997 for the period
from inception through December 31, 1997 and on January 1, 1998 for the nine
months ended September 30, 1998. Operating results for the nine months ended
September 30, 1998 are not necessarily indicative of the results that may be
expected for the entire year. Dollar amounts are in thousands, except share
amounts.
From the Company's formation in April 1997 until December 16, 1997, the Company
was in the development stage. The Company has generated operating losses and
negative cash flow from its operating activities to date. The selected financial
data set forth below should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
consolidated financial statements, including the notes thereto, contained
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1998
----------------------------------------------------
PRO FORMA
--------------------------------------
AS ADJUSTED FOR
THE EQUITY OFFERING
DEBT OFFERING
ACTUAL ADJUSTMENTS AND UNIT OFFERING
----------- --------------- -------------------
(AUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues...................... $ 4,200.6 $ -- $ 4,200.6
Operating expenses:
Network..................... 4,506.0 -- 4,506.0
Selling, general and
administrative............ 26,075.2 -- 26,075.2
Management ownership
allocation charge......... 160,534.4 12,557.7(1) 173,092.1
Non-cash deferred
compensation.............. 3,758.7 -- 3,758.7
Depreciation and
amortization.............. 3,705.3 -- 3,705.3
----------- ---------- -----------
Total operating
expenses................ 198,579.6 12,557.7 211,137.3
----------- ---------- -----------
Loss from operations.......... (194,379.0) (12,557.7) (206,936.7)
Interest income............... 13,059.1 --(2) 13,059.1
Interest expense.............. (25,278.4) (23,264.0)(3) (48,542.4)
----------- ---------- -----------
Net loss...................... (206,598.3) (35,821.7) (242,420.0)
Accretion of redeemable
convertible preferred stock
and warrant values.......... (11,844.0) (7.4)(4) (11,851.4)
----------- ---------- -----------
Net loss applicable to common
stock....................... $(218,442.3) $(35,829.1) $(254,271.4)
=========== ========== ===========
<CAPTION>
PERIOD FROM INCEPTION (APRIL 22, 1997) THROUGH
DECEMBER 31, 1997
-----------------------------------------------------
PRO FORMA
-------------------------------------
AS ADJUSTED FOR
THE EQUITY OFFERING
DEBT OFFERING
ACTUAL ADJUSTMENTS AND UNIT OFFERING
------------- -------------- -------------------
(AUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues...................... $ 0.4 $ -- $ 0.4
Operating expenses:
Network..................... 151.2 -- 151.2
Selling, general and
administrative............ 3,425.9 -- 3,425.9
Management ownership
allocation charge......... -- 171,743.4(1) 171,743.4
Non-cash deferred
compensation.............. 209.9 -- 209.9
Depreciation and
amortization.............. 12.7 -- 12.7
----------- ------------- -----------
Total operating
expenses................ 3,799.7 171,743.4 175,543.1
----------- ------------- -----------
Loss from operations.......... (3,799.3) (171,743.4) (175,542.7)
Interest income............... 111.4 --(2) 111.4
Interest expense.............. -- (41,212.5)(3) (41,212.5)
----------- ------------- -----------
Net loss...................... (3,687.9) (212,955.9) (216,643.8)
Accretion of redeemable
convertible preferred stock
and warrant values.......... (3,814.2) (288.6)(4) (4,102.8)
----------- ------------- -----------
Net loss applicable to common
stock....................... $ (7,502.1) $ (213,244.5) $(220,746.6)
=========== ============= ===========
</TABLE>
27
<PAGE> 28
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1998
----------------------------------------------------
PRO FORMA
--------------------------------------
AS ADJUSTED FOR
THE EQUITY OFFERING
DEBT OFFERING
ACTUAL ADJUSTMENTS AND UNIT OFFERING
----------- --------------- -------------------
(AUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Net loss per share, basic and
diluted..................... $ (13.02) $ (5.05)
=========== ===========
Weighted average number of
shares outstanding, basic
and diluted................. 16,780,802 33,560,752(5) 50,341,554
=========== ========== ===========
OTHER FINANCIAL DATA:
EBITDA(6)..................... $(26,380.6) --(1) $ (26,380.6)
Net cash used in operating
activities.................. (10,497.9) $(13,196.9)(7) (23,694.8)
Net cash used in investing
activities.................. (183,593.3) 13,196.9(7) (170,396.4)
Net cash provided by financing
activities.................. 593,215.5 -- 593,215.5
Capital expenditures(9)....... 63,550.2 -- 63,550.2
Ratio of earnings to fixed
charges(10)................. -- -- --
<CAPTION>
PERIOD FROM INCEPTION (APRIL 22, 1997) THROUGH
DECEMBER 31, 1997
-----------------------------------------------------
PRO FORMA
-------------------------------------
AS ADJUSTED FOR
THE EQUITY OFFERING
DEBT OFFERING
ACTUAL ADJUSTMENTS AND UNIT OFFERING
------------- -------------- -------------------
(AUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Net loss per share, basic and
diluted..................... $(17,610.68) $ (4.41)
=========== ===========
Weighted average number of
shares outstanding, basic
and diluted................. 426 50,067,766(5) 50,068,192
=========== ============= ===========
OTHER FINANCIAL DATA:
EBITDA(6)..................... $ (3,576.7) --(1) $ (3,576.7)
Net cash used in operating
activities.................. (1,942.9) $ (13,196.9)(7) (15,139.8)
Net cash used in investing
activities.................. (21,926.0) (55,836.5)(7) (77,762.5)
Net cash provided by financing
activities.................. 29,595.3 572,340.4(8) 601,935.7
Capital expenditures(9)....... 21,926.0 -- 21,926.0
Ratio of earnings to fixed
charges(10)................. -- -- --
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------ -----------------
BALANCE SHEET DATA (AUDITED) (AUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $404,850.7 $ 5,726.4
Short-term investments.................................... 49,366.5 --
Short-term investments, restricted........................ 22,144.7 --
Accounts receivable (net of allowance for doubtful
accounts of $152.9 and $0, respectively)................ 2,031.9 4.3
Prepaid expenses and other current assets................. 1,711.4 245.2
---------- ---------
Total current assets................................ 480,105.2 5,975.9
Property and Equipment:
Property and equipment.................................... 106,713.5 23,912.6
Accumulated depreciation and amortization................. (3,718.0) (12.7)
---------- ---------
Property and equipment, net......................... 102,995.5 23,899.9
Other Non-Current Assets:
Deferred debt issuance costs (net of accumulated
amortization of $485.9 and $0, respectively)............ 16,326.2 --
Long-term investments, restricted......................... 48,531.9 --
Other assets.............................................. 1,268.0 171.2
---------- ---------
Total other non-current assets...................... 66,126.1 171.2
---------- ---------
Total assets........................................ $649,226.8 $30,047.0
========== =========
</TABLE>
28
<PAGE> 29
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------ -----------------
BALANCE SHEET DATA (AUDITED) (AUDITED)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable.......................................... $ 6,716.8 $ 2,261.7
Accrued liabilities and other............................. 28,130.8 1,668.0
---------- ---------
Total current liabilities........................... 34,847.6 3,929.7
Long-term Debt.............................................. 463,751.6 --
Redeemable Cumulative Convertible Preferred Stock -- 0 and
40,498,062 shares issued and outstanding at September 30,
1998 and December 31, 1997, respectively.................. -- 33,409.4
Redeemable Warrants......................................... 8,506.7 --
Commitments and Contingencies
Stockholders' Equity (Deficit):
Common stock -- 50,341,554 and 426 shares issued and
outstanding at September 30, 1998 and December 31, 1997,
respectively............................................ 503.4 --
Additional paid-in capital................................ 416,095.6 3,008.4
Deferred compensation..................................... (15,531.5) (2,798.4)
Deferred management ownership allocation charge........... (33,002.2) --
Accumulated deficit....................................... (225,944.4) (7,502.1)
---------- ---------
Total stockholders' equity (deficit)................ 142,120.9 (7,292.1)
---------- ---------
Total liabilities and stockholders' equity
(deficit)........................................... $649,226.8 $30,047.0
========== =========
</TABLE>
- -------------------------
(1) In connection with the Equity Offering, Allegiance LLC, an entity that
owned substantially all of the Company's outstanding capital stock, was
dissolved and its assets (which consisted almost entirely of such capital
stock) were distributed to the Fund Investors and the Management Investors
in accordance with the LLC Agreement (as defined under "Certain
Relationships and Related Transactions"). The LLC Agreement provides 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 Equity Offering. Under generally accepted accounting
principles, upon consummation of the Equity Offering, the Company recorded
the increase in the assets of Allegiance LLC allocated to the Management
Investors as a $193.5 million increase in additional paid-in capital, of
which $122.5 million was recorded as a non-cash, non-recurring charge to
operating expense and $71.0 million will be recorded as deferred management
ownership allocation charge. The deferred charge was amortized at $38.0
million as of September 30, 1998 and will be further amortized at $6.8
million, $18.8 million, $7.2 million and $.2 million during 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. See "Certain Relationships and Related
Transactions." The period from inception (April 22, 1997) through December
31, 1997 pro forma gives effect to the initial $122.5 million non-cash,
non-recurring charge to operating expense and the related amortization of
the deferred management ownership allocation charge for the
29
<PAGE> 30
period. The nine months ended September 30, 1998 pro forma gives effect to
the additional amortization of the deferred management ownership allocation
charge.
(2) Pro forma interest income excludes interest income that would have been
earned on the estimated $69.0 million of the proceeds from the Debt
Offering required to be placed in a pledged account to secure and fund the
first six scheduled interest payments on the Notes.
(3) Reflects $19.8 million and $18.2 million of interest expense related to the
Notes offered in the Debt Offering, $.2 million and $.1 million of
amortization of the $4.1 million of original issuance discount, $.3 million
and $.3 million of amortization of the $7.0 million of deferred debt
issuance cost related thereto, $2.9 million and $22.1 million of interest
expense related to the accretion of the 11 3/4% Notes and $.1 million and
$.5 million of amortization of the $9.8 million of deferred debt issuance
cost related to the 11 3/4% Notes for the nine months ended September 30,
1998 and for the period from inception (April 22, 1997) through December
31, 1997, respectively.
(4) Reflects the increase of $7,435 and $.3 million of accretion for the
warrants for the nine months ended September 30, 1998 and for the period
from inception (April 22, 1997) through December 31, 1997, respectively.
(5) The pro forma weighted average number of shares outstanding gives effect to
(i) the Company's Common Stock issued as a result of the Equity Offering
and (ii) the conversion of Redeemable Convertible Preferred Stock to Common
Stock.
(6) EBITDA represents earnings before interest, income taxes, depreciation and
amortization, management ownership allocation charge and non-cash deferred
compensation. EBITDA is not a measurement of financial performance under
generally accepted accounting principles, is not intended to represent cash
flow from operations, and should not be considered as an alternative to net
loss as an indicator of the Company's operating performance or to cash
flows as a measure of liquidity. The Company believes that EBITDA is widely
used by analysts, investors and other interested parties in the
telecommunications industry. EBITDA is not necessarily comparable with
similarly titled measures for other companies.
(7) Reflects the purchase of $69.0 million of U.S. government securities, which
securities were placed in a pledged account, to fund the first six
scheduled interest payments on the Notes. For the nine months ended
September 30, 1998 and for the period from inception (April 22, 1997)
through December 31, 1997 also reflects the $13.2 million cash interest
payment on the Notes, which is funded through a reduction of the pledged
account.
(8) Reflects $193.9 million of net proceeds received from the Debt Offering of
which $69.0 million was required to be placed in a pledged account to
secure and fund the first six scheduled interest payments on the Notes,
$137.8 million of net proceeds received from the Equity Offering and $240.7
million of net proceeds from the Unit Offering.
(9) Reflects cash paid for capital expenditures.
(10) For purposes of calculating the ratio of earnings to fixed charges,
earnings is defined as net loss plus fixed charges (other than capitalized
interest). Fixed charges consist of interest and amortization of debt
discount and debt issuance costs, whether expensed or capitalized, and that
portion of rental expense deemed to represent
30
<PAGE> 31
interest (estimated to be 1/3 of such expense). The Company's earnings for
the nine months ended September 30, 1998 and for the period from inception
(April 22, 1997) through December 31, 1997 were insufficient to cover fixed
charges by approximately $208.4 million and $3.7 million, respectively.
After giving pro forma effect to the increase in interest expense resulting
from the issuance of the Notes in the Debt Offering and the 11 3/4% Notes
in the Unit Offering and giving effect to $12.6 million and $171.7 million
of management ownership allocation charge to be recorded in connection with
the Equity Offering, the Company's earnings would have been insufficient to
cover fixed charges by approximately $242.4 million and $216.6 million, for
the nine months ended September 30, 1998 and for the period from inception
(April 22, 1997) through December 31, 1997, respectively.
31
<PAGE> 32
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. 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. Allegiance plans to establish networks in 24 of the
largest U.S. markets.
RESULTS OF OPERATIONS
SALES AND REVENUES
From its inception on April 22, 1997 through December 16, 1997, the Company was
in the development stage of operations. Its principal activities during that
period included developing its business plans, initiating applications for
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, acquiring equipment and facilities and
negotiating interconnection agreements. From inception (April 22, 1997) through
December 31, 1997, the Company's operations resulted in a $7.5 million net loss
(after accreting redeemable preferred stock and warrant values). As of December
31, 1997, the Company generated only nominal revenues.
The net loss (after the non-cash one-time management allocation charge and
amortization of deferred compensation and a portion of the deferred management
allocation charge) for the nine months ended September 30, 1998 was $218.4
million. Earnings before interest, taxes, depreciation, amortization, management
ownership allocation charge and non-cash deferred compensation ("EBITDA") was a
negative $26.4 million. EBITDA excludes the non-cash charges to operations
described in the preceding sentence totaling $164.3 million for the nine months
ended September 30, 1998.
The Company expects to continue to experience increasing operating losses and
negative EBITDA as a result of its development activities and as it expands its
operations. The Company does not expect to achieve positive EBITDA in any market
until at least two to three years after it commences initial service in such
market.
Allegiance is operational in six markets, including New York City, Dallas,
Atlanta, Fort Worth, Chicago and Los Angeles. Allegiance is in the process of
deploying networks in seven markets: San Francisco, Oakland, Boston, Washington
D.C., Northern New Jersey, San Diego and San Jose. The Company has collocation
applications pending in Orange County and plans to initiate the collocation
application process for Long Island, New York central offices during the fourth
quarter of 1998. In addition to the above, the Company has switching equipment
on order for two of its other target markets, Philadelphia and Houston. The
Company plans to continue to open markets at the rate of one per month during
the fourth quarter, and into the first eight months of 1999.
32
<PAGE> 33
The Company generated $4.2 million in revenue during the nine months ended
September 30, 1998. At September 30, 1998, the Company has a total installed
base of 25,900 lines.
The Company is emphasizing the sale and installation of facility-based lines,
while de-emphasizing reselling of ILEC provided services. At September 30, 1998,
facility-based lines represented 47% of the total installed base. The Company
estimates that resale services will continue to diminish proportionally and will
ultimately represent no more than 5% of all lines installed.
Through September 30, 1998, the Company had sold a total approximately 43,400
access lines. Facility-based lines accounted for 64% of all sales through
September 30, 1998.
Sales are expected to increase as new markets are opened, and as sales teams in
existing markets are increased. Allegiance presently has 17 sales teams, a total
of 231 sales personnel, and plans to add 11 new sales teams before the end of
1998. Markets expected to become operational in the fourth quarter of 1998 are
San Francisco, Oakland and Boston. Three teams will initially address the San
Francisco and Oakland markets, and two new teams will sell in the Boston market
during the fourth quarter. Two new teams will be added early in the fourth
quarter to sell in Dallas and Fort Worth and two new teams in Los Angeles. There
will be one new team added in each of the New York and Atlanta markets also in
the fourth quarter.
The Company does not use agents to sell its services, and has no plans to do so
in the future.
Allegiance generated revenue of approximately $53 per average line during
September 1998. Such amount is the result of the sales effort to date focusing
on basic local services for small and medium sized business customers and a
majority of installed lines being high capacity local connections. Allegiance's
sales teams will begin to focus their sales effort on long distance and Internet
services during the fourth quarter of 1998, and the Company expects the revenue
per line to increase accordingly. The Company does not accept orders for long
distance service only; the Company rejects orders which do not include local
service.
Revenues realized to date have been derived exclusively from sales of
telecommunications services, principally local service. The Company has not
recognized any revenue from so-called "reciprocal compensation" generated by
calls placed to ISPs connected to the Company's network from inception to date,
and does not plan to recognize any such revenue except upon receipt of cash.
ILECs around the country have been contesting whether the obligation to pay
reciprocal compensation to CLECs should apply to local telephone calls from ILEC
customers to ISPs served by CLECs. The ILECs claim that this traffic is
interstate in nature and therefore should be exempt from compensation
arrangements applicable to local, intrastate calls. CLECs have contended that
the interconnection agreements provide no exception for local calls to ISPs and
reciprocal compensation is therefore applicable. The FCC recently held that
GTE's ADSL service, which provides a dedicated connection (rather than
circuit-switched dial up) that permits an ISP to provide its end user with
high-speed access to the Internet, is a special access service with more than a
de minimis amount of interstate traffic. This order ("GTE ADSL Order")
determined that GTE's ADSL service
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is properly tariffed at the federal level but if GTE or any other ILECs were to
offer an ADSL service that is intrastate in nature, that service should be
tariffed at the state level.
Under the Eighth Circuit decisions, the states have primary jurisdiction over
the determination of reciprocal compensation arrangements and as a result, the
treatment of this issue can vary from state to state. Currently, 23 state
commissions, three federal courts and one state court have ruled that reciprocal
compensation arrangements do apply to calls to ISPs. Certain of these rulings
are subject to appeal. Additional disputes over the appropriate treatment of ISP
traffic are pending in other states. The NARUC adopted a resolution in favor of
applying reciprocal compensation to calls to ISPs. The FCC made clear that its
GTE ADSL Order did not determine whether reciprocal compensation is owed
pursuant to existing interconnection agreements, state arbitration decisions and
federal court decisions. The FCC indicated that it intends to issue a separate
order specifically addressing reciprocal compensation issues. The Company
anticipates that ISPs will be among its target customers, and adverse decisions
in these proceedings could limit the Company's ability to service this group of
customers profitably.
The Company has had 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
revenue. The Company expects to initiate data and Internet services during the
fourth quarter of 1998. The Company has no plans to sell wireless services in
the foreseeable future.
OPERATING 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
dark fiber capacity or overbuild specific network segments as economically
justified by traffic volume growth or when these arrangements otherwise become
more attractive than leasing unbundled network elements. Allegiance is
collocated in a total of 51 ILEC central offices at September 30, 1998, and has
DS3 hub connections to three additional ILEC central offices. Through the
process of achieving collocation in the 51 offices the Company has determined
that it takes six to seven months before a typical collocation site will be
ready to generate revenue, instead of the three-month period the Company had
originally estimated. As a result of the longer lead time, Allegiance has
adjusted its network planning and is now delivering completed central office
collocation applications to ILECs six to seven months in advance of the desired
revenue ready date. The Company has 159 central office collocations currently in
various stages of process, from applications pending, to deposits for
construction, to equipment being installed and tested. Allegiance estimates it
will have a total of 90 central office collocations in service or revenue ready
by the end of 1998.
For the nine months ended September 30, 1998, and for the period from inception
(April 22, 1997), through December 31, 1997, the Company incurred network costs
of approximately $4.5 million and $.2 million, respectively.
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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. Allegiance is accounting for the Metromedia Fiber Network lease
as a capital lease, based on the terms and conditions of the lease agreement.
The Company anticipates that any future dark fiber leases will have roughly
similar terms and conditions, and therefore it is likely that such additional
dark fiber leases, if any, will also be accounted for as capital leases. In
addition, Allegiance expects to increase the capacity of its switches, and may
add additional switches, in a market as demand warrants.
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 of 1996.
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; typically at lower prices than the ILEC price. 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.
To enter a market and make ubiquitous calling available to its customers,
Allegiance must enter into an interconnection agreement with the ILEC in such
market. 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.
The Company has entered into one resale agreement with a long distance carrier
to provide the Company with transmission services. The Company 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. Under such
agreements, if a company fails to meet any minimum volume commitments, it may be
obligated to pay underutilization charges. If a company underestimates its need
for transmission capacity under such agreements, it 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.
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. For example, Allegiance uses collocation to access the
ILECs unbundled networks elements. This collocation can be a physical space or
cage within the ILEC central office where the
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Company places its equipment or it can consist of "virtual collocation" where
the ILEC places equipment within the central office and maintains the equipment
on behalf of the Company. In the virtual collocation scenario, the Company does
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. In addition, the Company is required to invest a
significant amount of funds to develop the central office collocation sites and
to deploy the transmission and distribution electronics.
Another network alternative is a DS3 hub arrangement whereby the Company
connects its switching equipment to an ILEC central office through a leased,
high capacity circuit. The Company then purchases, from the ILEC, multiplexing
services and high capacity circuits to customer premises to connect the customer
to the Allegiance network. Typically, the hubbing arrangement is implemented in
advance of collocation; but it may continue indefinitely depending upon the
quantity and type of services provided over that facility.
The cost of collocation has exceeded the Company's estimates in some instances
because of changes in configuration of transmission equipment and because of
certain requirements imposed by ILECs on the first company requesting
collocation in a specific central office. ILECs generally require the company
initially requesting collocation to reimburse the ILEC for the cost associated
with a minimum buildout space and this minimum space is often greater than the
amount Allegiance actually requests for its use. In those instances in which
Allegiance is the company initially requesting collocation, it will be rebated a
portion of the costs paid as additional companies commit to collocation in the
same central office. While these circumstances have led, and will continue to
lead, to greater than anticipated capital expenditures, the Company believes
these additional expenditures will be offset by the benefits of the Company
entering its selected markets earlier than its competitors.
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 incurred $26.1 million and $3.4 million for selling and general and
administrative expenses during the nine months ending September 30, 1998, and
the period from inception (April 22, 1997), through December 31, 1997,
respectively. These increased expenses resulted primarily from an expansion of
the Company's staffing from less than 50 at December 31, 1997, to approximately
460 full-time staff at September 30, 1998. Sales personnel represent
approximately 50% of total staff at September 30, 1998. Also, as the Company has
increased the deployment of its network, its costs associated with monitoring
that network has increased as well. Network monitoring costs during the nine
months ending September 30, 1998 totaled $.9 million. No such costs were
incurred during 1997.
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 offers its sales and customer care
personnel a compensation package emphasizing commissions and stock options. The
Company expects to incur significant, and increased, 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.
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Allegiance has acquired and is integrating 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 third quarter of 1998,
Allegiance expended significant effort in developing such an electronic bond
with Bell Atlantic in New York. Currently, the electronic bond is being
subjected to a high volume, production test in which all new orders taken by
Allegiance for the New York market are relayed to Bell Atlantic electronically.
The test is expected to successfully conclude during the fourth quarter of 1998,
at which time the electronic bond will be placed into production.
Electronic bonding is expected to result in significant productivity
improvements by reducing the period between the time of sale and the time a
customer's line is installed in the Allegiance network and accepted by the
customer. The Bell Atlantic test has demonstrated a reduction of elapsed time
from the conveyance of a service request to the ILEC to the receipt of
communication from the ILEC that the service order has been received and
confirmed as complete in as little as five minutes. This is a significant
reduction in elapsed time; confirmation of receipt and completeness of previous
orders has taken as little as three to four hours to as long as several days or
weeks.
In addition to the electronic bonding process with Bell Atlantic, Allegiance and
Southwestern Bell and Pacific Bell have agreed to begin discussions about the
possibility of using the same template Allegiance uses with Bell Atlantic to
pass service requests between these parties.
During the second quarter of 1998, Allegiance achieved permanent local number
portability in New York with Bell Atlantic and in Texas with Southwestern Bell.
During the third quarter of 1998, Allegiance achieved permanent local number
portability in Georgia with Bell South, in Illinois with Ameritech and in
California with Pacific Bell. Allegiance uses DSET Corporation'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 debts. 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
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become smaller as a percentage of the Company's revenue as the Company builds
its customer base.
The magnitude of the loss for the nine months ended September 30, 1998 is
principally due to the management ownership allocation charge. On July 7, 1998,
the Fund Investors and 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
Company's initial public offering of its Common Stock, the assets of Allegiance
LLC (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 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 initial public offering. Under generally accepted
accounting principles, the Company recorded the increase in the assets of
Allegiance LLC allocated to the Management Investors as a $193.5 million
increase in additional paid-in capital, of which $122.5 million was recorded as
a non-cash, non-recurring charge to operating expense and $71.0 million was
recorded as a deferred management ownership allocation charge. The deferred
charge was amortized at $38.0 million as of September 30, 1998 and will be
further amortized at $6.8 million, $18.8 million, $7.2 million and $.2 million
during 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 certain
of 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 addition to the above expenses, the Company recognized $3.8 million and $.2
million amortization of deferred stock compensation expense for the nine months
ended September 30, 1998, and the period from inception (April 22, 1997),
through December 31, 1997, respectively, also a non-cash charge. Interest
expense for the nine months ending September 30, 1998 was $25.3 million. These
amounts reflect the issuance of the 11 3/4% Notes during February 1998 and the
Notes during July 1998. There was no interest expense during 1997. Interest
income for the nine months ended September 30, 1998, and the period from
inception (April 22, 1997) through December 31, 1997, was $13.1 million and $.1
million, respectively, resulting from the investment of cash not used in
operations or network rollout. The amount of invested cash increased from 1997
as a result of the net proceeds from the Equity Offering, offering of the Notes
and Unit Offering.
As required by accounting principles promulgated by the Securities and Exchange
Commission, the Company has recorded the potential redemption value of
Redeemable Warrants in the potential event that they are redeemed at fair market
value in February 2008. Amounts are accreted using the effective interest method
and management's estimates of the future fair market value of the warrants when
redemption is first permitted. Amounts accreted increase the recorded value of
the Redeemable Warrants on the balance sheet and result in a non-cash charge to
increase the net loss applicable to Common Stock. Accretion of $.3 million has
been recorded for the nine months ending September 30, 1998, respectively.
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Until the consummation of the Company's initial public offering in July 1998,
Allegiance also recorded the potential redemption values of Redeemable
Convertible Preferred Stock, in the potential event that they would be redeemed
at fair market value in August 2004. At the time of the initial public offering,
such preferred stock was converted into Common Stock. Accordingly, the amounts
accreted for the Redeemable Convertible Preferred Stock were reclassified as an
increase to additional paid-in capital in the stockholders' equity section of
the balance sheet, and there has been, and will be, no additional accretion of
Redeemable Convertible Preferred Stock values beyond that point in time.
Accretion of $11,520.8 and $3,814.2 was recorded for the nine months ending
September 30, 1998, and for the period from inception (April 22, 1997), through
December 31, 1997, respectively.
FINANCIAL CONDITION
The balance sheet of Allegiance at September 30, 1998 reflects additional cash,
unrestricted short-term investments, short-term and long-term restricted
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 the 11 3/4% Notes and Redeemable Warrants were
sold, the initial public offering of Common Stock and issuance of the Notes in
July 1998. In accordance with the terms of the Notes, the Company purchased, and
placed in a pledged account, U.S. government securities which will be used to
pay the first three years' (or six semi-annual installments) interest payments
on the Notes. Such securities are reflected in the balance sheet at accreted
value at September 30, 1998 of approximately $69.9 million, $22.1 million of
which is classified as current assets, and $47.8 million of which is classified
in other, non-current assets.
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
September 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, Washington, D.C., Oakland and
Houston, 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 construction and operations.
Redeemable Convertible Preferred Stock outstanding at December 31, 1997 was
converted to Common Stock in July 1998 at the closing of the initial public
offering.
Accumulated deficit increased consistent with the net loss for the nine months
ending September 30, 1998. There have been no dividends declared from inception
to date.
LIQUIDITY AND CAPITAL RESOURCES
Allegiance plans to establish networks in the 24 largest U.S. metropolitan
markets. Total funds required for the buildout of the networks and to fund
operating losses to Positive
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Free Cash Flow (operating cash flow from a market sufficient to fund such
market's operating costs and capital expenditures) is estimated to be
approximately $700 million.
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.
Also, as part of its network deployment, 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 Company has ordered, and made initial payments
for, switching equipment for two additional target markets, the Philadelphia and
Houston. The cost of all of these switches and related equipment and
installation will be approximately $49.7 million.
Allegiance's financing plan is predicated on the pre-funding of each market's
expansion to Positive Free Cash Flow. This approach is designed to allow the
Company to be opportunistic and raise capital on more favorable terms and
conditions.
To pre-fund its market expansion, the Company raised approximately $50.1 million
from Management Investors and Fund Investors and received approximately $240.7
million of net proceeds, after deducting underwriting discounts and commissions
and other expenses payable by the Company, from the sale of 445,000 Units, each
of which consisted 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 Redeemable Warrants became
exercisable in connection with the Company's initial public offering of its
Common Stock 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 Company's initial public offering.
The 11 3/4% Notes have a principal amount at maturity of $445.0 million and an
effective interest rate of 12.45%. The 11 3/4% Notes mature on February 15,
2008. From and after February 15, 2003, interest on the 11 3/4% Notes 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 September
30, 1998 to February 15, 2008 of $187.6 million. The net proceeds from the sale
of the 11 3/4% Notes have been, and are continuing to be, used to fund the
completion of networks in the Company's initial 12 target markets.
Following completion of the Unit Offering, the Company increased the scope of
its business plan to, among other things, accommodate (i) an expansion of the
Company's network buildout in the New York, Chicago, Los Angeles and San
Francisco 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 its
target markets. To fund these activities, the Company consummated an initial
public offering of its Common Stock and sold the Notes during
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the third quarter of 1998. These sales were consummated on July 7, 1998 and the
Company raised net proceeds of approximately $262.6 million, bringing the
Company's total capital raised since inception to approximately $553.8 million.
The Notes mature on 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 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 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 Notes are outstanding. The
remaining proceeds will be used, in conjunction with the net proceeds of the
Company's initial public offering of Common Stock, to fund the development of
networks in its initial 18 target markets.
For the nine month period ending September 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, Atlanta, Fort Worth, Chicago
and Los Angeles each of which is operational, as well as networks under
development in San Francisco, Boston, Oakland, Washington, D.C., Philadelphia
and Houston, 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.
As of September 30, 1998, Allegiance had approximately $454.2 million of cash
and short term investments. Such amount excludes the restricted U.S. Government
securities which have been placed in a pledged account. The Company believes,
based on its business plan, that the net proceeds from the capital raising
activities completed thus far will be sufficient to pre-fund its market
deployment in its initial 18 markets to Positive Free Cash Flow. The Company
will require up to an estimated additional $200 million to completely fund its
remaining six target markets.
The Company recently initiated discussions with commercial and investment banks,
vendors and equipment lease finance companies for the purposes of evaluating the
feasibility of raising up to an additional $200 million in financing on or
before December 31, 1998. Allegiance will not expend any funds, other than
minimum amounts required to incorporate and become certified to do business, for
the unfunded six markets, until such time as the permanent financing required to
rollout the network and fund the operations to Positive Free Cash Flow in these
markets is obtained. 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 capital requirements to fund
market deployment in the Company's initial 24 target markets to Positive Free
Cash Flow 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
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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 (including the extent of planned
penetration in its target markets) 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.
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 operations support systems 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.
IMPACT OF THE YEAR 2000
The "year 2000" issue generally describes the various problems that may result
from the improper processing of dates and date-sensitive calculations by
computers and other equipment as a result of computer hardware and software
using two digits to identify the year in a date. If a computer program or other
piece of equipment fails to properly process dates including and after the year
2000, date-sensitive calculations may be inaccurate. The failure to process
dates could result in system failures or miscalculations causing disruptions in
operations including, among other things, a temporary inability to process
transactions, send invoices or engage in other routine business activities.
State of Readiness. Generally, the Company has identified two areas for year
2000 review: internal systems and operations, and external systems and services.
As a new enterprise, the Company is not burdened internally with legacy systems
that are not year 2000 ready. As it develops its network and support systems,
the Company intends to ensure that all systems will be year 2000 ready. The
Company is purchasing its operations support systems with express
specifications, warranties and remedies that all systems be year 2000 ready. In
addition, all vendors supplying third party software and hardware to the Company
are required to warrant year 2000 readiness. However, there can be no assurance
until the year 2000 that all systems will then function adequately. Also, the
Company intends to sell its telecommunications services to companies that may
rely upon computerized systems to make payments for such services, and to
interconnect certain portions of its network and systems with other companies'
networks and systems. These transactions and interactions potentially will
expose the Company to year 2000 problems. The Company intends to contact its
external suppliers, vendors and providers to obtain information about their
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year 2000 readiness and, based on that information, to assess the extent to
which these external information technology and non-information technology
systems (including embedded technology) could cause a material adverse effect on
the Company's operations in the event that the systems fail to properly process
date-sensitive calculations after December 31, 1999.
The Company's assessment of its year 2000 readiness will be ongoing as it
continues to develop its own operations support system and becomes reliant on
the systems of additional third parties as a result of the geographic expansion
of its business into additional markets. As a result, the Company may in the
future identify a significant internal or external year 2000 issue which, if not
remedied in a timely manner, could have a material adverse effect on the
Company's business, financial condition and results of operations.
Costs to Address Year 2000 Issues. Other than time spent by the Company's
internal information technology and other personnel, the Company has not
incurred any significant costs in identifying year 2000 issues. The Company does
not anticipate any significant costs to make its internal systems year 2000
compliant because no remediation is expected to be required. Because no material
year 2000 issues have yet been identified in connection with external sources,
the Company cannot reasonably estimate costs which may be required for
remediation or for implementation of contingency plans. As the Company gathers
information relating to external sources of year 2000 issues, the Company will
reevaluate its ability to estimate costs associated with year 2000 issues. There
can be no assurance that as additional year 2000 issues are addressed, the
Company's costs to remediate such issues will be consistent with its historical
costs.
Risks of Year 2000 Issues. Because no material year 2000 issues have yet been
identified, the Company cannot reasonably ascertain the extent of the risks
involved in the event that any one system fails to process date-sensitive
calculations accurately. Potential risks include the inability to process
customer billing accurately or in a timely manner, the inability to provide
accurate financial reporting to management, auditors, investors and others,
litigation costs associated with potential suits from customers and investors,
delays in implementing other information technology projects as a result of work
by internal personnel on year 2000 issues, delays in receiving payment or
equipment from customers or suppliers as a result of their systems' failure, and
the inability to occupy and operate in a facility. Any one of these risks, if
they materialize, could individually have a material adverse effect on the
Company's business, financial condition or results of operations.
As all of the Company's information technology and non-information technology
systems and products relating to the Company's external issues are manufactured
or supplied by third parties outside of the Company's control, there can be no
assurance that each one of those third parties' systems will be year 2000 ready.
In particular, the Company will be dependent upon other ILECs, long distance
carriers and others on whose services the Company depends for interconnection
and completion of off-network calls. These interconnection arrangements are
material to the Company's ability to conduct its business and failure by any of
these providers to be year 2000 ready may have a material adverse effect on the
Company's business in the affected market. Moreover, although the Company has
taken every precaution to purchase its internal systems to be fully year 2000
ready, there can be no assurance that every vendor will fully comply with the
contract requirements. If some or all of the Company's internal and external
systems fail or are not
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<PAGE> 44
year 2000 ready in a timely manner, there could be a material adverse effect on
the Company's business, financial condition or results of operations.
Contingency Plans. Even though the Company has not identified any specific year
2000 issues, the Company believes that the design of its networks and support
systems could provide the Company with certain operating contingencies in the
event material external systems fail. In all of its markets, however, the
Company has or intends to establish interconnection agreements with the ILECs
and other regional and international carriers and should one of these carriers
fail for any reason including year 2000 problems there may be little the Company
can do to mitigate the impact of such a failure on the Company's operations. The
Company has provisioned its operations facilities and systems to be fully backed
up with auxiliary power generators capable of operating all equipment and
systems for indeterminate periods should power supplies fail. The Company also
has the ability to relocate headquarters and administrative personnel to one of
its backed-up facilities should power and other services at its Dallas
headquarters fail. Because of the inability of the Company's contingency plans
to eliminate the negative impact that disruptions in ILEC service or the service
of other carriers would create, there can be no assurance that the Company will
not experience numerous disruptions that could have a material effect on the
Company's operations and its ability to service its indebtedness.
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<PAGE> 45
BUSINESS
THE COMPANY
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. The Company was founded in
April 1997 by a management team led by Royce J. Holland, the former president,
chief operating officer and co-founder of MFS, and Thomas M. Lord, former
managing director of Bear, Stearns & Co. Inc., where he specialized in the
telecommunications, information services and technology industries. The
Company's initial equity financing of approximately $50.1 million has been
provided by the Management Investors and the Fund Investors.
The Company believes that the Telecommunications Act, by opening the local
exchange market to competition, has created an attractive opportunity for new
facilities-based CLECs like the Company. Most importantly, the
Telecommunications Act stated that CLECs should be able to acquire the unbundled
network elements from the ILECs, which are necessary for the cost-effective
provision of service. As such, the Telecommunications Act will enable the
Company 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. For certain of its networks, the Company plans to lease
capacity or overbuild specific network segments as economically justified by
traffic volume growth and other factors that may make these arrangements more
attractive. Management believes that pursuing this "smart build" approach
should: (i) accelerate market entry by 9 to 18 months by deferring the need for
city franchises, rights-of-way and building access; (ii) reduce initial capital
requirements for individual market entry prior to revenue generation, allowing
the Company to focus its capital resources on the critical areas of sales,
marketing, and operations support systems; (iii) provide for ongoing capital
expenditures on a "success basis" as demand dictates; and (iv) allow the Company
to address attractive service areas selectively throughout its targeted markets.
Allegiance is currently developing tailored systems and procedures for
operations support and other back office systems that it believes will provide
the Company with a significant competitive advantage in terms of cost,
processing large order volumes and customer service. These systems are required
to enter, schedule, provision and track a customer's order from the point of
sale to the installation and testing of service and also include or interface
with trouble management, inventory, billing, collection and customer service
systems. The legacy systems currently employed by many ILECs, CLECs and long
distance carriers, which systems were developed prior to the passage of the
Telecommunications Act, generally require multiple entries of customer
information to accomplish order management, provisioning, switch administration
and billing. This process is not only labor intensive, but it also creates
numerous opportunities for errors in provisioning service and billing, delays in
installing orders, service interruptions, poor customer service, increased
customer churn and significant added expenses due to duplicated efforts and the
need to correct service and billing problems. The Company believes that the
practical problems
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<PAGE> 46
and costs of upgrading legacy systems are often prohibitive for companies whose
existing systems support a large number of customers with ongoing service.
Allegiance's development plan is focused on offering services in 24 of the
largest metropolitan areas in the U.S. The Company estimates that these 24
markets will include 18 BTAs with more than 20 million non-residential access
lines, representing approximately 44.7% of the total non-residential access
lines in the U.S. With a network deployment and end user, direct sales marketing
strategy focusing on the central business districts and suburban commercial
districts in these areas, Allegiance plans to address a majority of the
non-residential access lines in most of its targeted markets. As of September
30, 1998, the Company was operational in six markets: New York City, Dallas,
Atlanta, Fort Worth, Chicago and Los Angeles; and is in the process of deploying
networks in seven other markets: San Francisco, Boston, Washington D.C.,
Northern New Jersey, Oakland, San Diego and San Jose. In each of these markets,
the Company will use a Lucent Series 5ESS(R)-2000 digital switch, which provides
local and long distance functionality. The Company believes, based on its
business plan, that the net proceeds from the capital raising activities
completed thus far will be sufficient to pre-fund its market deployment in its
initial 18 target markets to Positive Free Cash Flow. The Company will require
up to an estimated additional $200 million to completely fund its business plan
covering its remaining six target markets. The Company recently initiated
discussions with commercial and investment banks, vendors and equipment lease
finance companies for the purposes of evaluating the feasibility of raising up
to an additional $200 million in financing.
BUSINESS STRATEGY
To accomplish its goal of becoming a premier provider of telecommunications
services to business, government, and other institutional users in U.S.
metropolitan areas, the Company has developed an end-user-focused business
strategy designed to achieve significant market penetration and deliver superior
customer care while maximizing operating margins. The key components of this
strategy include the following:
Leverage Proven Management Team. The Company's veteran management team has
extensive experience and past successes in the CLEC industry, and the Company
believes that its ability to combine and draw upon the collective talent and
expertise of its senior management gives it a competitive advantage in the
effective and efficient execution of network deployment, sales, provisioning,
service installation, billing and collection, and customer service functions.
Allegiance's Chairman and Chief Executive Officer, Royce J. Holland, has more
than 25 years of experience in the telecommunications and energy industries,
including as president, chief operating officer, and co-founder of MFS. Under
his leadership, MFS grew from a start-up operation to become the largest CLEC
with approximately $1.1 billion in revenues before its acquisition by WorldCom
in 1996. Other key Allegiance executives have significant experience in the
critical functions of network operations, sales and marketing, back office and
operations support systems, finance and regulatory affairs.
Target End Users with Integrated Service Offerings. Allegiance plans to focus
principally on end-user customers in the business, government and other
institutional market segments. The majority of these customers are and are
expected to continue to be small and medium-sized businesses, to which the
Company will offer "one-stop shopping" consisting of a comprehensive package of
communications services with convenient
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<PAGE> 47
integrated billing and a single point of contact for sales and service. For
large businesses and government and other institutional users, which typically
obtain telecommunications services from a variety of suppliers, the Company will
focus primarily on capturing a significant portion of these customers' local
exchange, intraLATA toll and data traffic. Although the Company will principally
target end-users in markets where it believes it can achieve significant market
penetration by providing superior customer care at competitive prices, the
Company may augment its core business strategy by selectively supplying
wholesale services including equipment collocation and facilities management
services to ISPs.
Offer Data, Internet, and Enhanced Services to Enhance Market Penetration and
Reduce Churn. The Company believes it can accelerate new account penetration and
reduce customer churn by offering LAN interconnection, frame relay, Internet
services, ISDN, DSL, Web page design, Web server hosting, and other enhanced
services not generally available from the ILECs (or available only at high
prices) in conjunction with traditional local and long distance services. This
strategy has been successfully employed by certain CLECs, and Allegiance's
management team has extensive experience in providing these types of enhanced
services.
Utilize "Smart Build" Strategy to Maximize Speed to Market and Minimize
Investment Risk. 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. For certain of its
networks, Allegiance plans to lease dark fiber or overbuild specific network
segments as economically justified by traffic volume growth and other factors
that may make these arrangements more attractive. Allegiance expects that this
"smart build" strategy in which it reduces initial capital expenditure
requirements by leasing unbundled network elements allows it to enter into a new
market in a six- to nine-month time frame instead of the 18 to 24 months
required to construct a metropolitan area fiber network under the "build first,
sell later" approach required before the Telecommunications Act established a
framework for CLECs to lease these unbundled network elements.
Achieve Broad Coverage of Attractive Areas within Each Targeted Market. As a
result of the substantial up-front capital requirements necessary to construct
metropolitan area fiber networks, CLECs have traditionally limited their initial
network buildout to highly concentrated downtown areas, thereby limiting their
ability to provide service to customers in other attractive, but geographically
dispersed, portions of their targeted markets. The Company intends to leverage
the benefits of using a "smart build" strategy by selectively deploying its
facilities to address attractive service areas throughout each target market in
order to optimize the Company's penetration. Prior to entering a market,
Allegiance prepares a detailed, "bottoms-up" analysis of that market's local
exchange areas using FCC and demographic data. The Company uses this analysis,
together with estimates of the costs and potential benefits of addressing
particular service areas, to identify attractive areas, determine the optimal
concentration of areas to be served and develop its schedule for network
deployment and expansion.
Maximize Operating Margins by Emphasizing Facilities-Based Services. Allegiance
believes that facilities-based solutions where the Company provides local
exchange, local access, and long distance services using its own facilities
should generate significantly higher gross network margins than could be
obtained by reselling such services. As a result, Allegiance
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<PAGE> 48
focuses its marketing activities on areas where it can serve customers through a
direct connection using unbundled loops or high capacity circuits connected to
Allegiance's facilities collocated in ILEC central offices. The Company plans to
resell ILEC services only in order to provide comprehensive geographical service
coverage to customers with multiple on-net sites (which can be addressed by the
Company's facilities-based services) and a few off-net sites (which can be
addressed only by the Company's reselling ILEC services).
Build Market Share by Focusing on Direct Sales. The Company believes that the
key to achieving its goals is the capturing and retaining of customers using
direct sales, and offering a full suite of turn-key product offerings and
personalized customer care. Management believes that ILECs have generally
neglected small and medium-sized business customers in these areas. The
Company's sales management team is composed of executives with experience in
managing a large number of direct sales specialists in the telecommunications
and data networking industries. Additionally, the Company believes it will be
able to attract and retain highly qualified sales and support personnel by
offering them the opportunity to: (i) work with an experienced and
success-proven management team in building a developing, entrepreneurial
company; (ii) market a comprehensive set of products and services and customer
care options; and (iii) participate in the potential economic returns made
available through a results-oriented compensation package emphasizing sales
commissions and stock options.
Develop Efficient Automated Back Office Systems. Unburdened by existing legacy
operations support systems, Allegiance is focusing on developing, acquiring and
integrating back office systems to facilitate a smooth, efficient order
management, provisioning, trouble management, billing and collection, and
customer service process. To address this critical issue, the Company has hired
an experienced team of engineering and information technology professionals.
This team is working to develop, with the assistance of key third party vendors,
operations support systems that will synchronize multiple tasks such as
provisioning, customer service and billing and provide management with timely
operating and financial data to most efficiently direct network, sales and
customer service resources. The Company is working toward "electronic bonding"
between the Allegiance operations support systems and those of the ILEC, which
would permit creation of service requests on-line. Allegiance believes that
these back office systems, once developed, will provide it with a significant
competitive advantage in terms of cost, processing large order volumes and
customer service as compared to companies using legacy systems.
Expand Customer Base Through Potential Acquisitions. The Company believes that
strategic acquisitions may produce a number of benefits, including acceleration
of market penetration, providing a customer base for cross-selling additional
services, acquiring experienced management and improving margins by migrating
resold services to the Company's network facilities.
MARKET OPPORTUNITY
U.S. Census Bureau data indicates that the United States communications services
market (including cable television, but excluding Internet access and content)
in 1995 totaled approximately $221 billion in annual revenue. As depicted on the
chart below, wireline telecommunications services (other than Internet access
and content) purchased by non-
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<PAGE> 49
residential users accounted for about 43%, or approximately $96 billion, of the
total U.S. market in 1995:
[US COMMUNICATIONS MARKET GRAPH]
The major segments of the non-residential wireline telecommunications services
market, based on U.S. Census Bureau data, are as follows:
[NON-RESIDENTIAL WIRELESS TELECOMMUNICATIONS GRAPH]
Traditional voice traffic accounted for the vast majority of non-residential
communications revenue in 1995, with local exchange and exchange access
accounting for over half of the total non-residential wireline
telecommunications market (excluding Internet access and content). Due to its
rapid growth, estimates of data and Internet services revenue are not as well
established as those relating to traditional voice traffic communications.
However, the Company believes that a significant market opportunity exists for
providers of non-residential Internet services.
The Company believes that the rapid opening of the local market to competition,
accelerated growth rates in local traffic related to increases in Internet
access, the desire for multiple suppliers by large businesses, and the desire
for "one-stop shopping" by small and medium-sized businesses and consumers,
presents an opportunity for new entrants to achieve product differentiation and
significant penetration into this very large, established market. Success in
this environment will, in the opinion of management, depend primarily on
speed-to-market, marketing creativity and a CLEC's ability to provide
competitively
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<PAGE> 50
priced services rapidly and accurately, and to issue concise, accurate
integrated billing statements.
Allegiance plans to deploy networks in 24 markets. The Company estimates that
these 24 markets will include 18 BTAs with more than 20 million non-residential
access lines, representing approximately 44.7% of the total non-residential
access lines in the U.S. With a network deployment and end user, direct sales
marketing strategy focusing on the most significant areas of business
concentration in these areas, Allegiance plans to address a majority of the
non-residential access lines in most of its targeted markets.
THE COMPANY'S TELECOMMUNICATIONS SERVICES
The Company intends to tailor its service offerings to meet the specific needs
of the business, government, and other institutional end users in its target
markets. Management believes that the Company's close contact with customers
from its direct sales force and customer care personnel will enable it to tailor
its service offerings to meet customers' needs and to creatively package its
services to provide "one-stop shopping" solutions for those customers. The
Company plans to offer the following services:
Local Exchange Services. The Company plans to offer local exchange services,
including local dial tone as well as enhanced features such as call forwarding,
call waiting, dial back, caller ID, and voice mail, in all of its target
markets. By offering dial tone service, the Company will also receive
originating and terminating access charges for interexchange calls placed or
received by its subscribers.
PBX/Shared Tenant Services. In areas where telephone density is high and most
telephone customers desire similar services (such as office buildings,
apartments, condominiums or campus-type environments), PBX or shared tenant
services such as Centrex are among the most efficient means of providing
telephone services. The Company will offer these services in areas where market
potential warrants.
ISDN and High Speed Data Services. The Company will offer high speed data
transmission services, such as wide area network interconnection and broadband
Internet access, via frame relay and dedicated point-to-point connections. In
order to provide these services, the Company intends to utilize leased T1 and
higher speed (multiple T1 or T3) fiber connections to medium- and large-sized
business, government, and other institutional customers, while employing DSL
and/or ISDN connections over unbundled copper loops to smaller business users
whose bandwidth requirements may not justify fiber connections or which are
located in areas where T1 connections are not available.
Interexchange/Long Distance Services. The Company will offer a full range of
domestic (interLATA and intraLATA) and international long distance services,
including "1+" outbound calling, inbound toll free service, and such
complementary services as calling cards, operator assistance, and conference
calling.
Enhanced Internet Services. The Company will offer dedicated and dial-up high
speed Internet access services via conventional modem connections, ISDN, DSL,
and T1 and higher speed dedicated connections.
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Web Site Design and Hosting Services. The Company intends to offer Web site
design services and will offer Web site hosting on its own computer servers to
provide customers with a turn-key solution that gives them a presence on the
World Wide Web.
Facilities and Systems Integration Services. The Company plans to assist
individual customers with the design and implementation of turn-key solutions in
order to meet their specific needs, including the selection of the customer's
premises equipment, interconnection of LANs and wide area networks, provision of
Advanced Intelligent Network applications and implementation of virtual private
networks.
Wholesale Services to ISPs. The Company believes that with the recent growth in
demand for Internet services, numerous ISPs are unable to obtain network
capacity rapidly enough to meet customer demand and eliminate network congestion
problems. Allegiance plans to supplement its core end user product offerings by
providing a full array of local services to ISPs, including telephone numbers
and switched and dedicated access to the Internet.
SALES AND CUSTOMER SUPPORT
The Company will offer an integrated package of local exchange, local access,
domestic and international long distance, enhanced voice, data transmission, and
a full suite of Internet services to small and medium-sized businesses, with
"medium-sized" describing a user having approximately 200-300 phone lines and
250 employees. Unlike large corporate, government, or other institutional users,
small and medium-sized businesses often have no in-house telecommunications
manager. Based on management's previous experience, Allegiance believes that a
direct sales and customer care program focusing on turn-key, "one-stop shopping"
solutions will have a competitive advantage in capturing this type of customers'
total telecommunications traffic.
Although the vast majority of the Company's sales force will focus primarily on
the small and medium-sized business segment, the Company also intends to provide
services to large business, government, and other institutional users, as well
as to ISPs, and expects that a significant portion of its initial revenue will
come from these segments. Therefore, Allegiance will organize its sales and
customer care organizations to serve each of these three market segments. Sales
and marketing approaches in the telecommunications market are market-segment
specific, and the Company believes the following are the most effective
approaches with respect to its three targeted market segments:
- - Small/medium business -- The Company will use direct sales, print advertising,
and agency programs.
- - Large business, government, and other institutional users -- The Company will
use account teams, established business relationships, applications sales,
trade show advertising, and technical journal articles.
- - Wholesale (ISPs) -- The Company will use direct sales, established business
relationships, and competitive pricing.
The principal portion of Allegiance's sales and customer care resources will be
dedicated to the small and medium-sized business segment. The Company will
organize account executives into teams with a team manager and a sales support
specialist. These teams will utilize telemarketing to "qualify" leads and set up
initial appointments. The Company will closely manage account executives with
regard to activity (i.e. number of sales calls per
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week) with the goal of eventually calling on every prospective business customer
in an account executive's sales territory. The Company intends to use commission
plans and incentive programs to reward and retain the top performers and
encourage strong customer relationships. The sales team managers in a market
will report to a city sales director who will in turn report to a regional vice
president. In addition, each team's sales support specialist will act as a
"customer advocate" for the customers served by that team, so that the customer
needs to contact only one person for sales information and personalized customer
service.
The Company's wholesale sales to local and regional ISPs will be performed by
account executives reporting to the city sales director. Account executives
reporting to the senior vice president of national accounts will handle large
national ISPs. The senior vice president of national accounts will also have
responsibility for large corporate, government, and other institutional
accounts, with designated national account managers and sales support personnel
assigned to the major accounts. Unlike the small and medium-sized business
segment, the national account program will be built by recruiting national
account managers with established business relationships with large corporate
accounts, supported by technical applications personnel and customer care
specialists.
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INFORMATION SYSTEMS
Allegiance is currently developing tailored information systems and procedures
for operations support and other back-office systems that it believes will
provide a significant competitive advantage in terms of cost, processing large
order volumes, and customer service. These systems are required to enter,
schedule, provision, and track a customer's order from the point of sale to the
installation and testing of service and also include or interface with trouble
management, inventory, billing, collection and customer service systems. The
required high-level information requirements to support facilities-based service
are depicted in the following figure:
[DIAGRAM]
The legacy systems currently employed by most ILECs, CLECs and long distance
carriers, which were developed prior to the passage of the Telecommunications
Act, generally require multiple entries of customer information to accomplish
order management, provisioning, switch administration and billing. This process
is not only labor intensive, but it creates numerous opportunities for errors in
provisioning service and billing, delays in installing orders, service
interruptions, poor customer service, increased customer churn, and significant
added expenses due to duplicated efforts and the need to correct service and
billing problems. The Company believes that the practical problems and costs of
upgrading legacy systems are often prohibitive for companies whose existing
systems support a large number of customers with ongoing service. Unburdened by
legacy systems, the Company's team of engineering and information technology
professionals experienced in the CLEC industry is working to develop, with the
assistance of key third party vendors, operations support and other back office
systems designed to facilitate a smooth, efficient order management,
provisioning, trouble management, billing and collection, and customer care
process. See "Risk Factors -- Dependence on Billing, Customer Service, and
Information Systems."
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Order Management. Allegiance has signed a contract with a third-party vendor to
license their order management software. This product allows the sales team not
only to enter customer orders, but also to monitor the status of the order as it
progresses through the service initiation process.
Provisioning Management. The licensed order management software also supports
the design and management of the provisioning process, including circuit design
and work flow management. The system has been designed to permit programming
into the system of a standard schedule of tasks which must be accomplished in
order to initiate service to a customer, as well as the standard time intervals
during which each such task must be completed. This way, when a standard order
is selected in the system, each required task in the service initiation process
can be efficiently managed to its assigned time interval.
External Interfaces. Several external interfaces are required to initiate
service for a customer. While some of these will be automated initially via
gateways from the order management software, the most important interfaces
(those to the ILEC) will be accomplished initially via fax or e-mail. Certain
ILECs are just beginning to develop automated interfaces on a limited basis.
Allegiance intends to take a lead role with selected ILECs to create standards
for automation of these interfaces.
Network Element Administration. The Company has signed a contract with a
third-party vendor to license their network element administration software. The
Company is currently developing an interface between its order management system
and the network element manager to integrate data integrity and eliminate
redundant data entry.
Customer Billing. Allegiance has selected a billing services provider, and a
contract for this service is currently being negotiated. Customer information
will be electronically interfaced with this provider from the Company's order
management system via a gateway being developed, thereby integrating all
repositories of information.
Billing Records. Billing records will be generated by the Lucent Series
5ESS(R)-2000 switches to record customer calling activity. These records will be
automatically processed by the billing services provider in order to calculate
and produce bills in a customer-specified billing format.
Allegiance believes this integrated operations support systems approach will
provide for faster customer service initiation, improved billing accuracy and
customization, and a superior level of customer service. See "Risk
Factors -- Dependence on Billing, Customer Service, and Information Systems."
The Company will actively work toward "electronic bonding" between the
Allegiance operations support systems and those of the ILECs, which would permit
creation of service requests on-line.
NETWORK DEPLOYMENT
Allegiance plans to deploy networks in 24 markets. The Company estimates that
these 24 markets will include 18 BTAs with over 20 million non-residential
access lines, representing approximately 44.7% of the total non-residential
access lines in the U.S. As of September 30, 1998, the Company was operational
in six markets: New York City, Dallas, Atlanta, Fort Worth, Chicago and Los
Angeles; and is in the process of deploying networks in seven other markets: San
Francisco, Boston, Washington D.C., Northern New Jersey, Oakland, San Diego and
San Jose. The following table sets forth the markets
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targeted by the Company and the Company's current buildout schedule, although
the order and timing of network deployment may vary and will depend on a number
of factors, including recruiting city management, the regulatory environment,
the Company's results of operations and the existence of specific market
opportunities, such as acquisitions, and no assurance can be given that the
Company will deploy networks in each such market:
MARKET SIZE AND BUILDOUT SCHEDULE
<TABLE>
<CAPTION>
ESTIMATED TOTAL NON- % OF TOTAL U.S. NON- INITIAL FACILITIES-
MARKET RESIDENTIAL ACCESS LINES(1) RESIDENTIAL ACCESS LINES(2) BASED SERVICE DATE(3)
------ --------------------------- --------------------------- ---------------------
(THOUSANDS)
<S> <C> <C> <C>
New York City......... 3,298(4) 6.7%(4) March 1998
Dallas, TX............ 867(5) 1.8%(5) April 1998
Atlanta, GA........... 612 1.2% April 1998
Fort Worth, TX........ --(5) --(5) July 1998
Chicago, IL........... 1,951 4.0% August 1998
Los Angeles, CA....... 3,430(6) 7.0%(6) September 1998
Boston, MA............ 649 1.3% November 1998
San Francisco, CA..... 2,148(7) 4.4%(7) December 1998
Oakland, CA........... --(7) --(7) December 1998
Northern New Jersey... --(4) --(4) 1Q, 1999
Philadelphia, PA...... 1,754 3.6% 1Q, 1999
Washington, D.C....... 871 1.8% 1Q, 1999
Houston, TX........... 765 1.6% 2Q, 1999
Orange County, CA..... --(6) --(6) 2Q, 1999
San Jose, CA.......... --(7) --(7) 2Q, 1999
Baltimore, MD......... 639 1.3% 3Q, 1999
Long Island, NY....... --(4) --(4) 3Q, 1999
San Diego, CA......... 790 1.6% 3Q, 1999
Denver, CO............ 632 1.3% 4Q, 1999
Detroit, MI........... 821 1.7% 4Q, 1999
Seattle, WA........... 779 1.6% 4Q, 1999
Cleveland, OH......... 654 1.3% 1Q, 2000
Miami, FL............. 769 1.6% 1Q, 2000
St. Louis, MO......... 449 0.9% 1Q, 2000
------ -----
Total....... 21,878 44.7%
</TABLE>
- -------------------------
(1) Data as of December 31, 1996.
(2) Based on an estimated 49.0 million U.S. non-residential access lines as of
December 31, 1996.
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(3) Refers to the first month during which the Company could offer
facilities-based service or the quarter during which the Company expects to
be able to offer facilities-based service based on its current business
plan.
(4) Data for New York City also includes Northern New Jersey and Long Island,
NY.
(5) Data for Dallas, TX also includes Fort Worth, TX.
(6) Data for Los Angeles, CA also includes Orange County, CA.
(7) Data for San Francisco, CA also includes San Jose, CA and Oakland, CA.
In the majority of its targeted markets, Allegiance will initially deploy
switches and collocate transmission equipment in ILEC central offices with heavy
concentrations of non-residential access lines. Over time, the Company plans to
expand its networks throughout the metropolitan areas to address the majority of
the business market in each area. In some markets, such as Northern New Jersey,
Allegiance will not initially deploy its own switch, but will deploy
transmission equipment in major central offices and route traffic to an existing
Allegiance switch until traffic growth warrants the addition of a switch to
service that market.
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NETWORK ARCHITECTURE
Allegiance is deploying Lucent Series 5ESS(R)-2000 digital switches in New York
City, Dallas, Atlanta, Chicago, Los Angeles, San Francisco, Washington, D.C.,
Boston, Philadelphia and Houston. The Company currently plans to deploy similar
switches in its other markets. As a result of the network unbundling provisions
of the Telecommunications Act, the Company believes it can accelerate its market
entry, reduce its initial capital requirements and mitigate risks in estimating
market share growth by employing a "smart build" strategy. The Company plans to
install the Lucent switch and related equipment at a central location in each
market and deploy transmission equipment in ILEC central offices. Allegiance
intends initially to lease local network trunking facilities from the ILEC
and/or one or more CLECs in order to connect Allegiance's switch to major ILEC
central offices serving the central business district and outlying areas of
business concentrations in each market. The switch will also be connected to
ILEC tandem switches and certain interexchange carrier ("IXC")
points-of-presence ("POPs"). Allegiance will deploy integrated digital loop
carriers ("IDLCs") and related equipment in each of the ILEC central offices in
which it is connected. As each customer is obtained, service will be provisioned
by leasing unbundled loops from the ILEC to connect the Company's IDLC (located
in the serving central office) to the customer premise equipment. For large
business, government, or other institutional customers or for numerous customers
located in large buildings, it may be more cost-effective for Allegiance to use
leased ILEC or CLEC capacity in the 1.5 to 150 megabit range (or perhaps a
wireless local loop leased from one of the emerging wireless CLECs) to connect
the customer(s) to the Allegiance network. In this case, Allegiance will locate
its IDLC or other equipment in the customer's building. A diagram of the
Company's typical network layout is presented in the following figure:
[DIAGRAM]
Although Allegiance will initially lease its local network transmission
facilities, the Company plans to replace leased trunk capacity with its own
fiber optic facilities as and
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when it experiences sufficient traffic volume growth between its switch and
specific ILEC central offices and based on other factors that may make these
arrangements more attractive.
Allegiance will employ a similar "success-based" strategy to manage its long
distance network expenses. Initially, the Company will resell long distance
transmission services by buying minutes on a wholesale basis. As traffic on a
specific route increases (for example, on the New York City-Chicago route),
Allegiance will subsequently lease long distance trunk capacity connecting its
switches between the two markets. Allegiance would thus transport its calls from
New York City to Chicago (or vice versa) over its own network and terminate the
calls at the ILEC tandem switch in Chicago. For international calls, the Company
plans to negotiate agreements with various international carriers for
termination of its international calls throughout the world. As Allegiance's
international traffic volumes increase to major destinations (e.g. Canada,
Mexico, the United Kingdom, France, Germany and Japan), the Company expects to
be able to improve its resale margins.
IMPLEMENTATION OF SERVICES
In order to offer services in a market, Allegiance generally must secure
certification from the state regulator and typically must file tariffs or price
lists for the services that it will offer. The certification process varies from
state to state; however, the fundamental requirements are largely the same.
State regulators require new entrants to demonstrate that they have secured
adequate financial resources to establish and maintain good customer service.
New entrants are also required to show that they have a staff that possesses the
knowledge and ability required to establish and operate a telecommunications
network. Allegiance has made such demonstrations in Texas, Georgia, California,
Illinois, Maryland, New York, New Jersey, Virginia and Massachusetts where the
Company has obtained certificates to provide local exchange and intrastate toll
services. Applications for such authority are pending in the District of
Columbia and Pennsylvania. The Company intends to file similar applications in
the near future for Florida, Washington and Michigan.
Before providing local service, a new entrant must negotiate and execute an
interconnection agreement with the ILEC. While such agreements can be voluminous
and may take months to negotiate, most of the key interconnection issues have
now been thoroughly addressed and commissions in most states have ruled on
arbitrations between the ILECs and new entrants. New entrants may adopt an
interconnection agreement already entered into by the ILEC and another carrier.
Such an approach will be selectively adopted by Allegiance to enable it to enter
markets quickly while at the same time preserving its right to replace the
adopted agreement with a customized interconnection agreement that can be
negotiated once service has already been established. For example, Allegiance
has adopted the interconnection agreement entered into between Southwestern Bell
and WinStar Wireless of Texas, Inc. in Texas and has begun to negotiate
enhancements to that agreement for ultimate inclusion in Allegiance's customized
agreement with Southwestern Bell.
While such interconnection agreements include key terms and prices for
interconnection, a significant joint implementation effort must be made with the
ILEC in order to establish operationally efficient and reliable traffic exchange
arrangements. Such exchange arrangements must include those between the new
entrant's network and the facilities of other
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service providers as well as public service agencies. For example, Allegiance
worked closely with Southwestern Bell in order to devise and implement an
efficient 911 call routing plan that will meet the requirements of each
individual 911 service bureau in Southwestern Bell areas that Allegiance will
serve using its own switches. Allegiance meets with key personnel from 911
service bureaus to obtain their acceptance and to establish dates for circuit
establishment and joint testing. Other examples of traffic exchange and
interconnection arrangements utilizing the ILEC's network include connectivity
to its out-of-band signaling facilities, interconnectivity to the ILEC's
operator services and directory assistance personnel, and access through the
ILEC to the networks of wireless companies and interexchange carriers.
After the initial implementation activities are completed in a market, an
on-going trunking capacity management plan must be followed to ensure that
adequate quantities of network facilities (e.g., interconnection trunks) are in
place, and a contingency plan must be devised to address spikes in demand caused
by events such as a larger-than-expected customer sale in a relatively small
geographic area.
REGULATION
The Company's telecommunications services business is subject to varying degrees
of federal, state and local regulation.
FEDERAL REGULATION
The FCC regulates interstate and international telecommunications services. The
Company provides service on a common carrier basis. The FCC imposes certain
regulations on common carriers such as the RBOCs that have some degree of market
power. The FCC imposes less regulation on common carriers without market power
including, to date, CLECs. The FCC requires common carriers to receive an
authorization to construct and operate telecommunications facilities, and to
provide or resell telecommunications services, between the United States and
international points.
In August 1996, the FCC released a decision (the "Interconnection Decision")
establishing rules implementing the Telecommunications Act requirements that
ILECs negotiate interconnection agreements and providing guidelines for review
of such agreements by state public utilities commissions. On July 18, 1997, the
Eighth Circuit vacated certain portions of the Interconnection Decision,
including provisions establishing a pricing methodology and a procedure
permitting new entrants to "pick and choose" among various provisions of
existing interconnection agreements between ILECs and their competitors. On
October 14, 1997, the Eighth Circuit issued a decision vacating additional FCC
rules that will likely have the effect of increasing the cost of obtaining the
use of combinations of an ILEC's unbundled network elements. The Eighth Circuit
decisions create uncertainty about the rules governing pricing and the terms and
conditions of interconnection agreements, and could make negotiating and
enforcing such agreements more difficult and protracted and may require
renegotiation of existing agreements. There can be no assurance that the Company
will be able to obtain or enforce interconnection agreements on terms acceptable
to the Company. The Supreme Court has granted a writ of certiorari to review the
Eighth Circuit decisions. Oral argument was held on October 13, 1998 and a
decision is expected before July, 1999.
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In October 1996, the FCC adopted an order in which it eliminated the requirement
that non-dominant interstate carriers such as the Company maintain tariffs on
file with the FCC for domestic interstate services. This order applies to all
non-dominant interstate carriers, including AT&T. The order does not apply to
the switched and special access services of the RBOCs or other local exchange
providers. The FCC order was issued pursuant to authority granted to the FCC in
the Telecommunications Act to "forbear" from regulating any telecommunications
services provider if the FCC determines that the public interest will be served.
After a nine-month transition period, relationships between interstate carriers
and their customers will be set by contract. At that point long distance
companies may no longer file with the FCC tariffs for interstate, domestic,
interexchange services. Carriers have the option to immediately cease filing
tariffs. Several parties have filed petitions for reconsideration of the FCC
order and other parties appealed the decision. On February 13, 1997, the United
States Court of Appeals for the District of Columbia Circuit stayed the
implementation of the FCC order pending its review of the order on the merits.
Currently, that temporary stay remains in effect.
If the stay is lifted and the FCC order becomes effective, telecommunications
carriers such as the Company will no longer be able to rely on the filing of
tariffs with the FCC as a means of providing notice to customers of prices,
terms and conditions on which they offer their interstate services. The
obligation to provide non-discriminatory, just and reasonable prices remains
unchanged under the Communications Act of 1934, as amended (the "Communications
Act"). While tariffs provided a means of providing notice of prices, terms and
conditions, the Company intends to rely primarily on its sales force and direct
marketing to provide such information to its customers.
The Telecommunications Act is intended to increase competition. The act opens
the local services market by requiring ILECs to permit interconnection to their
networks and establishing ILEC obligations with respect to:
Reciprocal Compensation. Requires all LECs to complete calls originated by
competing LECs under reciprocal arrangements at prices based on a reasonable
approximation of incremental cost or through mutual exchange of traffic without
explicit payment.
Resale. Requires all ILECs and CLECs to permit resale of their
telecommunications services without unreasonable restrictions or conditions. In
addition, ILECs are required to offer wholesale versions of all retail services
to other telecommunications carriers for resale at discounted rates, based on
the costs avoided by the ILEC in the wholesale offering.
Interconnection. Requires all ILECs and CLECs to permit their competitors to
interconnect with their facilities. Requires all ILECs to permit interconnection
at any technically feasible point within their networks, on nondiscriminatory
terms, at prices based on cost (which may include a reasonable profit). At the
option of the carrier seeking interconnection, collocation of the requesting
carrier's equipment in the ILECs' premises must be offered, except where an ILEC
can demonstrate space limitations or other technical impediments to collocation.
Unbundled Access. Requires all ILECs to provide nondiscriminatory access to
unbundled network elements (including, network facilities, equipment, features,
functions, and capabilities) at any technically feasible point within their
networks, on nondiscriminatory terms, at prices based on cost (which may include
a reasonable profit).
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Number Portability. Requires all ILECs and CLECs to permit users of
telecommunications services to retain existing telephone numbers without
impairment of quality, reliability or convenience when switching from one
telecommunications carrier to another.
Dialing Parity. Requires all ILECs and CLECs to provide "1+" equal access to
competing providers of telephone exchange service and toll service, and to
provide nondiscriminatory access to telephone numbers, operator services,
directory assistance, and directory listing, with no unreasonable dialing
delays.
Access to Rights-of-Way. Requires all ILECs and CLECs to permit competing
carriers access to poles, ducts, conduits and rights-of-way at regulated prices.
ILECs are required to negotiate in good faith with carriers requesting any or
all of the above arrangements. If the negotiating carriers cannot reach
agreement within a prescribed time, either carrier may request binding
arbitration of the disputed issues by the state regulatory commission. Where an
agreement has not been reached, ILECs remain subject to interconnection
obligations established by the FCC and state telecommunication regulatory
commissions.
On May 8, 1997, the FCC released an order establishing a significantly expanded
federal universal service subsidy regime. For example, the FCC established new
subsidies for telecommunications and information services provided to qualifying
schools and libraries with an annual cap of $2.25 billion and for services
provided to rural health care providers with an annual cap of $400.0 million.
The FCC also expanded the federal subsidies for local exchange telephone
services provided to low-income consumers. Providers of interstate
telecommunications service, such as the Company, as well as certain other
entities, must pay for these programs. The Company's share of these federal
subsidy funds will be based on its share of certain defined telecommunications
end user revenues. Currently, the FCC is assessing such payments on the basis of
a provider's revenue for the previous year; since the Company had no significant
revenues in 1997, it will not be liable for subsidy payments in any material
amount during 1998. With respect to subsequent years, however, the Company is
currently unable to quantify the amount of subsidy payments that it will be
required to make or the effect that these required payments will have on its
financial condition. In the May 8th order, the FCC also announced that it will
soon revise its rules for subsidizing service provided to consumers in high cost
areas, which may result in further substantial increases in the overall cost of
the subsidy program. Several parties have appealed the May 8th order. Such
appeals have been consolidated and transferred to the United States Court of
Appeals for the Fifth Circuit where they are currently pending. Oral argument is
scheduled for December 1, 1998. In addition, on July 3, 1997, several ILECs
filed a petition for stay of the May 8th order with the FCC. That petition is
pending, as well as several petitions for administrative reconsideration of the
order.
The Telecommunications Act codifies the ILECs' equal access and
nondiscrimination obligations and preempts inconsistent state regulation. The
Telecommunications Act also contains special provisions that eliminate the AT&T
Antitrust Consent Decree (and similar antitrust restrictions on the GTOCs)
restricting the RBOCs from providing long distance services and engaging in
telecommunications equipment manufacturing. The Telecommunications Act permitted
the RBOCs to enter the out-of-region long distance market immediately upon its
enactment. Further, provisions of the Telecommunications
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Act permit a RBOC to enter the long distance market in its in-region states if
it satisfies several procedural and substantive requirements, including
obtaining FCC approval upon a showing that the RBOC has entered into
interconnection agreements (or, under some circumstances, has offered to enter
into such agreements) in those states in which it seeks long distance relief,
the interconnection agreements satisfy a 14-point "checklist" of competitive
requirements, and the FCC is satisfied that the RBOC's entry into long distance
markets is in the public interest. To date, several petitions by RBOCs for such
entry have been denied by the FCC, and none have been granted.
On December 31, 1997, the U.S. District Court for the Northern District of Texas
issued the SBC Decision finding that Sections 271 to 275 of the
Telecommunications Act are unconstitutional. These sections of the
Telecommunications Act impose restrictions on the lines of business in which the
RBOCs may engage, including establishing the conditions they must satisfy before
they may provide in-region interLATA telecommunications services. The Fifth
Circuit subsequently reversed the district court decision. SBC has sought review
in the Supreme Court. The Company cannot predict the likely outcome of that
appeal. If the Supreme Court upholds the SBC Decision, however, the RBOCs would
be able to provide such in-region services immediately without satisfying the
statutory conditions. This would likely have an unfavorable effect on the
Company's business for at least two reasons. First, the SBC Decision removes the
incentive RBOCs have to cooperate with companies like Allegiance to foster
competition within their service areas so that they can qualify to offer
in-region interLATA services because the decision allows RBOCs to offer such
services immediately. However, the SBC Decision does not affect other provisions
of the Act which create legal obligations for all ILECs to offer interconnection
and network access. Second, the Company is legally able to offer its customers
both long distance and local exchange services, which the RBOCs currently may
not do. This ability to offer "one-stop shopping" gives the Company a marketing
advantage that it would no longer enjoy if the SBC Decision were upheld on
appeal. See "-- Competition."
Under the Telecommunications Act, any entity, including cable television
companies and electric and gas utilities, may enter any telecommunications
market, subject to reasonable state regulation of safety, quality and consumer
protection. Because implementation of the Telecommunications Act is subject to
numerous federal and state policy rulemaking proceedings and judicial review
there is still uncertainty as to what impact such legislation will have on the
Company.
Pursuant to authority granted by the FCC, the Company will resell the
international telecommunications services of other common carriers between the
United States and international points. In connection with such authority, the
Company's subsidiary, Allegiance Telecom International, Inc., has filed tariffs
with the FCC stating the rates, terms and conditions for its international
services.
With respect to its domestic service offerings, various subsidiaries of the
Company have filed tariffs with the FCC stating the rates, terms and conditions
for their interstate services. The Company's tariffs are generally not subject
to pre-effective review by the FCC, and can be amended on one day's notice. The
Company's interstate services are provided in competition with interexchange
carriers and, with respect to access services, the ILECs. With limited
exceptions, the current policy of the FCC for most interstate access services
dictates that ILECs charge all customers the same price for the same
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service. Thus, the ILECs generally cannot lower prices to those customers likely
to contract for their services without also lowering charges for the same
service to all customers in the same geographic area, including those whose
telecommunications requirements would not justify the use of such lower prices.
The FCC may, however, alleviate this constraint on the ILECs and permit them to
offer special rate packages to very large customers, as it has done in a few
cases, or permit other forms of rate flexibility. The FCC has adopted some
proposals that significantly lessen the regulation of ILECs that are subject to
competition in their service areas and provide such ILECs with additional
flexibility in pricing their interstate switched and special access on a central
office specific basis; and, as discussed in the following paragraph, is
considering expanding such flexibility.
In two orders released on December 24, 1996, and May 16, 1997, the FCC made
major changes in the interstate access charge structure. In the December 24th
order, the FCC removed restrictions on ILECs' ability to lower access prices and
relaxed the regulation of new switched access services in those markets where
there are other providers of access services. If this increased pricing
flexibility is not effectively monitored by federal regulators, it could have a
material adverse effect on the Company's ability to compete in providing
interstate access services. The May 16th order substantially increased the costs
that ILECs subject to the FCC's price cap rules ("price cap LECs") recover
through monthly, non-traffic sensitive access charges and substantially
decreased the costs that price cap LECs recover through traffic sensitive access
charges. In the May 16th order, the FCC also announced its plan to bring
interstate access rate levels more in line with cost. The plan will include
rules that may grant price cap LECs increased pricing flexibility upon
demonstrations of increased competition (or potential competition) in relevant
markets. The manner in which the FCC implements this approach to lowering access
charge levels could have a material effect on the Company's ability to compete
in providing interstate access services. Several parties appealed the May 16th
order. On August 19, 1998, the May 16th order was affirmed by the Eighth Circuit
U.S. Court of Appeals. On October 5, 1998, the FCC released a Public Notice
asking parties to refresh the record on access charge reform. It specifically
requested comment on pricing flexibility proposals submitted by two RBOCs and on
changing the 6.5% X-Factor adjustment, which is applied annually to reduce
ILECs' price cap indices.
ILECs around the country have been contesting whether the obligation to pay
reciprocal compensation to CLECs should apply to local telephone calls from ILEC
customers to ISPs served by CLECs. The ILECs claim that this traffic is
interstate in nature and therefore should be exempt from compensation
arrangements applicable to local, intrastate calls. CLECs have contended that
the interconnection agreements provide no exception for local calls to ISPs and
reciprocal compensation is therefore applicable. The FCC recently held that
GTE's ADSL service, which provides a dedicated connection (rather than
circuit-switched dial up) that permits an ISP to provide its end user with
high-speed access to the Internet, is a special access service with more than a
de minimis amount of interstate traffic. This GTE ADSL Order determined that
GTE's ADSL service is properly tariffed at the federal level but if GTE or any
other ILECs were to offer an ADSL service that is intrastate in nature, that
service should be tariffed at the state level.
Under the Eighth Circuit decisions, the states have primary jurisdiction over
the determination of reciprocal compensation arrangements and as a result, the
treatment of
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this issue can vary from state to state. Currently, 23 state commissions, three
federal courts and one state court have ruled that reciprocal compensation
arrangements do apply to calls to ISPs. Certain of these rulings are subject to
appeal. Additional disputes over the appropriate treatment of ISP traffic are
pending in other states. The NARUC adopted a resolution in favor of applying
reciprocal compensation to calls to ISPs. The FCC made clear that its GTE ADSL
Order did not determine whether reciprocal compensation is owed pursuant to
existing interconnection agreements, state arbitration decisions and federal
court decisions. The FCC indicated that it intends to issue a separate order
specifically addressing reciprocal compensation issues. The Company anticipates
that ISPs will be among its target customers, and adverse decisions in these
proceedings could limit the Company's ability to service this group of customers
profitably.
STATE REGULATION
The Telecommunications Act is intended to increase competition in the
telecommunications industry, especially in the local exchange market. With
respect to local services, ILECs are required to allow interconnection to their
networks and to provide unbundled access to network facilities, as well as a
number of other procompetitive measures. Because the implementation of the
Telecommunications Act is subject to numerous state rulemaking proceedings on
these issues, it is currently difficult to predict how quickly full competition
for local services, including local dial tone, will be introduced.
State regulatory agencies have regulatory jurisdiction when Company facilities
and services are used to provide intrastate services. A portion of the Company's
current traffic may be classified as intrastate and therefore subject to state
regulation. The Company expects that it will offer more intrastate services
(including intrastate switched services) as its business and product lines
expand and state regulations are modified to allow increased local services
competition. To provide intrastate services, the Company generally must obtain a
certificate of public convenience and necessity from the state regulatory agency
and comply with state requirements for telecommunications utilities, including
state tariffing requirements. The Company has obtained such certificates to
provide local exchange and intrastate toll service in Texas, Georgia,
California, Illinois, Maryland, New York, New Jersey, Virginia and
Massachusetts. Applications for authority to provide local exchange and
intrastate toll services are currently pending in the District of Columbia and
Pennsylvania. In Georgia, the Company has also received certificate authority to
provide intrastate interexchange alternate operator services. The Company also
intends to file similar applications in the near future in Michigan, Florida and
Washington. There can be no assurance that such state authorizations will be
granted.
LOCAL REGULATION
The Company's networks are subject to numerous local regulations such as
building codes and licensing. Such regulations vary on a city by city and county
by county basis. To the extent the Company decides in the future to install its
own fiber optic transmission facilities, it will need to obtain rights-of-way
over private and publicly owned land. There can be no assurance that such
rights-of-way will be available to the Company on economically reasonable or
advantageous terms.
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COMPETITION
The telecommunications industry is highly competitive. The Company believes that
the principal competitive factors affecting its business will be pricing levels
and clear pricing policies, customer service, accurate billing and, to a lesser
extent, variety of services. The ability of the Company to compete effectively
will depend upon its continued ability to maintain high quality, market-driven
services at prices generally equal to or below those charged by its competitors.
To maintain its competitive posture, the Company believes that it must be in a
position to reduce its prices in order to meet reductions in rates, if any, by
others. Any such reductions could adversely affect the Company. Many of the
Company's current and potential competitors have financial, personnel and other
resources, including brand name recognition, substantially greater than those of
the Company, as well as other competitive advantages over the Company.
Local Exchange Carriers ("LECs"). In each of the markets targeted by the
Company, the Company will compete principally with the ILEC serving that area,
such as Ameritech, BellSouth, Southwestern Bell, or Bell Atlantic Corporation.
The Company believes the RBOCs' primary agenda is to be able to offer long
distance service in their service territories. The independent telcos have
already achieved this goal with good early returns. Many experts expect the
RBOCs to be successful in entering the long distance market in a few states by
early 1999. The Company believes the RBOCs expect to offset share losses in
their local markets by capturing a significant percentage of the in-region long
distance market, especially in the residential segment where the RBOCs' strong
regional brand names and extensive advertising campaigns may be very successful.
In the event that the SBC Decision, which held that the Telecommunications Act's
restrictions on the lines of business in which RBOCs may engage (including the
conditions to the RBOCs provision of in-region interLATA telecommunications
services) are unconstitutional, is upheld, the RBOCs would immediately
thereafter be able to enter the long distance market in their service
territories. See "-- Regulation."
As a recent entrant in the integrated telecommunications services industry, the
Company has not achieved and does not expect to achieve a significant market
share for any of its services. In particular, the ILECs have long-standing
relationships with their customers, have financial, technical and marketing
resources substantially greater than those of the Company, have the potential to
subsidize competitive services with revenues from a variety of businesses and
currently benefit from certain existing regulations that favor the ILECs over
the Company in certain respects. While recent regulatory initiatives, which
allow CLECs such as the Company to interconnect with ILEC facilities, provide
increased business opportunities for the Company, such interconnection
opportunities have been (and likely will continue to be) accompanied by
increased pricing flexibility for and relaxation of regulatory oversight of the
ILECs.
ILECs have long-standing relationships with regulatory authorities at the
federal and state levels. While recent FCC administrative decisions and
initiatives provide increased business opportunities to telecommunications
providers such as the Company, they also provide the ILECs with increased
pricing flexibility for their private line and special access and switched
access services. In addition, with respect to competitive access services (as
opposed to switched local exchange services), the FCC recently proposed a rule
that would provide for increased ILEC pricing flexibility and deregulation for
such access services either automatically or after certain competitive levels
are reached. If the ILECs are
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allowed by regulators to offer discounts to large customers through contract
tariffs, engage in aggressive volume and term discount pricing practices for
their customers, and/or seek to charge competitors excessive fees for
interconnection to their networks, the income of competitors to the ILECs,
including the Company, could be materially adversely affected. If future
regulatory decisions afford the ILECs increased access services pricing
flexibility or other regulatory relief, such decisions could also have a
material adverse effect on competitors to the ILEC, including the Company.
Competitive Access Carriers/Competitive Local Exchange Carriers/IXCs/Other
Market Entrants. The Company also faces, and expects to continue to face,
competition from other current and potential market entrants, including long
distance carriers seeking to enter, reenter or expand entry into the local
exchange market such as AT&T, MCI Worldcom, and Sprint, and from other CLECs,
resellers of local exchange services, CAPs, cable television companies, electric
utilities, microwave carriers, wireless telephone system operators and private
networks built by large end users. In addition, a continuing trend toward
consolidation of telecommunications companies and the formation of strategic
alliances within the telecommunications industry, as well as the development of
new technologies, could give rise to significant new competitors to the Company.
For example, WorldCom acquired MFS in December 1996, has recently acquired
another CLEC, Brooks Fiber Properties, Inc., and recently merged with MCI. AT&T
recently acquired Teleport Communications Group Inc. In May 1998, SBC
Communications Inc. and Ameritech Corporation agreed to merge. On June 24, 1998,
AT&T announced that it has entered into a merger agreement with
Tele-Communications, Inc., a cable, telecommunications, and high-speed Internet
services provider. These types of consolidations and strategic alliances could
put the Company at a competitive disadvantage. The Telecommunications Act
includes provisions which impose certain regulatory requirements on all local
exchange carriers, including competitors such as the Company, while granting the
FCC expanded authority to reduce the level of regulation applicable to any or
all telecommunications carriers, including ILECs. The manner in which these
provisions of the Telecommunications Act are implemented and enforced could have
a material adverse effect on the Company's ability to successfully compete
against ILECs and other telecommunications service providers. The Company also
competes with equipment vendors and installers, and telecommunications
management companies with respect to certain portions of its business.
The changes in the Telecommunications Act radically altered the market
opportunity for traditional CAPs and CLECs. Due to the fact that most existing
CAP/CLECs initially entered the market providing dedicated access in the
pre-1996 era, these companies had to build a fiber infrastructure before
offering services. Switches were added by most CAP/CLECs in the last year to
take advantage of the opening of the local market. With the Telecommunications
Act requiring unbundling of the LEC networks, CAP/CLECs will now be able to more
rapidly enter the market by installing switches and leasing trunk and loop
capacity until traffic volume justifies building facilities. New CLECs will not
have to replicate existing facilities and can be more opportunistic in designing
and implementing networks.
The Company believes the major IXCs (AT&T, MCI Worldcom, Sprint) have a two
pronged strategy: (1) keep the RBOCs out of in-region long distance as long as
possible and (2) develop facilities-based and unbundled local service, an
approach already being
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pursued by MCI WorldCom with the acquisition of MFS, and more recently by AT&T
with its acquisition of Teleport Communications.
Competition for Provision of Long Distance Services. The long distance
telecommunications industry has numerous entities competing for the same
customers and a high average churn rate, as customers frequently change long
distance providers in response to the offering of lower rates or promotional
incentives by competitors. Prices in the long distance market have declined
significantly in recent years and are expected to continue to decline. The
Company expects to increasingly face competition from companies offering long
distance data and voice services over the Internet. Such companies could enjoy a
significant cost advantage because they do not currently pay carrier access
charges or universal service fees.
Data/Internet Services Providers. The Internet services market is highly
competitive, and the Company expects that competition will continue to
intensify. The Company's competitors in this market will include ISPs, other
telecommunications companies, online services providers and Internet software
providers. Many of these competitors have greater financial, technological and
marketing resources than those available to the Company.
Competition from International Telecommunications Providers. Under the recent
WTO agreement on basic telecommunications services, the United States and 72
other members of the WTO committed themselves to opening their respective
telecommunications markets and/or foreign ownership and/or to adopting
regulatory measures to protect competitors against anticompetitive behavior by
dominant telecommunications companies, effective in some cases as early as
January 1998. Although the Company believes that the WTO agreement could provide
the Company with significant opportunities to compete in markets that were not
previously accessible and to provide more reliable services at lower costs than
the Company could have provided prior to implementation of the WTO agreement, it
could also provide similar opportunities to the Company's competitors. There can
be no assurance that the pro-competitive effects of the WTO agreement will not
have a material adverse effect on the Company's business, financial condition
and results of operations or that members of the WTO will implement the terms of
the WTO agreement. See "Risk Factors -- Competition."
EMPLOYEES
As of September 30, 1998, the Company had approximately 460 full-time employees.
The Company believes that its future success will depend on its continued
ability to attract and retain highly skilled and qualified employees. None of
the Company's employees are currently represented by a collective bargaining
agreement. The Company believes that it enjoys good relationships with its
employees.
LEGAL PROCEEDINGS
On August 29, 1997, WorldCom sued the Company and two of its Senior Vice
Presidents. 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
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unfair competition. WorldCom seeks injunctive relief, including barring two of
the Company's executives from continued employment with the Company, and
monetary 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 of
this matter to have a material adverse effect on the results of operations or
financial condition of the Company.
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 moved to dismiss
the abuse of process and unfair competition claims. On March 4, 1998, the court
dismissed the claim for unfair competition.
The Company is not party to any other pending legal proceedings that the Company
believes would, individually or in the aggregate, have a material adverse effect
on the Company's financial condition or results of operations.
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<PAGE> 69
FACILITIES
The Company is headquartered in Dallas, Texas and leases offices and space in a
number of locations, primarily for sales offices and network equipment
installations. The table below lists the Company's current leased facilities:
<TABLE>
<CAPTION>
APPROXIMATE
LOCATION LEASE EXPIRATION SQUARE FOOTAGE
-------- ---------------- --------------
<S> <C> <C>
Dallas, TX...................................... February 2008 76,000
Atlanta, GA..................................... February 2003 7,400
Atlanta, GA..................................... November 2001 7,900
Boston, MA...................................... September 2003 12,000
Boston, MA...................................... September 2008 18,000
Chicago, IL..................................... February 2009 11,000
Chicago, IL..................................... July 2008 14,000
Fort Worth, TX.................................. June 2003 3,900
Houston, TX..................................... December 2005 11,700
Los Angeles, CA................................. June 2008 11,700
Los Angeles, CA................................. June 2008 14,585
New York, NY.................................... August 2006 8,700
New York, NY.................................... April 2008 19,500
New York, NY.................................... June 2008 12,400
Philadelphia, PA................................ April 2002 8,900
Philadelphia, PA................................ October 2008 18,000
San Diego, CA................................... March 2008 14,000
San Francisco, CA............................... April 2002 8,100
San Francisco, CA............................... June 2008 16,000
Washington, DC.................................. November 2008 15,000
Westchester, IL................................. April 2001 16,300
</TABLE>
The Company believes that its leased facilities are adequate to meet its current
needs in the markets in which it has begun to deploy networks, and that
additional facilities are available to meet its development and expansion needs
in existing and projected target markets for the foreseeable future.
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<PAGE> 70
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND OTHER KEY EMPLOYEES
The following table sets forth certain information concerning the directors,
executive officers and other key personnel of the Company, including their ages
as of November 1, 1998:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
---- --- -----------
<S> <C> <C>
Royce J. Holland(1)..... 49 Chairman of the Board and Chief Executive
Officer
C. Daniel Yost.......... 50 President and Chief Operating Officer, and
Director
Thomas M. Lord.......... 41 Executive Vice President of Corporate
Development, Chief Financial Officer, and
Director
John J. Callahan........ 48 Senior Vice President of Sales and Marketing,
and Director
Dana A. Crowne.......... 37 Senior Vice President and Chief Engineer
Stephen N. Holland...... 46 Senior Vice President and Chief Information
Officer
Patricia E. Koide....... 50 Senior Vice President of Human Resources, Real
Estate, Facilities and Administration
Gregg A. Long........... 44 Senior Vice President of Development and
Regulatory
L.C. Baird.............. 54 Regional Vice President -- Southeast Division
Anthony J. Parella...... 38 Regional Vice President -- Central Division
Lawrence A. Price....... 35 Regional Vice President -- Northeast Division
Paul D. Carbery......... 37 Director
James E. Crawford,
III(1)................ 52 Director
John B. Ehrenkranz...... 33 Director
Paul J. Finnegan........ 45 Director
Richard D. Frisbie...... 49 Director
Reed E. Hundt........... 49 Director
Robert H. Niehaus (1)... 43 Director
James N. Perry, Jr.
(1)................... 37 Director
</TABLE>
- -------------------------
(1) Member of the Board's Executive Committee.
Royce J. Holland, the Company's Chairman of the Board and Chief Executive
Officer, has more than 25 years of experience in the telecommunications,
independent power and engineering/construction industries. Prior to founding
Allegiance in April 1997, Mr. Holland was one of several co-founders of MFS,
where he served as President and Chief Operating Officer from April 1990 until
September 1996 and as Vice Chairman from September 1996 to February 1997. In
January 1993, Mr. Holland was appointed by President George Bush to the National
Security Telecommunications Advisory Committee. Mr. Holland also presently
serves on the Board of Directors of CSG Systems, a publicly held billing
services company. Mr. Holland's brother, Stephen N. Holland, is employed as the
Company's Senior Vice President and Chief Information Officer.
C. Daniel Yost, who joined the Company as President and Chief Operating Officer
in February 1998, was elected to the Company's Board of Directors in March 1998.
Mr. Yost
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<PAGE> 71
has more than 26 years of experience in the telecommunications industry. From
July 1997 until he joined the Company, Mr. Yost was the President and Chief
Operating Officer for U.S. Operations of Netcom On-Line Communications Services,
Inc., a leading Internet service provider. Mr. Yost served as the President,
Southwest Region of AT&T Wireless Services, Inc. from June 1994 to July 1997.
Prior to that, from July 1991 to June 1994, Mr. Yost was the President,
Southwest Region of McCaw Cellular Communications/LIN Broadcasting.
Thomas M. Lord, a co-founder and Director of the Company and its Executive Vice
President of Corporate Development and Chief Financial Officer, is responsible
for overseeing the Company's mergers and acquisitions, corporate finance and
investor relations functions. Mr. Lord is an 18-year veteran in investment
banking, securities research and portfolio management, including serving as a
managing director of Bear, Stearns & Co. Inc. from January 1986 to December
1996. In the five-year period ending December 1996, Mr. Lord oversaw 43
different transactions valued in excess of $6.2 billion for the
telecommunications, information services and technology industries.
John J. Callahan, who joined the Company as Senior Vice President of Sales and
Marketing in December 1997, has more than 18 years of experience in the
telecommunications industry. Most recently, Mr. Callahan was President of the
Western Division for MFS from December 1991 to November 1997, where he was
responsible for the company's sales and operations in Arizona, California,
Georgia, Florida, Illinois, Michigan, Missouri, Ohio, Oregon, Texas and
Washington. Prior to joining MFS, Mr. Callahan was Vice President and General
Manager, Southwest Division for Sprint. Mr. Callahan also held sales positions
with Data Switch and North American Telecom. Mr. Callahan was elected to the
Company's Board of Directors in March 1998.
Dana A. Crowne became the Company's Senior Vice President and Chief Engineer in
August 1997. Prior to joining Allegiance, Mr. Crowne held various management
positions at MFS from the time of its founding in 1988, where his
responsibilities included providing engineering support and overseeing budgets
for the construction of MFS' networks. Mr. Crowne ultimately became Vice
President, Network Optimization for MFS from January 1996 to May 1997 and
managed the company's network expenses and planning and its domestic engineering
functions. Prior to joining MFS, Mr. Crowne designed and installed fiber optic
transmission systems for Morrison-Knudsen and served as a consultant on the
construction of private telecommunications networks with JW Reed and Associates.
Stephen N. Holland joined the Company as its Senior Vice President and Chief
Information Officer in September 1997. Prior to that time, Mr. Holland held
several senior level positions involving management of or consulting on
information systems, accounting, taxation and finance. Mr. Holland's experience
includes serving as Practice Manager and Information Technology Consultant for
Oracle Corporation from June 1995 to September 1997, as Chief Financial Officer
of Petrosurance Casualty Co. from September 1992 to June 1995, as Manager of
Business Development for Electronic Data Systems, and as a partner of Price
Waterhouse. Mr. Holland's brother, Royce J. Holland, presently serves as the
Company's Chairman of the Board and Chief Executive Officer.
Patricia E. Koide has been the Company's Senior Vice President of Human
Resources, Real Estate, Facilities and Administration since August 1997. Before
then, Ms. Koide was Vice President of Corporate Services, Facilities and
Administration for WorldCom from
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<PAGE> 72
March 1997 to August 1997. Ms. Koide also held various management positions
within MFS and its subsidiaries since 1989, including Senior Vice President of
Facilities, Administration and Purchasing for MFS North America from 1996 to
1997, Senior Vice President of Human Resources, Facilities and Administration
for MFS Telecom from 1994 to 1996, and Vice President of Human Resources and
Administration for MFS North America from 1989 to 1993. Prior to MFS, Ms. Koide
was with Sprint for eight years where she managed the company's human resources,
real estate and facilities for the Midwest.
Gregg A. Long, who became the Company's Senior Vice President of Regulatory and
Development in September 1997, spent 11 years at Destec Energy, Inc. as Project
Development Manager -- Partnership Vice President and Director. In that
position, he was responsible for the development of gas-fired power plants from
conceptual stages through project financing. Prior to joining Destec, Mr. Long
was Manager of Project Finance at Morrison-Knudsen, where he was responsible for
analyzing and arranging finance packages for various industrial, mining and
civil projects and also served as financial consultant and analyst.
L.C. Baird, who became the Company's Regional Vice President -- Southeast
Division in September 1997, has more than 25 years of experience in the
telecommunications industry. Prior to joining Allegiance, Mr. Baird held several
senior level positions in operating units of MFS, including serving as President
of MFS Intelenet's Southern Division from January 1993 to April 1997 and as vice
president of sales and marketing for MFS Network Technologies from August 1987
to January 1993. Mr. Baird also served as area manager for Motorola's Latin
American Communications where he was responsible for sales in Central America,
Mexico, South America and the Caribbean.
Anthony J. Parella, who joined the Company as its Regional Vice
President -- Central Division in August 1997, has more than 10 years of
experience in the telecommunications industry. Prior to joining Allegiance, Mr.
Parella was Vice President and General Manager for MFS Intelenet, Inc., an
operating unit of MFS, from February 1994 to January 1997, where he was
responsible for the company's sales and operations in Texas. Mr. Parella also
served as Director of Commercial Sales for Sprint from 1991 to January 1994.
Lawrence A. Price joined the Company as its Regional Vice President -- Northeast
Division in February, 1998. From February 1997 until he joined the Company, Mr.
Price was a Vice President/General Manager of WinStar Telecommunications, Inc.
From June 1995 to February 1997, Mr. Price held management positions with ADC
Telecommunications, Inc. From July 1994 to June 1995, he was the Director of
U.S. Sales and Operations of ATX Telecom Systems, Inc, and from July 1993 to
July 1994 he was a sales manager with Teleport Communications Group, Inc.
Paul D. Carbery, who was elected to the Company's Board of Directors in August
1997, is a general partner of Frontenac Company, a Chicago-based private equity
investing firm, where he specializes in investing in companies in the
telecommunications and technology industries. Mr. Carbery also presently serves
on the boards of directors of Whittman Hart, Inc., a publicly traded information
services company.
James E. Crawford, III, who was elected to the Company's Board of Directors in
August 1997, is a general partner of Frontenac Company, a Chicago-based private
equity investing firm, where he specializes in investing in companies in the
telecommunications and
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<PAGE> 73
technology industries. Mr. Crawford also presently serves on the boards of
directors of Focal Communications Corporation ("Focal"), a privately held CLEC
that will compete with the Company, as well as of Optika Incorporated, a
publicly held imaging software document company, and Input Software
Incorporated, a publicly held document imaging software company.
John B. Ehrenkranz, who was elected to the Company's Board of Directors in March
1998, is a Principal of Morgan Stanley & Co. Incorporated where he has been
employed since 1987. Mr. Ehrenkranz also presently serves on the board of
directors of Choice One, a privately held CLEC that may compete with the
Company. Mr. Ehrenkranz is also a Principal of Morgan Stanley Capital Partners
III, Inc.
Paul J. Finnegan, who was elected to the Company's Board of Directors in August
1997, is a vice president of Madison Dearborn Partners, Inc., a Chicago-based
private equity investing firm, where he specializes in investing in companies in
the telecommunications industry. Mr. Finnegan also presently serves on the
boards of directors of Focal, a privately held CLEC that will compete with the
Company, and Omnipoint Corporation, a publicly traded PCS provider.
Richard D. Frisbie, who was elected to the Company's Board of Directors in
August 1997, is a Managing Partner of Battery Ventures, a Boston-based private
equity investing firm, where he specializes in investing in companies in the
telecommunications industry. Mr. Frisbie also presently serves on the board of
directors of Focal, a privately held CLEC that will compete with the Company.
Reed E. Hundt was elected to the Company's Board of Directors in March 1998. Mr.
Hundt served as chairman of the Federal Communications Commission from 1993 to
1997. He currently serves as chairman of The Forum on Communications and Society
(FOCAS) at The Aspen Institute and is a principal of Charles Ross Partners, LLC,
a consulting firm. Prior to joining the FCC, Mr. Hundt was a partner at Latham &
Watkins, an international law firm.
Robert H. Niehaus, who was elected to the Company's Board of Directors in August
1997, is a Managing Director of Morgan Stanley & Co. Incorporated where he has
been employed since 1982. Mr. Niehaus also presently serves on the boards of
directors of numerous companies including PageMart Wireless, Inc., Silgan
Holdings Inc., Waterford Wedgewood, plc. and Choice One, a privately held CLEC
that may compete with the Company. Mr. Niehaus is also a Managing Director and a
Director of Morgan Stanley Capital Partners III, Inc.
James N. Perry, Jr., who was elected to the Company's Board of Directors in
August 1997, is a vice president of Madison Dearborn Partners, Inc., a
Chicago-based private equity investing firm, where he specializes in investing
in companies in the telecommunications industry. Mr. Perry also presently serves
on the boards of directors of Focal, a privately held CLEC that will compete
with the Company, as well as Omnipoint Corporation, a publicly traded PCS
provider, and Clearnet Communications, a Canadian publicly traded PCS and
enhanced specialized mobile radio company.
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<PAGE> 74
ELECTION OF DIRECTORS; VOTING AGREEMENT
The Company's bylaws establish the size of the Company's Board of Directors at
13 Directors; there is presently one vacancy. The Company anticipates that one
additional director not otherwise affiliated with the Company or any of its
stockholders will be elected by the Board of Directors. The Company's
certificate of incorporation and by-laws provide that its Directors will be
appointed and may be removed by majority vote of the Company's stockholders
(without cumulative voting).
At present all directors are elected annually and serve until the next annual
meeting of stockholders, or until the election and qualification of their
successors. The Board of Directors is divided into three classes, as nearly
equal in number as possible, with each Director serving a three year term and
one class being elected at each year's annual meeting of stockholders. Messrs.
Callahan, Finnegan, Carbery, and Ehrenkranz are in the class of directors whose
term expires at the 1999 annual meeting of the Company's stockholders. Messrs.
Lord, Yost, Crawford, Frisbie and the additional director anticipated to be
appointed by the Board of Directors are in the class of directors whose term
expires at the 2000 annual meeting of the Company's stockholders. Messrs.
Holland, Hundt, Perry, and Niehaus are in the class of directors whose term
expires at the 2001 annual meeting of the Company's stockholders. At each annual
meeting of the Company's stockholders, successors to the class of directors
whose term expires at such meeting will be elected to serve for three-year terms
and until their successors are elected and qualified.
Certain of the Company's stockholders are parties to a voting agreement,
pursuant to which they have each agreed to vote all of their shares in such a
manner as to elect the following persons to serve as Directors: Madison Dearborn
Capital Partners, Morgan Stanley Capital Partners, and Frontenac Company (and
their respective successors, assigns, transferees, and affiliates) each have the
right to designate two Directors; Battery Ventures (and its successors, assigns,
transferees, and affiliates) has the right to designate one Director; the
Company's Chief Executive Officer has the right to serve as a Director; the
Management Investors (and their successors and assigns) have the right to
designate three Directors; and the final two directorships may be filled by
representatives designated by the Fund Investors and acceptable to the
Management Investors.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors currently has three committees: (i) an Executive
Committee, (ii) an Audit Committee and (iii) a Compensation Committee.
Certain of the Company's stockholders are parties to a voting agreement,
pursuant to which they have agreed to vote all of their shares in such a manner
that the Executive Committee will comprise the Company's Chief Executive Officer
and three other representatives, one designated by each of Morgan Stanley
Capital Partners, Madison Dearborn Capital Partners, and Frontenac Company (and
their respective successors, assigns, transferees and affiliates). The Executive
Committee is authorized, subject to certain limitations, to exercise all of the
powers of the Board of Directors during periods between Board meetings.
The Audit Committee is currently comprised of Messrs. Yost, Hundt, Carbery,
Ehrenkranz and Finnegan. The Audit Committee is responsible for making
recommenda-
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<PAGE> 75
tions to the Board of Directors regarding the selection of independent auditors,
reviewing the results and scope of the audit and other services provided by the
Company's independent accountants and reviewing and evaluating the Company's
audit and control functions.
The Compensation Committee is currently comprised of Messrs. Holland, Frisbie,
Crawford, Niehaus and Perry. The Compensation Committee is responsible for
reviewing, and as it deems appropriate, recommending to the Board of Directors,
policies, practices and procedures relating to the compensation of the officers
and other managerial employees of the Company and the establishment and
administration of employee benefit plans. The Compensation Committee exercises
all authority under any stock option or stock purchase plans of the Company
(unless the Board appoints any other committee to exercise such authority), and
advises and consults with the officers of the Company as may be requested
regarding managerial personnel policies.
COMPENSATION OF DIRECTORS
The Company will reimburse the members of its Board of Directors for their
reasonable out-of-pocket expenses incurred in connection with attending Company
Board or committee meetings. Additionally, the Company is obligated to maintain
its present level of directors' and officers' insurance. Members of the
Company's Board of Directors receive no other compensation for services provided
as a Director or as a member of any Board committee.
EXECUTIVE COMPENSATION
The following table sets forth compensation paid during the period from April
22, 1997 to December 31, 1997 to the Chief Executive Officer of the Company (the
"Named Executive Officer"). There were no other executive officers of the
Company whose annual salary and bonus exceeded $100,000 for all services
rendered to the Company during such period.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------------------------
OTHER ANNUAL ALL OTHER
COMPENSATION COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) ($)(a) ($)
--------------------------- ---- --------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Royce J. Holland............. 1997 $72,308 $ -- $ -- $ --
Chairman of the Board and
Chief Executive Officer
</TABLE>
- -------------------------
(a) Includes perquisites and other benefits paid to the Named Executive Officer
in excess of 10% of the total annual salary and bonus received by the Named
Executive Officer during the last fiscal year.
Prior to April 1998, the Board did not have a Compensation Committee and
decisions concerning the compensation of executive officers and other key
employees of the Company were determined by the Company's Board of Directors.
During the Company's
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<PAGE> 76
fiscal year ending December 31, 1998, Royce J. Holland, C. Daniel Yost, Thomas
M. Lord, and John J. Callahan expect to earn salaries at an annual rate of
$200,000, $200,000, $175,000, and $175,000, respectively.
STOCK PLANS
1997 NONQUALIFIED STOCK OPTION PLAN
On November 13, 1997, the Company's Board of Directors adopted the 1997
Nonqualified Stock Option Plan (the "Option Plan"), under which the Company may
issue to Directors, consultants, and executive and other key employees of the
Company, stock options (the "Options") exercisable for shares of the Company's
Common Stock. Options to acquire an aggregate of 1,030,559 shares of Common
Stock have been granted under such Option Plan and the Company will not grant
Options for any additional shares under the Option Plan. The Option Plan is
administered by the Compensation Committee. The Option Plan authorized the
Compensation Committee to issue Options in such forms and amounts and on such
terms as determined by the Compensation Committee. The per-share exercise price
for Options will be set by the Compensation Committee, but may not be less than
the fair market value of a share of the Company's Common Stock on the date of
grant (as determined in good faith by the Compensation Committee). The
Compensation Committee has issued Options under the Option Plan to certain
Company employees other than the Management Investors, and has set the number of
Options issued as an annual component of such employee's compensation package.
The terms of the Options issued under the Option Plan to date are summarized
below.
Three years' amount of Options will be issued on the first business day of the
quarter succeeding the date which a participant joins the Company. Such Options
will vest over a three-year period, with 1/3 "cliff" vesting on the first
anniversary of the date of grant and 1/12 vesting on each of the first eight
quarter-ends thereafter. Subject to available Options under the Option Plan, one
year's amount of Options will be issued on each anniversary of the initial
grant, and such Options will vest in the third year after grant, with 1/4
vesting on each of the 27-, 30-, 33-, and 36-month anniversaries of the date of
grant. Through this mechanism, a participant will at any given time have three
years' amount of Options unvested. Vesting is accelerated 100% upon an
employee's death or permanent physical disability. If there is a sale of the
Company and the participant is terminated (or constructively terminated) within
the two-year period following the sale, vesting is accelerated 100% upon such
termination. Options expire if not exercised within six years after the date of
grant. If a participant is terminated for any reason, all unvested Options
immediately expire and all vested Options must be exercised within 90 days after
termination. Options are nontransferable during the life of the participant.
Shares of Common Stock issued upon exercise of Options are subject to various
restrictions on transferability, holdback periods in the event of a public
offering of the Company's securities and provisions requiring the holder of such
shares to approve and, if requested by the Company, sell its shares in any sale
of the Company that is approved by the Board.
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<PAGE> 77
1998 STOCK INCENTIVE PLAN
Prior to the closing of the Notes offering, the Board and stockholders of the
Company approved the Company's 1998 Stock Incentive Plan (the "1998 Stock
Plan"). The 1998 Stock Plan is administered by the Compensation Committee.
Certain employees, directors, advisors and consultants of the Company will be
eligible to participate in the 1998 Stock Plan (a "Participant"). The
Compensation Committee is authorized under the 1998 Stock Plan to select the
Participants and determine the terms and conditions of the awards under the 1998
Stock Plan. The 1998 Stock Plan provides for the issuance of the following types
of incentive awards: stock options, stock appreciation rights, restricted stock,
performance grants and other types of awards that the Compensation Committee
deems consistent with the purposes of the 1998 Stock Plan. An aggregate of
3,662,693 shares of Common Stock of the Company have been reserved for issuance
under the 1998 Stock Plan, subject to certain adjustments reflecting changes in
the Company's capitalization.
Options granted under the 1998 Stock Plan may be either incentive stock options
("ISOs") or such other forms of non-qualified stock options ("NQOs") as the
Compensation Committee may determine. ISOs are intended to qualify as "incentive
stock options" within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended (the "Code"). The exercise price of (i) an ISO granted to an
individual who owns shares possessing more than 10% of the total combined voting
power of all classes of stock of the Company (a "10% Owner") will be at least
110% of the fair market value of a share of Common Stock on the date of grant
and (ii) an ISO granted to an individual other than a 10% Owner and an NQO will
be at least 100% of the fair market value of a share of Common Stock on the date
of grant.
Options granted under the 1998 Stock Plan may be subject to time vesting and
certain other restrictions at the sole discretion of the Compensation Committee.
Subject to certain exceptions, the right to exercise an option generally will
terminate at the earlier of (i) the first date on which the initial grantee of
such option is not employed by the Company for any reason other than termination
without cause, death or permanent disability or (ii) the expiration date of the
option. If the holder of an option dies or suffers a permanent disability while
still employed by the Company, the right to exercise all unexpired installments
of such option shall be accelerated and shall vest as of the latest of the date
of such death, the date of such permanent disability and the date of the
discovery of such permanent disability, and such option shall be exercisable,
subject to certain exceptions, for 180 days after such date. If the holder of an
option is terminated without cause, to the extent the option has vested, such
option will be exercisable for 30 days after such date.
All outstanding awards under the 1998 Stock Plan will terminate immediately
prior to consummation of a liquidation or dissolution of the Company, unless
otherwise provided by the Board. In the event of the sale of all or
substantially all of the assets of the Company or the merger of the Company with
another corporation, all restrictions on any outstanding awards will terminate
and Participants will be entitled to the full benefit of their awards
immediately prior to the closing date of such sale or merger, unless otherwise
provided by the Board.
The Board generally will have the power and authority to amend the 1998 Stock
Plan at any time without approval of the Company's stockholders, subject to
applicable federal securities and tax laws limitations (including regulations of
the Nasdaq National Market).
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<PAGE> 78
STOCK PURCHASE PLAN
The Company's Employee Stock Discount Purchase Plan (the "Stock Purchase Plan")
was approved by the Board and stockholders prior to the consummation of the
Notes offering. The Stock Purchase Plan is intended to give employees desiring
to do so a convenient means of purchasing shares of Common Stock through payroll
deductions. The Stock Purchase Plan is intended to provide an incentive to
participate by permitting purchases at a discounted price. The Company believes
that ownership of stock by employees will foster greater employee interest in
the success, growth and development of the Company.
Subject to certain restrictions, each employee of the Company who is a U.S.
resident or a U.S. citizen temporarily on location at a facility outside of the
United States will be eligible to participate in the Stock Purchase Plan if he
or she has been employed by the Company for more than three months.
Participation will be discretionary with each eligible employee. The Company
will reserve 2,305,718 shares of Common Stock for issuance in connection with
the Stock Purchase Plan. Elections to participate and purchases of stock will be
made on a quarterly basis. Each participating employee contributes to the Stock
Purchase Plan by choosing a payroll deduction in any specified amount, with a
specified minimum deduction per payroll period. A participating employee may
increase or decrease the amount of such employee's payroll deduction, including
a change to a zero deduction as of the beginning of any calendar quarter.
Elected contributions will be credited to participants' accounts at the end of
each calendar quarter.
Each participating employee's contributions will be used to purchase shares for
the employee's share account as promptly as practicable after each calendar
quarter. The cost per share will be 85% of the lower of the closing price of the
Company's Common Stock on the Nasdaq National Market on the first or the last
day of the calendar quarter. The number of shares purchased on each employee's
behalf and deposited in his/her share account will be based on the amount
accumulated in such participant's cash account and the purchase price for shares
with respect to any calendar quarter. Shares purchased under the Stock Purchase
Plan carry full rights to receive dividends declared from time to time. Under
the Stock Purchase Plan, any dividends attributable to shares in the employee's
share account will be automatically used to purchase additional shares for such
employee's share account. Share distributions and share splits will be credited
to the participating employee's share account as of the record date and
effective date, respectively. A participating employee will have full ownership
of all shares in such employee's share account and may withdraw them for sale or
otherwise by written request to the Compensation Committee following the close
of each calendar quarter. Subject to applicable federal securities and tax laws,
the Board will have the right to amend or to terminate the Stock Purchase Plan.
Amendments to the Stock Purchase Plan will not affect a participating employee's
right to the benefit of the contributions made by such employee prior to the
date of any such amendment. In the event the Stock Purchase Plan is terminated,
the Compensation Committee will be required to distribute all shares held in
each participating employee's share account plus an amount of cash equal to the
balance in each participating employee's cash account.
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401(k) PLAN
The Company has adopted a tax-qualified employee savings and retirement plan
(the "401(k) Plan") covering all of the Company's full-time employees. Pursuant
to the 401(k) Plan, employees may elect to reduce their current compensation up
to the statutorily prescribed annual limit and have the amount of such reduction
contributed to the 401(k) Plan. The 401(k) Plan is intended to qualify under
Section 401 of the Code so that contributions by employees to the 401(k) Plan,
and income earned on plan contributions, are not taxable to employees until
withdrawn from the 401(k) Plan. The trustees under the 401(k) Plan, at the
direction of each participant, invest such participant's assets in the 401(k)
Plan in selected investment options.
EXECUTIVE AGREEMENTS
ROYCE J. HOLLAND EXECUTIVE AGREEMENT
In August 1997, the Company, Allegiance LLC, and Mr. Holland entered into an
Executive Purchase Agreement (the "Holland Executive Agreement"), including,
among others, the following terms:
Vesting. The Allegiance LLC securities purchased by Mr. Holland, as well as any
Company securities distributed with respect to such Allegiance LLC securities
(collectively, the "Holland Executive Securities") are subject to vesting over a
four-year period, with 20.0% vesting on the date of grant and 20.0% vesting on
each of the first four anniversaries thereof. Vesting was accelerated by one
year upon the consummation of the Equity Offering, and will be accelerated
100.0% in the event of Mr. Holland's death or disability, and 100.0% upon a sale
of the Company where at least 50.0% of the consideration for such sale is cash
or marketable securities.
Repurchase of Securities. If Mr. Holland's employment is terminated for any
reason other than a termination by the Company without cause, Allegiance LLC and
the Company (or their assignees) will have the right to repurchase all vested
Holland Executive Securities at fair market value, and all unvested Holland
Executive Securities at the lesser of fair market value and original cost.
Restrictions on Transfer; Holdback and "Drag Along" Agreements. The Holland
Executive Securities are subject to various restrictions on transferability,
holdback periods in the event of a public offering of the Company's securities
and provisions requiring the holder of such shares to approve and, if requested
by the Company, sell its shares in any sale of the Company that is approved by
the Board.
Terms of Employment. Mr. Holland is an "at will" employee of the Company and,
thus, may be terminated by the Company at any time and for any reason. Mr.
Holland is not entitled to receive any severance payments upon any such
termination, other than payments in consideration of the noncompetition and
nonsolicitation agreements discussed below.
Noncompetition and Nonsolicitation Agreements. During the Noncompete Period (as
defined below), Mr. Holland may not hire or attempt to induce any employee of
the Company to leave the Company's employ, nor attempt to induce any customer or
other business relation of the Company to cease doing business with the Company,
nor in any
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other way interfere with the Company's relationships with its employees,
customers, and other business relations. Also, during the Noncompete Period, Mr.
Holland may not participate in any business engaged in the provision of
telecommunications services in any Covered Market. As used in the Holland
Executive Agreement, the "Noncompete Period" means the period of employment and
the following additional period: (i) if Mr. Holland is terminated prior to
August 13, 2000, the period ending on the later of August 13, 2001 and the
second anniversary of termination; (ii) if Mr. Holland is terminated at any time
on or after August 13, 2000 but prior to August 13, 2001, the period ending on
August 13, 2002; and (iii) if Mr. Holland is terminated at any time on or after
August 13, 2001, the one-year period following termination; provided that the
"Noncompete Period" shall end if at any time the Company ceases to pay Mr.
Holland his base salary and benefits in existence at the time of termination
(reduced by any salary or benefits Mr. Holland receives as a result of other
employment). As used in the Holland Executive Agreement, "Covered Market" means:
(i) any market in which the Company is conducting business or preparing,
pursuant to a business plan approved by the Board of Directors and the Fund
Investors, to conduct business; (ii) Dallas, New York City, Atlanta, Chicago,
Los Angeles and 15 additional markets; and (iii) any market for which the
Company has prepared a business plan unless such business plan has been rejected
by the Board of Directors or the Fund Investors.
C. DANIEL YOST EXECUTIVE AGREEMENT
In February 1998, the Company, Allegiance LLC, and Mr. Yost entered into an
Executive Purchase Agreement, containing the same terms as the Holland Executive
Agreement described above.
THOMAS M. LORD EXECUTIVE AGREEMENT
In August 1997, the Company, Allegiance LLC, and Mr. Lord entered into an
Executive Purchase Agreement, containing the same terms as the Holland Executive
Agreement described above.
EXECUTIVE AGREEMENTS ENTERED INTO BY OTHER MANAGEMENT INVESTORS
Each of the Management Investors has entered into an Executive Purchase
Agreement (the "Other Executive Agreements"), including, among others, the
following terms:
Vesting. The Allegiance LLC securities purchased by a Management Investor, as
well as any Company securities distributed with respect to such Allegiance LLC
securities (collectively, the "Executive Securities") are subject to vesting
over a four-year period, with 25.0% vesting on each of the first four
anniversaries of the grant date. Vesting was accelerated by one year upon the
consummation of the Equity Offering, and will be accelerated 100.0% in the event
of such Management Investor's death or disability, and 100.0% upon a sale of the
Company where at least 50.0% of the consideration for such sale is cash or
marketable securities.
Repurchase of Securities. If a Management Investor's employment is terminated
for any reason, Allegiance LLC and the Company (or their assignees) will have
the right to repurchase all such Management Investor's vested Executive
Securities at fair market
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value, and all unvested Executive Securities at the lesser of fair market value
and original cost.
Restrictions on Transfer; Holdback and "Drag Along" Agreements. The Executive
Securities are subject to various restrictions on transferability, holdback
periods in the event of a public offering of the Company's securities and
provisions requiring the holder of such shares to approve and, if requested by
the Company, sell its shares in any sale of the Company that is approved by the
Board.
Terms of Employment. Each Management Investor is an "at will" employee of the
Company and, thus, may be terminated by the Company at any time and for any
reason. No Management Investor is entitled to receive any severance payments
upon any such termination.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to April 1998, the Company did not have a Compensation Committee and the
compensation of executive officers and other key employees of the Company was
determined by the Company's Board of Directors. Royce J. Holland, the Company's
Chairman and Chief Executive Officer, Thomas M. Lord, the Company's Executive
Vice President of Corporate Development and Chief Financial Officer, C. Daniel
Yost, the Company's President and Chief Operating Officer, and John J. Callahan,
the Company's Senior Vice President of Sales and Marketing, are all currently
members of the Company's Board of Directors. The Board of Directors established
the Compensation Committee, which is responsible for decisions regarding
salaries, incentive compensation, stock option grants and other matters
regarding executive officers and key employees of the Company. See
"-- Committees of the Board of Directors."
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
LIMITED LIABILITY COMPANY AGREEMENT
On August 13, 1997, the Fund Investors and the Management Investors entered into
a limited liability company agreement (the "LLC Agreement") in order to govern
the affairs of Allegiance LLC, which immediately prior to the Notes offering,
held the one outstanding share of the Company's Common Stock and substantially
all of the outstanding shares of the Company's Preferred Stock.
Upon consummation of the Equity Offering, Allegiance LLC dissolved and its
assets (which consisted almost entirely of Company stock) were distributed to
the Fund Investors and the Management Investors in accordance with the LLC
Agreement. The LLC Agreement provided that the Equity Allocation between the
Fund Investors and the Management Investors would range between 95.0%/5.0% and
66.7%/33.3% based upon the valuation of the Company's Common Stock implied by
the Equity Offering. Based upon the valuation of the Company's Common Stock
implied by the Equity Offering, the Equity Allocation was 66.7% to the Fund
Investors and 33.3% to the Management Investors. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Overview."
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SECURITYHOLDERS AGREEMENT
The Fund Investors, the Management Investors, the Company, and Allegiance LLC
are parties to a securityholders agreement dated as of August 13, 1997 (the
"Securityholders Agreement"). Pursuant to the terms of the Securityholders
Agreement, in the event of an approved sale of the Company, each of the Fund
Investors (and their transferees) agrees to approve and, if requested, to sell
its shares in such sale of the Company. The Securityholders Agreement, apart
from certain provisions thereof, terminated upon the consummation of the Equity
Offering.
REGISTRATION AGREEMENT
The Fund Investors, the Management Investors, and the Company are parties to the
Registration Agreement dated as of August 13, 1997. See "Description of Capital
Stock -- Registration Rights."
VOTING AGREEMENT
Certain of the Company's stockholders are parties to a voting agreement,
pursuant to which they have each agreed to vote all of their shares in such a
manner as to elect the following persons to serve as Directors: Madison Dearborn
Capital Partners, Morgan Stanley Capital Partners, and Frontenac Company (and
their respective successors, assigns, transferees, and affiliates) each have the
right to designate two Directors; Battery Ventures (and its successors, assigns,
transferees, and affiliates) has the right to designate one Director; the
Company's Chief Executive Officer has the right to serve as a Director; the
Management Investors (and their successors and assigns) have the right to
designate three Directors; and the final two directorships may be filled by
representatives designated by the Fund Investors and acceptable to the
Management Investors.
OTHER
Morgan Stanley & Co. Incorporated ("Morgan Stanley"), an affiliate of Morgan
Stanley Capital Partners, one of the Fund Investors, acted as a placement agent
in connection with the Unit Offering and received fees of approximately $4.4
million. In addition, Morgan Stanley was one of the Underwriters in the Equity
Offering and the Notes offering and received fees in connection with each of
such offerings.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the outstanding Common Stock of the Company as of September 30,
1998 by: (i) each of the directors and the executive officers of the Company;
(ii) all directors and executive officers as a group and (iii) each owner of
more than 5% of the equity securities of the Company ("5% Owners"). Unless
otherwise noted, the address for each director and executive officer of the
Company is c/o the Company, 1950 Stemmons Freeway, Suite 3026, Dallas, Texas
75207.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENT
- ------------------------------------ ---------- -------
<S> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS:
Royce J. Holland(1)....................................... 3,904,685 7.8%
C. Daniel Yost............................................ 1,619,940 3.2
Thomas M. Lord(2)......................................... 1,822,432 3.6
John J. Callahan.......................................... 607,477 1.2
Paul D. Carbery(3)........................................ 4,262,999 8.5
James E. Crawford, III(3)(4).............................. 4,274,499 8.5
John B. Ehrenkranz........................................ -- --
Paul J. Finnegan(5)....................................... -- --
Richard D. Frisbie(6)..................................... 2,131,499 4.2
Reed E. Hundt(7).......................................... 101,246 *
Robert H. Niehaus(8)...................................... -- --
James N. Perry, Jr.(5).................................... -- --
All directors and executive officers as a group (12
persons)................................................ 14,461,778 28.7
5% OWNERS:
Madison Dearborn Capital Partners(9)...................... 10,302,247 20.5
Morgan Stanley Capital Partners(10)....................... 10,302,247 20.5
Frontenac Company(11)..................................... 4,262,999 8.5
</TABLE>
- -------------------------
* Denotes less than one percent.
(1) Includes 1,940,552 shares of Common Stock owned by the Royce J. Holland
Family Limited Partnership, of which Royce J. Holland is the sole general
partner, 1,000 shares of Common Stock owned by Mr. Holland's wife, 2,600
shares of Common Stock held by Mr. Holland as custodian for his children
(as to which 2,600 shares Mr. Holland disclaims beneficial ownership
thereof). 3,881,105 of the shares of Common Stock owned by Mr. Holland and
the Royce J. Holland Family Limited Partnership are subject to vesting,
with 20% of such shares of Common Stock vested on August 13, 1997, 20%
vested upon the consummation of the Equity Offering and an additional 20%
vesting on each of August 13, 1998, 1999 and 2000. See
"Management -- Executive Agreements."
(2) Includes 911,216 shares of Common Stock owned by Mr. Lord's wife and
children, as to which Mr. Lord disclaims beneficial ownership. All of the
shares of Common Stock owned by Mr. Lord and his family are subject to
vesting with 20% of such
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shares of Common Stock vested on August 13, 1997, 20% vested upon the
consummation of the Equity Offering and an additional 20% vesting on each
of August 13, 1998, 1999 and 2000. See "Management -- Executive
Agreements."
(3) 4,262,999 shares of Common Stock shown are owned by Frontenac VII Limited
Partnership and Frontenac Masters VII Limited Partnership. Messrs. Carbery
and Crawford are members of Frontenac Company, VII, L.L.C., the general
partner of Frontenac VII Limited Partnership and Frontenac Masters VII
Limited Partnership and their address is c/o Frontenac Company, 135 S.
LaSalle Street, Suite 3800, Chicago, IL 60603. They disclaim beneficial
ownership of these shares of Common Stock.
(4) Includes 500 shares of Common Stock owned by Mr. Crawford's spouse, 100
shares of Common Stock owned by Mr. Crawford's son, and 600 shares held by
Mr. Crawford as custodian for his son (as to which 600 shares Mr. Crawford
disclaims beneficial ownership thereof).
(5) Messrs. Finnegan and Perry are managing directors of Madison Dearborn
Partners, Inc., the general partner of the general partner of Madison
Dearborn Capital Partners II, L.P. and their address is c/o Madison
Dearborn Partners, Inc., Three First National Plaza, Suite 3800, Chicago,
IL 60602.
(6) All shares of Common Stock shown are owned by Battery Ventures IV, L.P. and
Battery Investment Partners IV, LLC. Mr. Frisbie is a managing partner of
Battery Ventures, the general partner of these funds and his address is c/o
Battery Ventures, 20 William Street, Wellesley, MA 02181. He disclaims
beneficial ownership of these shares of Common Stock.
(7) Mr. Hundt owns options to acquire 50,623 shares of Common Stock and Charles
Ross Partners, LLC, a Delaware limited liability company, of which Mr.
Hundt is a member, owns 50,623 shares of Common Stock.
(8) Mr. Niehaus is a managing director and director of Morgan Stanley Capital
Partners III, Inc., the general partner of the general partner of the funds
described in footnote (10) below and their address is c/o Morgan Stanley
Capital Partners, 1221 Avenue of the Americas, New York, NY 10020.
(9) These shares of Common Stock are owned by Madison Dearborn Capital Partners
II, L.P.
(10) These shares of Common Stock are owned by Morgan Stanley Capital Partners
III, L.P., MSCP III 892 Investors, L.P. and Morgan Stanley Capital
Investors, L.P.
(11) These shares of Common Stock are owned by Frontenac VII Limited Partnership
and Frontenac Masters VII Limited Partnership.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
11 3/4% NOTES
The Company issued $445,000,000 aggregate principal amount at maturity of
11 3/4% Senior Discount Notes due February 15, 2008 pursuant to the 11 3/4%
Notes Indenture between the Company and The Bank of New York. The 11 3/4% Notes
were issued in units, with each unit consisting of one 11 3/4% Note and one
Warrant.
No interest will be payable on the 11 3/4% Notes prior to August 15, 2003. From
and after February 15, 2003, interest on the 11 3/4% Notes will accrue at the
rate of 11 3/4% per annum from February 15, 2003 or from the most recent
interest payment date to which interest has been paid or provided for, payable
semiannually (to holders of record at the close of business on the February 1 or
August 1 immediately preceding the interest payment date) on February 15 and
August 15 of each year, commencing August 15, 2003.
The 11 3/4% Notes are unsubordinated, unsecured obligations of the Company,
ranking pari passu in right of payment with all unsubordinated, unsecured
indebtedness of the Company, including the Notes offered hereby, and will rank
senior in right of payment to all future subordinated indebtedness of the
Company.
The 11 3/4% Notes may be redeemed at any time on or after February 15, 2003, in
whole or in part, at 105.8750% of their principal amount at maturity, plus
accrued interest, declining to 100% of their principal amount at maturity, plus
accrued interest, on and after February 15, 2006. In addition, at any time on or
before February 15, 2001, the Company may redeem up to 35% of the aggregate
principal amount at maturity of the 11 3/4% Notes with the net proceeds of one
or more public equity offerings at a redemption price equal to 111.75%
(expressed as a percentage of the accreted value of the 11 3/4% Notes on the
redemption date), provided that at least $289,250,000 aggregate principal amount
at maturity of the 11 3/4% Notes remains outstanding immediately after such
redemption.
The 11 3/4% Notes Indenture contains certain restrictive covenants, including
among others, limitations on the ability of the Company and its restricted
subsidiaries to incur indebtedness, pay dividends, prepay subordinated
indebtedness, repurchase capital stock, make investments, engage in transactions
with affiliates, create liens, sell assets and engage in mergers and
consolidations and certain other events which could cause an event of default,
which are substantially similar to those relating to the Notes offered hereby.
See "Description of the Notes."
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DESCRIPTION OF THE NOTES
The Notes were issued under an Indenture, dated as of July 7, 1998, between the
Company, as issuer, and The Bank of New York (the "Trustee"). The terms of the
Notes include those stated in the Indenture and those made part of the Indenture
by reference to the Trust Indenture Act of 1939, as amended (the "Trust
Indenture Act"). The Notes are subject to all such terms, and holders of the
Notes are referred to the Indenture and the Trust Indenture Act for a statement
of them. The following is a summary of the material terms and provisions of the
Notes. This summary does not purport to be a complete description of the Notes
and is subject to the detailed provisions of, and qualified in its entirety by
reference to, the Notes and the Indenture (including the definitions contained
therein). A copy of the Indenture is filed as an exhibit to the Registration
Statement of which this Prospectus forms a part. For definitions of certain
capitalized terms, see "-- Certain Definitions."
GENERAL
The Notes are unsecured (except to the extent described under "-- Security"
below), unsubordinated obligations of the Company, initially limited to $205.0
million aggregate principal amount, and will mature on May 15, 2008. Each Note
will bear interest at the rate shown on the front cover of this Prospectus from
the Closing Date or from the most recent Interest Payment Date to which interest
has been paid or provided for, payable semiannually (to Holders of record at the
close of business on the May 1 or November 1 immediately preceding the Interest
Payment Date) on May 15 and November 15 of each year, commencing November 15,
1998. Interest will be computed on the basis of a 360-day year of twelve 30-day
months.
Principal of, premium, if any, and interest on the Notes will be payable, and
the Notes may be exchanged or transferred, at the office or agency of the
Company in the Borough of Manhattan, the City of New York (which initially will
be the corporate trust office of the Trustee at One Wall Street, New York, New
York 10286); provided that, at the option of the Company, payment of interest
may be made by check mailed to the Holders at their addresses as they appear in
the Security Register.
The Notes will be issued only in fully registered form, without coupons, in
denominations of $1,000 of principal amount and any integral multiple thereof.
The Notes were initially be represented by one or more global notes (the "Global
Notes") and will be deposited with, or on behalf of, The Depository Trust
Company (the "Depositary") and registered in the name of a nominee of the
Depositary. Except as set forth under "-- Book-Entry; Delivery and Form," owners
of beneficial interests in such Global Notes will not be entitled to have Notes
registered in their names, will not receive or be entitled to receive physical
delivery of Notes in definitive form and will not be considered the owners or
Holders thereof under the Indenture. See "Book-Entry; Delivery and Form." No
service charge will be made for any registration of transfer or exchange of
Notes, but the Company may require payment of a sum sufficient to cover any
transfer tax or other similar governmental charge payable in connection
therewith.
Subject to the covenants described below under "Covenants" and applicable law,
the Company may issue additional Notes under the Indenture. The Notes offered
hereby and
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any additional Notes subsequently issued would be treated as a single class for
all purposes under the Indenture.
OPTIONAL REDEMPTION
The Notes will be redeemable, at the Company's option, in whole or in part, at
any time or from time to time, on or after May 15, 2003 and prior to maturity,
upon not less than 30 nor more than 60 days' prior notice mailed by first class
mail to each Holder's last address as it appears in the Security Register, at
the Redemption Prices (expressed in percentages of principal amount) set forth
below, plus accrued and unpaid interest to the Redemption Date (subject to the
right of Holders of record on the relevant Regular Record Date that is on or
prior to the Redemption Date to receive interest due on an Interest Payment
Date), if redeemed during the 12-month period commencing May 15 of the years set
forth below:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
---- ----------------
<S> <C>
2003........................................... 106.438%
2004........................................... 104.292
2005........................................... 102.146
2006 and thereafter............................ 100.000%
</TABLE>
In addition, at any time prior to May 15, 2001, the Company may redeem up to 35%
of the principal amount of the Notes originally issued with the proceeds of one
or more Public Equity Offerings following which there is a Public Market, at any
time or from time to time in part, at a Redemption Price (expressed as a
percentage of principal amount) of 112.875% plus accrued and unpaid interest to
the Redemption Date (subject to the right of Holders of record on the relevant
Regular Record Date that is on or prior to the Redemption Date to receive
interest due on an Interest Payment Date); provided that at least 65% of the
aggregate principal amount of Notes originally issued remains outstanding after
each such redemption and notice of any such redemption is mailed within 60 days
after the related Public Equity Offering.
In the case of any partial redemption, selection of the Notes for redemption
will be made by the Trustee in compliance with the requirements of the principal
national securities exchange, if any, on which the Notes are listed or, if the
Notes are not listed on a national securities exchange, by lot or by such other
method as the Trustee in its sole discretion shall deem to be fair and
appropriate; provided that no Note of $1,000 in principal amount or less shall
be redeemed in part. If any Note is to be redeemed in part only, the notice of
redemption relating to such Note shall state the portion of the principal amount
thereof to be redeemed. A new Note in principal amount equal to the unredeemed
portion thereof will be issued in the name of the Holder thereof upon
cancellation of the original Note.
SINKING FUND
There will be no sinking fund payments for the Notes.
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<PAGE> 88
SECURITY
In connection with the sale of the Notes, the Company purchased approximately
$69.0 million of U.S. Treasury securities and placed such securities in a pledge
account to be used for payment in full of the first six scheduled interest
payments due on the Notes.
The Pledged Securities were pledged by the Company to the Trustee for the
benefit of the Holders of the Notes pursuant to the Pledge Agreement and will be
held by the Trustee in the Pledge Account. Pursuant to the Pledge Agreement,
immediately prior to an Interest Payment Date, the Company may either deposit
with the Trustee from funds otherwise available to the Company cash sufficient
to pay the interest scheduled to be paid on such date or the Company may direct
the Trustee to release from the Pledge Account proceeds sufficient to pay
interest then due on the Notes. In the event the Company exercises the former
option, the Company may direct the Trustee to release a like amount of proceeds
from the Pledge Account. A failure to pay interest on the Notes in a timely
manner through the first six scheduled interest payment dates will constitute an
immediate Event of Default under the Indenture, with no grace or cure period.
The Pledged Securities and Pledge Account will also secure the repayment of the
principal amount and premium on the Notes.
Under the Pledge Agreement, once the Company makes the first six scheduled
interest payments on the Notes, all of the remaining Pledged Securities, if any,
will be released from the Pledge Account and thereafter the Notes will be
unsecured.
RANKING
The Indebtedness evidenced by the Notes will rank pari passu in right of payment
with all existing and future unsubordinated indebtedness of the Company,
including the 11 3/4% Notes, and senior in right of payment to all subordinated
indebtedness of the Company. At September 30, 1998, the Company and its
subsidiaries had approximately $463.8 million of indebtedness outstanding all of
which would have been unsubordinated, unsecured indebtedness. In addition, all
existing and future liabilities (including trade payables) of the Company's
subsidiaries will be effectively senior to the Notes.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
covenants and other provisions of the Indenture. Reference is made to the
Indenture for the definition of any other capitalized term used herein for which
no definition is provided.
"Acquired Indebtedness" means Indebtedness of a Person existing at the time such
Person becomes a Restricted Subsidiary or assumed in connection with an Asset
Acquisition by a Restricted Subsidiary and not Incurred in connection with, or
in anticipation of, such Person becoming a Restricted Subsidiary or such Asset
Acquisition.
"Adjusted Consolidated Net Income" means, for any period, the aggregate net
income (or loss) of the Company and its Restricted Subsidiaries for such period
determined in conformity with GAAP; provided that the following items shall be
excluded in computing Adjusted Consolidated Net Income (without duplication):
(i) the net income (or loss) of any Person that is not a Restricted Subsidiary,
except (x) with respect to net income, to the extent of the amount of dividends
or other distributions actually paid to the Company
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or any of its Restricted Subsidiaries by such Person during such period and (y)
with respect to net losses, to the extent of the amount of Investments made by
the Company or any Restricted Subsidiary in such Person during such period; (ii)
solely for the purposes of calculating the amount of Restricted Payments that
may be made pursuant to clause (C) of the first paragraph of the "Limitation on
Restricted Payments" covenant described below (and in such case, except to the
extent includable pursuant to clause (i) above), the net income (or loss) of any
Person accrued prior to the date it becomes a Restricted Subsidiary or is merged
into or consolidated with the Company or any of its Restricted Subsidiaries or
all or substantially all of the property and assets of such Person are acquired
by the Company or any of its Restricted Subsidiaries; (iii) the net income of
any Restricted Subsidiary to the extent that the declaration or payment of
dividends or similar distributions by such Restricted Subsidiary of such net
income is not at the time permitted by the operation of the terms of its charter
or any agreement, instrument, judgment, decree, order, statute, rule or
governmental regulation applicable to such Restricted Subsidiary; (iv) any gains
or losses (on an after-tax basis) attributable to Asset Sales; (v) except for
purposes of calculating the amount of Restricted Payments that may be made
pursuant to clause (C) of the first paragraph of the "Limitation on Restricted
Payments" covenant described below, any amount paid or accrued as dividends on
Preferred Stock of the Company or any Restricted Subsidiary owned by Persons
other than the Company and any of its Restricted Subsidiaries; (vi) all
extraordinary gains and extraordinary losses; and (vii) any compensation expense
paid or payable solely with Capital Stock (other than Disqualified Stock) of the
Company or any options, warrants or other rights to acquire Capital Stock (other
than Disqualified Stock) of the Company.
"Adjusted Consolidated Net Tangible Assets" means the total amount of assets of
the Company and its Restricted Subsidiaries (less applicable depreciation,
amortization and other valuation reserves), except to the extent resulting from
write-ups of capital assets (excluding write-ups in connection with accounting
for acquisitions in conformity with GAAP), after deducting therefrom (i) all
current liabilities of the Company and its Restricted Subsidiaries (excluding
intercompany items) and (ii) all goodwill, trade names, trademarks, patents,
unamortized debt discount and expense and other like intangibles, all as set
forth on the most recent quarterly or annual consolidated balance sheet of the
Company and its Restricted Subsidiaries, prepared in conformity with GAAP and
filed with the Commission or provided to the Trustee pursuant to the "Commission
Reports and Reports to Holders" covenant.
"Affiliate" means, as applied to any Person, any other Person directly or
indirectly controlling, controlled by, or under direct or indirect common
control with, such Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as applied to any Person, means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities, by contract or otherwise.
"Asset Acquisition" means (i) an investment by the Company or any of its
Restricted Subsidiaries in any other Person pursuant to which such Person shall
become a Restricted Subsidiary or shall be merged into or consolidated with the
Company or any of its Restricted Subsidiaries; provided that such Person's
primary business is related, ancillary or complementary to the businesses of the
Company and its Restricted Subsidiaries on the
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date of such investment or (ii) an acquisition by the Company or any of its
Restricted Subsidiaries of the property and assets of any Person other than the
Company or any of its Restricted Subsidiaries that constitute substantially all
of a division or line of business of such Person; provided that the property and
assets acquired are related, ancillary or complementary to the businesses of the
Company and its Restricted Subsidiaries on the date of such acquisition.
"Asset Disposition" means the sale or other disposition by the Company or any of
its Restricted Subsidiaries (other than to the Company or another Restricted
Subsidiary) of (i) all or substantially all of the Capital Stock of any
Restricted Subsidiary or (ii) all or substantially all of the assets that
constitute a division or line of business of the Company or any of its
Restricted Subsidiaries.
"Asset Sale" means any sale, transfer or other disposition (including by way of
merger, consolidation or sale-leaseback transaction) in one transaction or a
series of related transactions by the Company or any of its Restricted
Subsidiaries to any Person other than the Company or any of its Restricted
Subsidiaries of (i) all or any of the Capital Stock of any Restricted
Subsidiary, (ii) all or substantially all of the property and assets of an
operating unit or business of the Company or any of its Restricted Subsidiaries
or (iii) any other property and assets (other than the Capital Stock or other
Investment in an Unrestricted Subsidiary) of the Company or any of its
Restricted Subsidiaries outside the ordinary course of business of the Company
or such Restricted Subsidiary and, in each case, that is not governed by the
provisions of the Indenture applicable to mergers, consolidations and sales of
all or substantially all of the assets of the Company; provided that "Asset
Sale" shall not include (a) sales or other dispositions of inventory,
receivables and other current assets, (b) sales, transfers or other dispositions
of assets constituting a Restricted Payment permitted to be made under the
"Limitation on Restricted Payments" covenant, (c) sales, transfers or other
dispositions of assets with a fair market value (as certified in an Officers'
Certificate) not in excess of $1 million in any transaction or series of related
transactions, or (d) sales or other dispositions of assets for consideration at
least equal to the fair market value of the assets sold or disposed of, to the
extent that the consideration received would constitute property or assets of
the kind described in clause (B) of the "Limitation on Asset Sales" covenant.
"Average Life" means, at any date of determination with respect to any debt
security, the quotient obtained by dividing (i) the sum of the products of (a)
the number of years from such date of determination to the dates of each
successive scheduled principal payment of such debt security and (b) the amount
of such principal payment by (ii) the sum of all such principal payments.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) in equity of such Person, whether outstanding on the
Closing Date or issued thereafter, including, without limitation, all Common
Stock and Preferred Stock.
"Capitalized Lease" means, as applied to any Person, any lease of any property
(whether real, personal or mixed) of which the discounted present value of the
rental obligations of such Person as lessee, in conformity with GAAP, is
required to be capitalized on the balance sheet of such Person.
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"Capitalized Lease Obligations" means the discounted present value of the rental
obligations under a Capitalized Lease.
"Change of Control" means such time as (i) a "person" or "group" (within the
meaning of Sections 13(d) and 14(d)(2) of the Exchange Act) becomes the ultimate
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of more
than 35% of the total voting power of the Voting Stock of the Company on a fully
diluted basis and such ownership represents a greater percentage of the total
voting power of the Voting Stock of the Company, on a fully diluted basis, than
is held by the Existing Stockholders on such date; or (ii) individuals who on
the Closing Date constitute the Board of Directors (together with any new
directors whose election by the Board of Directors or whose nomination by the
Board of Directors for election by the Company's stockholders was approved by a
vote of at least two-thirds of the members of the Board of Directors then in
office who either were members of the Board of Directors on the Closing Date or
whose election or nomination for election was previously so approved) cease for
any reason to constitute a majority of the members of the Board of Directors
then in office.
"Closing Date" means July 7, 1998.
"Consolidated EBITDA" means, for any period, Adjusted Consolidated Net Income
for such period plus, to the extent such amount was deducted in calculating such
Adjusted Consolidated Net Income, (i) Consolidated Interest Expense, (ii) income
taxes (other than income taxes (either positive or negative) attributable to
extraordinary and non-recurring gains or losses or sales of assets), (iii)
depreciation expense, (iv) amortization expense and (v) all other non-cash items
reducing Adjusted Consolidated Net Income (other than items that will require
cash payments and for which an accrual or reserve is, or is required by GAAP to
be, made), less all non-cash items increasing Adjusted Consolidated Net Income,
all as determined on a consolidated basis for the Company and its Restricted
Subsidiaries in conformity with GAAP; provided that, if any Restricted
Subsidiary is not a Wholly Owned Restricted Subsidiary, Consolidated EBITDA
shall be reduced (to the extent not otherwise reduced in accordance with GAAP)
by an amount equal to (A) the amount of the Adjusted Consolidated Net Income
attributable to such Restricted Subsidiary multiplied by (B) the percentage
ownership interest in the income of such Restricted Subsidiary not owned on the
last day of such period by the Company or any of its Restricted Subsidiaries.
"Consolidated Interest Expense" means, for any period, the aggregate amount of
interest in respect of Indebtedness (including, without limitation, amortization
of original issue discount on any Indebtedness and the interest portion of any
deferred payment obligation, calculated in accordance with the effective
interest method of accounting; all commissions, discounts and other fees and
charges owed with respect to letters of credit and bankers' acceptance
financing; the net costs associated with Interest Rate Agreements; and
Indebtedness that is Guaranteed or secured by the Company or any of its
Restricted Subsidiaries) and all but the principal component of rentals in
respect of Capitalized Lease Obligations paid, accrued or scheduled to be paid
or to be accrued by the Company and its Restricted Subsidiaries during such
period; excluding, however, (i) any amount of such interest of any Restricted
Subsidiary if the net income of such Restricted Subsidiary is excluded in the
calculation of Adjusted Consolidated Net Income pursuant to clause (iii) of the
definition thereof (but only in the same proportion as the net income of such
Restricted Subsidiary is excluded from the calculation of Adjusted Consolidated
Net
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Income pursuant to clause (iii) of the definition thereof) and (ii) any
premiums, fees and expenses (and any amortization thereof) payable in connection
with the Equity Offering and the Notes offering, all as determined on a
consolidated basis (without taking into account Unrestricted Subsidiaries) in
conformity with GAAP.
"Consolidated Leverage Ratio" means, on any Transaction Date, the ratio of (i)
the aggregate amount of Indebtedness of the Company and its Restricted
Subsidiaries on a consolidated basis outstanding on such Transaction Date to
(ii) the aggregate amount of Consolidated EBITDA for the then most recent four
fiscal quarters for which financial statements of the Company have been filed
with the Commission or provided to the Trustee pursuant to the "Commission
Reports and Reports to Holders" covenant described below (such four fiscal
quarter period being the "Four Quarter Period"); provided that, in making the
foregoing calculation, (A) pro forma effect shall be given to any Indebtedness
to be Incurred or repaid on the Transaction Date; (B) pro forma effect shall be
given to Asset Dispositions and Asset Acquisitions (including giving pro forma
effect to the application of proceeds of any Asset Disposition) that occur from
the beginning of the Four Quarter Period through the Transaction Date (the
"Reference Period"), as if they had occurred and such proceeds had been applied
on the first day of such Reference Period; (C) pro forma effect shall be given
to asset dispositions and asset acquisitions (including giving pro forma effect
to the application of proceeds of any asset disposition) that have been made by
any Person that has become a Restricted Subsidiary or has been merged with or
into the Company or any Restricted Subsidiary during such Reference Period and
that would have constituted Asset Dispositions or Asset Acquisitions had such
transactions occurred when such Person was a Restricted Subsidiary as if such
asset dispositions or asset acquisitions were Asset Dispositions or Asset
Acquisitions that occurred on the first day of such Reference Period; provided
that to the extent that clause (B) or (C) of this sentence requires that pro
forma effect be given to an Asset Acquisition or Asset Disposition, such pro
forma calculation shall be based upon the four full fiscal quarters immediately
preceding the Transaction Date of the Person, or division or line of business of
the Person, that is acquired or disposed of for which financial information is
available; and (D) the aggregate amount of Indebtedness outstanding as of the
end of the Reference Period will be deemed to include the total amount of funds
outstanding and/or available on the Transaction Date under any revolving credit
or similar facilities of the Company or its Restricted Subsidiaries.
"Consolidated Net Worth" means, at any date of determination, stockholders'
equity as set forth on the most recently available quarterly or annual
consolidated balance sheet of the Company and its Restricted Subsidiaries (which
shall be as of a date not more than 90 days prior to the date of such
computation, and which shall not take into account Unrestricted Subsidiaries),
less any amounts attributable to Disqualified Stock or any equity security
convertible into or exchangeable for Indebtedness, the cost of treasury stock
and the principal amount of any promissory notes receivable from the sale of the
Capital Stock of the Company or any of its Restricted Subsidiaries, each item to
be determined in conformity with GAAP (excluding the effects of foreign currency
exchange adjustments under Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 52).
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement.
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"Default" means any event that is, or after notice or passage of time or both
would be, an Event of Default.
"Disqualified Stock" means any class or series of Capital Stock of any Person
that by its terms or otherwise is (i) required to be redeemed prior to the
Stated Maturity of the Notes, (ii) redeemable at the option of the holder of
such class or series of Capital Stock at any time prior to the Stated Maturity
of the Notes or (iii) convertible into or exchangeable for Capital Stock
referred to in clause (i) or (ii) above or Indebtedness having a scheduled
maturity prior to the Stated Maturity of the Notes; provided that any Capital
Stock that would not constitute Disqualified Stock but for provisions thereof
giving holders thereof the right to require such Person to repurchase or redeem
such Capital Stock upon the occurrence of an "asset sale" or "change of control"
occurring prior to the Stated Maturity of the Notes shall not constitute
Disqualified Stock if the "asset sale" or "change of control" provisions
applicable to such Capital Stock are no more favorable to the holders of such
Capital Stock than the provisions contained in "Limitation on Asset Sales" and
"Repurchase of Notes upon a Change of Control" covenants described below and
such Capital Stock, or the agreements or instruments governing the redemption
rights thereof, specifically provides that such Person will not repurchase or
redeem any such stock pursuant to such provision prior to the Company's
repurchase of such Notes as are required to be repurchased pursuant to the
"Limitation on Asset Sales" and "Repurchase of Notes upon a Change of Control"
covenants described below.
"Existing Stockholders" means Madison Dearborn Partners, Inc., Morgan Stanley
Capital Partners III, Inc., Frontenac Company, Battery Partners IV, L.P. and
Battery Investment Partners IV, LLC and their respective Affiliates.
"fair market value" means the price that would be paid in an arm's-length
transaction between an informed and willing seller under no compulsion to sell
and an informed and willing buyer under no compulsion to buy, as determined in
good faith by the Board of Directors, whose determination shall be conclusive if
evidenced by a Board Resolution; provided that for purposes of clause (viii) of
the second paragraph of the "Limitation on Indebtedness" covenant, (x) the fair
market value of any security registered under the Exchange Act shall be the
average of the closing prices, regular way, of such security for the 20
consecutive trading days immediately preceding the sale of Capital Stock and (y)
in the event the aggregate fair market value of any other property (other than
cash or cash equivalents) received by the Company exceeds $10 million, the fair
market value of such property shall be determined by a nationally recognized
investment banking firm and set forth in their written opinion which shall be
delivered to the Trustee.
"GAAP" means generally accepted accounting principles in the United States of
America as in effect as of the Closing Date, including, without limitation,
those set forth in the opinions and pronouncements of the Accounting Principles
Board of the American Institute of Certified Public Accountants and statements
and pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession. All ratios and computations contained or referred to in
the Indenture shall be computed in conformity with GAAP applied on a consistent
basis, except that calculations made for purposes of determining compliance with
the terms of the covenants and with other provisions of the Indenture shall be
made without giving effect to (i) the amortization of any expenses incurred in
connection with the Equity Offering and the Notes offering and (ii) except as
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otherwise provided, the amortization of any amounts required or permitted by
Accounting Principles Board Opinion Nos. 16 and 17.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any other Person and,
without limiting the generality of the foregoing, any obligation, direct or
indirect, contingent or otherwise, of such Person (i) to purchase or pay (or
advance or supply funds for the purchase or payment of) such Indebtedness of
such other Person (whether arising by virtue of partnership arrangements, or by
agreements to keep-well, to purchase assets, goods, securities or services
(unless such purchase arrangements are on arm's-length terms and are entered
into in the ordinary course of business), to take-or-pay, or to maintain
financial statement conditions or otherwise) or (ii) entered into for purposes
of assuring in any other manner the obligee of such Indebtedness of the payment
thereof or to protect such obligee against loss in respect thereof (in whole or
in part); provided that the term "Guarantee" shall not include endorsements for
collection or deposit in the ordinary course of business. The term "Guarantee"
used as a verb has a corresponding meaning.
"Incur" means, with respect to any Indebtedness, to incur, create, issue,
assume, Guarantee or otherwise become liable for or with respect to, or become
responsible for, the payment of, contingently or otherwise, such Indebtedness,
including an "Incurrence" of Acquired Indebtedness; provided that neither the
accrual of interest nor the accretion of original issue discount shall be
considered an Incurrence of Indebtedness.
"Indebtedness" means, with respect to any Person at any date of determination
(without duplication), (i) all indebtedness of such Person for borrowed money,
(ii) all obligations of such Person evidenced by bonds, debentures, notes or
other similar instruments, (iii) all obligations of such Person in respect of
letters of credit or other similar instruments (including reimbursement
obligations with respect thereto, but excluding obligations with respect to
letters of credit (including trade letters of credit) securing obligations
(other than obligations described in (i) or (ii) above or (v), (vi) or (vii)
below) entered into in the ordinary course of business of such Person to the
extent such letters of credit are not drawn upon or, if drawn upon, to the
extent such drawing is reimbursed no later than the third Business Day following
receipt by such Person of a demand for reimbursement), (iv) all obligations of
such Person to pay the deferred and unpaid purchase price of property or
services, which purchase price is due more than six months after the date of
placing such property in service or taking delivery and title thereto or the
completion of such services, except Trade Payables, (v) all Capitalized Lease
Obligations of such Person, (vi) all Indebtedness of other Persons secured by a
Lien on any asset of such Person, whether or not such Indebtedness is assumed by
such Person; provided that the amount of such Indebtedness shall be the lesser
of (A) the fair market value of such asset at such date of determination and (B)
the amount of such Indebtedness, (vii) all Indebtedness of other Persons
Guaranteed by such Person to the extent such Indebtedness is Guaranteed by such
Person and (viii) to the extent not otherwise included in this definition,
obligations under Currency Agreements and Interest Rate Agreements. The amount
of Indebtedness of any Person at any date shall be the outstanding balance at
such date (or, in the case of a revolving credit or other similar facility, the
total amount of funds outstanding and/or available on the date of determination)
of all unconditional obligations as described above and, with respect to
contingent obligations, the maximum liability upon the occurrence of the
contingency giving rise to the obligation, provided (A) that the amount
outstanding at
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any time of any Indebtedness issued with original issue discount is the face
amount of such Indebtedness less the remaining unamortized portion of the
original issue discount of such Indebtedness at the time of its issuance as
determined in conformity with GAAP, (B) that money borrowed and set aside at the
time of the Incurrence of any Indebtedness in order to prefund the payment of
the interest on such Indebtedness shall not be deemed to be "Indebtedness" so
long as such money is held to secure the payment of such interest and (C) that
Indebtedness shall not include any liability for federal, state, local or other
taxes.
"Interest Rate Agreement" means any interest rate protection agreement, interest
rate future agreement, interest rate option agreement, interest rate swap
agreement, interest rate cap agreement, interest rate collar agreement, interest
rate hedge agreement, option or future contract or other similar agreement or
arrangement.
"Investment" in any Person means any direct or indirect advance, loan or other
extension of credit (including, without limitation, by way of Guarantee or
similar arrangement; but excluding advances to customers in the ordinary course
of business that are, in conformity with GAAP, recorded as accounts receivable
on the balance sheet of the Company or its Restricted Subsidiaries) or capital
contribution to (by means of any transfer of cash or other property to others or
any payment for property or services for the account or use of others), or any
purchase or acquisition of Capital Stock, bonds, notes, debentures or other
similar instruments issued by, such Person and shall include (i) the designation
of a Restricted Subsidiary as an Unrestricted Subsidiary and (ii) the fair
market value of the Capital Stock (or any other Investment), held by the Company
or any of its Restricted Subsidiaries, of (or in) any Person that has ceased to
be a Restricted Subsidiary, including without limitation, by reason of any
transaction permitted by clause (iii) of the "Limitation on the Issuance and
Sale of Capital Stock of Restricted Subsidiaries" covenant; provided that the
fair market value of the Investment remaining in any Person that has ceased to
be a Restricted Subsidiary shall not exceed the aggregate amount of Investments
previously made in such Person valued at the time such Investments were made
less the net reduction of such Investments. For purposes of the definition of
"Unrestricted Subsidiary" and the "Limitation on Restricted Payments" covenant
described below, (i) "Investment" shall include the fair market value of the
assets (net of liabilities (other than liabilities to the Company or any of its
Restricted Subsidiaries)) of any Restricted Subsidiary at the time that such
Restricted Subsidiary is designated an Unrestricted Subsidiary, (ii) the fair
market value of the assets (net of liabilities (other than liabilities to the
Company or any of its Restricted Subsidiaries)) of any Unrestricted Subsidiary
at the time that such Unrestricted Subsidiary is designated a Restricted
Subsidiary shall be considered a reduction in outstanding Investments and (iii)
any property transferred to or from an Unrestricted Subsidiary shall be valued
at its fair market value at the time of such transfer.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including, without limitation, any conditional sale or other
title retention agreement or lease in the nature thereof or any agreement to
give any security interest).
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Net Cash Proceeds" means, (a) with respect to any Asset Sale, the proceeds of
such Asset Sale in the form of cash or cash equivalents, including payments in
respect of
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deferred payment obligations (to the extent corresponding to the principal, but
not interest, component thereof) when received in the form of cash or cash
equivalents (except to the extent such obligations are financed or sold with
recourse to the Company or any Restricted Subsidiary) and proceeds from the
conversion of other property received when converted to cash or cash
equivalents, net of (i) brokerage commissions and other fees and expenses
(including fees and expenses of counsel and investment bankers) related to such
Asset Sale, (ii) provisions for all taxes (whether or not such taxes will
actually be paid or are payable) as a result of such Asset Sale without regard
to the consolidated results of operations of the Company and its Restricted
Subsidiaries, taken as a whole, (iii) payments made to repay Indebtedness or any
other obligation outstanding at the time of such Asset Sale that either (A) is
secured by a Lien on the property or assets sold or (B) is required to be paid
as a result of such sale and (iv) appropriate amounts to be provided by the
Company or any Restricted Subsidiary as a reserve against any liabilities
associated with such Asset Sale, including, without limitation, pension and
other post-employment benefit liabilities, liabilities related to environmental
matters and liabilities under any indemnification obligations associated with
such Asset Sale, all as determined in conformity with GAAP and (b) with respect
to any issuance or sale of Capital Stock, the proceeds of such issuance or sale
in the form of cash or cash equivalents, including payments in respect of
deferred payment obligations (to the extent corresponding to the principal, but
not interest, component thereof) when received in the form of cash or cash
equivalents (except to the extent such obligations are financed or sold with
recourse to the Company or any Restricted Subsidiary) and proceeds from the
conversion of other property received when converted to cash or cash
equivalents, net of attorney's fees, accountants' fees, underwriters' or
placement agents' fees, discounts or commissions and brokerage, consultant and
other fees incurred in connection with such issuance or sale and net of taxes
paid or payable as a result thereof.
"Offer to Purchase" means an offer to purchase Notes by the Company from the
Holders commenced by mailing a notice to the Trustee and each Holder stating:
(i) the covenant pursuant to which the offer is being made and that all Notes
validly tendered will be accepted for payment on a pro rata basis; (ii) the
purchase price and the date of purchase (which shall be a Business Day no
earlier than 30 days nor later than 60 days from the date such notice is mailed)
(the "Payment Date"); (iii) that any Note not tendered will continue to accrue
interest pursuant to its terms; (iv) that, unless the Company defaults in the
payment of the purchase price, any Note accepted for payment pursuant to the
Offer to Purchase shall cease to accrue interest on and after the Payment Date;
(v) that Holders electing to have a Note purchased pursuant to the Offer to
Purchase will be required to surrender the Note, together with the form entitled
"Option of the Holder to Elect Purchase" on the reverse side of the Note
completed, to the Paying Agent at the address specified in the notice prior to
the close of business on the Business Day immediately preceding the Payment
Date; (vi) that Holders will be entitled to withdraw their election if the
Paying Agent receives, not later than the close of business on the third
Business Day immediately preceding the Payment Date, a telegram, facsimile
transmission or letter setting forth the name of such Holder, the principal
amount of Notes delivered for purchase and a statement that such Holder is
withdrawing his election to have such Notes purchased; and (vii) that Holders
whose Notes are being purchased only in part will be issued new Notes equal in
principal amount to the unpurchased portion of the Notes surrendered; provided
that each Note purchased and each new Note issued shall be in a principal amount
of $1,000 or an integral multiple thereof. On the Payment Date, the
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Company shall (i) accept for payment on a pro rata basis Notes or portions
thereof tendered pursuant to an Offer to Purchase; (ii) deposit with the Paying
Agent money sufficient to pay the purchase price of all Notes or portions
thereof so accepted; and (iii) deliver, or cause to be delivered, to the Trustee
all Notes or portions thereof so accepted together with an Officers' Certificate
specifying the Notes or portions thereof accepted for payment by the Company.
The Paying Agent shall promptly mail to the Holders of Notes so accepted payment
in an amount equal to the purchase price, and the Trustee shall promptly
authenticate and mail to such Holders a new Note equal in principal amount to
any unpurchased portion of the Note surrendered; provided that each Note
purchased and each new Note issued shall be in a principal amount of $1,000 or
an integral multiple thereof. The Company will publicly announce the results of
an Offer to Purchase as soon as practicable after the Payment Date. The Trustee
shall act as the Paying Agent for an Offer to Purchase. The Company will comply
with Rule 14e-1 under the Exchange Act and any other securities laws and
regulations thereunder to the extent such laws and regulations are applicable,
in the event that the Company is required to repurchase Notes pursuant to an
Offer to Purchase.
"Permitted Investment" means (i) an Investment in the Company or a Restricted
Subsidiary or a Person which will, upon the making of such Investment, become a
Restricted Subsidiary or be merged or consolidated with or into or transfer or
convey all or substantially all its assets to, the Company or a Restricted
Subsidiary; provided that such person's primary business is related, ancillary
or complementary to the businesses of the Company and its Restricted
Subsidiaries on the date of such Investment; (ii) Temporary Cash Investments;
(iii) payroll, travel and similar advances to cover matters that are expected at
the time of such advances ultimately to be treated as expenses in accordance
with GAAP; (iv) stock, obligations or securities received in satisfaction of
judgments; (v) Investments in prepaid expenses, negotiable instruments held for
collection and lease, utility and worker's compensation, performance and other
similar deposits; (vi) Interest Rate Agreements and Currency Agreements designed
solely to protect the Company or its Restricted Subsidiaries against
fluctuations in interest rates or foreign currency exchange rates; and (vii)
loans or advances to officers or employees of the Company or any Restricted
Subsidiary that do not in the aggregate exceed $2 million at any time
outstanding.
"Permitted Liens" means (i) Liens for taxes, assessments, governmental charges
or claims that are being contested in good faith by appropriate legal
proceedings promptly instituted and diligently conducted and for which a reserve
or other appropriate provision, if any, as shall be required in conformity with
GAAP shall have been made; (ii) statutory and common law Liens of landlords and
carriers, warehousemen, mechanics, suppliers, materialmen, repairmen or other
similar Liens arising in the ordinary course of business and with respect to
amounts not yet delinquent or being contested in good faith by appropriate legal
proceedings promptly instituted and diligently conducted and for which a reserve
or other appropriate provision, if any, as shall be required in conformity with
GAAP shall have been made; (iii) Liens incurred or deposits made in the ordinary
course of business in connection with workers' compensation, unemployment
insurance and other types of social security; (iv) Liens incurred or deposits
made to secure the performance of tenders, bids, leases, statutory or regulatory
obligations, bankers' acceptances, surety and appeal bonds, government
contracts, performance and return-of-money bonds and other obligations of a
similar nature incurred in the ordinary course of business (exclusive of
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obligations for the payment of borrowed money); (v) easements, rights-of-way,
municipal and zoning ordinances and similar charges, encumbrances, title defects
or other irregularities that do not materially interfere with the ordinary
course of business of the Company or any of its Restricted Subsidiaries; (vi)
Liens (including extensions and renewals thereof) upon real or personal property
acquired after the Closing Date; provided that (a) such Lien is created solely
for the purpose of securing Indebtedness Incurred, in accordance with the
"Limitation on Indebtedness" covenant described below, to finance the cost
(including the cost of design, development, acquisition, construction,
installation, improvement, transportation or integration) of the item of
property or assets subject thereto and such Lien is created prior to, at the
time of or within six months after the later of the acquisition, the completion
of construction or the commencement of full operation of such property, (b) the
principal amount of the Indebtedness secured by such Lien does not exceed 100%
of such cost and (c) any such Lien shall not extend to or cover any property or
assets other than such item of property or assets and any improvements on such
item; (vii) leases or subleases granted to others that do not materially
interfere with the ordinary course of business of the Company and its Restricted
Subsidiaries, taken as a whole; (viii) Liens encumbering property or assets
under construction arising from progress or partial payments by a customer of
the Company or its Restricted Subsidiaries relating to such property or assets;
(ix) any interest or title of a lessor in the property subject to any
Capitalized Lease or operating lease; (x) Liens arising from filing Uniform
Commercial Code financing statements regarding leases; (xi) Liens on property
of, or on shares of Capital Stock or Indebtedness of, any Person existing at the
time such Person becomes, or becomes a part of, any Restricted Subsidiary;
provided that such Liens do not extend to or cover any property or assets of the
Company or any Restricted Subsidiary other than the property or assets acquired;
(xii) Liens in favor of the Company or any Restricted Subsidiary; (xiii) Liens
arising from the rendering of a final judgment or order against the Company or
any Restricted Subsidiary that does not give rise to an Event of Default; (xiv)
Liens securing reimbursement obligations with respect to letters of credit that
encumber documents and other property relating to such letters of credit and the
products and proceeds thereof; (xv) Liens in favor of customs and revenue
authorities arising as a matter of law to secure payment of customs duties in
connection with the importation of goods; (xvi) Liens encumbering customary
initial deposits and margin deposits, and other Liens that are within the
general parameters customary in the industry and incurred in the ordinary course
of business, in each case, securing Indebtedness under Interest Rate Agreements
and Currency Agreements and forward contracts, options, future contracts,
futures options or similar agreements or arrangements designed solely to protect
the Company or any of its Restricted Subsidiaries from fluctuations in interest
rates, currencies or the price of commodities; (xvii) Liens arising out of
conditional sale, title retention, consignment or similar arrangements for the
sale of goods entered into by the Company or any of its Restricted Subsidiaries
in the ordinary course of business in accordance with the past practices of the
Company and its Restricted Subsidiaries prior to the Closing Date; (xviii) Liens
on or sales of receivables; and (xix) Liens that secure Indebtedness with an
aggregate principal amount not in excess of $5 million at any time outstanding.
"Pledge Account" means an account established with the Trustee pursuant to the
terms of the Pledge Agreement for the deposit of the Pledged Securities to be
purchased by the Company with the net proceeds from the sale of the Notes.
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"Pledge Agreement" means the Collateral Pledge and Security Agreement, dated as
of the Closing Date, made by the Company in favor of the Trustee, governing the
disbursement of funds from the Pledge Account, as such agreement may be amended,
restated, supplemented or otherwise modified from time to time.
"Pledged Securities" means the U.S. government securities purchased by the
Company and held in the Pledge Account in accordance with the Pledge Agreement.
"Public Equity Offering" means an underwritten primary public offering of Common
Stock of the Company pursuant to an effective registration statement under the
Securities Act.
A "Public Market" shall be deemed to exist if (i) a Public Equity Offering has
been consummated and (ii) at least 15% of the total issued and outstanding
Common Stock of the Company immediately prior to the consummation of such Public
Equity Offering has been distributed by means of an effective registration
statement under the Securities Act or sales pursuant to Rule 144 under the
Securities Act.
"Restricted Subsidiary" means any Subsidiary of the Company other than an
Unrestricted Subsidiary.
"Significant Subsidiary" means, at any date of determination, any Restricted
Subsidiary that, together with its Subsidiaries, (i) for the most recent fiscal
year of the Company, accounted for more than 10% of the consolidated revenues of
the Company and its Restricted Subsidiaries or (ii) as of the end of such fiscal
year, was the owner of more than 10% of the consolidated assets of the Company
and its Restricted Subsidiaries, all as set forth on the most recently available
consolidated financial statements of the Company for such fiscal year.
"S&P" means Standard & Poor's Ratings Services and its successors.
"Stated Maturity" means, (i) with respect to any debt security, the date
specified in such debt security as the fixed date on which the final installment
of principal of such debt security is due and payable and (ii) with respect to
any scheduled installment of principal of or interest on any debt security, the
date specified in such debt security as the fixed date on which such installment
is due and payable.
"Strategic Subordinated Indebtedness" means Indebtedness of the Company Incurred
to finance the acquisition of a Person engaged in a business that is related,
ancillary or complementary to the business conducted by the Company or any of
its Restricted Subsidiaries, which Indebtedness by its terms, or by the terms of
any agreement or instrument pursuant to which such Indebtedness is Incurred, (i)
is expressly made subordinate in right of payment to the Notes and (ii) provides
that no payment of principal, premium or interest on, or any other payment with
respect to, such Indebtedness may be made prior to the payment in full of all of
the Company's obligations under the Notes; provided that such Indebtedness may
provide for and be repaid at any time from the proceeds of a capital
contribution or the sale of Capital Stock (other than Disqualified Stock) of the
Company after the Incurrence of such Indebtedness.
"Subsidiary" means, with respect to any Person, any corporation, association or
other business entity of which more than 50% of the voting power of the
outstanding Voting Stock is owned, directly or indirectly, by such Person and
one or more other Subsidiaries of such Person.
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"Temporary Cash Investment" means any of the following: (i) direct obligations
of the United States of America or any agency thereof or obligations fully and
unconditionally guaranteed by the United States of America or any agency
thereof, (ii) time deposit accounts, certificates of deposit and money market
deposits maturing within one year of the date of acquisition thereof issued by a
bank or trust company which is organized under the laws of the United States of
America, any state thereof or any foreign country recognized by the United
States of America, and which bank or trust company has capital, surplus and
undivided profits aggregating in excess of $50 million (or the foreign currency
equivalent thereof) and has outstanding debt which is rated "A" (or such similar
equivalent rating) or higher by at least one nationally recognized statistical
rating organization (as defined in Rule 436 under the Securities Act) or any
money-market fund sponsored by a registered broker dealer or mutual fund
distributor, (iii) repurchase obligations with a term of not more than 30 days
for underlying securities of the types described in clause (i) above entered
into with a bank meeting the qualifications described in clause (ii) above, (iv)
commercial paper, maturing not more than one year after the date of acquisition,
issued by a corporation (other than an Affiliate of the Company) organized and
in existence under the laws of the United States of America, any state thereof
or any foreign country recognized by the United States of America with a rating
at the time as of which any investment therein is made of "P-1" (or higher)
according to Moody's or "A-1" (or higher) according to S&P, and (v) securities
with maturities of six months or less from the date of acquisition issued or
fully and unconditionally guaranteed by any state, commonwealth or territory of
the United States of America, or by any political subdivision or taxing
authority thereof, and rated at least "A" by S&P or Moody's.
"Trade Payables" means, with respect to any Person, any accounts payable or any
other indebtedness or monetary obligation to trade creditors created, assumed or
Guaranteed by such Person or any of its Subsidiaries arising in the ordinary
course of business in connection with the acquisition of goods or services.
"Transaction Date" means, with respect to the Incurrence of any Indebtedness by
the Company or any of its Restricted Subsidiaries, the date such Indebtedness is
to be Incurred and, with respect to any Restricted Payment, the date such
Restricted Payment is to be made.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at the
time of determination shall be designated an Unrestricted Subsidiary by the
Board of Directors in the manner provided below; and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Restricted
Subsidiary (including any newly acquired or newly formed Subsidiary of the
Company) to be an Unrestricted Subsidiary unless such Subsidiary owns any
Capital Stock of, or owns or holds any Lien on any property of, the Company or
any Restricted Subsidiary; provided that (A) any Guarantee by the Company or any
Restricted Subsidiary of any Indebtedness of the Subsidiary being so designated
shall be deemed an "Incurrence" of such Indebtedness and an "Investment" by the
Company or such Restricted Subsidiary (or both, if applicable) at the time of
such designation; (B) either (I) the Subsidiary to be so designated has total
assets of $1,000 or less or (II) if such Subsidiary has assets greater than
$1,000, such designation would be permitted under the "Limitation on Restricted
Payments" covenant described below and (C) if applicable, the Incurrence of
Indebtedness and the Investment referred to in clause
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(A) of this proviso would be permitted under the "Limitation on Indebtedness"
and "Limitation on Restricted Payments" covenants described below. The Board of
Directors may designate any Unrestricted Subsidiary to be a Restricted
Subsidiary; provided that (i) no Default or Event of Default shall have occurred
and be continuing at the time of or after giving effect to such designation and
(ii) all Liens and Indebtedness of such Unrestricted Subsidiary outstanding
immediately after such designation would, if Incurred at such time, have been
permitted to be Incurred (and shall be deemed to have been Incurred) for all
purposes of the Indenture. Any such designation by the Board of Directors shall
be evidenced to the Trustee by promptly filing with the Trustee a copy of the
Board Resolution giving effect to such designation and an Officers' Certificate
certifying that such designation complied with the foregoing provisions.
"Voting Stock" means with respect to any Person, Capital Stock of any class or
kind ordinarily having the power to vote for the election of directors, managers
or other voting members of the governing body of such Person.
"Wholly Owned" means, with respect to any Subsidiary of any Person, the
ownership of all of the outstanding Capital Stock of such Subsidiary (other than
any director's qualifying shares or Investments by foreign nationals mandated by
applicable law) by such Person or one or more Wholly Owned Subsidiaries of such
Person.
COVENANTS
LIMITATION ON INDEBTEDNESS
(a) The Company will not, and will not permit any of its Restricted Subsidiaries
to, Incur any Indebtedness (other than the Notes and Indebtedness existing on
the Closing Date); provided that the Company may Incur Indebtedness if, after
giving effect to the Incurrence of such Indebtedness and the receipt and
application of the proceeds therefrom, the Consolidated Leverage Ratio would be
greater than zero and less than 6:1.
Notwithstanding the foregoing, the Company and any Restricted Subsidiary (except
as specified below) may Incur each and all of the following: (i) Indebtedness
outstanding at any time in an aggregate principal amount not to exceed $100
million, less any amount of such Indebtedness permanently repaid as provided
under the "Limitation on Asset Sales" covenant described below; (ii)
Indebtedness owed (A) to the Company evidenced by a promissory note or (B) to
any Restricted Subsidiary; provided that any event which results in any such
Restricted Subsidiary ceasing to be a Restricted Subsidiary or any subsequent
transfer of such Indebtedness (other than to the Company or another Restricted
Subsidiary) shall be deemed, in each case, to constitute an Incurrence of such
Indebtedness not permitted by this clause (ii); (iii) Indebtedness issued in
exchange for, or the net proceeds of which are used to refinance or refund, then
outstanding Indebtedness (other than Indebtedness Incurred under clause (i),
(ii), (iv), (vi), (viii) or (xi) of this paragraph) and any refinancings thereof
in an amount not to exceed the amount so refinanced or refunded (plus premiums,
accrued interest, fees and expenses); provided that Indebtedness the proceeds of
which are used to refinance or refund the Notes or Indebtedness that is pari
passu with, or subordinated in right of payment to, the Notes shall only be
permitted under this clause (iii) if (A) in case the Notes are refinanced in
part or the Indebtedness to be refinanced is pari passu with the Notes, such new
Indebtedness, by its terms or by the terms of any agreement or instrument
pursuant to
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which such new Indebtedness is outstanding, is expressly made pari passu with,
or subordinate in right of payment to, the remaining Notes, (B) in case the
Indebtedness to be refinanced is subordinated in right of payment to the Notes,
such new Indebtedness, by its terms or by the terms of any agreement or
instrument pursuant to which such new Indebtedness is issued or remains
outstanding, is expressly made subordinate in right of payment to the Notes at
least to the extent that the Indebtedness to be refinanced is subordinated to
the Notes and (C) such new Indebtedness, determined as of the date of Incurrence
of such new Indebtedness, does not mature prior to the Stated Maturity of the
Indebtedness to be refinanced or refunded, and the Average Life of such new
Indebtedness is at least equal to the remaining Average Life of the Indebtedness
to be refinanced or refunded; and provided further that in no event may
Indebtedness of the Company be refinanced by means of any Indebtedness of any
Restricted Subsidiary pursuant to this clause (iii); (iv) Indebtedness (A) in
respect of performance, surety or appeal bonds provided in the ordinary course
of business, (B) under Currency Agreements and Interest Rate Agreements;
provided that such agreements (a) are designed solely to protect the Company or
its Restricted Subsidiaries against fluctuations in foreign currency exchange
rates or interest rates and (b) do not increase the Indebtedness of the obligor
outstanding at any time other than as a result of fluctuations in foreign
currency exchange rates or interest rates or by reason of fees, indemnities and
compensation payable thereunder; and (C) arising from agreements providing for
indemnification, adjustment of purchase price or similar obligations, or from
Guarantees or letters of credit, surety bonds or performance bonds securing any
obligations of the Company or any of its Restricted Subsidiaries pursuant to
such agreements, in any case Incurred in connection with the disposition of any
business, assets or Restricted Subsidiary (other than Guarantees of Indebtedness
Incurred by any Person acquiring all or any portion of such business, assets or
Restricted Subsidiary for the purpose of financing such acquisition), in a
principal amount not to exceed the gross proceeds actually received by the
Company or any Restricted Subsidiary in connection with such disposition; (v)
Indebtedness of the Company, to the extent the net proceeds thereof are promptly
(A) used to purchase Notes tendered in an Offer to Purchase made as a result of
a Change in Control or (B) deposited to defease the Notes as described below
under "Defeasance"; (vi) Guarantees of the Notes and Guarantees of Indebtedness
of the Company by any Restricted Subsidiary provided the Guarantee of such
Indebtedness is permitted by and made in accordance with the "Limitation on
Issuance of Guarantees by Restricted Subsidiaries" covenant described below;
(vii) Indebtedness (including Guarantees) Incurred to finance the cost
(including the cost of design, development, acquisition, construction,
installation, improvement, transportation or integration) to acquire equipment,
inventory or network assets (including acquisitions by way of Capitalized Lease
and acquisitions of the Capital Stock of a Person that becomes a Restricted
Subsidiary to the extent of the fair market value of the equipment, inventory or
network assets so acquired) by the Company or a Restricted Subsidiary after the
Closing Date; (viii) Indebtedness of the Company not to exceed, at any one time
outstanding, two times (A) the Net Cash Proceeds received by the Company after
February 3, 1998 as a capital contribution or from the issuance and sale of its
Capital Stock (other than Disqualified Stock) to a Person that is not a
Subsidiary of the Company, to the extent (I) such capital contribution or Net
Cash Proceeds have not been used pursuant to clause (C)(2) of the first
paragraph or clause (iii), (iv), (vi), (vii), or (viii) of the second paragraph
of the "Limitation on Restricted Payments" covenant described below to make a
Restricted Payment and (II) if such capital contribution or Net Cash Proceeds
are
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used to consummate a transaction pursuant to which the Company Incurs Acquired
Indebtedness, the amount of such Net Cash Proceeds exceeds one-half of the
amount of Acquired Indebtedness so Incurred and (B) 80% of the fair market value
of property (other than cash and cash equivalents) received by the Company after
February 3, 1998 from the sale of its Capital Stock (other than Disqualified
Stock) to a Person that is not a Subsidiary of the Company, to the extent (I)
such capital contribution or sale of Capital Stock has not been used pursuant to
clause (iii), (iv), (vi) or (vii) of the second paragraph of the "Limitation on
Restricted Payments" covenant described below to make a Restricted Payment and
(II) if such capital contribution or Capital Stock is used to consummate a
transaction pursuant to which the Company Incurs Acquired Indebtedness, 80% of
the fair market value of the property received exceeds one-half of the amount of
Acquired Indebtedness so Incurred; provided that such Indebtedness does not
mature prior to the Stated Maturity of the Notes and has an Average Life longer
than the Notes; (ix) Acquired Indebtedness; (x) Strategic Subordinated
Indebtedness; and (xi) subordinated Indebtedness of the Company (in addition to
Indebtedness permitted under clauses (i) through (x) above) in an aggregate
principal amount outstanding at any time not to exceed $100 million, less any
amount of such Indebtedness permanently repaid as provided under the "Limitation
on Asset Sales" covenant described below.
(b) Notwithstanding any other provision of this "Limitation on Indebtedness"
covenant, the maximum amount of Indebtedness that the Company or a Restricted
Subsidiary may Incur pursuant to this "Limitation on Indebtedness" covenant
shall not be deemed to be exceeded, with respect to any outstanding Indebtedness
due solely to the result of fluctuations in the exchange rates of currencies.
(c) For purposes of determining any particular amount of Indebtedness under this
"Limitation on Indebtedness" covenant, (1) Guarantees, Liens or obligations with
respect to letters of credit supporting Indebtedness otherwise included in the
determination of such particular amount shall not be included and (2) any Liens
granted pursuant to the equal and ratable provisions referred to in the
"Limitation on Liens" covenant described below shall not be treated as
Indebtedness. For purposes of determining compliance with this "Limitation on
Indebtedness" covenant, in the event that an item of Indebtedness meets the
criteria of more than one of the types of Indebtedness described in the above
clauses, the Company, in its sole discretion, shall classify, and from time to
time may reclassify, such item of Indebtedness and only be required to include
the amount and type of such Indebtedness in one of such clauses.
LIMITATION ON RESTRICTED PAYMENTS
The Company will not, and will not permit any Restricted Subsidiary to, directly
or indirectly, (i) declare or pay any dividend or make any distribution on or
with respect to its Capital Stock (other than (x) dividends or distributions
payable solely in shares of its Capital Stock (other than Disqualified Stock) or
in options, warrants or other rights to acquire shares of such Capital Stock and
(y) pro rata dividends or distributions on Common Stock of Restricted
Subsidiaries held by minority stockholders) held by Persons other than the
Company or any of its Restricted Subsidiaries, (ii) purchase, redeem, retire or
otherwise acquire for value any shares of Capital Stock of (A) the Company or an
Unrestricted Subsidiary (including options, warrants or other rights to acquire
such shares of Capital Stock) held by any Person or (B) a Restricted Subsidiary
(including options,
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warrants or other rights to acquire such shares of Capital Stock) held by any
Affiliate of the Company (other than a Wholly Owned Restricted Subsidiary) or
any holder (or any Affiliate of such holder) of 5% or more of the Capital Stock
of the Company, (iii) make any voluntary or optional principal payment, or
voluntary or optional redemption, repurchase, defeasance, or other acquisition
or retirement for value, of Indebtedness of the Company that is subordinated in
right of payment to the Notes or (iv) make any Investment, other than a
Permitted Investment, in any Person (such payments or any other actions
described in clauses (i) through (iv) above being collectively "Restricted
Payments") if, at the time of, and after giving effect to, the proposed
Restricted Payment: (A) a Default or Event of Default shall have occurred and be
continuing, (B) the Company could not Incur at least $1.00 of Indebtedness under
the first paragraph of the "Limitation on Indebtedness" covenant or (C) the
aggregate amount of all Restricted Payments (the amount, if other than in cash,
to be determined in good faith by the Board of Directors, whose determination
shall be conclusive and evidenced by a Board Resolution) made after the Closing
Date shall exceed the sum of (1) 50% of the aggregate amount of the Adjusted
Consolidated Net Income (or, if the Adjusted Consolidated Net Income is a loss,
minus 100% of the amount of such loss) (determined by excluding income resulting
from transfers of assets by the Company or a Restricted Subsidiary to an
Unrestricted Subsidiary) accrued on a cumulative basis during the period (taken
as one accounting period) beginning on April 1, 1998 and ending on the last day
of the last fiscal quarter preceding the Transaction Date for which reports have
been filed with the Commission or provided to the Trustee pursuant to the
"Commission Reports and Reports to Holders" covenant plus (2) the aggregate Net
Cash Proceeds received by the Company after February 3, 1998 as a capital
contribution or from the issuance and sale permitted by the Indenture of its
Capital Stock (other than Disqualified Stock) to a Person who is not a
Subsidiary of the Company, including an issuance or sale permitted by the
Indenture of Indebtedness of the Company for cash subsequent to February 3, 1998
upon the conversion of such Indebtedness into Capital Stock (other than
Disqualified Stock) of the Company, or from the issuance to a Person who is not
a Subsidiary of the Company of any options, warrants or other rights to acquire
Capital Stock of the Company (in each case, exclusive of any Disqualified Stock
or any options, warrants or other rights that are redeemable at the option of
the holder, or are required to be redeemed, prior to the Stated Maturity of the
Notes), in each case except to the extent such Net Cash Proceeds are used to
Incur Indebtedness pursuant to clause (viii) of the second paragraph under the
"Limitation on Indebtedness" covenant, plus (3) an amount equal to the net
reduction in Investments (other than reductions in Permitted Investments) in any
Person resulting from payments of interest on Indebtedness, dividends,
repayments of loans or advances, or other transfers of assets, in each case to
the Company or any Restricted Subsidiary or from the Net Cash Proceeds from the
sale of any such Investment (except, in each case, to the extent any such
payment or proceeds are included in the calculation of Adjusted Consolidated Net
Income), or from redesignations of Unrestricted Subsidiaries as Restricted
Subsidiaries (valued in each case as provided in the definition of
"Investments"), not to exceed, in each case, the amount of Investments
previously made by the Company or any Restricted Subsidiary in such Person or
Unrestricted Subsidiary.
The foregoing provision shall not be violated by reason of: (i) the payment of
any dividend within 60 days after the date of declaration thereof if, at said
date of declaration, such payment would comply with the foregoing paragraph;
(ii) the redemption, repurchase, defeasance or other acquisition or retirement
for value of Indebtedness that is subordinated
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in right of payment to the Notes including premium, if any, and accrued and
unpaid interest, with the proceeds of, or in exchange for, Indebtedness Incurred
under clause (iii) of the second paragraph of part (a) of the "Limitation on
Indebtedness" covenant; (iii) the repurchase, redemption or other acquisition of
Capital Stock of the Company or an Unrestricted Subsidiary (or options, warrants
or other rights to acquire such Capital Stock) in exchange for, or out of the
proceeds of a capital contribution or a substantially concurrent offering of,
shares of Capital Stock (other than Disqualified Stock) of the Company (or
options, warrants or other rights to acquire such Capital Stock); (iv) the
making of any principal payment or the repurchase, redemption, retirement,
defeasance or other acquisition for value of Indebtedness of the Company which
is subordinated in right of payment to the Notes in exchange for, or out of the
proceeds of a capital contribution or a substantially concurrent offering of,
shares of the Capital Stock (other than Disqualified Stock) of the Company (or
options, warrants or other rights to acquire such Capital Stock); (v) payments
or distributions, to dissenting stockholders pursuant to applicable law,
pursuant to or in connection with a consolidation, merger or transfer of assets
that complies with the provisions of the Indenture applicable to mergers,
consolidations and transfers of all or substantially all of the property and
assets of the Company; (vi) Investments in any Person the primary business of
which is related, ancillary or complementary to the business of the Company and
its Restricted Subsidiaries on the date of such Investments; provided that the
aggregate amount of Investments made pursuant to this clause (vi) does not
exceed the sum of (a) $20 million and (b) the amount of Net Cash Proceeds
received by the Company after February 3, 1998 as a capital contribution or from
the sale of its Capital Stock (other than Disqualified Stock) to a Person who is
not a Subsidiary of the Company, except to the extent such Net Cash Proceeds are
used to Incur Indebtedness pursuant to clause (viii) under the "Limitation on
Indebtedness" covenant or to make Restricted Payments pursuant to clause (C)(2)
of the first paragraph, or clauses (iii), (iv) or (viii) of this paragraph, of
this "Limitation on Restricted Payments" covenant, plus (z) the net reduction in
Investments made pursuant to this clause (vi) resulting from distributions on or
repayments of such Investments or from the Net Cash Proceeds from the sale of
any such Investment (except in each case to the extent any such payment or
proceeds is included in the calculation of Adjusted Consolidated Net Income) or
from such Person becoming a Restricted Subsidiary (valued in each case as
provided in the definition of "Investments"), provided that the net reduction in
any Investment shall not exceed the amount of such Investment; (vii) Investments
acquired in exchange for Capital Stock (other than Disqualified Stock) of the
Company; (viii) the declaration or payment of dividends on Capital Stock (other
than Disqualified Stock) of the Company in an aggregate annual amount not to
exceed 6% of the Net Cash Proceeds received by the Company from the sale of such
Capital Stock after the Closing Date; (ix) repurchases of Warrants pursuant to a
Repurchase Offer; (x) any purchase of any fractional share of Common Stock (or
other Capital Stock of the Company issuable upon exercise of the Warrants) in
connection with an exercise of the Warrants; and (xi) other Restricted Payments
in an aggregate amount not to exceed $2 million; provided that, except in the
case of clauses (i) and (iii), no Default or Event of Default shall have
occurred and be continuing or occur as a consequence of the actions or payments
set forth therein.
Each Restricted Payment permitted pursuant to the preceding paragraph (other
than the Restricted Payment referred to in clause (ii) thereof, an exchange of
Capital Stock for Capital Stock or Indebtedness referred to in clause (iii) or
(iv) thereof and an Investment
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referred to in clause (vi) thereof), and the Net Cash Proceeds from any capital
contribution or any issuance of Capital Stock referred to in clauses (iii), (iv)
and (vi), shall be included in calculating whether the conditions of clause (C)
of the first paragraph of this "Limitation on Restricted Payments" covenant have
been met with respect to any subsequent Restricted Payments. In the event the
proceeds of an issuance of Capital Stock of the Company are used for the
redemption, repurchase or other acquisition of the Notes, or Indebtedness that
is pari passu with the Notes, then the Net Cash Proceeds of such issuance shall
be included in clause (C) of the first paragraph of this "Limitation on
Restricted Payments" covenant only to the extent such proceeds are not used for
such redemption, repurchase or other acquisition of Indebtedness.
LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED
SUBSIDIARIES
The Company will not, and will not permit any Restricted Subsidiary to, create
or otherwise cause or suffer to exist or become effective any consensual
encumbrance or restriction of any kind on the ability of any Restricted
Subsidiary to (i) pay dividends or make any other distributions permitted by
applicable law on any Capital Stock of such Restricted Subsidiary owned by the
Company or any other Restricted Subsidiary, (ii) pay any Indebtedness owed to
the Company or any other Restricted Subsidiary, (iii) make loans or advances to
the Company or any other Restricted Subsidiary or (iv) transfer any of its
property or assets to the Company or any other Restricted Subsidiary.
The foregoing provisions shall not restrict any encumbrances or restrictions:
(i) existing on the Closing Date in the Indenture or any other agreements in
effect on the Closing Date, and any extensions, refinancings, renewals or
replacements of such agreements; provided that the encumbrances and restrictions
in any such extensions, refinancings, renewals or replacements are no less
favorable in any material respect to the Holders than those encumbrances or
restrictions that are then in effect and that are being extended, refinanced,
renewed or replaced; (ii) existing under or by reason of applicable law; (iii)
existing with respect to any Person or the property or assets of such Person
acquired by the Company or any Restricted Subsidiary, existing at the time of
such acquisition and not incurred in contemplation thereof, which encumbrances
or restrictions are not applicable to any Person or the property or assets of
any Person other than such Person or the property or assets of such Person so
acquired; (iv) in the case of clause (iv) of the first paragraph of this
"Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries" covenant, (A) that restrict in a customary manner the subletting,
assignment or transfer of any property or asset that is a lease, license,
conveyance or contract or similar property or asset, (B) existing by virtue of
any transfer of, agreement to transfer, option or right with respect to, or Lien
on, any property or assets of the Company or any Restricted Subsidiary not
otherwise prohibited by the Indenture or (C) arising or agreed to in the
ordinary course of business, not relating to any Indebtedness, and that do not,
individually or in the aggregate, detract from the value of property or assets
of the Company or any Restricted Subsidiary in any manner material to the
Company or any Restricted Subsidiary; (v) with respect to a Restricted
Subsidiary and imposed pursuant to an agreement that has been entered into for
the sale or disposition of all or substantially all of the Capital Stock of, or
property and assets of, such Restricted Subsidiary; or (vi) contained in the
terms of any Indebtedness or any agreement pursuant to which such Indebtedness
was issued if (A) the encumbrance or restriction applies only in the event of
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a payment default or a default with respect to a financial covenant contained in
such Indebtedness or agreement, (B) the encumbrance or restriction is not
materially more disadvantageous to the Holders of the Notes than is customary in
comparable financings (as determined by the Company) and (C) the Company
determines that any such encumbrance or restriction will not materially affect
the Company's ability to make principal or interest payments on the Notes.
Nothing contained in this "Limitation on Dividend and Other Payment Restrictions
Affecting Restricted Subsidiaries" covenant shall prevent the Company or any
Restricted Subsidiary from (1) creating, incurring, assuming or suffering to
exist any Liens otherwise permitted in the "Limitation on Liens" covenant or (2)
restricting the sale or other disposition of property or assets of the Company
or any of its Restricted Subsidiaries that secure Indebtedness of the Company or
any of its Restricted Subsidiaries.
LIMITATION ON THE ISSUANCE AND SALE OF CAPITAL STOCK OF RESTRICTED SUBSIDIARIES
The Company will not sell, and will not permit any Restricted Subsidiary,
directly or indirectly, to issue or sell, any shares of Capital Stock of a
Restricted Subsidiary (including options, warrants or other rights to purchase
shares of such Capital Stock) except (i) to the Company or a Wholly Owned
Restricted Subsidiary; (ii) issuances of director's qualifying shares or sales
to foreign nationals of shares of Capital Stock of foreign Restricted
Subsidiaries, to the extent required by applicable law; (iii) if, immediately
after giving effect to such issuance or sale, such Restricted Subsidiary would
no longer constitute a Restricted Subsidiary and any Investment in such Person
remaining after giving effect to such issuance or sale would have been permitted
to be made under the "Limitation on Restricted Payments" covenant if made on the
date of such issuance or sale; or (iv) issuances or sales of Common Stock of a
Restricted Subsidiary, provided that the Company or such Restricted Subsidiary
applies the Net Cash Proceeds, if any, of any such sale in accordance with
clause (A) or (B) of the "Limitation on Asset Sales" covenant described below.
LIMITATION ON ISSUANCES OF GUARANTEES BY RESTRICTED SUBSIDIARIES
The Company will not permit any Restricted Subsidiary, directly or indirectly,
to Guarantee any Indebtedness of the Company which is pari passu with or
subordinate in right of payment to the Notes ("Guaranteed Indebtedness"), unless
(i) such Restricted Subsidiary simultaneously executes and delivers a
supplemental indenture to the Indenture providing for a Guarantee (a "Subsidiary
Guarantee") of payment of the Notes by such Restricted Subsidiary and (ii) such
Restricted Subsidiary waives and will not in any manner whatsoever claim or take
the benefit or advantage of, any rights of reimbursement, indemnity or
subrogation or any other rights against the Company or any other Restricted
Subsidiary as a result of any payment by such Restricted Subsidiary under its
Subsidiary Guarantee; provided that this paragraph shall not be applicable to
any Guarantee of any Restricted Subsidiary that existed at the time such Person
became a Restricted Subsidiary and was not Incurred in connection with, or in
contemplation of, such Person becoming a Restricted Subsidiary. If the
Guaranteed Indebtedness is (A) pari passu with the Notes, then the Guarantee of
such Guaranteed Indebtedness shall be pari passu with, or subordinated to, the
Subsidiary Guarantee or (B) subordinated to the Notes, then the Guarantee of
such Guaranteed Indebtedness shall be subordinated to the Subsidiary
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Guarantee at least to the extent that the Guaranteed Indebtedness is
subordinated to the Notes.
Notwithstanding the foregoing, any Subsidiary Guarantee by a Restricted
Subsidiary may provide by its terms that it shall be automatically and
unconditionally released and discharged upon (i) any sale, exchange or transfer,
to any Person not an Affiliate of the Company, of all of the Company's and each
Restricted Subsidiary's Capital Stock in, or all or substantially all the assets
of, such Restricted Subsidiary (which sale, exchange or transfer is not
prohibited by the Indenture) or (ii) the release or discharge of the Guarantee
which resulted in the creation of such Subsidiary Guarantee, except a discharge
or release by or as a result of payment under such Guarantee.
LIMITATION ON TRANSACTIONS WITH SHAREHOLDERS AND AFFILIATES
The Company will not, and will not permit any Restricted Subsidiary to, directly
or indirectly, enter into, renew or extend any transaction (including, without
limitation, the purchase, sale, lease or exchange of property or assets, or the
rendering of any service) with any holder (or any Affiliate of such holder) of
5% or more of any class of Capital Stock of the Company or with any Affiliate of
the Company or any Restricted Subsidiary, except upon fair and reasonable terms
no less favorable to the Company or such Restricted Subsidiary than could be
obtained, at the time of such transaction or, if such transaction is pursuant to
a written agreement, at the time of the execution of the agreement providing
therefor, in a comparable arm's-length transaction with a Person that is not
such a holder or an Affiliate.
The foregoing limitation does not limit, and shall not apply to (i) transactions
(A) approved by a majority of the disinterested members of the Board of
Directors or (B) for which the Company or a Restricted Subsidiary delivers to
the Trustee a written opinion of a nationally recognized investment banking firm
stating that the transaction is fair to the Company or such Restricted
Subsidiary from a financial point of view; (ii) any transaction solely between
the Company and any of its Wholly Owned Restricted Subsidiaries or solely
between Wholly Owned Restricted Subsidiaries; (iii) the payment of reasonable
and customary regular fees to directors of the Company who are not employees of
the Company; (iv) any payments or other transactions pursuant to any tax-sharing
agreement between the Company and any other Person with which the Company files
a consolidated tax return or with which the Company is part of a consolidated
group for tax purposes; or (v) any Restricted Payments not prohibited by the
"Limitation on Restricted Payments" covenant. Notwithstanding the foregoing, any
transaction or series of related transactions covered by the first paragraph of
this "Limitation on Transactions with Shareholders and Affiliates" covenant and
not covered by clauses (ii) through (v) of this paragraph, the aggregate amount
of which exceeds $1 million in value, must be approved or determined to be fair
in the manner provided for in clause (i)(A) or (B) above.
LIMITATION ON LIENS
The Company will not, and will not permit any Restricted Subsidiary to, create,
incur, assume or suffer to exist any Lien on any of its assets or properties of
any character (including, without limitation, licenses), or any shares of
Capital Stock or Indebtedness of any Restricted Subsidiary, without making
effective provision for all of the Notes and all
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other amounts due under the Indenture to be directly secured equally and ratably
with (or, if the obligation or liability to be secured by such Lien is
subordinated in right of payment to the Notes, prior to) the obligation or
liability secured by such Lien.
The foregoing limitation does not apply to (i) Liens existing on the Closing
Date; (ii) Liens granted after the Closing Date on any assets or Capital Stock
of the Company or its Restricted Subsidiaries created in favor of the Holders;
(iii) Liens with respect to the assets of a Restricted Subsidiary granted by
such Restricted Subsidiary to the Company or a Wholly Owned Restricted
Subsidiary to secure Indebtedness owing to the Company or such other Restricted
Subsidiary; (iv) Liens securing Indebtedness which is Incurred to refinance
secured Indebtedness which is permitted to be Incurred under clause (iii) of the
second paragraph of the "Limitation on Indebtedness" covenant; provided that
such Liens do not extend to or cover any property or assets of the Company or
any Restricted Subsidiary other than the property or assets securing the
Indebtedness being refinanced; (v) Liens on the Capital Stock of, or any
property or assets of, a Restricted Subsidiary securing Indebtedness of such
Restricted Subsidiary permitted under the "Limitation on Indebtedness" covenant;
(vi) Liens on the Capital Stock of Restricted Subsidiaries securing up to $100.0
million of Indebtedness Incurred under clause (vii) of the "Limitation on
Indebtedness" covenant; or (vii) Permitted Liens.
LIMITATION ON SALE-LEASEBACK TRANSACTIONS
The Company will not, and will not permit any Restricted Subsidiary to, enter
into any sale-leaseback transaction involving any of its assets or properties
whether now owned or hereafter acquired, whereby the Company or a Restricted
Subsidiary sells or transfers such assets or properties and then or thereafter
leases such assets or properties or any part thereof or any other assets or
properties which the Company or such Restricted Subsidiary, as the case may be,
intends to use for substantially the same purpose or purposes as the assets or
properties sold or transferred.
The foregoing restriction does not apply to any sale-leaseback transaction if
(i) the lease is for a period, including renewal rights, of not in excess of
three years; (ii) the lease secures or relates to industrial revenue or
pollution control bonds; (iii) the transaction is solely between the Company and
any Wholly Owned Restricted Subsidiary or solely between Wholly Owned Restricted
Subsidiaries; or (iv) the Company or such Restricted Subsidiary, within 12
months after the sale or transfer of any assets or properties is completed,
applies an amount not less than the net proceeds received from such sale in
accordance with clause (A) or (B) of the first paragraph of the "Limitation on
Asset Sales" covenant described below.
LIMITATION ON ASSET SALES
The Company will not, and will not permit any Restricted Subsidiary to,
consummate any Asset Sale, unless (i) the consideration received by the Company
or such Restricted Subsidiary is at least equal to the fair market value of the
assets sold or disposed of and (ii) at least 75% of the consideration received
consists of cash or Temporary Cash Investments; provided, however, that this
clause (ii) shall not apply to long-term assignments in capacity in a
telecommunications network. In the event and to the extent that the Net Cash
Proceeds received by the Company or any of its Restricted Subsidiaries
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from one or more Asset Sales occurring on or after the Closing Date in any
period of 12 consecutive months exceed 10% of Adjusted Consolidated Net Tangible
Assets (determined as of the date closest to the commencement of such 12-month
period for which a consolidated balance sheet of the Company and its
Subsidiaries has been filed with the Commission pursuant to the "Commission
Reports and Reports to Holders" covenant), then the Company shall or shall cause
the relevant Restricted Subsidiary to (i) within 12 months after the date Net
Cash Proceeds so received exceed 10% of Adjusted Consolidated Net Tangible
Assets (A) apply an amount equal to such excess Net Cash Proceeds to permanently
repay unsubordinated Indebtedness of the Company, or any Restricted Subsidiary
providing a Subsidiary Guarantee pursuant to the "Limitation on Issuances of
Guarantees by Restricted Subsidiaries" covenant described above or Indebtedness
of any other Restricted Subsidiary, in each case owing to a Person other than
the Company or any of its Restricted Subsidiaries or (B) invest an equal amount,
or the amount not so applied pursuant to clause (A) (or enter into a definitive
agreement committing to so invest within 12 months after the date of such
agreement), in property or assets (other than current assets) of a nature or
type or that are used in a business (or in a company having property and assets
of a nature or type, or engaged in a business) similar or related to the nature
or type of the property and assets of, or the business of, the Company and its
Restricted Subsidiaries existing on the date of such investment (as determined
in good faith by the Board of Directors, whose determination shall be conclusive
and evidenced by a Board Resolution) and (ii) apply (no later than the end of
the 12-month period referred to in clause (i)) such excess Net Cash Proceeds (to
the extent not applied pursuant to clause (i)) as provided in the following
paragraph of this "Limitation on Asset Sales" covenant. The amount of such
excess Net Cash Proceeds required to be applied (or to be committed to be
applied) during such 12-month period as set forth in clause (i) of the preceding
sentence and not applied as so required by the end of such period shall
constitute "Excess Proceeds."
If, as of the first day of any calendar month, the aggregate amount of Excess
Proceeds not theretofore subject to an Offer to Purchase pursuant to this
"Limitation on Asset Sales" covenant totals at least $5 million, the Company
must commence, not later than the fifteenth Business Day of such month, and
consummate an Offer to Purchase from the Holders on a pro rata basis an
aggregate principal amount of Notes equal to the Excess Proceeds on such date,
at a purchase price equal to 100% of the principal amount of the Notes, plus
accrued interest to the Payment Date.
REPURCHASE OF NOTES UPON A CHANGE OF CONTROL
The Company must commence, within 30 days of the occurrence of a Change of
Control, and consummate an Offer to Purchase for all Notes then outstanding, at
a purchase price equal to 101% of the principal amount thereof, plus accrued
interest to the Payment Date.
There can be no assurance that the Company will have sufficient funds available
at the time of any Change of Control to make any debt payment (including
repurchases of Notes) required by the foregoing covenant (as well as may be
contained in other securities of the Company which might be outstanding at the
time). The above covenant requiring the Company to repurchase the Notes will,
unless consents are obtained, require the Company to repay all indebtedness then
outstanding which by its terms would prohibit such Note repurchase, either prior
to or concurrently with such Note repurchase.
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COMMISSION REPORTS AND REPORTS TO HOLDERS
Whether or not the Company is then required to file reports with the Commission,
the Company shall file with the Commission all such reports and other
information as it would be required to file with the Commission by Sections
13(a) or 15(d) under the Securities Exchange Act of 1934 if it were subject
thereto. The Company shall supply the Trustee and each Holder or shall supply to
the Trustee for forwarding to each such Holder, without cost to such Holder,
copies of such reports and other information.
EVENTS OF DEFAULT
The following events will be defined as "Events of Default" in the Indenture:
(a) default in the payment of principal of (or premium, if any, on) any Note
when the same becomes due and payable at maturity, upon acceleration, redemption
or otherwise; (b) default in the payment of interest on any Note when the same
becomes due and payable, and such default continues for a period of 30 days;
provided that a failure to make any of the first six scheduled interest payments
on the Notes on the applicable Interest Payment Date will constitute an Event of
Default with no grace or cure period; (c) default in the performance or breach
of the provisions of the Indenture applicable to mergers, consolidations and
transfers of all or substantially all of the assets of the Company or the
failure to make or consummate an Offer to Purchase in accordance with the
"Limitation on Asset Sales" or "Repurchase of Notes upon a Change of Control"
covenant; (d) the Company defaults in the performance of or breaches any other
covenant or agreement of the Company in the Indenture or under the Notes (other
than a default specified in clause (a), (b) or (c) above) and such default or
breach continues for a period of 30 consecutive days after written notice by the
Trustee or the Holders of 25% or more in aggregate principal amount of the
Notes; (e) there occurs with respect to any issue or issues of Indebtedness of
the Company or any Significant Subsidiary having an outstanding principal amount
of $5 million or more in the aggregate for all such issues of all such Persons,
whether such Indebtedness now exists or shall hereafter be created, (I) an event
of default that has caused the holder thereof to declare such Indebtedness to be
due and payable prior to its Stated Maturity and such Indebtedness has not been
discharged in full or such acceleration has not been rescinded or annulled
within 30 days of such acceleration and/or (II) the failure to make a principal
payment at the final (but not any interim) fixed maturity and such defaulted
payment shall not have been made, waived or extended within 30 days of such
payment default; (f) any final judgment or order (not covered by insurance) for
the payment of money in excess of $5 million in the aggregate for all such final
judgments or orders against all such Persons (treating any deductibles,
self-insurance or retention as not so covered) shall be rendered against the
Company or any Significant Subsidiary and shall not be paid or discharged, and
there shall be any period of 30 consecutive days following entry of the final
judgment or order that causes the aggregate amount for all such final judgments
or orders outstanding and not paid or discharged against all such Persons to
exceed $5 million during which a stay of enforcement of such final judgment or
order, by reason of a pending appeal or otherwise, shall not be in effect; (g) a
court having jurisdiction in the premises enters a decree or order for (A)
relief in respect of the Company or any Significant Subsidiary in an involuntary
case under any applicable bankruptcy, insolvency or other similar law now or
hereafter in effect, (B) appointment of a receiver, liquidator, assignee,
custodian, trustee, sequestrator or similar official of the Company or any
Significant Subsidiary or for all or
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substantially all of the property and assets of the Company or any Significant
Subsidiary or (C) the winding up or liquidation of the affairs of the Company or
any Significant Subsidiary and, in each case, such decree or order shall remain
unstayed and in effect for a period of 30 consecutive days; (h) the Company or
any Significant Subsidiary (A) commences a voluntary case under any applicable
bankruptcy, insolvency or other similar law now or hereafter in effect, or
consents to the entry of an order for relief in an involuntary case under any
such law, (B) consents to the appointment of or taking possession by a receiver,
liquidator, assignee, custodian, trustee, sequestrator or similar official of
the Company or any Significant Subsidiary or for all or substantially all of the
property and assets of the Company or any Significant Subsidiary or (C) effects
any general assignment for the benefit of creditors; or (i) the Pledge Agreement
shall cease to be in full force and effect or enforceable in accordance with its
terms, other than in accordance with its terms.
If an Event of Default (other than an Event of Default specified in clause (g)
or (h) above that occurs with respect to the Company) occurs and is continuing
under the Indenture, the Trustee or the Holders of at least 25% in aggregate
principal amount of the Notes, then outstanding, by written notice to the
Company (and to the Trustee if such notice is given by the Holders), may, and
the Trustee at the request of such Holders shall, declare the principal of,
premium, if any, and accrued interest on the Notes to be immediately due and
payable. Upon a declaration of acceleration, such principal of, premium, if any,
and accrued interest shall be immediately due and payable. In the event of a
declaration of acceleration because an Event of Default set forth in clause (e)
above has occurred and is continuing, such declaration of acceleration shall be
automatically rescinded and annulled if the event of default triggering such
Event of Default pursuant to clause (e) shall be remedied or cured by the
Company or the relevant Significant Subsidiary or waived by the holders of the
relevant Indebtedness within 60 days after the declaration of acceleration with
respect thereto. If an Event of Default specified in clause (g) or (h) above
occurs with respect to the Company, the principal of, premium, if any, and
accrued interest on the Notes then outstanding shall ipso facto become and be
immediately due and payable without any declaration or other act on the part of
the Trustee or any Holder. The Holders of at least a majority in principal
amount of the outstanding Notes by written notice to the Company and to the
Trustee, may waive all past defaults and rescind and annul a declaration of
acceleration and its consequences if (i) all existing Events of Default, other
than the nonpayment of the principal of, premium, if any, and interest on the
Notes that have become due solely by such declaration of acceleration, have been
cured or waived and (ii) the rescission would not conflict with any judgment or
decree of a court of competent jurisdiction. For information as to the waiver of
defaults, see "-- Modification and Waiver."
The Holders of at least a majority in aggregate principal amount of the
outstanding Notes may direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred on the Trustee. However, the Trustee may refuse to follow any
direction that conflicts with law or the Indenture, that may involve the Trustee
in personal liability, or that the Trustee determines in good faith may be
unduly prejudicial to the rights of Holders of Notes not joining in the giving
of such direction and may take any other action it deems proper that is not
inconsistent with any such direction received from Holders of Notes. A Holder
may not pursue any remedy with respect to the Indenture or the Notes unless: (i)
the Holder gives
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the Trustee written notice of a continuing Event of Default; (ii) the Holders of
at least 25% in aggregate principal amount of outstanding Notes make a written
request to the Trustee to pursue the remedy; (iii) such Holder or Holders offer
the Trustee indemnity satisfactory to the Trustee against any costs, liability
or expense; (iv) the Trustee does not comply with the request within 60 days
after receipt of the request and the offer of indemnity; and (v) during such
60-day period, the Holders of a majority in aggregate principal amount of the
outstanding Notes do not give the Trustee a direction that is inconsistent with
the request. However, such limitations do not apply to the right of any Holder
of a Note to receive payment of the principal of, premium, if any, or interest
on, such Note or to bring suit for the enforcement of any such payment, on or
after the due date expressed in the Notes, which right shall not be impaired or
affected without the consent of the Holder.
The Indenture requires certain officers of the Company to certify, on or before
a date not more than 90 days after the end of each fiscal year, that a review
has been conducted of the activities of the Company and its Restricted
Subsidiaries and the Company's and its Restricted Subsidiaries' performance
under the Indenture and that the Company has fulfilled all obligations
thereunder, or, if there has been a default in the fulfillment of any such
obligation, specifying each such default and the nature and status thereof. The
Company will also be obligated to notify the Trustee of any default or defaults
in the performance of any covenants or agreements under the Indenture.
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Company will not consolidate with, merge with or into, or sell, convey,
transfer, lease or otherwise dispose of all or substantially all of its property
and assets (as an entirety or substantially an entirety in one transaction or a
series of related transactions) to, any Person or permit any Person to merge
with or into the Company unless: (i) the Company shall be the continuing Person,
or the Person (if other than the Company) formed by such consolidation or into
which the Company is merged or that acquired or leased such property and assets
of the Company shall be a corporation organized and validly existing under the
laws of the United States of America or any jurisdiction thereof and shall
expressly assume, by a supplemental indenture, executed and delivered to the
Trustee, all of the obligations of the Company on all of the Notes and under the
Indenture; (ii) immediately after giving effect to such transaction, no Default
or Event of Default shall have occurred and be continuing; (iii) immediately
after giving effect to such transaction on a pro forma basis, the Company or any
Person becoming the successor obligor of the Notes shall have a Consolidated Net
Worth equal to or greater than the Consolidated Net Worth of the Company
immediately prior to such transaction; (iv) immediately after giving effect to
such transaction on a pro forma basis the Company, or any Person becoming the
successor obligor of the Notes, as the case may be, could Incur at least $1.00
of Indebtedness under the first paragraph of the "Limitation on Indebtedness"
covenant; provided that this clause (iv) shall not apply to (x) a consolidation,
merger or sale of all (but not less than all) of the assets of the Company if
all Liens and Indebtedness of the Company or any Person becoming the successor
obligor on the Notes, as the case may be, and its Restricted Subsidiaries
outstanding immediately after such transaction would, if Incurred at such time,
have been permitted to be Incurred (and all such Liens and Indebtedness, other
than Liens and Indebtedness of the Company and its Restricted Subsidiaries
outstanding immediately prior to the transaction, shall be
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deemed to have been Incurred) for all purposes of the Indenture or (y) a
consolidation, merger or sale of all or substantially all of the assets of the
Company if immediately after giving effect to such transaction on a pro forma
basis, the Company or any Person becoming the successor obligor of the Notes
shall have a Consolidated Leverage Ratio equal to or less than the Consolidated
Leverage Ratio of the Company immediately prior to such transaction; and (v) the
Company delivers to the Trustee an Officers' Certificate (attaching the
arithmetic computations to demonstrate compliance with clauses (iii) and (iv)
above) and Opinion of Counsel, in each case stating that such consolidation,
merger or transfer and such supplemental indenture complies with this provision
and that all conditions precedent provided for herein relating to such
transaction have been complied with; provided, however, that clauses (iii) and
(iv) above do not apply if, in the good faith determination of the Board of
Directors of the Company, whose determination shall be evidenced by a Board
Resolution, the principal purpose of such transaction is to change the state of
incorporation of the Company; and provided further that any such transaction
shall not have as one of its purposes the evasion of the foregoing limitations.
DEFEASANCE
Defeasance and Discharge. The Indenture provides that the Company will be deemed
to have paid and will be discharged from any and all obligations in respect of
the Notes on the 123rd day after the deposit referred to below, and the
provisions of the Indenture will no longer be in effect with respect to the
Notes (except for, among other matters, certain obligations to register the
transfer or exchange of the Notes, to replace stolen, lost or mutilated Notes,
to maintain paying agencies and to hold monies for payment in trust) if, among
other things, (A) the Company has deposited with the Trustee, in trust, money
and/or U.S. Government Obligations that through the payment of interest and
principal in respect thereof in accordance with their terms will provide money
in an amount sufficient to pay the principal of, premium, if any, and accrued
interest on the Notes on the Stated Maturity of such payments in accordance with
the terms of the Indenture and the Notes, (B) the Company has delivered to the
Trustee (i) either (x) an Opinion of Counsel to the effect that Holders will not
recognize income, gain or loss for federal income tax purposes as a result of
the Company's exercise of its option under this "Defeasance" provision and will
be subject to federal income tax on the same amount and in the same manner and
at the same times as would have been the case if such deposit, defeasance and
discharge had not occurred, which Opinion of Counsel must be based upon (and
accompanied by a copy of) a ruling of the Internal Revenue Service to the same
effect unless there has been a change in applicable federal income tax law after
the Closing Date such that a ruling is no longer required or (y) a ruling
directed to the Trustee received from the Internal Revenue Service to the same
effect as the aforementioned Opinion of Counsel and (ii) an Opinion of Counsel
to the effect that the creation of the defeasance trust does not violate the
Investment Company Act of 1940 and after the passage of 123 days following the
deposit, the trust fund will not be subject to the effect of Section 547 of the
United States Bankruptcy Code or Section 15 of the New York Debtor and Creditor
Law, (C) immediately after giving effect to such deposit on a pro forma basis,
no Event of Default, or event that after the giving of notice or lapse of time
or both would become an Event of Default, shall have occurred and be continuing
on the date of such deposit or during the period ending on the 123rd day after
the date of such deposit, and such deposit shall not result in a breach or
violation of, or constitute a default under, any other
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agreement or instrument to which the Company or any of its Subsidiaries is a
party or by which the Company or any of its Subsidiaries is bound and (D) if at
such time the Notes are listed on a national securities exchange, the Company
has delivered to the Trustee an Opinion of Counsel to the effect that the Notes
will not be delisted as a result of such deposit, defeasance and discharge.
Defeasance of Certain Covenants and Certain Events of Default. The Indenture
further provides that the provisions of the Indenture will no longer be in
effect with respect to clauses (iii) and (iv) under "Consolidation, Merger and
Sale of Assets" and all the covenants described herein under "Covenants," clause
(c) under "Events of Default" with respect to such clauses (iii) and (iv) under
"Consolidation, Merger and Sale of Assets," clause (d) under "Events of Default"
with respect to such other covenants and clauses (e) and (f) under "Events of
Default" shall be deemed not to be Events of Default upon, among other things,
the deposit with the Trustee, in trust, of money and/or U.S. Government
Obligations that through the payment of interest and principal in respect
thereof in accordance with their terms will provide money in an amount
sufficient to pay the principal of, premium, if any, and accrued interest on the
Notes on the Stated Maturity of such payments in accordance with the terms of
the Indenture and the Notes, the satisfaction of the provisions described in
clauses (B)(ii), (C) and (D) of the preceding paragraph and the delivery by the
Company to the Trustee of an Opinion of Counsel to the effect that, among other
things, the Holders will not recognize income, gain or loss for federal income
tax purposes as a result of such deposit and defeasance of certain covenants and
Events of Default and will be subject to federal income tax on the same amount
and in the same manner and at the same times as would have been the case if such
deposit and defeasance had not occurred.
Defeasance and Certain Other Events of Default. In the event the Company
exercises its option to omit compliance with certain covenants and provisions of
the Indenture with respect to the Notes as described in the immediately
preceding paragraph and the Notes are declared due and payable because of the
occurrence of an Event of Default that remains applicable, the amount of money
and/or U.S. Government Obligations on deposit with the Trustee will be
sufficient to pay amounts due on the Notes at the time of their Stated Maturity
but may not be sufficient to pay amounts due on the Notes at the time of the
acceleration resulting from such Event of Default. However, the Company will
remain liable for such payments.
MODIFICATION AND WAIVER
Modifications and amendments of the Indenture may be made by the Company and the
Trustee with the consent of the Holders of not less than a majority in aggregate
principal amount of the outstanding Notes; provided, however, that no such
modification or amendment may, without the consent of each Holder affected
thereby, (i) change the Stated Maturity of the principal of, or any installment
of interest on, any Note, (ii) reduce the principal of, or premium, if any, or
interest on, any Note, (iii) change the place or currency of payment of
principal of, or premium, if any, or interest on, any Note, (iv) impair the
right to institute suit for the enforcement of any payment on or after the
Stated Maturity (or, in the case of a redemption, on or after the Redemption
Date) of any Note, (v) reduce the above-stated percentage of outstanding Notes
the consent of whose Holders is necessary to modify or amend the Indenture, (vi)
waive a default in the
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payment of principal of, premium, if any, or interest on the Notes or (vii)
reduce the percentage or aggregate principal amount of outstanding Notes the
consent of whose Holders is necessary for waiver of compliance with certain
provisions of the Indenture or for waiver of certain defaults.
NO PERSONAL LIABILITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS, DIRECTORS, OR
EMPLOYEES
The Indenture provides that no recourse for the payment of the principal of,
premium, if any, or interest on any of the Notes or for any claim based thereon
or otherwise in respect thereof, and no recourse under or upon any obligation,
covenant or agreement of the Company in the Indenture, or in any of the Notes or
because of the creation of any Indebtedness represented thereby, shall be had
against any incorporator, stockholder, officer, director, employee or
controlling person of the Company or of any successor Person thereof. Each
Holder, by accepting the Notes, waives and releases all such liability.
CONCERNING THE TRUSTEE
The Indenture provides that, except during the continuance of a Default, the
Trustee will not be liable, except for the performance of such duties as are
specifically set forth in such Indenture. If an Event of Default has occurred
and is continuing, the Trustee will use the same degree of care and skill in its
exercise of the rights and powers vested in it under the Indenture as a prudent
person would exercise under the circumstances in the conduct of such person's
own affairs.
The Indenture and provisions of the Trust Indenture Act of 1939, as amended,
incorporated by reference therein contain limitations on the rights of the
Trustee, should it become a creditor of the Company, to obtain payment of claims
in certain cases or to realize on certain property received by it in respect of
any such claims, as security or otherwise. The Trustee is permitted to engage in
other transactions; provided, however, that if it acquires any conflicting
interest, it must eliminate such conflict or resign.
The Trustee is also the trustee under the 11 3/4% Notes Indenture.
BOOK-ENTRY; DELIVERY AND FORM
The Notes were initially represented by one or more global notes (the "Global
Notes") issued in the form of fully registered Global Notes, which were
deposited with, or on behalf of, the Depositary and registered in the name of a
nominee of the Depositary. Transfers between participants in the Depositary will
be effected in the ordinary way in accordance with the Depositary's rules and
will be settled in same-day funds.
The Depositary has advised the Company that the Depositary intends to follow the
procedures described below:
The Depositary will act as securities depository for the Global Notes. The
Global Notes will be issued as a fully registered security registered in the
name of Cede & Co. (the Depositary's nominee).
The Depositary is a limited-purpose trust company organized under the New
York Banking Law, a "banking organization" within the meaning of the New
York Banking
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Law, a member of the Federal Reserve System, a "clearing corporation" within
the meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered pursuant to the Provisions of Section 17A of the Exchange Act.
The Depositary holds securities that its participants ("Participants")
deposit with the Depositary. The Depositary also facilitates the settlement
among Participants of securities transactions, such as transfers and
pledges, in deposited securities through electronic computerized book-entry
changes in Participants' accounts, thereby eliminating the need for physical
movement of securities certificates. Direct Participants include securities
brokers and dealers, banks, trust companies, clearing corporations, and
certain other organizations ("Direct Participants"). The Depositary is owned
by a number of its Direct Participants and by the New York Stock Exchange,
Inc., the AMEX and the National Association of Securities Dealers, Inc.
Access to the Depositary's system is also available to others such as
securities brokers and dealers, banks, and trust companies that clear
through or maintain a custodial relationship with a Direct Participant,
either directly or indirectly ("Indirect Participants"). The Rules
applicable to the Depositary and its Participants are on file with the
Commission.
Purchases of Notes must be made by or through Direct Participants, which
will receive a credit for the Notes on the Depositary's records. The
ownership interest of each actual purchaser of each Note ("Beneficial
Owner") is in turn recorded on the Direct and Indirect Participant's
records. Transfers of ownership interests in the Notes are to be
accomplished by entries made on the books of Participants acting on behalf
of Beneficial Owners. Beneficial Owners will not receive certificates
representing their ownership interests in the Notes, except in the event
that use of the book-entry system for the Notes is discontinued.
Conveyance of Notes and other communications by the Depositary to Direct
Participants, by Direct Participants to Indirect Participants, and Direct
Participants and Indirect Participants to Beneficial Owners are governed by
arrangements among them, subject to any statutory or regulatory
requirements as may be in effect from time to time.
Redemption notices shall be sent to Cede & Co. If less than all of the
Notes are being redeemed, the Depositary's practice is to determine by lot
the amount of the interest of each Direct Participant in such issue to be
redeemed.
Neither the Depositary nor Cede & Co. will consent or vote with respect to
the Notes. Under its usual procedures, the Depositary mails an Omnibus
Proxy to the issuer as soon as possible after the record date. The Omnibus
Proxy assigns Cede & Co.'s consenting or voting rights to those Direct
Participants to whose accounts the Notes are credited on the record date
(identified in a listing attached to the Omnibus Proxy).
Principal, premium (if any), and interest payments on the Notes will be made
to the Depositary. The Depositary's practice is to credit Direct
Participants' accounts on the payable date in accordance with their
respective holdings shown on the Depositary's records unless the Depositary
has reason to believe that it will not receive payment on the payable date.
Payments by Participants to Beneficial Owners will be governed by standing
instructions and customary practices, as is the case with securities held
for
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the accounts of customers in bearer form or registered in "street name," and
will be the responsibility of such Participant and not of the Depositary,
the Paying Agent, or the Company, subject to any statutory or regulatory
requirements as may be in effect from time to time. Payment to the
Depositary of principal, premium (if any) and interest on the Notes are the
responsibility of the Company or the Paying Agent, disbursement of such
payments to Direct Participants shall be the responsibility of the
Depositary, and disbursement of such payments to the Beneficial Owners shall
be the responsibility of Direct and Indirect Participants.
The information in this section concerning the Depositary and the Depositary's
book-entry system has been obtained from sources that the Company believes to be
reliable, but the Company takes no responsibility for the accuracy thereof.
So long as the Depositary for the Global Notes, or its nominee, is the
registered owner of the Global Notes, the Depositary or its nominee, as the case
may be, will be considered the sole owner or Holder of the Notes represented by
the Global Notes for all purposes under the Indenture. Except as set forth
below, owners of beneficial interests in such Global Notes will not be entitled
to have Notes represented by such Global Notes registered in their names, will
not receive or be entitled to receive physical delivery of Notes in definitive
form and will not be considered the owners or Holders thereof under the
Indenture. Accordingly, each person owning a beneficial interest in Global Notes
must rely on the procedures of the Depositary and, if such person is not a
Participant, those of the Participant through which such person owns its
interests, in order to exercise any rights of a Holder under the Indenture or
such Note.
The Indenture provides that the Depositary, as a Holder, may appoint agents and
otherwise authorize Participants to give or take any request, demand,
authorization, direction, notice, consent, waiver or other action which a Holder
is entitled to give or take under the Indenture, including the right to sue for
payment of principal or interest pursuant to Section 316(b) of the Trust
Indenture Act of 1939, as amended. The Company understands that under existing
industry practices, when the Company requests any action of Holders or when a
Beneficial Owner desires to give or take any action which a Holder is entitled
to give or take under the Indenture, the Depositary generally will give or take
such action, or authorize the relevant Participants to give or take such action,
and such Participants would authorize Beneficial Owners owning through such
Participants to give or take such action or would otherwise act upon the
instructions of Beneficial Owners owning through them.
The Company has been informed by the Depositary that the Depositary will assist
its Participants and their customers (Beneficial Owners) in taking any action a
Holder is entitled to take under the Indenture or exercise any rights available
to Cede & Co., as the holder of record of the Notes and including the right to
demand acceleration of the Notes upon an Event of Default or to institute suit
for the enforcement of payment or interest pursuant to Section 316(b) of the
Trust Indenture Act of 1939, as amended. The Depositary has advised the Company
that it will act with respect to such matters upon written instructions from a
Participant to whose account with the Depositary the relevant beneficial
ownership in the Notes is credited. The Company understands that a Participant
will deliver such written instructions to the Depositary upon itself receiving
similar written instructions from either Indirect Participants or Beneficial
Owners, as the case may be.
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Under Rule 6 of the rules and procedures filed by the Depositary with the
Commission pursuant to Section 17 of the Exchange Act, Participants are required
to indemnify the Depositary against all liability the Depositary may sustain,
without fault on the part of the Depositary or its nominee, as a result of any
action they may take pursuant to the instructions of the Participant in
exercising any such rights.
The laws of some jurisdictions require that certain purchasers of securities
take physical delivery of such securities in definitive form. Such limits and
such laws may impair the ability to transfer beneficial interests in the Global
Notes.
Principal, premium, if any, and interest payments on Notes registered in the
name of or held by the Depositary or its nominee will be made to the Depositary
or its nominee, as the case may be, as the registered owner or the Holder of the
Global Notes representing such Notes. Neither the Company nor the Trustee will
have any responsibility or liability for any aspect of the records relating to
or payments made on account of beneficial ownership interests in the Global
Notes or for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests.
If the Depositary is at any time unwilling, unable or ineligible to continue as
depositary and a successor depositary is not appointed by the Company within 60
days or, if an Event of Default under the Indenture has occurred and is
continuing, the Company will issue Notes in definitive registered form, without
coupons, in denominations of $1,000 of principal amount and any integral
multiple thereof, in exchange for the Global Notes representing such Notes. In
addition, the Company may at any time and in its sole discretion determine not
to have any Notes in registered form represented by the Global Notes and, in
such event, will issue Notes or in definitive registered form in exchange for
the Global Notes representing such Notes. In any such instance, an owner of a
beneficial interest in a Global Note will be entitled to physical delivery in
definitive form of Notes registered in its name. Upon the exchange of the Global
Notes for Notes in definitive form, the Global Notes will be cancelled by the
Trustee.
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DESCRIPTION OF CAPITAL STOCK
GENERAL MATTERS
The total amount of authorized capital stock of the Company consists of
150,000,000 shares of Common Stock, par value $.01 per share, and 1,000,000
shares of preferred stock, par value $.01 per share (the "Preferred Stock"),
50,341,554 shares of Common Stock which are currently issued and outstanding and
no shares of Preferred Stock which are currently issued and outstanding. The
discussion herein describes the Company's capital stock, the Restated
Certificate and By-laws. The following summary of certain provisions of the
Company's capital stock describes all material provisions of, but does not
purport to be complete and is subject to, and qualified in its entirety by, the
Restated Certificate and the By-laws of the Company that are included as
exhibits to the Registration Statements of which this Prospectus forms a part
and by the provisions of applicable law.
The Restated Certificate and By-laws contain certain provisions that are
intended to enhance the likelihood of continuity and stability in the
composition of the Board of Directors and which may have the effect of delaying,
deferring or preventing a future takeover or change in control of the Company
unless such takeover or change in control is approved by the Board of Directors.
COMMON STOCK
The issued and outstanding shares of Common Stock are validly issued, fully paid
and nonassessable. Subject to the prior rights of the holders of any Preferred
Stock, the holders of outstanding shares of Common Stock are entitled to receive
dividends out of assets legally available therefor at such time and in such
amounts as the Board of Directors may from time to time determine. The shares of
Common Stock are not convertible and the holders thereof have no preemptive or
subscription rights to purchase any securities of the Company. Upon liquidation,
dissolution or winding up of the Company, the holders of Common Stock are
entitled to receive pro rata the assets of the Company which are legally
available for distribution, after payment of all debts and other liabilities and
subject to the prior rights of any holders of Preferred Stock then outstanding.
Each outstanding share of Common Stock is entitled to one vote on all matters
submitted to a vote of stockholders. There is no cumulative voting.
PREFERRED STOCK
The Company's Board of Directors may, without further action by the Company's
stockholders, from time to time, direct the issuance of shares of Preferred
Stock in series and may, at the time of issuance, determine the rights,
preferences and limitations of each series. Satisfaction of any dividend
preferences of outstanding shares of Preferred Stock would reduce the amount of
funds available for the payment of dividends on shares of Common Stock. Holders
of shares of Preferred Stock may be entitled to receive a preference payment in
the event of any liquidation, dissolution or winding-up of the Company before
any payment is made to the holders of shares of Common Stock. Under certain
circumstances, the issuance of shares of Preferred Stock may render more
difficult or tend to discourage a merger, tender offer or proxy contest, the
assumption of control by
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a holder of a large block of the Company's securities or the removal of
incumbent management. Upon the affirmative vote of a majority of the total
number of directors then in office, the Board of Directors of the Company,
without stockholder approval, may issue shares of Preferred Stock with voting
and conversion rights which could adversely affect the holders of shares of
Common Stock. There are no shares of Preferred Stock currently outstanding, and
the Company has no present intention to issue any shares of Preferred Stock.
CERTAIN PROVISIONS OF THE RESTATED CERTIFICATE OF INCORPORATION AND BY-LAWS
The Restated Certificate provides for the Board of Directors to be divided into
three classes, as nearly equal in number as possible, serving staggered terms.
Approximately one-third of the Board of Directors will be elected each year. See
"Management." Under the Delaware General Corporation Law, directors serving on a
classified board can only be removed for cause. The provision for a classified
board could prevent a party who acquires control of a majority of the
outstanding voting stock from obtaining control of the Board of Directors until
the second annual stockholders meeting following the date the acquiror obtains
the controlling stock interest. The classified board provision could have the
effect of discouraging a potential acquiror from making a tender offer or
otherwise attempting to obtain control of the Company and could increase the
likelihood that incumbent directors will retain their positions.
The Restated Certificate provides that stockholder action can be taken only at
an annual or special meeting of stockholders and cannot be taken by written
consent in lieu of a meeting. The Restated Certificate and the By-laws provides
that, except as otherwise required by law, special meetings of the stockholders
can only be called pursuant to a resolution adopted by a majority of the Board
of Directors or by the Chief Executive Officer of the Company. Stockholders will
not be permitted to call a special meeting or to require the Board of Directors
to call a special meeting.
The By-laws establish an advance notice procedure for stockholder proposals to
be brought before an annual meeting of stockholders of the Company, including
proposed nominations of persons for election to the Board of Directors.
Stockholders at an annual meeting may only consider proposals or nominations
specified in the notice of meeting or brought before the meeting by or at the
direction of the Board of Directors or by a stockholder who was a stockholder of
record on the record date for the meeting, who is entitled to vote at the
meeting and who has given to the Company's Secretary timely written notice, in
proper form, of the stockholder's intention to bring that business before the
meeting. Although the By-laws do not give the Board of Directors the power to
approve or disapprove stockholder nominations of candidates or proposals
regarding other business to be conducted at a special or annual meeting, the
By-laws may have the effect of precluding the conduct of certain business at a
meeting if the proper procedures are not followed or may discourage or defer a
potential acquiror from conducting a solicitation of proxies to elect its own
slate of directors or otherwise attempting to obtain control of the Company.
The Restated Certificate and By-laws provide that the affirmative vote of
holders of at least 66 2/3% of the total votes eligible to be cast in the
election of directors is required to amend, alter, change or repeal certain of
their provisions. This requirement of a super-
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majority vote to approve amendments to the Restated Certification of
Incorporation and By-laws could enable a minority of the Company's stockholders
to exercise veto power over any such amendments.
CERTAIN PROVISIONS OF DELAWARE LAW
The Company is subject to the "Business Combination" provisions of the Delaware
General Corporation Law. In general, such provisions prohibit a publicly held
Delaware corporation from engaging in various "business combination"
transactions with any "interested stockholder" for a period of three years after
the date of the transaction which the person became an "interested stockholder,"
unless (i) the transaction is approved by the Board of Directors prior to the
date the "interested stockholder" obtained such status; (ii) upon consummation
of the transaction which resulted in the stockholder becoming an "interested
stockholder," the "interested stockholder," owned at least 85% of the voting
stock of the corporation outstanding at the time the transaction commenced,
excluding for purposes of determining the number of shares outstanding those
shares owned by (a) persons who are directors and also officers and (b) employee
stock plans in which employee participants do not have the right to determine
confidentially whether shares held subject to the plan will be tendered in a
tender or exchange offer; or (iii) on or subsequent to such date the "business
combination" is approved by the Board of Directors and authorized at an annual
or special meeting of stockholders by the affirmative vote of at least 66 2/3%
of the outstanding voting stock which is not owned by the "interested
stockholder." A "business combination" is defined to include mergers, asset
sales and other transactions resulting in financial benefit to a stockholder. In
general, an "interested stockholder" is a Person who, together with affiliates
and associates, owns (or within three years, did own) 15% or more of a
corporation's voting stock. The statute could prohibit or delay mergers or other
takeover or change in control attempts with respect to the Company and,
accordingly, may discourage attempts to acquire the Company.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Restated Certificate limits the liability of Directors to the fullest extent
permitted by the Delaware General Corporation Law. In addition, the Restated
Certificate of Incorporation provides that the Company shall indemnify Directors
and officers of the Company to the fullest extent permitted by such law. The
Company anticipates entering into indemnification agreements with its current
Directors and executive officers and any new Directors or executive officers.
WARRANTS
In connection with the Unit Offering, the Company issued 445,000 Warrants
pursuant to the Warrant Agreement between the Company and The Bank of New York.
Wherever particular terms of the Warrant Agreement, not otherwise defined
herein, are referred to, such defined terms are incorporated herein by
reference. A copy of the Warrant Agreement is filed as an exhibit to the
Registration Statement of which this Prospectus forms a part.
Each Warrant is exercisable to purchase 1.458983995 shares of Common Stock at an
exercise price of $.01 per share, subject to adjustment. The Warrants may be
exercised at
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any time on or after February 3, 1999 and prior to February 3, 2008. Upon the
occurrence of a merger with a person that does not have a class of equity
securities registered under the Securities Exchange Act of 1934, as amended (the
"Exchange Act") in connection with which the consideration to stockholders of
the Company is not all cash, the Company or its successor by merger or
consolidation will be required to offer to repurchase the Warrants. All such
repurchases will be at the market price of the Common Stock or other securities
issuable upon exercise of the Warrants (or, if the Common Stock (or such other
securities) are not registered under the Exchange Act, the value of the Common
Stock or other securities as determined by an independent financial expert),
less the exercise price thereof.
REGISTRATION RIGHTS
The Fund Investors, the Management Investors, and the Company are parties to a
Registration Agreement dated as of August 13, 1997 (the "Registration
Agreement"). Each of Morgan Stanley Capital Partners, Madison Dearborn Capital
Partners, and Frontenac Company are entitled to demand two long-form
registrations and unlimited short-form registrations, and Battery Ventures is
entitled to demand one long-form registration and unlimited short-form
registrations. In addition, the Fund Investors and the Management Investors may
"piggyback" on primary or secondary registered public offerings of the Company's
securities. Each Fund Investor and Management Investor is subject to holdback
restrictions in the event of a public offering of Company securities. The
parties to the Registration Agreement have agreed to permit the holders of
Warrants to "piggyback" on any registrations under the Registration Agreement.
The Company and The Bank of New York are parties to a Warrant Registration
Rights Agreement dated as of February 3, 1998 (the "Warrant Registration
Agreement"). The holders of the Warrants are entitled to "piggyback"
registration rights in connection with certain public offerings of the Common
Stock. In addition, the Company is required to use its best efforts to cause to
become effective under the Securities Act, within 180 days after the closing of
the Equity Offering, a shelf registration statement with respect to the issuance
of the Common Stock issuable upon exercise of the Warrants; provided, however,
that such shelf registration statement may not be declared effective prior to
the first anniversary of the issuance of the Warrants. Once the shelf
registration statement is declared effective, the Company is required to
maintain the effectiveness of such registration statement until all Warrants
have expired or been exercised.
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CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS
The following is a general discussion of the principal United States federal
income tax consequences of the purchase, ownership and disposition of the Notes
to initial purchasers thereof. This discussion is based on currently existing
provisions of the Code, existing, temporary and proposed Treasury regulations
promulgated thereunder, and administrative and judicial interpretations thereof,
all as in effect or proposed on the date hereof and all of which are subject to
change, possibly with retroactive effect, or different interpretations. This
discussion does not address the tax consequences to subsequent purchasers of
Notes and is limited to purchasers who acquire the Notes at their issue price
and hold such Notes as capital assets, within the meaning of section 1221 of the
Code. Moreover, this discussion is for general information only and does not
address all of the tax consequences that may be relevant to particular initial
purchasers in light of their personal circumstances or to certain types of
initial purchasers, such as certain financial institutions, insurance companies,
tax-exempt entities, dealers in securities, certain U.S. expatriates, persons
who have hedged the risk of owning a Note or holders whose "functional currency"
is not the U.S. dollar.
As used herein, the term "U.S. Holder" means an initial purchaser of a Note that
is, for United States federal income tax purposes, (a) a citizen or individual
resident of the United States, (b) a corporation, partnership or other entity
created or organized in or under the laws of the United States or any political
subdivision thereof, (c) an estate the income of which is subject to United
States federal income taxation regardless of source, or (d) a trust subject to
the primary supervision of a court within the United States and the control of a
United States person, as described in the Code. An individual may, subject to
certain exceptions, be deemed to be a United States resident (as opposed to a
non-resident alien) by virtue of being present in the United States on at least
31 days in the calendar year and for an aggregate of at least 183 days during a
three-year period ending in the current calendar year (counting for such
purposes all of the days present in the current year, one-third of the days
present in the immediately preceding year, and one-sixth of the days present in
the second preceding year). Resident aliens are subject to U.S. federal tax as
if they were U.S. citizens. As used herein, a "Non-U.S. Holder" is a holder that
is not a U.S. Holder.
ALL PROSPECTIVE PURCHASERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE
PARTICULAR TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION
OF THE NOTES, INCLUDING THE APPLICABILITY OF ANY FEDERAL TAX LAWS OR ANY STATE,
LOCAL OR FOREIGN TAX LAWS, AND ANY CHANGES (OR PROPOSED CHANGES) IN APPLICABLE
TAX LAWS OR INTERPRETATIONS THEREOF.
UNITED STATES FEDERAL INCOME TAXATION OF UNITED STATES HOLDERS
Interest. Stated interest paid on a Note generally will be taxable to a U.S.
Holder as ordinary interest income as it accrues or is received, in accordance
with such U.S. Holder's method of accounting for United States federal income
tax purposes. Holders of the Notes will not be required to include any original
issue discount ("OID") in gross income for U.S. federal income tax purposes as a
consequence of the issuance of the Notes at an
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approximately 2% discount from their principal amount because the amount of OID
created by such discount will not exceed the de minimis threshold as determined
under Section 1273(a)(3) of the Code and thus will be treated as zero.
Optional Redemption. Notes may be redeemed prior to their stated maturity at the
option of the Company. For purposes of computing the yield of such instruments,
the Company will be deemed to exercise or not exercise its option to redeem the
Notes in a manner that minimizes the yield on the Notes. In the event the
Company were deemed to exercise its option to redeem, for purposes of
determining whether the Notes were issued with OID, the Notes' yield to maturity
would be computed by treating the deemed redemption date as the maturity date of
the Note and the amount payable on redemption as the principal amount of the
Note. It is not anticipated that the Company's option to redeem the Notes prior
to stated maturity will be treated as exercised.
Redemption, Sale, Exchange or Retirement of the Notes. In general, a U.S. Holder
will recognize gain or loss on the redemption, sale, exchange or retirement of
the Notes equal to the difference between the amount realized on the redemption,
sale, exchange or retirement (reduced by any amounts attributable to accrued but
unpaid interest, which will be taxable as such) and such U.S. Holder's adjusted
tax basis in the Note. A U.S. Holder's adjusted tax basis in the Note generally
will be its cost to such U.S. Holder. As a general rule, such gain or loss
recognized on the redemption, sale, exchange or retirement of the Notes will be
capital gain or loss. With respect to individuals, gain is subject to reduced
rates of tax if the Note was held for more than twelve months and is subject to
further reduced rates if the Note was held for more than eighteen months, in
each case as of the date of redemption, sale, exchange or retirement.
UNITED STATES FEDERAL INCOME TAXATION OF NON-U.S. HOLDERS
Under present U.S. federal income and estate tax law and subject to the
discussion of backup withholding below:
(i) payments of principal, premium (if any) and interest on a Note by the
Company or any agent of the Company to any Non-U.S. Holder will not be
subject to withholding of U.S. federal income tax, provided that, in the
case of interest (1) the Non-U.S. Holder does not actually or
constructively own 10% or more of the total combined voting power of all
classes of stock of the Company entitled to vote, (2) the Non-U.S. Holder
is not (x) a controlled foreign corporation that is related to the Company
through stock ownership, or (y) a bank receiving interest described in
Section 881(c)(3)(A) of the Code, and (3) the beneficial owner of the Note
certifies to the Company or its agent, under penalties of perjury, that it
is not a "United States person" (as defined in the Code) and provides its
name and address, and (A) such beneficial owner files the Form W-8 with the
withholding agent or (B) in the case of a securities clearing organization,
bank or other financial institution that holds customers' securities in the
ordinary course of its trade or business (a "financial institution") and
holds the Note on behalf of the beneficial owner, such financial
institution certifies to the Company or its agent under penalties of
perjury that such statement has been received from the beneficial owner and
furnishes the payor with a copy thereof;
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(ii) a Non-U.S. Holder will not be subject to U.S. federal income tax on
gain realized on the sale, exchange, redemption, retirement at maturity or
other disposition of a Note unless (1) such holder is an individual who is
present in the United States for 183 days or more during the taxable year
and certain other conditions are met, or (2) the gain is effectively
connected with a U.S. trade or business of the holder, and if an income tax
treaty applies, is generally attributable to a U.S. "permanent
establishment" maintained by the holder;
(iii) a Note held by an individual who at the time of death is not a
citizen or resident of the United States will not be subject to U.S.
federal estate tax as a result of such individual's death if, at the time
of such death, (1) the individual did not actually or constructively own 10
percent or more of the total combined voting power of all classes of stock
of the Company entitled to vote, and (2) the income on the Note would not
have been effectively connected with the conduct of a trade or business by
the individual in the United States; and
If a Non-U.S. Holder is engaged in a trade or business in the United States, and
interest on the Note or gain realized on the sale, exchange or other disposition
of the Note is effectively connected with the conduct of such trade or business
(and, if an income tax treaty applies, the Non-U.S. Holder maintains a U.S.
"permanent establishment" to which the interest or gain is attributable), the
Non-U.S. Holder, although exempt from the withholding tax discussed in the
preceding paragraph (i) (provided that such holder furnishes a properly executed
Internal Revenue Service ("IRS") Form 4224 or successor form on or before any
payment date to claim such exemption), generally will be subject to U.S. federal
income tax on such interest or gain on a net basis in the same manner as if it
were a U.S. Holder.
In addition, a foreign corporation that is a Non-U.S. Holder may be subject to a
branch profits tax equal to 30% of its effectively connected earnings and
profits for the taxable year, subject to certain adjustments, unless it
qualifies for a lower rate under an applicable tax treaty. For this purpose,
interest on a Note or gain on the disposition of a Note will be included in
earnings and profits if such interest or gain is effectively connected with the
conduct by the foreign corporation of a trade or business in the United States.
Recently finalized Treasury regulations pertaining to U.S. federal withholding
tax, generally effective for payments made after December 31, 1999 (the "Final
Withholding Tax Regulations"), will provide alternative methods for satisfying
the certification requirement described in paragraph (i)(3) above and will
require a Non-U.S. Holder that provides an IRS Form 4224 or successor form (as
discussed above) to also provide its U.S. taxpayer identification number. The
Final Withholding Tax Regulations generally also will require, in the case of a
Note held by a foreign partnership, that (x) the certification described in
paragraph (i)(3) above be provided by the partners rather than the partnership
and (y) the partnership provide certain information, including a U.S. taxpayer
identification number. A look-through rule will apply in the case of tiered
partnerships.
Non-U.S. Holders should consult with their tax advisors regarding U.S. and
foreign tax consequences with respect to the Notes.
126
<PAGE> 127
INFORMATION REPORTING AND BACKUP WITHHOLDING
In general, information reporting requirements will apply to certain payments
made in respect of a Note made to U.S. Holders other than certain exempt
recipients (such as corporations). A 31% backup withholding tax will apply to
such payments if the U.S. Holder fails to provide a correct taxpayer
identification number or certification of exempt status or, with respect to
certain payments, the U.S. Holder fails to report in full all dividend and
interest income and the IRS notifies the payor of such underreporting.
Under current Treasury Regulations, backup withholding and information reporting
will not apply to payments made by the Company or any agent thereof (in its
capacity as such) to a Non-U.S. Holder of a Note if such holder has provided the
required certification that it is not a United States person as set forth in
paragraph (i) under "United States Federal Income Taxation of Foreign Holders,"
provided that neither the Company nor its agent has actual knowledge that the
holder is a United States person. The Company or its agent may, however, report
(on IRS Form 1042S) payments of interest on the Notes.
Payment of the proceeds from the disposition of a Note made to or through a
foreign office of a broker will not be subject to information reporting or
backup withholding, except that if the broker is a United States person, a
controlled foreign corporation for U.S. tax purposes or a foreign person 50% or
more of whose gross income from all sources for the three-year period ending
with the close of its taxable year preceding the payment was effectively
connected with a U.S. trade or business, information reporting may apply to such
payments. Payments of the proceeds from a disposition of a Note made to or
through the U.S. office of a broker is subject to information reporting and
backup withholding unless the holder or beneficial owner certifies as to its
taxpayer identification number or otherwise establishes an exemption from
information reporting and backup withholding.
In general, the Final Withholding Tax Regulations do not significantly alter the
current substantive backup withholding and information reporting requirements,
but unify current certification procedures and clarify reliance standards. Under
the Final Withholding Tax Regulations, special rules apply which permit the
shifting of primary responsibility for withholding to certain financial
intermediaries acting on behalf of beneficial owners. A holder of a Note should
consult with its tax advisor regarding the application of the backup withholding
rules to its particular situation, the availability of an exemption therefrom,
the procedure for obtaining such an exemption, if available, and the impact of
the Final Withholding Tax Regulations on payments made with respect to Notes
after December 31, 1999.
Any amounts withheld under the backup withholding rules from a payment to a
holder would be allowed as a refund or a credit against such holder's U.S.
federal income tax liability, provided the required information is timely
furnished to the IRS.
127
<PAGE> 128
ERISA CONSIDERATIONS
A fiduciary of a pension, profit-sharing, retirement, or other employee benefit
plan ("Plan") subject to Title I of the Employee Retirement Income Security Act
of 1974, as amended ("ERISA"), should consider the fiduciary standards under
ERISA in the context of the Plan's particular circumstances before authorizing
an investment of a portion of such Plan's assets in the Notes. Accordingly, such
fiduciary should consider (i) whether the investment satisfies the
diversification requirements of Section 404(a)(1)(C) of ERISA, (ii) whether the
investment is in accordance with the documents and instruments governing the
Plan as required by Section 404(a)(1)(D) of ERISA and (iii) whether the
investment is prudent under ERISA.
In addition to the imposition of general fiduciary standards of investment
prudence and diversification, ERISA and the corresponding provisions of the Code
prohibit a wide range of transactions involving the assets of a Plan or a plan
subject to Section 4975 of the Code (such plans are collectively referred to as
"ERISA Plans") and persons who have certain specified relationships to the ERISA
Plan ("parties in interest" within the meaning of ERISA, and "disqualified
persons" within the meaning of the Code). A prohibited transaction described in
Section 406 of ERISA or Section 4975 of the Code could arise if the Company
were, or were to become, a party in interest or a disqualified person with
respect to an ERISA Plan purchasing the Notes. Certain exemptions from the
prohibited transaction rules could be applicable to the purchase of the Notes by
an ERISA Plan depending on the type and circumstances of the fiduciary of the
ERISA Plan making the decision to acquire the Notes. Included among these
exemptions are: Prohibited Transaction Class Exemption ("PTCE") 90-1, regarding
investments by insurance company pooled separate accounts; PTCE 91-38, regarding
investments by bank collective investment funds; PTCE 84-14, regarding
transactions effected by a qualified professional asset manager; PTCE 95-60,
regarding investments by insurance company general amounts; and PTCE 96-23,
regarding transactions effected by an in-house asset manager. Thus, a fiduciary
of an ERISA Plan considering an investment in the Notes also should consider
whether the acquisition or the continued holding of the Notes might constitute
or give rise to a non-exempt prohibited transaction. No ERISA Plan with respect
to which the Company is a party in interest or a disqualified person may
purchase the Notes, unless a statutory or administrative exemption is available.
Certain employee benefit plans, such as governmental plans and church plans (if
no election has been made under Section 410(d) of the Code), are not subject to
the restrictions of ERISA, and assets of such Plans may be invested in the Notes
without regard to the ERISA considerations described above. The investment in
the Notes by such employee benefit plans may, however, be subject to other
applicable federal and state laws, which should be carefully considered by such
employee benefit plans before investing in the Notes.
Every ERISA Plan investor considering the acquisition of the Notes should
consult with its counsel with respect to the potential applicability of ERISA
and Section 4975 of the Code to such investment, and whether any prohibited
transaction exemption would be applicable.
128
<PAGE> 129
PLAN OF DISTRIBUTION
This Prospectus is to be used by Morgan Stanley Dean Witter in connection with
offers and sales of the Notes in market-making transactions at negotiated prices
relating to prevailing market prices at the time of sale. Morgan Stanley Dean
Witter may act as principal or agent in such transactions. Morgan Stanley Dean
Witter has no obligation to make a market in the Notes, and may discontinue its
market-making activities at any time without notice, at its sole discretion.
There is currently no established public market for the Notes. The Company does
not currently intend to apply for listing of the Notes on any securities
exchange. Therefore, any trading that does develop will occur on the
over-the-counter market. The Company has been advised by Morgan Stanley Dean
Witter that it intends to make a market in the Notes but it has no obligation to
do so and any market-making may be discontinued at any time. No assurance can be
given that an active public market for the Notes will develop.
Morgan Stanley Dean Witter acted as an "Underwriter" in connection with the
initial public offering of the Company's Common Stock and the public offering of
the Notes and received aggregate commissions and fees of $6.0 million in
connection therewith. Morgan Stanley also acted as an "Initial Purchaser" in
connection with the original offering of the 11 3/4% Notes and received
approximately $4.4 million in fees in connection therewith. Morgan Stanley Dean
Witter is affiliated with entities that beneficially own approximately 20.5% of
the outstanding Common Stock as of September 30, 1998. Robert H. Niehaus and
John B. Ehrenkranz, directors of the Company, are officers of Morgan Stanley.
For further information regarding the involvement of affiliates of Morgan
Stanley Dean Witter in the management of the Company and their equity ownership,
see "Risk Factors -- Potential Conflicts of Interest Caused by Fund Investor
Control," "Management" and "Security Ownership of Certain Beneficial Owners and
Management."
Although there are no agreements to do so, Morgan Stanley Dean Witter, as well
as others, may act as broker or dealer in connection with the sale of the Notes
contemplated by this Prospectus and may receive fees or commissions in
connection therewith.
The Company has agreed to indemnify Morgan Stanley Dean Witter against certain
liabilities under the Securities Act or to contribute to payment that Morgan
Stanley Dean Witter may be required to make in respect of such liabilities.
LEGAL MATTERS
The validity of the Notes offered hereby have been passed upon for the Company
by Kirkland & Ellis (a partnership including professional corporations),
Chicago, Illinois.
129
<PAGE> 130
EXPERTS
The consolidated balance sheets of the Company as of September 30, 1998 and
December 31, 1997, and the related consolidated statements of operations,
stockholders' equity (deficit) and cash flows for the nine months ended
September 30, 1998 and for the period from inception (April 22, 1997) to
December 31, 1997, have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto and are included
herein in reliance upon the authority of said firm as experts in giving said
report.
130
<PAGE> 131
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets as of September 30, 1998, and
December 31, 1997......................................... F-3
Consolidated Statements of Operations for the nine months
ended September 30, 1998, and the Period from Inception
(April 22, 1997) through December 31, 1997................ F-4
Consolidated Statement of Stockholders' Equity (Deficit) for
the nine months ended September 30, 1998, and the Period
from Inception (April 22, 1997) through December 31,
1997...................................................... F-5
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1998, and the Period from Inception
(April 22, 1997) through December 31, 1997................ F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 132
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Allegiance Telecom, Inc.:
We have audited the accompanying consolidated balance sheets of Allegiance
Telecom, Inc. (a Delaware corporation) and subsidiaries (the "Company") as of
September 30, 1998, and December 31, 1997, and the related consolidated
statements of operations, stockholders' equity (deficit) and cash flows for the
nine months ended September 30, 1998, and for the period from inception (April
22, 1997), to December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Allegiance Telecom, Inc. and
subsidiaries as of September 30, 1998, and December 31, 1997, and the results of
their operations and their cash flows for the nine months ended September 30,
1998, and for the period from inception (April 22, 1997) to December 31, 1997,
in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
November 19, 1998
F-2
<PAGE> 133
ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 404,850.7 $ 5,726.4
Short-term investments.................................... 49,366.5 --
Short-term investments, restricted........................ 22,144.7 --
Accounts receivable (net of allowance for doubtful
accounts of $152.9 and $0, at September 30, 1998, and
December 31, 1997, respectively)........................ 2,031.9 4.3
Prepaid expenses and other current assets................. 1,711.4 245.2
----------- ---------
Total current assets................................ 480,105.2 5,975.9
PROPERTY AND EQUIPMENT:
Property and equipment.................................... 106,713.5 23,912.6
Accumulated depreciation and amortization................. (3,718.0) (12.7)
----------- ---------
Property and equipment, net......................... 102,995.5 23,899.9
OTHER NONCURRENT ASSETS:
Deferred debt issuance costs (net of accumulated
amortization of $485.9 and 0, respectively)............. 16,326.2 --
Long-term investments, restricted......................... 48,531.9 --
Other assets.............................................. 1,268.0 171.2
----------- ---------
Total other noncurrent assets....................... 66,126.1 171.2
----------- ---------
Total assets........................................ $ 649,226.8 $30,047.0
=========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable.......................................... $ 6,716.8 $ 2,261.7
Accrued liabilities and other............................. 28,130.8 1,668.0
----------- ---------
Total current liabilities........................... 34,847.6 3,929.7
LONG-TERM DEBT.............................................. 463,751.6... --
REDEEMABLE CUMULATIVE CONVERTIBLE PREFERRED STOCK:
$.01 par value, 0 and 40,498,062 shares authorized, 0 and
40,498,062 shares issued and outstanding at September
30, 1998, and December 31, 1997, respectively........... -- 33,409.4
REDEEMABLE WARRANTS......................................... 8,506.7 --
COMMITMENTS AND CONTINGENCIES (see Notes 6 and 8)
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $.01 par value, 1,000,000 and 0 shares
authorized, no shares issued or outstanding at September
30, 1998, and December 31, 1997, respectively........... -- --
Common stock -- $.01 par value, 150,000,000 and 42,629,965
shares authorized, 50,341,554 and 426 shares issued and
outstanding at September 30, 1998, and December 31,
1997, respectively...................................... 503.4 --
Additional paid-in capital................................ 416,729.9 3,008.4
Deferred compensation..................................... (16,165.8) (2,798.4)
Deferred management ownership allocation charge........... (33,002.2) --
Accumulated deficit....................................... (225,944.4) (7,502.1)
----------- ---------
Total stockholders' equity (deficit)................ 142,120.9 (7,292.1)
----------- ---------
Total liabilities and stockholders' equity
(deficit)........................................... $ 649,226.8 $30,047.0
=========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 134
ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
NINE MONTHS (APRIL 22, 1997),
ENDED THROUGH
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- -----------------
<S> <C> <C>
REVENUES.......................................... 4$,200.6..... $ 0.4
OPERATING EXPENSES:
Network......................................... 4,506.0 151.2
Selling......................................... 6,212.8 22.8
General and administrative...................... 19,862.4 3,403.1
Management ownership allocation charge.......... 160,534.4 --
Noncash deferred compensation................... 3,758.7 209.9
Depreciation and amortization................... 3,705.3 12.7
----------- -----------
Total operating expenses................ 198,579.6 3,799.7
----------- -----------
Loss from operations.................... (194,379.0) (3,799.3)
OTHER (EXPENSE) INCOME:
Interest income................................. 13,059.1 111.4
Interest expense................................ (25,278.4) --
----------- -----------
Total other (expense) income............ (12,219.3) 111.4
----------- -----------
NET LOSS.......................................... (206,598.3) (3,687.9)
ACCRETION OF REDEEMABLE PREFERRED STOCK AND
WARRANT VALUES.................................. (11,844.0) (3,814.2)
----------- -----------
NET LOSS APPLICABLE TO COMMON STOCK............... $(218,442.3) $ (7,502.1)
=========== ===========
NET LOSS PER SHARE, basic and diluted............. $ (13.02) $(17,610.68)
=========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING,
basic and diluted............................... 16,780,802 426
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 135
ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(Dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK DEFERRED
------------------- ------------------- ADDITIONAL MANAGEMENT
NUMBER OF NUMBER OF PAID-IN DEFERRED ALLOCATION ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION CHARGE DEFICIT
---------- ------ ---------- ------ ---------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, April 22, 1997 (date
of inception).............. -- $ -- -- $ -- $ -- $ -- $ -- $ --
Issuance of common stock at
$.23 per share........... -- -- 426 -- 0.1 -- -- --
Accretion of redeemable
preferred stock and
warrant values........... -- -- -- -- -- -- -- (3,814.2)
Deferred compensation...... -- -- -- -- 3,008.3 (3,008.3) -- --
Amortization of deferred
compensation............. -- -- -- -- -- 209.9 -- --
Net loss................... -- -- -- -- -- -- -- (3,687.9)
---------- ------ ---------- ------ ---------- ---------- ----------- -----------
BALANCE, December 31, 1997... -- -- 426 -- 3,008.4 (2,798.4) -- (7,502.1)
Accretion of redeemable
preferred stock and
warrant values........... -- -- -- -- -- -- -- (11,844.0)
Initial public offering.... -- -- 10,000,000 100.0 137,656.8 -- -- --
Conversion of redeemable
preferred stock.......... -- -- 40,341,128 403.4 65,402.0 -- -- --
Deferred compensation...... -- -- -- -- 210,662.7 (17,126.1) (193,536.6) --
Amortization of deferred
compensation............. -- -- -- -- -- 3,758.7 160,534.4 --
Net loss................... -- -- -- -- -- -- -- (206,598.3)
---------- ------ ---------- ------ ---------- ---------- ----------- -----------
BALANCE, September 30, 1998.. -- $ -- 50,341,554 $503.4 $416,729.9 $(16,165.8) $ (33,002.2) $(225,944.4)
========== ====== ========== ====== ========== ========== =========== ===========
<CAPTION>
TOTAL
-----------
<S> <C>
BALANCE, April 22, 1997 (date
of inception).............. $ --
Issuance of common stock at
$.23 per share........... 0.1
Accretion of redeemable
preferred stock and
warrant values........... (3,814.2)
Deferred compensation...... --
Amortization of deferred
compensation............. 209.9
Net loss................... (3,687.9)
-----------
BALANCE, December 31, 1997... (7,292.1)
Accretion of redeemable
preferred stock and
warrant values........... (11,844.0)
Initial public offering.... 137,756.8
Conversion of redeemable
preferred stock.......... 65,805.4
Deferred compensation...... --
Amortization of deferred
compensation............. 164,293.1
Net loss................... (206,598.3)
-----------
BALANCE, September 30, 1998.. $ 142,120.9
===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 136
ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
NINE MONTHS (APRIL 22, 1997),
ENDED THROUGH
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(206,598.3) $ (3,687.9)
Adjustments to reconcile net loss to cash used in
operating activities --
Depreciation and amortization........................... 3,705.3 12.7
Provision for uncollectible accounts receivable......... 152.9 --
Accretion of senior discount notes...................... 20,114.0 --
Amortization of original issue discount................. 387.8 --
Amortization of deferred debt issuance costs............ 485.9 --
Management ownership allocation charge and amortization
of deferred compensation.............................. 164,293.1 209.9
Changes in assets and liabilities --
Accounts receivable.................................. (2,180.5) (4.3)
Prepaid expenses and other current assets............ (1,466.2) (245.2)
Other assets......................................... (1,096.8) (171.2)
Accounts payable..................................... (1,453.6) 275.1
Accrued liabilities and other........................ 13,158.5 1,668.0
----------- ----------
Net cash used in operating activities.............. (10,497.9) (1,942.9)
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................... (63,550.2) (21,926.0)
Purchases of short-term and long-term investments......... (177,664.7) --
Proceeds from redemption of short-term and long-term
investments............................................. 57,621.6 --
----------- ----------
Net cash used in investing activities.............. (183,593.3) (21,926.0)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from senior discount notes....................... 443,212.1 --
Proceeds from issuance of redeemable warrants............. 8,183.6 --
Debt issuance costs....................................... (16,812.1) --
Proceeds from issuance of redeemable preferred stock...... -- 5,000.0
Proceeds from redeemable capital contributions............ 20,875.1 24,595.2
Proceeds from issuance of common stock.................... -- 0.1
Proceeds from initial public offering..................... 137,756.8 --
----------- ----------
Net cash provided by financing activities.......... 593,215.5 29,595.3
----------- ----------
INCREASE IN CASH AND CASH EQUIVALENTS....................... 399,124.3 5,726.4
CASH AND CASH EQUIVALENTS, beginning of period.............. 5,726.4 --
----------- ----------
CASH AND CASH EQUIVALENTS, end of period.................... $ 404,850.7 $ 5,726.4
=========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 137
ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998, AND DECEMBER 31, 1997
(Dollars in thousands, except share amounts)
1. GENERAL:
Allegiance Telecom, Inc., a competitive local exchange carrier ("CLEC"), was
incorporated on April 22, 1997, as a Delaware corporation for the purpose of
providing 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's development plan is focused on offering services in 24 of the
largest metropolitan areas in the U.S. As of September 30, 1998, the Company is
operational in six markets: New York City, Dallas, Atlanta, Fort Worth, Chicago
and Los Angeles; and is in the process of deploying networks in seven other
markets: San Francisco, Boston, Washington D.C., Northern New Jersey, Oakland,
San Diego and San Jose. In addition, the Company has switching equipment on
order for two of its other target markets: Philadelphia and Houston.
Until December 16, 1997, the Company was in the development stage. Since its
inception on April 22, 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. Accordingly, the Company has incurred substantial
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 operates. 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 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 provisions 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.
F-7
<PAGE> 138
ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CONSOLIDATION
The accompanying financial statements include the accounts of Allegiance
Telecom, Inc. and its wholly owned subsidiaries. All significant intercompany
balances and transactions have been eliminated.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, the Company includes as cash and cash
equivalents, cash, marketable securities and commercial paper with original
maturities of three months or less.
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.
RESTRICTED INVESTMENTS
Restricted investments consist primarily of U.S. government securities purchased
in connection with the Company's outstanding 12 7/8% Notes (see Note 4) to
secure the first three years' (six semi-annual) interest payments on these
notes. Such investments are stated at accreted value, which approximates fair
value, and are shown in both current and long-term assets, based upon the
maturity dates of each of the securities.
Restricted investments also include $50.0 in certificates of deposit classified
as short-term investments and $733.9 in certificates of deposit classified as
long-term investments held as collateral for letters of credit issued on behalf
of the Company.
ACCOUNTS RECEIVABLE
Accounts receivable consists of end user receivables, interest receivable, and
at December 31, 1997, a receivable from an employee.
PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of prepaid rent, prepaid
insurance and refundable deposits. Prepayments are expensed on a straight-line
basis over the life of the underlying agreements.
F-8
<PAGE> 139
ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment includes network equipment, leasehold improvements,
software, office equipment, furniture and fixtures, construction-in-progress and
other. These assets are stated at cost, which includes direct costs and
capitalized interest and are depreciated once placed in service using the
straight-line method. Interest expense for the nine months ended September 30,
1998, was $27,073.1 before the capitalization of $1,794.7 of interest related to
construction-in-progress. No interest expense was incurred during the period
ended December 31, 1997. Repair and maintenance costs are expensed as incurred.
Property and equipment at September 30, 1998, and December 31, 1997, consisted
of the following:
<TABLE>
<CAPTION>
USEFUL
SEPTEMBER 30, DECEMBER 31, LIVES
1998 1997 (IN YEARS)
------------- ------------ ----------
<S> <C> <C> <C>
Network equipment......................... $ 37,089.8 $ -- 5-7
Leasehold improvements.................... 8,830.1 37.5 5-10
Software.................................. 6,580.4 -- 3
Office equipment and other................ 3,735.7 89.9 2
Furniture and fixtures.................... 1,742.4 150.2 5
---------- ---------
Property and equipment, in service........ 57,978.4 277.6
Less: Accumulated depreciation............ (3,718.0) (12.7)
---------- ---------
Property and equipment in service, net.... 54,260.4 264.9
Construction-in-progress.................. 48,735.1 23,635.0
---------- ---------
Property and equipment, net............... $102,995.5 $23,899.9
========== =========
</TABLE>
REVENUE RECOGNITION
Revenue is recognized in the month in which the service is provided, except for
reciprocal compensation generated by calls placed to Internet service providers
connected to the Company's network, which is recorded on a cash basis. The
propriety of CLECs (such as the Company) to earn local reciprocal compensation
is the subject of numerous regulatory and legal challenges, and until this issue
is ultimately resolved, the Company has determined to recognize this revenue
only upon receipt.
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 established reporting and disclosure requirements for
comprehensive income and its components within the financial statements. The
Company's comprehensive income components were immaterial as of September 30,
1998, and the Company had no
F-9
<PAGE> 140
ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
comprehensive income components as of December 31, 1997; therefore,
comprehensive income is the same as net income for both periods.
LOSS PER SHARE
The Company calculates net loss per share under the provisions of the Financial
Accounting Standards Board Statement of Financial Accounting Standards No. 128,
"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 IPO
(see Note 3). The redeemable cumulative convertible preferred shares, warrants
and options were not included 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 $11,844.0 for the nine months ended September 30, 1998, and $3,814.2
for the period ended December 31, 1997.
RECOGNITION OF 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 costs capitalized prior to the adoption
of SOP 98-5 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.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133").
SFAS 133 requires that all derivatives be recognized at fair value as either
assets or liabilities. SFAS 133 also requires an entity that elects to apply
hedge accounting to establish the method to be used in assessing the
effectiveness of the hedging derivatives and the measurement approach for
determining the ineffectiveness of the hedge at the inception of the hedge. The
methods chosen must be consistent with the entity's approach to managing risk.
The Company will adopt SFAS 133 at the beginning of the fourth quarter of 1998.
Adoption of SFAS 133 will not have an effect on the Company, inasmuch as the
Company does not currently invest in derivatives or participate in hedging
activities.
USE OF ESTIMATES IN FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the
F-10
<PAGE> 141
ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
date of the financial statements and the reported amounts of expenses during the
reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain amounts in the prior period's consolidated financial statements have
been reclassified to conform with the current period presentation.
3. CAPITALIZATION:
In connection with its initial public offering of Common Stock (the "IPO") on
July 7, 1998, (see below) the Company effected a 426.2953905-for-one stock
split, which is retroactively reflected within these financial statements.
STOCK PURCHASE AGREEMENT AND SECURITY HOLDERS AGREEMENT
On August 13, 1997, the Company entered into a stock purchase agreement with
Allegiance Telecom, L.L.C. ("Allegiance LLC") (see Note 7). Allegiance LLC
purchased 40,498,062 shares of 12% Redeemable Cumulative Convertible Preferred
Stock par value $.01 per share ("Redeemable Preferred Stock") for aggregate
consideration of $5,000.0 (the "Initial Closing"). Allegiance LLC agreed to make
additional contributions as necessary to fund expansion into new markets
("Subsequent Closings"). In order to obtain funds through Subsequent Closings,
the Company had to submit a proposal to Allegiance LLC detailing the funds
necessary to build out the Company's business in a new market. Allegiance LLC
was not required to make any contributions until the proposal had been approved
by Allegiance LLC. The maximum commitment of Allegiance LLC was $100,000.0 and
no capital contributions were required to be made after the Company consummated
an initial public offering of its stock (which occurred on July 7, 1998).
Allegiance LLC has contributed a total of $50,132.9 and $29,595.2, respectively,
prior to the Company's IPO and December 31, 1997. Each security holder in
Allegiance LLC had the right to require Allegiance LLC to repurchase all of the
outstanding securities held by such security holder at the greater of the
original cost (including interest at 12% per annum) for such security, and the
fair market value as defined in the security holders agreement, at any time and
from time to time after August 13, 2004, but not after the consummation of a
public offering or sale of the Company. If repurchase provisions had been
exercised, the Company had agreed, at the request and direction of Allegiance
LLC, to take any and all actions necessary, including declaring and paying
dividends and repurchasing preferred or common stock, to enable Allegiance LLC
to satisfy its repurchase obligations.
Because of the redemption provisions, the Company has recognized the accretion
of the value of the Redeemable Preferred Stock to reflect management's estimate
of the potential future fair market value of the Redeemable Preferred Stock
payable in the event the repurchase provisions were exercised. Amounts were
accreted using the effective interest method assuming the Redeemable Preferred
Stock is redeemed at a redemption price
F-11
<PAGE> 142
ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
based on the estimated potential future fair market value of the equity of the
Company in August 2004. The accretion was recorded each period as an increase in
the balance of Redeemable Preferred Stock outstanding and a noncash increase in
the net loss applicable to common stock.
In connection with the IPO, the Redeemable Preferred Stock was converted to
common stock, and the amounts accreted were reclassified as a component of
additional paid-in capital in the stockholders' equity section of the balance
sheet. In addition, the redemption provision and the obligation of Allegiance
LLC to make additional contributions to the Company (and the obligation of the
members of Allegiance LLC to make capital contributions to it) has terminated.
REDEEMABLE CUMULATIVE CONVERTIBLE PREFERRED STOCK
Each share of the Company's Redeemable Preferred Stock was convertible into
shares of the Company's common stock (the "Common Stock") on a 1:1 basis,
subject to certain antidilution provisions. No dividends were declared in 1998
or in 1997.
In 1998, prior to the conversion of the Redeemable Preferred Stock, the Company
recorded accretion of $11,520.8. Accretion recorded in the period ended December
31, 1997, was $3,814.2.
Capital contributed in the Subsequent Closings occurring in October 1997 and
January 1998 and other capital contributions totaled approximately $45,132.9.
In February and March 1998, the Company issued 273,361.92 shares of Redeemable
Preferred Stock for an aggregate price of $337.5.
In connection with the consummation of the IPO, the outstanding shares of the
Redeemable Preferred Stock were converted into 40,341,128 shares of Common
Stock. Upon the conversion of the Redeemable Preferred Stock, the obligation of
the Company to redeem the Redeemable Preferred Stock also terminated and,
therefore, the accretion of the Redeemable Preferred Stock value recorded to the
date of the IPO, $15,335.0 was reclassified to additional paid-in capital in the
stockholders' equity section of the balance sheet, along with $50,470.4 in
proceeds from the issuance of the Redeemable Preferred Stock and redeemable
capital contributions.
PREFERRED STOCK
In connection with the IPO, the Company authorized 1,000,000 shares of preferred
stock ("Preferred Stock") with a $.01 par value. At September 30, 1998, no
shares of Preferred Stock are issued and outstanding.
COMMON STOCK
On July 7, 1998, the Company raised $150,000.0 of gross proceeds in the
Company's IPO. The Company sold 10,000,000 shares of its Common Stock at a price
of $15 per share. In
F-12
<PAGE> 143
ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
connection with the IPO, the outstanding shares of Redeemable Preferred Stock
were converted into 40,341,128 shares of Common Stock and the Company increased
the number of authorized Common Stock to 150 million. At September 30, 1998,
50,341,554 shares were issued and outstanding. Of the authorized but unissued
Common Stock, 6,998,970 shares are reserved for issuance upon exercise of stock
options issued under the Company's stock option, stock incentive and stock
purchase plans (see Note 10) and 649,248 shares are reserved for issuance, sale,
and delivery upon the exercise of warrants (see Note 4).
DEFERRED COMPENSATION
Allegiance LLC sold to certain management employees equity securities of
Allegiance LLC units at amounts less than the estimated fair market value;
therefore, the Company has recognized deferred compensation of $10,090.2 and
$977.6 at September 30, 1998, and December 31, 1997, respectively, of which
$2,034.3 and $40.7 has been amortized to expense at September 30, 1998, and
December 31, 1997, respectively. In connection with the IPO, the Redeemable
Preferred Stock was converted into Common Stock and Allegiance LLC was
dissolved. The deferred compensation charge is amortized based upon the period
over which the Company has the right to repurchase certain of 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.
DEFERRED MANAGEMENT OWNERSHIP ALLOCATION CHARGE
On July 7, 1998, in connection with the IPO, 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, which owned substantially all of the Company's outstanding
capital stock. As a result of the successful IPO, Allegiance LLC was dissolved
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 entity 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 recorded 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 was recorded as a noncash, nonrecurring charge to operating
expense and $71,061.1 was recorded as a deferred management ownership allocation
charge. The deferred charge was amortized at $38,058.9 as of September 30, 1998,
and will be further amortized at $6,777.5, $18,870.2, $7,175.7 and $178.8 during
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 certain
of the securities (at the lower of fair market
F-13
<PAGE> 144
ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
value or the price paid by the employee) in the event the management employee's
employment with the Company is terminated.
4. 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
consists of one 11 3/4% Senior Discount Note due 2008 of the Company (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 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 3)
in July 1998, and each warrant may now purchase 1.45898399509 shares of Common
Stock as a result of the stock split (see Note 3).
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 a result of the warrant
redemption provisions, the Company is recognizing the potential future
redemption value of the Redeemable Warrants by recording accretion of the
Redeemable Warrant to its estimated fair market value at February 3, 2008, using
the effective interest method. Accretion recorded in the nine months ended
September 30, 1998, was $323.2.
F-14
<PAGE> 145
ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 one or more public equity offerings at 111.750% of the
accreted value on the redemption date, provided that at least $289,250.0
aggregate principal amount at maturity of the Series B Notes remains outstanding
after such redemption.
On July 7, 1998, the Company raised approximately $200,918.5 of gross proceeds
from the sale of its 12 7/8% Senior Notes due 2008 (the "12 7/8% Notes") 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 (see Note 2).
The 12 7/8% Notes have a principal amount at maturity of $205,000.0. 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 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 Series B and 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 indentures relating to the
Series B Notes and the 12 7/8% Notes), enter into transactions with any holder
of 5% or more of any class of capital stock of the Company or effect a
consolidation or merger. In addition, upon a change of control, the Company is
required to make an offer to purchase each series of notes at a purchase price
of 101% of the accreted value thereof (in the case of the Series B Notes) and
101% of the principal amount thereof (in the case of the 12 7/8% Notes),
together with accrued interest, if any. However, these limitations are subject
to a number of qualifications and exceptions (as defined in the indentures
relating to each series of notes). The Company was in compliance with all such
restrictive covenants at September 30, 1998.
F-15
<PAGE> 146
ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. CAPITAL LEASE:
On May 29, 1998, the Company signed a capital lease agreement for three
four-fiber rings, with a term of ten years and a renewal term of ten years, at
an expected total cost of $3,485.0; $871.3 was paid as of September 30, 1998.
The remainder is expected to be paid in 1999 and is not reflected in the
financial statements, since the payment is contingent upon the timing of
completion of network segments.
6. 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.
7. RELATED PARTIES:
From inception (April 22, 1997) through July 7, 1998, the Company was a wholly
owned subsidiary of Allegiance LLC. On July 7, 1998, certain venture capital
investors in Allegiance LLC ("the Fund Investors") and certain management
investors in Allegiance LLC ("the Management Investors") owned 95.0% and 5.0%,
respectively, of the ownership interests of Allegiance LLC, which owned
substantially all of the Company's outstanding capital stock. As a result of the
successful IPO (see Note 3), Allegiance LLC was dissolved 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
(see Note 3).
As of September 30, 1998, and December 31, 1997, Allegiance LLC had made
aggregate capital contributions to the Company of approximately $50,131.3 and
$29,595.2, respectively.
F-16
<PAGE> 147
ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During 1998 and 1997, the Company paid all organizational and legal fees of
Allegiance LLC, the amount of which was not material. No amounts are due from
Allegiance LLC at September 30, 1998, or December 31, 1997.
In connection with the Unit Offering (see Note 4), the IPO (see Note 3) and the
12 7/8% Notes (see Note 4), the Company incurred approximately $11,331.5 in fees
to an affiliate of an investor in the Company.
8. COMMITMENTS AND CONTINGENCIES:
The Company has entered into various operating lease agreements, with
expirations through 2009, for network facilities, office space and equipment.
Future minimum lease obligations related to the Company's operating leases as of
September 30, 1998, are as follows:
<TABLE>
<S> <C>
1998............................... $ 4,421.2
1999............................... 6,787.5
2000............................... 6,845.7
2001............................... 6,087.3
2002............................... 5,559.5
2003............................... 5,550.4
Thereafter......................... 22,020.5
</TABLE>
Total rent expense for the nine months ended September 30, 1998, was $1,575.7
and for the period from inception (April 22, 1997) through December 31, 1997,
was $212.1.
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.
9. FEDERAL INCOME TAXES:
The Company accounts for income tax under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109). SFAS 109 requires an asset and liability approach which requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events which have been recognized in the Company's financial
statements. The Company had approximately $21,795.3 and $460.5 of net operating
loss carryforwards for federal income tax purposes at September 30, 1998, and
December 31, 1997, respectively. The net operating loss carryforwards will
expire in the years 2012 and 2013 if not previously utilized. The Company has
recorded a valuation allowance equal to the net deferred tax assets at September
30, 1998, and December 31, 1997, due to the uncertainty of future operating
results. The valuation allowance will be reduced at such time as management
believes it is more likely than not that the net deferred tax assets will be
realized. Any reductions in the valuation allowance will reduce future
provisions for income tax expense.
F-17
<PAGE> 148
ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's deferred tax assets and the changes in those assets are:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 CHANGE 1998
------------ --------- -------------
<S> <C> <C> <C>
Start-up costs capitalized for tax
purposes................................ $ 1,025.9 $ (162.4) $ 863.5
Net operating loss carryforward........... 156.6 7,410.4 7,567.0
Valuation allowance....................... (1,182.5) (7,248.0) (8,430.5)
--------- --------- ---------
$ -- $ -- $ --
========= ========= =========
</TABLE>
Amortization of the original issue discount on the Series B Notes and 12 7/8%
Notes as interest expense is not deductible in the income tax return until paid.
Under existing income tax law, all operating expenses incurred prior to a
company commencing its principal operations are capitalized and amortized over a
five-year period for tax purposes.
10. STOCK OPTION/STOCK INCENTIVE/STOCK PURCHASE PLANS:
At September 30, 1998, the Company had three stock-based compensation plans, the
1997 Nonqualified Stock Option Plan (the "1997 Option Plan"), the 1998 Stock
Incentive Plan and the Employee Stock Discount Purchase Plan (the "Stock
Purchase Plan"). The Company applies the provisions of Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" and the related
interpretations in accounting for the Company's plans. Had compensation cost for
the Company's plans been determined based on the fair value of the options as of
the grant dates for awards under the plans consistent with the method prescribed
in Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"), the Company's net loss would have
increased to the pro forma amount indicated below. The Company utilized the
following assumptions in calculating the estimated fair value of each option on
the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions for grants in 1998 and 1997: dividend
yield of 0%, expected volatility of 89.1%, and expected lives of six years for
both years; risk-free interest rates of 5.60% in 1998 and 6.06% in 1997 for the
1997 Option Plan and 5.45% in 1998 for the 1998 Stock Incentive Plan.
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
Net loss -- As reported.............................. $206,598.3 $3,687.9
Net loss -- Pro forma................................ $207,473.8 $3,698.0
</TABLE>
As the 1998 Stock Incentive Plan and the Stock Purchase Plan were adopted in
1998, the December 31, 1997, pro forma balances do not include expenses for
these plans. Since no shares were issued under the Stock Purchase Plan as of
September 30, 1998, the September 30, 1998, pro forma balance does not include
expenses for this plan.
F-18
<PAGE> 149
ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1997 OPTION PLAN AND 1998 STOCK INCENTIVE PLAN
Under the 1997 Option Plan, the Company granted options to key employees, a
director and a consultant of the Company for an aggregate of 1,030,559 shares of
the Company's Common Stock and the Company will not grant options for any
additional shares under the 1997 Option Plan.
Under the 1998 Stock Incentive Plan, the Company may grant options to certain
employees, directors, advisors and consultants of the Company. The 1998 Stock
Incentive Plan provides for issuance of the following types of incentive awards:
stock options, stock appreciation rights, restricted stock, performance grants
and other types of awards that the Compensation Committee deems consistent with
the purposes of the 1998 Stock Incentive Plan. The Company has reserved
3,662,693 shares of Common Stock for issuance under the 1998 Stock Incentive
Plan.
Options granted under both plans have a term of six years and vest over a
three-year period and the Compensation Committee administers both option plans.
A summary of the status of the 1997 Option Plan as of September 30, 1998, and
December 31, 1997, is presented in the table below:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
---------------------------- ---------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
--------- ---------------- -------- ----------------
<S> <C> <C> <C> <C>
Outstanding, beginning of
period................. 189,127 $2.47 -- $ --
Granted.................. 841,432 2.77 189,127 2.47
Exercised................ -- -- -- --
Forfeited................ (127,034) 2.56 -- --
--------- --------
Outstanding, end of
period................. 903,525 $2.74 189,127 $2.47
========= ========
Options exercisable at
period-end............. 44,481 --
========= ========
Weighted average fair
value of options
granted................ $ 2.76 $ 0.68
========= ========
</TABLE>
As of September 30, 1998, and December 31, 1997, options outstanding under the
1997 Option Plan have a weighted average remaining contractual life of 5.44 and
5.8 years, respectively.
F-19
<PAGE> 150
ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the status of the 1998 Stock Incentive Plan as of September 30,
1998, is presented in the table below:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
---------------------------
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
-------- ----------------
<S> <C> <C>
Outstanding, beginning of period..................... -- --
Granted.............................................. 137,521 $13.75
Exercised............................................ -- --
Forfeited............................................ (5,250) $13.75
--------
Outstanding, end of period........................... 132,271 $13.75
========
Options exercisable at period-end.................... --
========
Weighted average fair value of options granted....... $ 13.75
========
</TABLE>
As of September 30, 1998, options outstanding under the 1998 Stock Incentive
Plan have a weighted average remaining contractual life of 5.75 years.
As the fair market value of the Company's Common Stock (as determined by the IPO
price) exceeded the exercise price of the options granted, the Company has
recognized deferred compensation expense of $7,635.0 and $2,030.7 at September
30, 1998, and December 31, 1997, respectively, of which $1,724.4 and $169.2 has
been amortized to expense at September 30, 1998, and December 31, 1997,
respectively, over the vesting period of the options. As of September 30, 1998,
the Company has reversed $599.1 of unamortized deferred compensation related to
options forfeited.
EMPLOYEE STOCK PURCHASE PLAN
The Company's Stock Purchase Plan is intended to give employees a convenient
means of purchasing shares of Common Stock through payroll deductions. Each
participating employee's contributions will be used to purchase shares for the
employee's share account as promptly as practicable after each calendar quarter.
The cost per share will be 85% of the lower of the closing price of the
Company's Common Stock on the Nasdaq National Market on the first or the last
day of the calendar quarter. The Company has reserved 2,305,718 shares of Common
Stock for issuance under the Stock Purchase Plan. As of September 30, 1998, no
shares have been purchased under the Stock Purchase Plan. The Compensation
Committee administers the Stock Purchase Plan.
F-20
<PAGE> 151
[ALLEGIANCE TELECOM, INC. LOGO]
<PAGE> 152
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following is a statement of estimated expenses, to be paid solely by the
Company, in connection with the distribution of the securities being registered:
<TABLE>
<S> <C>
Printing expenses........................................... $ 75,000
Accounting fees and expenses................................ $140,000
Legal fees and expenses..................................... $ 30,000
Miscellaneous expenses...................................... $ 5,000
--------
Total............................................. $250,000
========
</TABLE>
- -------------------------
All amounts are estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
GENERAL CORPORATION LAW
The Company is incorporated under the laws of the State of Delaware. Section 145
("Section 145") of the General Corporation Law of the State of Delaware, as the
same exists or may hereafter be amended (the "General Corporation Law"), inter
alia, provides that a Delaware corporation may indemnify any persons who were,
are or are threatened to be made, parties to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of such corporation), by
reason of the fact that such person is or was an officer, director, employee or
agent of such corporation, or is or was serving at the request of such
corporation as a director, officer employee or agent of another corporation or
enterprise. The indemnity may include expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by such person in connection with such action, suit or proceeding, provided such
person acted in good faith and in a manner he reasonably believed to be in or
not opposed to the corporation's best interests and, with respect to any
criminal action or proceeding, had no reasonable cause to believe that his
conduct was illegal. A Delaware corporation may indemnify any persons who are,
were or are threatened to be made, a party to any threatened, pending or
completed action or suit by or in the right of the corporation by reasons of the
fact that such person was a director, officer, employee or agent of such
corporation, or is or was serving at the request of such corporation as a
director, officer, employee or agent of another corporation or enterprise. The
indemnity may include expenses (including attorneys' fees) actually and
reasonably incurred by such person in connection with the defense or settlement
of such action or suit, provided such person acted in good faith and in a manner
he reasonably believed to be in or not opposed to the corporation's best
interests, provided that no indemnification is permitted without judicial
approval if the officer, director, employee or agent is adjudged to be liable to
the corporation. Where an officer, director, employee or agent is successful on
the merits or otherwise in the defense of any action referred to
II-1
<PAGE> 153
above, the corporation must indemnify him against the expenses which such
officer or director has actually and reasonably incurred.
Section 145 further authorizes a corporation to purchase and maintain insurance
on behalf of any person who is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation or enterprise,
against any liability asserted against him and incurred by him in any such
capacity, arising out of his status as such, whether or not the corporation
would otherwise have the power to indemnify him under Section 145.
CERTIFICATE OF INCORPORATION
The Company's Certificate of Incorporation and By-laws provides for the
indemnification of officers and directors to the fullest extent permitted by the
General Corporation Law.
All of the Company's directors and officers are covered by insurance policies
maintained by it against certain liabilities for actions taken in their
capacities as such, including liabilities under the Securities Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since its inception, the Company has issued the following securities without
registration under the Securities Act (the number of shares set forth below does
not give effect to the proposed stock split of the Company's Common Stock
referred to in the Prospectus).
On August 13, 1997, in connection with the Company's formation, the Company
issued one share of Common Stock to Allegiance LLC for consideration of $1,000.
On August 13, 1997, the Company issued 95,000 shares of Redeemable Convertible
Preferred Stock to Allegiance LLC for an aggregate initial purchase price of
approximately $5 million.
On February 25, 1998, the Company issued: (i) 71.25 shares of Redeemable
Convertible Preferred Stock to Richard Fields for an aggregate initial purchase
price of $37,500; (ii) 95 shares of Redeemable Convertible Preferred Stock to
Roger Curry for an aggregate initial purchase price of $50,000; (iii) 23.75
shares of Redeemable Convertible Preferred Stock to Northwestern University for
an aggregate initial purchase price of $12,500; (iv) 237.5 shares of Redeemable
Convertible Preferred Stock to MKW Partners, L.P. for an aggregate initial
purchase price of $125,001; (v) 47.5 shares of Redeemable Convertible Preferred
Stock to Tom Shattan for an aggregate initial purchase price of $25,000; (vi)
28.5 shares of Redeemable Convertible Preferred Stock to Greg Mendel for an
aggregate initial purchase price of $15,000; and (vii) 19 shares of Redeemable
Convertible Preferred Stock to Kevin Fechtmeyer for an aggregate initial
purchase price of $10,000.
On March 13, 1998, the Company issued 118.75 shares of Redeemable Convertible
Preferred Stock to Charles Ross Partners, LLC for an aggregate initial purchase
price of $62,500.
The above-described transactions were exempt from registration under the
Securities Act pursuant to Section 4(2) of the Securities Act, as transactions
not involving any public offering.
II-2
<PAGE> 154
On February 3, 1998, the Company issued 445,000 units (the "Units"), with each
Unit consisting of one 11 3/4% Senior Discount Note due 2008 and one warrant to
purchase .0034224719 shares of the Company's Common Stock. The Company received
approximately $240.7 million of net proceeds, after deducting underwriting
discounts and commissions of approximately $8.75 million and other expenses
payable by the Company of approximately $1.0 million, from the issuance of the
Units. Such Units were issued to (i) "qualified institutional buyers" (as
defined in Rule 144A of the Securities Act), (ii) other institutional
"accredited investors" (as defined in Rule 501(a) of the Securities Act), and
(iii) outside the United States in compliance with Regulation S under the
Securities Act, and therefore, the issuance of such Units was exempt from
registration under the Securities Act. Morgan Stanley & Co. Incorporated,
Salomon Brothers Inc, Bear, Stearns & Co. Inc. and Donaldson, Lufkin & Jenrette
Securities Corporation were the initial purchasers of the Units.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement (incorporated by reference to
Exhibit 1.1 to Allegiance Telecom, Inc.'s Registration
Statement on Form S-1 (Registration No. 333-53479), filed on
May 22, 1998 and amended on June 5, 1998 and June 30, 1998
(the "Form S-1 Registration Statement")).
3.1 Amended and Restated Certificate of Incorporation of
Allegiance Telecom, Inc. (incorporated by reference to
Exhibit 3.1 to the Company's Form 10-Q for the period ended
June 30, 1998 (the "Form 10-Q")).
3.2 Amended and Restated By-Laws of Allegiance Telecom, Inc.
(incorporated by reference to Exhibit 3.2 to the Form 10-Q).
4.1 Indenture, dated as of July 7, 1998, by and between the
Company and The Bank of New York, as trustee (including the
Form of Notes).
4.2 Indenture, dated as of February 3, 1998, by and between the
Company and The Bank of New York, as trustee (incorporated
by reference to Exhibit 4.2 to Allegiance Telecom, Inc.'s
Registration Statement on Form S-4 (Registration No.
333-49013), filed on March 31, 1998 and amended on May 6,
1998, May 15, 1998 and May 22, 1998 (the "Form S-4
Registration Statement")).
4.3 Form of 11 3/4% Senior Discount Notes (incorporated by
reference to Exhibit 4.3 to the Form S-4 Registration
Statement).
4.4 Collateral Pledge and Security Agreement, dated as of July
7, 1998, by and between the Company and The Bank of New
York, as trustee.
5.1 Opinion of Kirkland & Ellis.
</TABLE>
II-3
<PAGE> 155
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
10.1 Stock Purchase Agreement, dated August 13, 1997, between
Allegiance LLC and the Company (incorporated by reference to
Exhibit 10.1 to the Form S-4 Registration Statement).
10.2 Securityholders Agreement, dated August 13, 1997, among
Allegiance LLC, the Fund Investors, the Management Investors
and the Company (incorporated by reference to Exhibit 10.2
to the Form S-4 Registration Statement).
10.3 Registration Agreement, dated August 13, 1997, among the
Fund Investors, the Management Investors and the Company
(incorporated by reference to Exhibit 10.3 to the Form S-4
Registration Statement).
10.4 Warrant Registration Rights Agreement, dated as of January
29, 1998, by and among the Company and Morgan Stanley & Co.
Incorporated, Salomon Brothers Inc, Bear, Stearns & Co. Inc.
and Donaldson, Lufkin & Jenrette Securities Corporation, as
initial purchasers of the 11 3/4% Senior Discount Notes
(incorporated by reference to Exhibit 10.11 to the Form S-4
Registration Statement).
10.5 Allegiance Telecom, Inc. 1997 Nonqualified Stock Option Plan
(incorporated by reference to Exhibit 10.4 to the Form S-4
Registration Statement).
10.6 Allegiance Telecom, Inc. 1998 Stock Incentive Plan
(incorporated by reference to Exhibit 10.6 to the Form S-1
Registration Statement).
10.7 Executive Purchase Agreement, dated August 13, 1997, among
Allegiance LLC, the Company and Royce J. Holland
(incorporated by reference to Exhibit 10.5 to the Form S-4
Registration Statement).
10.8 Executive Purchase Agreement, dated August 13, 1997, among
Allegiance LLC, the Company and Thomas M. Lord (incorporated
by reference to Exhibit 10.6 to the Form S-4 Registration
Statement).
10.9 Executive Purchase Agreement, dated January 28, 1998, among
Allegiance LLC, the Company and C. Daniel Yost (incorporated
by reference to Exhibit 10.7 to the Form S-4 Registration
Statement).
10.10 Form of Executive Purchase Agreement among Allegiance LLC,
the Company and each of the other Management Investors
(incorporated by reference to Exhibit 10.8 to the Form S-4
Registration Statement).
10.11 Warrant Agreement, dated February 3, 1998, by and between
the Company and The Bank of New York, as Warrant Agent
(including the form of the Warrant Certificate)
(incorporated by reference to Exhibit 10.9 to the Form S-4
Registration Statement).
10.12 General Agreement, dated October 16, 1997, as amended,
between the Company and Lucent Technologies Inc.
(incorporated by reference to Exhibit 10.10 to the Form S-4
Registration Statement).
</TABLE>
II-4
<PAGE> 156
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
10.13 Form of Indemnification Agreement by and between the Company
and its directors and officers (incorporated by reference to
Exhibit 10.13 to the Form S-1 Registration Statement).
11.1 Statement Regarding Computation of Pro Forma Per Share
Earnings for the nine months ended September 30, 1998.
11.2 Statement Regarding Computation of Pro Forma Per Share
Earnings for the period from inception (April 22, 1997)
through December 31, 1997.
12.1 Statement Regarding Computation of Ratios of Earnings (Loss)
to Fixed Charges.
21.1 Subsidiaries of the Company (incorporated by reference to
Exhibit 21.1 to the Form S-1 Registration Statement).
23.1 Consent of Arthur Andersen, LLP.
23.2 Consent of Kirkland & Ellis (included in Exhibit 5.1).
24.1 Powers of Attorney (included in Part II to the Registration
Statement).
25.1 Statement of Eligibility of Trustee on Form T-1
(incorporated by reference to Exhibit 25.1 to the Form S-1
Registration Statement).
27.1 Financial Data Schedule for the nine months ended September
30, 1998.
27.2 Financial Data Schedule for the period from inception (April
22, 1997) through December 31, 1997 (incorporated by
reference to Exhibit 27.2 to the Form S-4 Registration
Statement).
</TABLE>
(b) FINANCIAL STATEMENT SCHEDULES.
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required
under the related instructions, are inapplicable or not material, or the
information called for thereby is otherwise included in the financial
statements and therefore has been omitted.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes to provide to the underwriter at
closing specified in the underwriting agreement certificates in such
denominations and registered in such names as requested by the underwriter to
permit prompt delivery to each purchaser.
The undersigned registrant hereby undertakes:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
II-5
<PAGE> 157
(2) For purposes of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(3) (a) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(b) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination
of the offering.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-6
<PAGE> 158
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Dallas, State of Texas,
on December 22, 1998.
ALLEGIANCE TELECOM, INC.
By: /s/ ROYCE J. HOLLAND
--------------------------------------
Royce J. Holland
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Royce J. Holland, Thomas M. Lord and Dennis M. Maunder
and each of them, his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any or all amendments (including
post-effective amendments) to this registration statement (and any registration
statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as
amended, for the offerings which this Registration Statement relates), and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
****
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement and power of attorney have been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<C> <S> <C>
/s/ ROYCE J. HOLLAND Chairman of the Board December 22, 1998
- ------------------------------------------------ and Chief Executive
Royce J. Holland Officer (Principal
Executive Officer)
/s/ C. DANIEL YOST President, Chief December 22, 1998
- ------------------------------------------------ Operating Officer
C. Daniel Yost and Director
</TABLE>
II-7
<PAGE> 159
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<C> <S> <C>
/s/ THOMAS M. LORD Executive Vice December 22, 1998
- ------------------------------------------------ President, Chief
Thomas M. Lord Financial Officer,
and Director
(Principal
Financial Officer)
/s/ DENNIS M. MAUNDER Vice President and December 22, 1998
- ------------------------------------------------ Controller
Dennis M. Maunder (Principal
Accounting Officer)
/s/ JOHN J. CALLAHAN Senior Vice President December 22, 1998
- ------------------------------------------------ of Sales and
John J. Callahan Marketing and
Director
/s/ PAUL D. CARBERY Director December 22, 1998
- ------------------------------------------------
Paul D. Carbery
/s/ JAMES E. CRAWFORD, III Director December 22, 1998
- ------------------------------------------------
James E. Crawford, III
/s/ JOHN B. EHRENKRANZ Director December 22, 1998
- ------------------------------------------------
John B. Ehrenkranz
/s/ PAUL J. FINNEGAN Director December 22, 1998
- ------------------------------------------------
Paul J. Finnegan
/s/ RICHARD D. FRISBIE Director December 22, 1998
- ------------------------------------------------
Richard D. Frisbie
/s/ REED E. HUNDT Director December 22, 1998
- ------------------------------------------------
Reed E. Hundt
/s/ ROBERT H. NIEHAUS Director December 22, 1998
- ------------------------------------------------
Robert H. Niehaus
/s/ JAMES N. PERRY, JR. Director December 22, 1998
- ------------------------------------------------
James N. Perry, Jr.
</TABLE>
II-8
<PAGE> 160
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement (incorporated by reference to
Exhibit 1.1 to Allegiance Telecom, Inc.'s Registration
Statement on Form S-1 (Registration No. 333-53479), filed on
May 22, 1998 and amended on June 5, 1998 and June 30, 1998
(the "Form S-1 Registration Statement")).
3.1 Amended and Restated Certificate of Incorporation of
Allegiance Telecom, Inc. (incorporated by reference to
Exhibit 3.1 to the Company's Form 10-Q for the period ended
June 30, 1998 (the "Form 10-Q")).
3.2 Amended and Restated By-Laws of Allegiance Telecom, Inc.
(incorporated by reference to Exhibit 3.2 to the Form 10-Q).
4.1 Indenture, dated as of July 7, 1998, by and between the
Company and The Bank of New York, as trustee (including the
Form of Notes).
4.2 Indenture, dated as of February 3, 1998, by and between the
Company and The Bank of New York, as trustee (incorporated
by reference to Exhibit 4.2 to Allegiance Telecom, Inc.'s
Registration Statement on Form S-4 (Registration No.
333-49013), filed on March 31, 1998 and amended on May 6,
1998, May 15, 1998 and May 22, 1998 (the "Form S-4
Registration Statement")).
4.3 Form of 11 3/4% Senior Discount Notes (incorporated by
reference to Exhibit 4.3 to the Form S-4 Registration
Statement).
4.4 Collateral Pledge and Security Agreement, dated as of July
7, 1998, by and between the Company and The Bank of New
York, as trustee.
5.1 Opinion of Kirkland & Ellis.
10.1 Stock Purchase Agreement, dated August 13, 1997, between
Allegiance LLC and the Company (incorporated by reference to
Exhibit 10.1 to the Form S-4 Registration Statement).
10.2 Securityholders Agreement, dated August 13, 1997, among
Allegiance LLC, the Fund Investors, the Management Investors
and the Company (incorporated by reference to Exhibit 10.2
to the Form S-4 Registration Statement).
10.3 Registration Agreement, dated August 13, 1997, among the
Fund Investors, the Management Investors and the Company
(incorporated by reference to Exhibit 10.3 to the Form S-4
Registration Statement).
10.4 Warrant Registration Rights Agreement, dated as of January
29, February 3, 1998, by and among the Company and Morgan
Stanley & Co. Incorporated, Salomon Brothers Inc, Bear,
Stearns & Co. Inc. and Donaldson, Lufkin & Jenrette
Securities Corporation, as initial purchasers of the 11 3/4%
Senior Discount Notes (incorporated by reference to Exhibit
10.11 to the Form S-4 Registration Statement).
</TABLE>
<PAGE> 161
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
10.5 Allegiance Telecom, Inc. 1997 Nonqualified Stock Option Plan
(incorporated by reference to Exhibit 10.4 to the Form S-4
Registration Statement).
10.6 Allegiance Telecom, Inc. 1998 Stock Incentive Plan
(incorporated by reference to Exhibit 10.6 to the Form S-1
Registration Statement).
10.7 Executive Purchase Agreement, dated August 13, 1997, among
Allegiance LLC, the Company and Royce J. Holland
(incorporated by reference to Exhibit 10.5 to the Form S-4
Registration Statement).
10.8 Executive Purchase Agreement, dated August 13, 1997, among
Allegiance LLC, the Company and Thomas M. Lord (incorporated
by reference to Exhibit 10.6 to the Form S-4 Registration
Statement).
10.9 Executive Purchase Agreement, dated January 28, 1998, among
Allegiance LLC, the Company and C. Daniel Yost (incorporated
by reference to Exhibit 10.7 to the Form S-4 Registration
Statement).
10.10 Form of Executive Purchase Agreement among Allegiance LLC,
the Company and each of the other Management Investors
(incorporated by reference to Exhibit 10.8 to the Form S-4
Registration Statement).
10.11 Warrant Agreement, dated February 3, 1998, by and between
the Company and The Bank of New York, as Warrant Agent
(including the form of the Warrant Certificate)
(incorporated by reference to Exhibit 10.9 to the Form S-4
Registration Statement).
10.12 General Agreement, dated October 16, 1997, as amended,
between the Company and Lucent Technologies Inc.
(incorporated by reference to Exhibit 10.10 to the Form S-4
Registration Statement).
10.13 Form of Indemnification Agreement by and between the Company
and its directors and officers (incorporated by reference to
Exhibit 10.13 to the Form S-1 Registration Statement).
11.1 Statement Regarding Computation of Pro Forma Per Share
Earnings for the nine months ended September 30, 1998.
11.2 Statement Regarding Computation of Pro Forma Per Share
Earnings for the period from inception (April 22, 1997)
through December 31, 1997.
12.1 Statement Regarding Computation of Ratios of Earnings (Loss)
to Fixed Charges.
21.1 Subsidiaries of the Company (incorporated by reference to
Exhibit 21.1 to the Form S-1 Registration Statement).
23.1 Consent of Arthur Andersen, LLP.
23.2 Consent of Kirkland & Ellis (included in Exhibit 5.1).
24.1 Powers of Attorney (included in Part II to the Registration
Statement).
25.1 Statement of Eligibility of Trustee on Form T-1
(incorporated by reference to Exhibit 25.1 to the Form S-1
Registration Statement).
</TABLE>
<PAGE> 162
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
27.1 Financial Data Schedule for the nine months ended September
30, 1998.
27.2 Financial Data Schedule for the period from inception (April
22, 1997) through December 31, 1997 (incorporated by
reference to Exhibit 27.2 to the Form S-4 Registration
Statement).
</TABLE>
<PAGE> 1
EXHIBIT 4.1
================================================================================
ALLEGIANCE TELECOM, INC.,
as Issuer
and
THE BANK OF NEW YORK
---------------------
Indenture
Dated as of July 7, 1998
---------------------
12 7/8% Senior Notes due 2008
================================================================================
<PAGE> 2
CROSS-REFERENCE TABLE
<TABLE>
<CAPTION>
TIA Sections Indenture Sections
- ------------ ------------------
<S> <C>
SECTION 310(a)(1)............................................................ 7.10
(a)(2).......................................................... 7.10
(b)............................................................. 7.08
SECTION 313(c)............................................................... 7.06; 10.02
SECTION 314(a)............................................................... 4.17; 10.02
(a)(4).......................................................... 4.16; 10.02
(c)(1).......................................................... 10.03
(c)(2).......................................................... 10.03
(e)............................................................. 10.04
SECTION 315(b)............................................................... 7.05; 10.02
SECTION 316(a)(1)(A)......................................................... 6.05
(a)(1)(B)....................................................... 6.04
(b)............................................................. 6.07
SECTION 317(a)(1)............................................................ 6.08
(a)(2).......................................................... 6.09
SECTION 318(a)............................................................... 10.01
(c)............................................................. 10.01
</TABLE>
Note: The Cross-Reference Table shall not for any purpose be deemed to be a
part of the Indenture.
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
RECITALS OF THE COMPANY.....................................................................1
ARTICLE ONE
DEFINITIONS AND INCORPORATION BY REFERENCE
SECTION 1.01. Definitions..................................................................1
SECTION 1.02. Incorporation by Reference of Trust Indenture Act...........................20
SECTION 1.03. Rules of Construction.......................................................21
ARTICLE TWO
THE NOTES
SECTION 2.01. Form and Dating.............................................................21
SECTION 2.02. Execution, Authentication and Denominations.................................22
SECTION 2.03. Registrar and Paying Agent..................................................23
SECTION 2.04. Paying Agent to Hold Money in Trust.........................................23
SECTION 2.05. Transfer and Exchange.......................................................24
SECTION 2.06. Book-Entry Provisions for Global Notes......................................25
SECTION 2.07. Replacement Notes...........................................................26
SECTION 2.08. Outstanding Notes...........................................................26
SECTION 2.09. Temporary Notes.............................................................27
SECTION 2.10. Cancellation................................................................27
SECTION 2.11. CUSIP Numbers...............................................................27
SECTION 2.12. Defaulted Interest..........................................................27
SECTION 2.13. Issuance of Additional Notes................................................28
ARTICLE THREE
REDEMPTION
SECTION 3.01. Right of Redemption.........................................................28
SECTION 3.02. Notices to Trustee..........................................................29
SECTION 3.03. Selection of Notes to Be Redeemed...........................................29
SECTION 3.04. Notice of Redemption........................................................29
SECTION 3.05. Effect of Notice of Redemption..............................................30
SECTION 3.06. Deposit of Redemption Price.................................................30
SECTION 3.07. Payment of Notes Called for Redemption......................................31
SECTION 3.08. Notes Redeemed in Part......................................................31
</TABLE>
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Note: The Table of Contents shall not for any purposes be deemed to be a part
of the Indenture.
<PAGE> 4
ii
ARTICLE FOUR
COVENANTS
<TABLE>
<S> <C>
SECTION 4.01. Payment of Notes.............................................................31
SECTION 4.02. Maintenance of Office or Agency..............................................32
SECTION 4.03. Limitation on Indebtedness...................................................32
SECTION 4.04. Limitation on Restricted Payments............................................35
SECTION 4.05. Limitation on Dividend and Other Payment Restrictions Affecting
Restricted ............................................................38
SECTION 4.06. Limitation on the Issuance and Sale of Capital Stock of Restricted ..........39
SECTION 4.07. Limitation on Issuances of Guarantees by Restricted Subsidiaries.............40
SECTION 4.08. Limitation on Transactions with Shareholders and Affiliates..................40
SECTION 4.09. Limitation on Liens..........................................................41
SECTION 4.10. Limitation on Asset Sales....................................................42
SECTION 4.11. Repurchase of Notes upon a Change of Control.................................43
SECTION 4.12. Existence....................................................................43
SECTION 4.13. Payment of Taxes and Other Claims............................................43
SECTION 4.14. Maintenance of Properties and Insurance......................................44
SECTION 4.15. Notice of Defaults...........................................................44
SECTION 4.16. Compliance Certificates......................................................44
SECTION 4.17. Commission Reports and Reports to Holders....................................45
SECTION 4.18. Waiver of Stay, Extension or Usury Laws......................................46
SECTION 4.19. Limitation on Sale-Leaseback Transactions....................................46
ARTICLE FIVE
SUCCESSOR CORPORATION
SECTION 5.01. When Company May Merge, Etc..................................................47
SECTION 5.02. Successor Substituted........................................................48
ARTICLE SIX
DEFAULT AND REMEDIES
SECTION 6.01. Events of Default............................................................48
SECTION 6.02. Acceleration.................................................................50
SECTION 6.03. Other Remedies...............................................................50
SECTION 6.04. Waiver of Past Defaults......................................................50
SECTION 6.05. Control by Majority..........................................................51
SECTION 6.06. Limitation on Suits..........................................................51
SECTION 6.07. Rights of Holders to Receive Payment.........................................52
SECTION 6.08. Collection Suit by Trustee...................................................52
SECTION 6.09. Trustee May File Proofs of Claim.............................................52
</TABLE>
<PAGE> 5
iii
<TABLE>
<S> <C>
SECTION 6.10. Priorities...................................................................52
SECTION 6.11. Undertaking for Costs........................................................53
SECTION 6.12. Restoration of Rights and Remedies...........................................53
SECTION 6.13. Rights and Remedies Cumulative...............................................53
SECTION 6.14. Delay or Omission Not Waiver.................................................54
ARTICLE SEVEN
TRUSTEE
SECTION 7.01. General......................................................................54
SECTION 7.02. Certain Rights of Trustee....................................................54
SECTION 7.03. Individual Rights of Trustee.................................................55
SECTION 7.04. Trustee's Disclaimer.........................................................55
SECTION 7.05. Notice of Default............................................................56
SECTION 7.06. Reports by Trustee to Holders................................................56
SECTION 7.07. Compensation and Indemnity...................................................56
SECTION 7.08. Replacement of Trustee.......................................................57
SECTION 7.09. Successor Trustee by Merger, Etc. ...........................................58
SECTION 7.10. Eligibility..................................................................58
SECTION 7.11. Money Held in Trust..........................................................58
SECTION 7.12. Withholding Taxes............................................................58
ARTICLE EIGHT
DISCHARGE OF INDENTURE
SECTION 8.01. Termination of Company's Obligations.........................................58
SECTION 8.02. Defeasance and Discharge of Indenture........................................59
SECTION 8.03. Defeasance of Certain Obligations............................................61
SECTION 8.04. Application of Trust Money...................................................63
SECTION 8.05. Repayment to Company.........................................................63
SECTION 8.06. Reinstatement................................................................64
ARTICLE NINE
AMENDMENTS, SUPPLEMENTS AND WAIVERS
SECTION 9.01. Without Consent of Holders...................................................64
SECTION 9.02. With Consent of Holders......................................................65
SECTION 9.03. Revocation and Effect of Consent.............................................66
SECTION 9.04. Notation on or Exchange of Notes.............................................66
SECTION 9.05. Trustee to Sign Amendments, Etc. ............................................67
SECTION 9.06. Conformity with Trust Indenture Act..........................................67
</TABLE>
<PAGE> 6
iv
ARTICLE TEN
SECURITY
<TABLE>
<S> <C>
SECTION 10.01 Security...............................................................67
ARTICLE ELEVEN
MISCELLANEOUS
SECTION 11.01. Trust Indenture Act of 1939.................................................67
SECTION 11.02. Notices.....................................................................67
SECTION 11.03. Certificate and Opinion as to Conditions Precedent..........................68
SECTION 11.04. Statements Required in Certificate..........................................68
SECTION 11.05. Rules by Trustee, Paying Agent or Registrar.................................69
SECTION 11.06. Payment Date Other Than a Business Day......................................69
SECTION 11.07. Governing Law...............................................................69
SECTION 11.08. No Adverse Interpretation of Other Agreements...............................69
SECTION 11.09. No Recourse Against Others..................................................69
SECTION 11.10. Successors..................................................................70
SECTION 11.11. Duplicate Originals.........................................................70
SECTION 11.12. Separability................................................................70
SECTION 11.13. Table of Contents, Headings, Etc. ..........................................70
</TABLE>
<PAGE> 7
INDENTURE, dated as of July 7, 1998, between ALLEGIANCE
TELECOM, INC., a Delaware corporation, (the "Company"), and THE BANK OF NEW
YORK, a New York banking corporation, (the "Trustee").
RECITALS OF THE COMPANY
The Company has duly authorized the execution and
delivery of this Indenture to provide for the issuance initially of up to
$205,000,000 aggregate principal amount of the Company's 12 7/8% Senior Notes
due 2008 (the "Notes") issuable as provided in this Indenture. All things
necessary to make this Indenture a valid agreement of the Company, in accordance
with its terms, have been done, and the Company has done all things necessary to
make the Notes, when executed by the Company and authenticated and delivered by
the Trustee hereunder and duly issued by the Company, the valid obligations of
the Company as hereinafter provided.
This Indenture is subject to, and shall be governed by,
the provisions of the Trust Indenture Act of 1939, as amended, that are required
to be a part of and to govern indentures qualified under the Trust Indenture Act
of 1939, as amended.
AND THIS INDENTURE FURTHER WITNESSETH
For and in consideration of the premises and the
purchase of the Notes by the Holders thereof, it is mutually covenanted and
agreed, for the equal and proportionate benefit of all Holders, as follows.
ARTICLE ONE
DEFINITIONS AND INCORPORATION BY REFERENCE
SECTION 1.01. Definitions.
"Acquired Indebtedness" means Indebtedness of a Person existing at the
time such Person becomes a Restricted Subsidiary or assumed in connection with
an Asset Acquisition by a Restricted Subsidiary and not Incurred in connection
with, or in anticipation of, such Person becoming a Restricted Subsidiary or
such Asset Acquisition.
"Adjusted Consolidated Net Income" means, for any period, the aggregate
net income (or loss) of the Company and its Restricted Subsidiaries for such
period determined in conformity with GAAP; provided that the following items
shall be excluded in computing Adjusted Consolidated Net Income (without
duplication): (i) the net income (or loss) of any Person that is not a
Restricted Subsidiary, except (x) with respect to net income, to the extent of
the amount of dividends or other distributions actually paid to the Company or
any of its Restricted Subsidiaries by such Person during such period and (y)
with respect to net losses, to the extent of the amount of Investments made by
the Company or any Restricted Subsidiary in such Person during such
<PAGE> 8
2
period; (ii) solely for the purposes of calculating the amount of Restricted
Payments that may be made pursuant to clause (C) of the first paragraph of
Section 4.04 (and in such case, except to the extent includable pursuant to
clause (i) above), the net income (or loss) of any Person accrued prior to the
date it becomes a Restricted Subsidiary or is merged into or consolidated with
the Company or any of its Restricted Subsidiaries or all or substantially all of
the property and assets of such Person are acquired by the Company or any of its
Restricted Subsidiaries; (iii) the net income of any Restricted Subsidiary to
the extent that the declaration or payment of dividends or similar distributions
by such Restricted Subsidiary of such net income is not at the time permitted by
the operation of the terms of its charter or any agreement, instrument,
judgment, decree, order, statute, rule or governmental regulation applicable to
such Restricted Subsidiary; (iv) any gains or losses (on an after-tax basis)
attributable to Asset Sales; (v) except for purposes of calculating the amount
of Restricted Payments that may be made pursuant to clause (C) of the first
paragraph of Section 4.04, any amount paid or accrued as dividends on Preferred
Stock of the Company or any Restricted Subsidiary owned by Persons other than
the Company and any of its Restricted Subsidiaries; (vi) all extraordinary gains
and extraordinary losses; and (vii) any compensation expense paid or payable
solely with Capital Stock (other than Disqualified Stock) of the Company or any
options, warrants or other rights to acquire Capital Stock (other than
Disqualified Stock) of the Company.
"Adjusted Consolidated Net Tangible Assets" means the total amount of
assets of the Company and its Restricted Subsidiaries (less applicable
depreciation, amortization and other valuation reserves), except to the extent
resulting from write-ups of capital assets (excluding write-ups in connection
with accounting for acquisitions in conformity with GAAP), after deducting
therefrom (i) all current liabilities of the Company and its Restricted
Subsidiaries (excluding intercompany items) and (ii) all goodwill, trade names,
trademarks, patents, unamortized debt discount and expense and other like
intangibles, all as set forth on the most recent quarterly or annual
consolidated balance sheet of the Company and its Restricted Subsidiaries,
prepared in conformity with GAAP and filed with the Commission or provided to
the Trustee pursuant to Section 4.17.
"Affiliate" means, as applied to any Person, any other Person directly
or indirectly controlling, controlled by, or under direct or indirect common
control with, such Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as applied to any Person, means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities, by contract or otherwise.
"Agent" means any Registrar, Paying Agent, authenticating agent or
co-Registrar.
"Agent Members" has the meaning provided in Section 2.06(a).
<PAGE> 9
3
"Asset Acquisition" means (i) an investment by the Company or any of
its Restricted Subsidiaries in any other Person pursuant to which such Person
shall become a Restricted Subsidiary or shall be merged into or consolidated
with the Company or any of its Restricted Subsidiaries; provided that such
Person's primary business is related, ancillary or complementary to the
businesses of the Company and its Restricted Subsidiaries on the date of such
investment or (ii) an acquisition by the Company or any of its Restricted
Subsidiaries of the property and assets of any Person other than the Company or
any of its Restricted Subsidiaries that constitute substantially all of a
division or line of business of such Person; provided that the property and
assets acquired are related, ancillary or complementary to the businesses of the
Company and its Restricted Subsidiaries on the date of such acquisition.
"Asset Disposition" means the sale or other disposition by the Company
or any of its Restricted Subsidiaries (other than to the Company or another
Restricted Subsidiary) of (i) all or substantially all of the Capital Stock of
any Restricted Subsidiary or (ii) all or substantially all of the assets that
constitute a division or line of business of the Company or any of its
Restricted Subsidiaries.
"Asset Sale" means any sale, transfer or other disposition (including
by way of merger, consolidation or sale-leaseback transaction) in one
transaction or a series of related transactions by the Company or any of its
Restricted Subsidiaries to any Person other than the Company or any of its
Restricted Subsidiaries of (i) all or any of the Capital Stock of any Restricted
Subsidiary, (ii) all or substantially all of the property and assets of an
operating unit or business of the Company or any of its Restricted Subsidiaries
or (iii) any other property and assets (other than the Capital Stock or other
Investment in an Unrestricted Subsidiary) of the Company or any of its
Restricted Subsidiaries outside the ordinary course of business of the Company
or such Restricted Subsidiary and, in each case, that is not governed by the
provisions of Article Five; provided that "Asset Sale" shall not include (a)
sales or other dispositions of inventory, receivables and other current assets,
(b) sales, transfers or other dispositions of assets constituting a Restricted
Payment permitted to be made under Section 4.04, (c) sales, transfers or other
dispositions of assets with a fair market value (as certified in an Officers'
Certificate) not in excess of $1 million in any transaction or series of related
transactions, or (d) sales or other dispositions of assets for consideration at
least equal to the fair market value of the assets sold or disposed of, to the
extent that the consideration received would constitute property or assets of
the kind described in clause (B) of Section 4.10.
"Average Life" means, at any date of determination with respect to any
debt security, the quotient obtained by dividing (i) the sum of the products of
(a) the number of years from such date of determination to the dates of each
successive scheduled principal payment of such debt security and (b) the amount
of such principal payment by (ii) the sum of all such principal payments.
<PAGE> 10
4
"Board of Directors" means the Board of Directors of the Company or any
committee of such Board of Directors duly authorized to act under this
Indenture.
"Board Resolution" means a copy of a resolution, certified by the
Secretary of the Company to have been duly adopted by the Board of Directors and
to be in full force and effect on the date of such certification, and delivered
to the Trustee.
"Business Day" means any day except a Saturday, Sunday or other day on
which commercial banks in The City of New York, or in the city of the Corporate
Trust Office of the Trustee, are authorized by law to close.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) in equity of such Person, whether outstanding on the
Closing Date or issued thereafter, including, without limitation, all Common
Stock and Preferred Stock.
"Capitalized Lease" means, as applied to any Person, any lease of any
property (whether real, personal or mixed) of which the discounted present value
of the rental obligations of such Person as lessee, in conformity with GAAP, is
required to be capitalized on the balance sheet of such Person.
"Capitalized Lease Obligations" means the discounted present value of
the rental obligations under a Capitalized Lease.
"Change of Control" means such time as (i) a "person" or "group"
(within the meaning of Sections 13(d) and 14(d)(2) of the Exchange Act) becomes
the ultimate "beneficial owner" (as defined in Rule 13d-3 under the Exchange
Act) of more than 35% of the total voting power of the Voting Stock of the
Company on a fully diluted basis and such ownership represents a greater
percentage of the total voting power of the Voting Stock of the Company, on a
fully diluted basis, than is held by the Existing Stockholders on such date; or
(ii) individuals who on the Closing Date constitute the Board of Directors
(together with any new directors whose election by the Board of Directors or
whose nomination by the Board of Directors for election by the Company's
stockholders was approved by a vote of at least two-thirds of the members of the
Board of Directors then in office who either were members of the Board of
Directors on the Closing Date or whose election or nomination for election was
previously so approved) cease for any reason to constitute a majority of the
members of the Board of Directors then in office.
"Closing Date" means the date on which the Notes are originally issued
under this Indenture.
"Commission" means the Securities and Exchange Commission, as from time
to time constituted, created under the Exchange Act or, if at any time after the
execution of this
<PAGE> 11
5
instrument such Commission is not existing and performing the duties now
assigned to it under the TIA, then the body performing such duties at such time.
"Common Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) of such Person's common stock, whether now outstanding or
issued after the date of this Indenture, including, without limitation, all
series and classes of such common stock.
"Company" means the party named as such in the first paragraph of this
Indenture until a successor replaces it pursuant to Article Five of this
Indenture and thereafter means the successor.
"Company Order" means a written request or order signed in the name of
the Company (i) by its Chairman, a Vice Chairman, its President or a Vice
President and (ii) by its Treasurer, an Assistant Treasurer, its Secretary or an
Assistant Secretary and delivered to the Trustee; provided, however, that such
written request or order may be signed by any two of the officers or directors
listed in clause (i) above in lieu of being signed by one of such officers or
directors listed in such clause (i) and one of the officers listed in clause
(ii) above.
"Consolidated EBITDA" means, for any period, Adjusted Consolidated Net
Income for such period plus, to the extent such amount was deducted in
calculating such Adjusted Consolidated Net Income, (i) Consolidated Interest
Expense, (ii) income taxes (other than income taxes (either positive or
negative) attributable to extraordinary and non-recurring gains or losses or
sales of assets), (iii) depreciation expense, (iv) amortization expense and (v)
all other non-cash items reducing Adjusted Consolidated Net Income (other than
items that will require cash payments and for which an accrual or reserve is, or
is required by GAAP to be, made), less all non-cash items increasing Adjusted
Consolidated Net Income, all as determined on a consolidated basis for the
Company and its Restricted Subsidiaries in conformity with GAAP; provided that,
if any Restricted Subsidiary is not a Wholly Owned Restricted Subsidiary,
Consolidated EBITDA shall be reduced (to the extent not otherwise reduced in
accordance with GAAP) by an amount equal to (A) the amount of the Adjusted
Consolidated Net Income attributable to such Restricted Subsidiary multiplied by
(B) the percentage ownership interest in the income of such Restricted
Subsidiary not owned on the last day of such period by the Company or any of its
Restricted Subsidiaries.
"Consolidated Interest Expense" means, for any period, the aggregate
amount of interest in respect of Indebtedness (including, without limitation,
amortization of original issue discount on any Indebtedness and the interest
portion of any deferred payment obligation, calculated in accordance with the
effective interest method of accounting; all commissions, discounts and other
fees and charges owed with respect to letters of credit and bankers' acceptance
financing; the net costs associated with Interest Rate Agreements; and
Indebtedness that is Guaranteed or secured by the Company or any of its
Restricted Subsidiaries) and all but the principal
<PAGE> 12
6
component of rentals in respect of Capitalized Lease Obligations paid, accrued
or scheduled to be paid or to be accrued by the Company and its Restricted
Subsidiaries during such period; excluding, however, (i) any amount of such
interest of any Restricted Subsidiary if the net income of such Restricted
Subsidiary is excluded in the calculation of Adjusted Consolidated Net Income
pursuant to clause (iii) of the definition thereof (but only in the same
proportion as the net income of such Restricted Subsidiary is excluded from the
calculation of Adjusted Consolidated Net Income pursuant to clause (iii) of the
definition thereof) and (ii) any premiums, fees and expenses (and any
amortization thereof) payable in connection with the offering of the Notes and
the concurrent offering of common stock, par value $.01 per share, of the
Company, all as determined on a consolidated basis (without taking into account
Unrestricted Subsidiaries) in conformity with GAAP.
"Consolidated Leverage Ratio" means, on any Transaction Date, the ratio
of (i) the aggregate amount of Indebtedness of the Company and its Restricted
Subsidiaries on a consolidated basis outstanding on such Transaction Date to
(ii) the aggregate amount of Consolidated EBITDA for the then most recent four
fiscal quarters for which financial statements of the Company have been filed
with the Commission or provided to the Trustee pursuant to Section 4.17 (such
four fiscal quarter period being the "Four Quarter Period"); provided that, in
making the foregoing calculation, (A) pro forma effect shall be given to any
Indebtedness to be Incurred or repaid on the Transaction Date; (B) pro forma
effect shall be given to Asset Dispositions and Asset Acquisitions (including
giving pro forma effect to the application of proceeds of any Asset Disposition)
that occur from the beginning of the Four Quarter Period through the Transaction
Date (the "Reference Period"), as if they had occurred and such proceeds had
been applied on the first day of such Reference Period; (C) pro forma effect
shall be given to asset dispositions and asset acquisitions (including giving
pro forma effect to the application of proceeds of any asset disposition) that
have been made by any Person that has become a Restricted Subsidiary or has been
merged with or into the Company or any Restricted Subsidiary during such
Reference Period and that would have constituted Asset Dispositions or Asset
Acquisitions had such transactions occurred when such Person was a Restricted
Subsidiary as if such asset dispositions or asset acquisitions were Asset
Dispositions or Asset Acquisitions that occurred on the first day of such
Reference Period; provided that to the extent that clause (B) or (C) of this
sentence requires that pro forma effect be given to an Asset Acquisition or
Asset Disposition, such pro forma calculation shall be based upon the four full
fiscal quarters immediately preceding the Transaction Date of the Person, or
division or line of business of the Person, that is acquired or disposed of for
which financial information is available; and (D) the aggregate amount of
Indebtedness outstanding as of the end of the Reference Period will be deemed to
include the total amount of funds outstanding and/or available on the
Transaction Date under any revolving credit or similar facilities of the Company
or its Restricted Subsidiaries.
"Consolidated Net Worth" means, at any date of determination,
stockholders' equity as set forth on the most recently available quarterly or
annual consolidated balance sheet of the Company and its Restricted Subsidiaries
(which shall be as of a date not more than 90 days prior
<PAGE> 13
7
to the date of such computation, and which shall not take into account
Unrestricted Subsidiaries), less any amounts attributable to Disqualified Stock
or any equity security convertible into or exchangeable for Indebtedness, the
cost of treasury stock and the principal amount of any promissory notes
receivable from the sale of the Capital Stock of the Company or any of its
Restricted Subsidiaries, each item to be determined in conformity with GAAP
(excluding the effects of foreign currency exchange adjustments under Financial
Accounting Standards Board Statement of Financial Accounting Standards No. 52).
"Corporate Trust Office" means the office of the Trustee at which the
corporate trust business of the Trustee shall, at any particular time, be
principally administered, which office is, at the date of this Indenture,
located at 101 Barclay Street, 21 West, New York, New York 10286, Attention:
Corporate Trust Administration.
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement.
"Default" means any event that is, or after notice or passage of time
or both would be, an Event of Default.
"Depositary" means The Depository Trust Company, its nominees, and
their respective successors.
"Disqualified Stock" means any class or series of Capital Stock of any
Person that by its terms or otherwise is (i) required to be redeemed prior to
the Stated Maturity of the Notes, (ii) redeemable at the option of the holder of
such class or series of Capital Stock at any time prior to the Stated Maturity
of the Notes or (iii) convertible into or exchangeable for Capital Stock
referred to in clause (i) or (ii) above or Indebtedness having a scheduled
maturity prior to the Stated Maturity of the Notes; provided that any Capital
Stock that would not constitute Disqualified Stock but for provisions thereof
giving holders thereof the right to require such Person to repurchase or redeem
such Capital Stock upon the occurrence of an "asset sale" or "change of control"
occurring prior to the Stated Maturity of the Notes shall not constitute
Disqualified Stock if the "asset sale" or "change of control" provisions
applicable to such Capital Stock are no more favorable to the holders of such
Capital Stock than the provisions contained in Section 4.10 and Section 4.11 and
such Capital Stock, or the agreements or instruments governing the redemption
rights thereof, specifically provides that such Person will not repurchase or
redeem any such stock pursuant to such provision prior to the Company's
repurchase of such Notes as are required to be repurchased pursuant to Section
4.10 and Section 4.11.
"Event of Default" has the meaning provided in Section 6.01.
"Excess Proceeds" has the meaning provided in Section 4.10.
<PAGE> 14
8
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Existing Stockholders" means Madison Dearborn Partners, Inc., Morgan
Stanley Capital Partners III, Inc., Frontenac Company, Battery Partners IV, L.P.
and Battery Investment Partners IV, LLC and their respective Affiliates.
"fair market value" means the price that would be paid in an
arm's-length transaction between an informed and willing seller under no
compulsion to sell and an informed and willing buyer under no compulsion to buy,
as determined in good faith by the Board of Directors, whose determination shall
be conclusive if evidenced by a Board Resolution; provided that for purposes of
clause (viii) of the second paragraph of Section 4.03, (x) the fair market value
of any security registered under the Exchange Act shall be the average of the
closing prices, regular way, of such security for the 20 consecutive trading
days immediately preceding the sale of Capital Stock and (y) in the event the
aggregate fair market value of any other property (other than cash or cash
equivalents) received by the Company exceeds $10 million, the fair market value
of such property shall be determined by a nationally recognized investment
banking firm and set forth in their written opinion which shall be delivered to
the Trustee.
"Fund Investors" has the meaning specified in the definition of
"Existing Stockholders."
"GAAP" means generally accepted accounting principles in the United
States of America as in effect as of the Closing Date, including, without
limitation, those set forth in the opinions and pronouncements of the Accounting
Principles Board of the American Institute of Certified Public Accountants and
statements and pronouncements of the Financial Accounting Standards Board or in
such other statements by such other entity as approved by a significant segment
of the accounting profession. All ratios and computations contained or referred
to in this Indenture shall be computed in conformity with GAAP applied on a
consistent basis, except that calculations made for purposes of determining
compliance with the terms of the covenants and with other provisions of this
Indenture shall be made without giving effect to (i) the amortization of any
expenses incurred in connection with the offering of the Notes and the
concurrent offering of common stock, par value $.01 per share, of the Company
and (ii) except as otherwise provided, the amortization of any amounts required
or permitted by Accounting Principles Board Opinion Nos. 16 and 17.
"Global Notes" has the meaning provided in Section 2.01.
"Guarantee" means any obligation, contingent or otherwise, of any
Person directly or indirectly guaranteeing any Indebtedness of any other Person
and, without limiting the generality of the foregoing, any obligation, direct or
indirect, contingent or otherwise, of such Person (i) to purchase or pay (or
advance or supply funds for the purchase or payment of) such Indebtedness of
such other Person (whether arising by virtue of partnership arrangements, or by
agreements to keep-well, to purchase assets, goods, securities or services
(unless such purchase arrangements
<PAGE> 15
9
are on arm's-length terms and are entered into in the ordinary course of
business), to take-or-pay, or to maintain financial statement conditions or
otherwise) or (ii) entered into for purposes of assuring in any other manner the
obligee of such Indebtedness of the payment thereof or to protect such obligee
against loss in respect thereof (in whole or in part); provided that the term
"Guarantee" shall not include endorsements for collection or deposit in the
ordinary course of business. The term "Guarantee" used as a verb has a
corresponding meaning.
"Guaranteed Indebtedness" has the meaning provided in Section 4.07.
"Holder" or "Noteholder" means the registered holder of any Note.
"Incur" means, with respect to any Indebtedness, to incur, create,
issue, assume, Guarantee or otherwise become liable for or with respect to, or
become responsible for, the payment of, contingently or otherwise, such
Indebtedness, including an "Incurrence" of Acquired Indebtedness; provided that
neither the accrual of interest nor the accretion of original issue discount
shall be considered an Incurrence of Indebtedness.
"Indebtedness" means, with respect to any Person at any date of
determination (without duplication), (i) all indebtedness of such Person for
borrowed money, (ii) all obligations of such Person evidenced by bonds,
debentures, notes or other similar instruments, (iii) all obligations of such
Person in respect of letters of credit or other similar instruments (including
reimbursement obligations with respect thereto, but excluding obligations with
respect to letters of credit (including trade letters of credit) securing
obligations (other than obligations described in (i) or (ii) above or (v), (vi)
or (vii) below) entered into in the ordinary course of business of such Person
to the extent such letters of credit are not drawn upon or, if drawn upon, to
the extent such drawing is reimbursed no later than the third Business Day
following receipt by such Person of a demand for reimbursement), (iv) all
obligations of such Person to pay the deferred and unpaid purchase price of
property or services, which purchase price is due more than six months after the
date of placing such property in service or taking delivery and title thereto or
the completion of such services, except Trade Payables, (v) all Capitalized
Lease Obligations of such Person, (vi) all Indebtedness of other Persons secured
by a Lien on any asset of such Person, whether or not such Indebtedness is
assumed by such Person; provided that the amount of such Indebtedness shall be
the lesser of (A) the fair market value of such asset at such date of
determination and (B) the amount of such Indebtedness, (vii) all Indebtedness of
other Persons Guaranteed by such Person to the extent such Indebtedness is
Guaranteed by such Person and (viii) to the extent not otherwise included in
this definition, obligations under Currency Agreements and Interest Rate
Agreements. The amount of Indebtedness of any Person at any date shall be the
outstanding balance at such date (or, in the case of a revolving credit or other
similar facility, the total amount of funds outstanding and/or available on the
date of determination) of all unconditional obligations as described above and,
with respect to contingent obligations, the maximum liability upon the
occurrence of the contingency giving rise to the obligation, provided (A) that
the amount outstanding at any time of any Indebtedness issued with original
issue discount is the
<PAGE> 16
10
face amount of such Indebtedness less the remaining unamortized portion of the
original issue discount of such Indebtedness at the time of its issuance as
determined in conformity with GAAP, (B) that money borrowed and set aside at the
time of the Incurrence of any Indebtedness in order to prefund the payment of
the interest on such Indebtedness shall not be deemed to be "Indebtedness" so
long as such money is held to secure the payment of such interest and (C) that
Indebtedness shall not include any liability for federal, state, local or other
taxes.
"Indenture" means this Indenture as originally executed or as it may be
amended or supplemented from time to time by one or more indentures supplemental
to this Indenture entered into pursuant to the applicable provisions of this
Indenture.
"Interest Payment Date" means each semiannual interest payment date on
May 15 and November 15, of each year, commencing November 15, 1998.
"Interest Rate Agreement" means any interest rate protection agreement,
interest rate future agreement, interest rate option agreement, interest rate
swap agreement, interest rate cap agreement, interest rate collar agreement,
interest rate hedge agreement, option or future contract or other similar
agreement or arrangement.
"Investment" in any Person means any direct or indirect advance, loan
or other extension of credit (including, without limitation, by way of Guarantee
or similar arrangement; but excluding advances to customers in the ordinary
course of business that are, in conformity with GAAP, recorded as accounts
receivable on the balance sheet of the Company or its Restricted Subsidiaries)
or capital contribution to (by means of any transfer of cash or other property
to others or any payment for property or services for the account or use of
others), or any purchase or acquisition of Capital Stock, bonds, notes,
debentures or other similar instruments issued by, such Person and shall include
(i) the designation of a Restricted Subsidiary as an Unrestricted Subsidiary and
(ii) the fair market value of the Capital Stock (or any other Investment), held
by the Company or any of its Restricted Subsidiaries, of (or in) any Person that
has ceased to be a Restricted Subsidiary, including without limitation, by
reason of any transaction permitted by clause (iii) of Section 4.06; provided
that the fair market value of the Investment remaining in any Person that has
ceased to be a Restricted Subsidiary shall not exceed the aggregate amount of
Investments previously made in such Person valued at the time such Investments
were made less the net reduction of such Investments. For purposes of the
definition of "Unrestricted Subsidiary" and Section 4.04, (i) "Investment" shall
include the fair market value of the assets (net of liabilities (other than
liabilities to the Company or any of its Restricted Subsidiaries)) of any
Restricted Subsidiary at the time that such Restricted Subsidiary is designated
an Unrestricted Subsidiary, (ii) the fair market value of the assets (net of
liabilities (other than liabilities to the Company or any of its Restricted
Subsidiaries)) of any Unrestricted Subsidiary at the time that such Unrestricted
Subsidiary is designated a Restricted Subsidiary shall be considered a reduction
in outstanding Investments and (iii) any property transferred to or from an
Unrestricted Subsidiary shall be valued at its fair market value at the time of
such transfer.
<PAGE> 17
11
"Lien" means any mortgage, pledge, security interest, encumbrance, lien
or charge of any kind (including, without limitation, any conditional sale or
other title retention agreement or lease in the nature thereof or any agreement
to give any security interest).
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Net Cash Proceeds" means, (a) with respect to any Asset Sale, the
proceeds of such Asset Sale in the form of cash or cash equivalents, including
payments in respect of deferred payment obligations (to the extent corresponding
to the principal, but not interest, component thereof) when received in the form
of cash or cash equivalents (except to the extent such obligations are financed
or sold with recourse to the Company or any Restricted Subsidiary) and proceeds
from the conversion of other property received when converted to cash or cash
equivalents, net of (i) brokerage commissions and other fees and expenses
(including fees and expenses of counsel and investment bankers) related to such
Asset Sale, (ii) provisions for all taxes (whether or not such taxes will
actually be paid or are payable) as a result of such Asset Sale without regard
to the consolidated results of operations of the Company and its Restricted
Subsidiaries, taken as a whole, (iii) payments made to repay Indebtedness or any
other obligation outstanding at the time of such Asset Sale that either (A) is
secured by a Lien on the property or assets sold or (B) is required to be paid
as a result of such sale and (iv) appropriate amounts to be provided by the
Company or any Restricted Subsidiary as a reserve against any liabilities
associated with such Asset Sale, including, without limitation, pension and
other post-employment benefit liabilities, liabilities related to environmental
matters and liabilities under any indemnification obligations associated with
such Asset Sale, all as determined in conformity with GAAP and (b) with respect
to any issuance or sale of Capital Stock, the proceeds of such issuance or sale
in the form of cash or cash equivalents, including payments in respect of
deferred payment obligations (to the extent corresponding to the principal, but
not interest, component thereof) when received in the form of cash or cash
equivalents (except to the extent such obligations are financed or sold with
recourse to the Company or any Restricted Subsidiary) and proceeds from the
conversion of other property received when converted to cash or cash
equivalents, net of attorney's fees, accountants' fees, underwriters' or
placement agents' fees, discounts or commissions and brokerage, consultant and
other fees incurred in connection with such issuance or sale and net of taxes
paid or payable as a result thereof.
"Notes" means any of the securities, as defined in the first paragraph
of the recitals hereof, that are authenticated and delivered under this
Indenture. For all purposes of this Indenture, the term "Notes" shall include
the Notes initially issued on the Closing Date and any other Notes issued after
the Closing Date under this Indenture. For purposes of this Indenture, all Notes
shall vote together as one series of Notes under this Indenture.
"Offer to Purchase" means an offer to purchase Notes by the Company
from the Holders commenced by mailing a notice to the Trustee and each Holder
stating: (i) the covenant pursuant to which the offer is being made and that all
Notes validly tendered will be accepted for payment
<PAGE> 18
12
on a pro rata basis; (ii) the purchase price and the date of purchase (which
shall be a Business Day no earlier than 30 days nor later than 60 days from the
date such notice is mailed) (the "Payment Date"); (iii) that any Note not
tendered will continue to accrue interest pursuant to its terms; (iv) that,
unless the Company defaults in the payment of the purchase price, any Note
accepted for payment pursuant to the Offer to Purchase shall cease to accrue
interest on and after the Payment Date; (v) that Holders electing to have a Note
purchased pursuant to the Offer to Purchase will be required to surrender the
Note, together with the form entitled "Option of the Holder to Elect Purchase"
on the reverse side of the Note completed, to the Paying Agent at the address
specified in the notice prior to the close of business on the Business Day
immediately preceding the Payment Date; (vi) that Holders will be entitled to
withdraw their election if the Paying Agent receives, not later than the close
of business on the third Business Day immediately preceding the Payment Date, a
telegram, facsimile transmission or letter setting forth the name of such
Holder, the principal amount of Notes delivered for purchase and a statement
that such Holder is withdrawing his election to have such Notes purchased; and
(vii) that Holders whose Notes are being purchased only in part will be issued
new Notes equal in principal amount to the unpurchased portion of the Notes
surrendered; provided that each Note purchased and each new Note issued shall be
in a principal amount of $1,000 or an integral multiple thereof. On the Payment
Date, the Company shall (i) accept for payment on a pro rata basis Notes or
portions thereof tendered pursuant to an Offer to Purchase; (ii) deposit with
the Paying Agent money sufficient to pay the purchase price of all Notes or
portions thereof so accepted; and (iii) deliver, or cause to be delivered, to
the Trustee all Notes or portions thereof so accepted together with an Officers'
Certificate specifying the Notes or portions thereof accepted for payment by the
Company. The Paying Agent shall promptly mail to the Holders of Notes so
accepted payment in an amount equal to the purchase price, and the Trustee shall
promptly authenticate and mail to such Holders a new Note equal in principal
amount to any unpurchased portion of the Note surrendered; provided that each
Note purchased and each new Note issued shall be in a principal amount of $1,000
or an integral multiple thereof. The Company will publicly announce the results
of an Offer to Purchase as soon as practicable after the Payment Date. The
Trustee shall act as the Paying Agent for an Offer to Purchase. The Company will
comply with Rule 14e-1 under the Exchange Act and any other securities laws and
regulations thereunder to the extent such laws and regulations are applicable,
in the event that the Company is required to repurchase Notes pursuant to an
Offer to Purchase.
"Officer" means, with respect to the Company, (i) the Chairman of the
Board, the President, any Vice President, the Chief Financial Officer, and (ii)
the Treasurer or any Assistant Treasurer, or the Secretary or any Assistant
Secretary.
"Officers' Certificate" means a certificate signed by one Officer
listed in clause (i) of the definition thereof and one Officer listed in clause
(ii) of the definition thereof. Each Officers' Certificate (other than
certificates provided pursuant to TIA Section 314(a)(4)) shall include the
statements provided for in TIA Section 314(e).
<PAGE> 19
13
"Opinion of Counsel" means a written opinion signed by legal counsel
who may be an employee of or counsel to the Company. Each such Opinion of
Counsel shall include the statements provided for in TIA Section 314(e) to the
extent required by law.
"Paying Agent" has the meaning provided in Section 2.03, except that,
for the purposes of Article Eight, the Paying Agent shall not be the Company or
a Subsidiary of the Company or an Affiliate of any of them. The term "Paying
Agent" includes any additional Paying Agent.
"Payment Date" has the meaning specified in the definition of "Offer to
Purchase."
"Permitted Investment" means (i) an Investment in the Company or a
Restricted Subsidiary or a Person which will, upon the making of such
Investment, become a Restricted Subsidiary or be merged or consolidated with or
into or transfer or convey all or substantially all its assets to, the Company
or a Restricted Subsidiary; provided that such person's primary business is
related, ancillary or complementary to the businesses of the Company and its
Restricted Subsidiaries on the date of such Investment; (ii) Temporary Cash
Investments; (iii) payroll, travel and similar advances to cover matters that
are expected at the time of such advances ultimately to be treated as expenses
in accordance with GAAP; (iv) stock, obligations or securities received in
satisfaction of judgments; (v) Investments in prepaid expenses, negotiable
instruments held for collection and lease, utility and worker's compensation,
performance and other similar deposits; (vi) Interest Rate Agreements and
Currency Agreements designed solely to protect the Company or its Restricted
Subsidiaries against fluctuations in interest rates or foreign currency exchange
rates; and (vii) loans or advances to officers or employees of the Company or
any Restricted Subsidiary that do not in the aggregate exceed $2 million at any
time outstanding.
"Permitted Liens" means (i) Liens for taxes, assessments, governmental
charges or claims that are being contested in good faith by appropriate legal
proceedings promptly instituted and diligently conducted and for which a reserve
or other appropriate provision, if any, as shall be required in conformity with
GAAP shall have been made; (ii) statutory and common law Liens of landlords and
carriers, warehousemen, mechanics, suppliers, materialmen, repairmen or other
similar Liens arising in the ordinary course of business and with respect to
amounts not yet delinquent or being contested in good faith by appropriate legal
proceedings promptly instituted and diligently conducted and for which a reserve
or other appropriate provision, if any, as shall be required in conformity with
GAAP shall have been made; (iii) Liens incurred or deposits made in the ordinary
course of business in connection with workers' compensation, unemployment
insurance and other types of social security; (iv) Liens incurred or deposits
made to secure the performance of tenders, bids, leases, statutory or regulatory
obligations, bankers' acceptances, surety and appeal bonds, government
contracts, performance and return-of-money bonds and other obligations of a
similar nature incurred in the ordinary course of business (exclusive of
obligations for the payment of borrowed money); (v) easements, rights-of-way,
municipal and zoning ordinances and similar charges, encumbrances, title defects
or other
<PAGE> 20
14
irregularities that do not materially interfere with the ordinary course of
business of the Company or any of its Restricted Subsidiaries; (vi) Liens
(including extensions and renewals thereof) upon real or personal property
acquired after the Closing Date; provided that (a) such Lien is created solely
for the purpose of securing Indebtedness Incurred, in accordance with Section
4.03, to finance the cost (including the cost of design, development,
acquisition, construction, installation, improvement, transportation or
integration) of the item of property or assets subject thereto and such Lien is
created prior to, at the time of or within six months after the later of the
acquisition, the completion of construction or the commencement of full
operation of such property, (b) the principal amount of the Indebtedness secured
by such Lien does not exceed 100% of such cost and (c) any such Lien shall not
extend to or cover any property or assets other than such item of property or
assets and any improvements on such item; (vii) leases or subleases granted to
others that do not materially interfere with the ordinary course of business of
the Company and its Restricted Subsidiaries, taken as a whole; (viii) Liens
encumbering property or assets under construction arising from progress or
partial payments by a customer of the Company or its Restricted Subsidiaries
relating to such property or assets; (ix) any interest or title of a lessor in
the property subject to any Capitalized Lease or operating lease; (x) Liens
arising from filing Uniform Commercial Code financing statements regarding
leases; (xi) Liens on property of, or on shares of Capital Stock or Indebtedness
of, any Person existing at the time such Person becomes, or becomes a part of,
any Restricted Subsidiary; provided that such Liens do not extend to or cover
any property or assets of the Company or any Restricted Subsidiary other than
the property or assets acquired; (xii) Liens in favor of the Company or any
Restricted Subsidiary; (xiii) Liens arising from the rendering of a final
judgment or order against the Company or any Restricted Subsidiary that does not
give rise to an Event of Default; (xiv) Liens securing reimbursement obligations
with respect to letters of credit that encumber documents and other property
relating to such letters of credit and the products and proceeds thereof; (xv)
Liens in favor of customs and revenue authorities arising as a matter of law to
secure payment of customs duties in connection with the importation of goods;
(xvi) Liens encumbering customary initial deposits and margin deposits, and
other Liens that are within the general parameters customary in the industry and
incurred in the ordinary course of business, in each case, securing Indebtedness
under Interest Rate Agreements and Currency Agreements and forward contracts,
options, future contracts, futures options or similar agreements or arrangements
designed solely to protect the Company or any of its Restricted Subsidiaries
from fluctuations in interest rates, currencies or the price of commodities;
(xvii) Liens arising out of conditional sale, title retention, consignment or
similar arrangements for the sale of goods entered into by the Company or any of
its Restricted Subsidiaries in the ordinary course of business in accordance
with the past practices of the Company and its Restricted Subsidiaries prior to
the Closing Date; (xviii) Liens on or sales of receivables; and (xix) Liens that
secure Indebtedness with an aggregate principal amount not in excess of $5
million at any time outstanding.
"Person" means an individual, a corporation, a partnership, a limited
liability company, an association, a trust or any other entity or organization,
including a government or political subdivision or an agency or instrumentality
thereof.
<PAGE> 21
15
"Physical Notes" has the meaning provided in Section 2.06.
"Pledge Account" means an account established with the Trustee pursuant
to the terms of the Pledge Agreement for the deposit of the Pledged Securities
to be purchased by the Company with the net proceeds from the sale of the Notes.
"Pledge Agreement" means the Collateral Pledge and Security Agreement,
dated as of the Closing Date, made by the Company in favor of the Trustee,
governing the disbursement of funds from the Pledge Account, as such agreement
may be amended, restated, supplemented or otherwise modified from time to time.
"Pledged Securities" means the U.S. government securities to be
purchased by the Company and held in the Pledge Account in accordance with the
Pledge Agreement.
"Preferred Stock" means, with respect to any Person, any and all
shares, interests, participations or other equivalents (however designated,
whether voting or non-voting) of such Person's preferred or preference stock,
whether now outstanding or issued after the date of this Indenture, including,
without limitation, all series and classes of such preferred or preference
stock.
"principal" of a debt security, including the Notes, means the
principal amount due on the Stated Maturity as shown on such debt security.
"Public Equity Offering" means an underwritten primary public offering
of Common Stock of the Company pursuant to an effective registration statement
under the Securities Act.
A "Public Market" shall be deemed to exist if (i) a Public Equity
Offering has been consummated and (ii) at least 15% of the total issued and
outstanding Common Stock of the Company immediately prior to the consummation of
such Public Equity Offering has been distributed by means of an effective
registration statement under the Securities Act or sales pursuant to Rule 144
under the Securities Act.
"Redemption Date", when used with respect to any Note to be redeemed,
means the date fixed for such redemption by or pursuant to this Indenture.
"Redemption Price", when used with respect to any Note to be redeemed,
means the price at which such Note is to be redeemed pursuant to this Indenture.
"Registrar" has the meaning provided in Section 2.03.
<PAGE> 22
16
"Regular Record Date" for the interest payable on any Interest Payment
Date means the May 1 or November 1 (whether or not a Business Day), as the case
may be, next preceding such Interest Payment Date.
"Repurchase Offer" has the meaning provided in the Warrant Agreement,
dated as of February 3, 1998, between the Company and The Bank of New York, as
warrant agent.
"Responsible Officer", when used with respect to the Trustee, means the
chairman or any vice chairman of the board of directors, the chairman or any
vice chairman of the executive committee of the board of directors, the chairman
of the trust committee, the president, any vice president, any assistant vice
president, the secretary, any assistant secretary, the treasurer, any assistant
treasurer, the cashier, any assistant cashier, any trust officer or assistant
trust officer, the controller or any assistant controller or any other officer
of the Trustee customarily performing functions similar to those performed by
any of the above designated officers and also means, with respect to a
particular corporate trust matter, any other officer to whom such matter is
referred because of his or her knowledge of and familiarity with the particular
subject.
"Restricted Payments" has the meaning provided in Section 4.04.
"Restricted Subsidiary" means any Subsidiary of the Company other than
an Unrestricted Subsidiary.
"Security Register" has the meaning provided in Section 2.03.
"Securities Act" means the Securities Act of 1933, as amended.
"Significant Subsidiary" means, at any date of determination, any
Restricted Subsidiary that, together with its Subsidiaries, (i) for the most
recent fiscal year of the Company, accounted for more than 10% of the
consolidated revenues of the Company and its Restricted Subsidiaries or (ii) as
of the end of such fiscal year, was the owner of more than 10% of the
consolidated assets of the Company and its Restricted Subsidiaries, all as set
forth on the most recently available consolidated financial statements of the
Company for such fiscal year.
"S&P" means Standard & Poor's Ratings Services and its successors.
"Stated Maturity" means, (i) with respect to any debt security, the
date specified in such debt security as the fixed date on which the final
installment of principal of such debt security is due and payable and (ii) with
respect to any scheduled installment of principal of or interest on any debt
security, the date specified in such debt security as the fixed date on which
such installment is due and payable.
<PAGE> 23
17
"Strategic Subordinated Indebtedness" means Indebtedness of the Company
Incurred to finance the acquisition of a Person engaged in a business that is
related, ancillary or complementary to the business conducted by the Company or
any of its Restricted Subsidiaries, which Indebtedness by its terms, or by the
terms of any agreement or instrument pursuant to which such Indebtedness is
Incurred, (i) is expressly made subordinate in right of payment to the Notes and
(ii) provides that no payment of principal, premium or interest on, or any other
payment with respect to, such Indebtedness may be made prior to the payment in
full of all of the Company's obligations under the Notes; provided that such
Indebtedness may provide for and be repaid at any time from the proceeds of a
capital contribution or the sale of Capital Stock (other than Disqualified
Stock) of the Company after the Incurrence of such Indebtedness.
"Subsidiary" means, with respect to any Person, any corporation,
association or other business entity of which more than 50% of the voting power
of the outstanding Voting Stock is owned, directly or indirectly, by such Person
and one or more other Subsidiaries of such Person.
"Temporary Cash Investment" means any of the following: (i) direct
obligations of the United States of America or any agency thereof or obligations
fully and unconditionally guaranteed by the United States of America or any
agency thereof, (ii) time deposit accounts, certificates of deposit and money
market deposits maturing within one year of the date of acquisition thereof
issued by a bank or trust company which is organized under the laws of the
United States of America, any state thereof or any foreign country recognized by
the United States of America, and which bank or trust company has capital,
surplus and undivided profits aggregating in excess of $50 million (or the
foreign currency equivalent thereof) and has outstanding debt which is rated "A"
(or such similar equivalent rating) or higher by at least one nationally
recognized statistical rating organization (as defined in Rule 436 under the
Securities Act) or any money-market fund sponsored by a registered broker dealer
or mutual fund distributor, (iii) repurchase obligations with a term of not more
than 30 days for underlying securities of the types described in clause (i)
above entered into with a bank meeting the qualifications described in clause
(ii) above, (iv) commercial paper, maturing not more than one year after the
date of acquisition, issued by a corporation (other than an Affiliate of the
Company) organized and in existence under the laws of the United States of
America, any state thereof or any foreign country recognized by the United
States of America with a rating at the time as of which any investment therein
is made of "P-1" (or higher) according to Moody's or "A-1" (or higher) according
to S&P, and (v) securities with maturities of six months or less from the date
of acquisition issued or fully and unconditionally guaranteed by any state,
commonwealth or territory of the United States of America, or by any political
subdivision or taxing authority thereof, and rated at least "A" by S&P or
Moody's.
"TIA" or "Trust Indenture Act" means the Trust Indenture Act of 1939,
as amended (15 U.S. Code Sections 77aaa-77bbb), as in effect on the date this
Indenture was executed, except as provided in Section 9.06.
<PAGE> 24
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"Trade Payables" means, with respect to any Person, any accounts
payable or any other indebtedness or monetary obligation to trade creditors
created, assumed or Guaranteed by such Person or any of its Subsidiaries arising
in the ordinary course of business in connection with the acquisition of goods
or services.
"Transaction Date" means, with respect to the Incurrence of any
Indebtedness by the Company or any of its Restricted Subsidiaries, the date such
Indebtedness is to be Incurred and, with respect to any Restricted Payment, the
date such Restricted Payment is to be made.
"Trustee" means the party named as such in the first paragraph of this
Indenture until a successor replaces it in accordance with the provisions of
Article Seven of this Indenture and thereafter means such successor.
"United States Bankruptcy Code" means the Bankruptcy Reform Act of
1978, as amended and as codified in Title 11 of the United States Code, as
amended from time to time hereafter, or any successor federal bankruptcy law.
"U.S. Government Obligations" means securities that are (i) direct
obligations of the United States of America for the payment of which its full
faith and credit is pledged or (ii) obligations of a Person controlled or
supervised by and acting as an agency or instrumentality of the United States of
America the payment of which is unconditionally guaranteed as a full faith and
credit obligation by the United States of America, which, in either case, are
not callable or redeemable at the option of the issuer thereof at any time prior
to the Stated Maturity of the Notes, and shall also include a depository receipt
issued by a bank or trust company as custodian with respect to any such U.S.
Government Obligation or a specific payment of interest on or principal of any
such U.S. Government Obligation held by such custodian for the account of the
holder of a depository receipt; provided that (except as required by law) such
custodian is not authorized to make any deduction from the amount payable to the
holder of such depository receipt from any amount received by the custodian in
respect of the U.S. Government Obligation or the specific payment of interest on
or principal of the U.S. Government Obligation evidenced by such depository
receipt.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that
at the time of determination shall be designated an Unrestricted Subsidiary by
the Board of Directors in the manner provided below; and (ii) any Subsidiary of
an Unrestricted Subsidiary. The Board of Directors may designate any Restricted
Subsidiary (including any newly acquired or newly formed Subsidiary of the
Company) to be an Unrestricted Subsidiary unless such Subsidiary owns any
Capital Stock of, or owns or holds any Lien on any property of, the Company or
any Restricted Subsidiary; provided that (A) any Guarantee by the Company or any
Restricted Subsidiary of any Indebtedness of the Subsidiary being so designated
shall be deemed an "Incurrence" of such Indebtedness and an "Investment" by the
Company or such Restricted Subsidiary (or both, if applicable) at the time of
such designation; (B) either (I) the Subsidiary to
<PAGE> 25
19
be so designated has total assets of $1,000 or less or (II) if such Subsidiary
has assets greater than $1,000, such designation would be permitted under
Section 4.04 and (C) if applicable, the Incurrence of Indebtedness and the
Investment referred to in clause (A) of this proviso would be permitted under
Section 4.03 and Section 4.04. The Board of Directors may designate any
Unrestricted Subsidiary to be a Restricted Subsidiary; provided that (i) no
Default or Event of Default shall have occurred and be continuing at the time of
or after giving effect to such designation and (ii) all Liens and Indebtedness
of such Unrestricted Subsidiary outstanding immediately after such designation
would, if Incurred at such time, have been permitted to be Incurred (and shall
be deemed to have been Incurred) for all purposes of this Indenture. Any such
designation by the Board of Directors shall be evidenced to the Trustee by
promptly filing with the Trustee a copy of the Board Resolution giving effect to
such designation and an Officers' Certificate certifying that such designation
complied with the foregoing provisions.
"Voting Stock" means with respect to any Person, Capital Stock of any
class or kind ordinarily having the power to vote for the election of directors,
managers or other voting members of the governing body of such Person.
"Warrants" means the warrants to purchase Common Stock of the Company
issued pursuant to a Warrant Agreement, dated as of February 3, 1998, between
the Company and The Bank of New York, as warrant agent.
"Wholly Owned" means, with respect to any Subsidiary of any Person, the
ownership of all of the outstanding Capital Stock of such Subsidiary (other than
any director's qualifying shares or Investments by foreign nationals mandated by
applicable law) by such Person or one or more Wholly Owned Subsidiaries of such
Person.
SECTION 1.02. Incorporation by Reference of Trust Indenture
Act. Whenever this Indenture refers to a provision of the TIA, the provision is
incorporated by reference in and made a part of this Indenture. The following
TIA terms used in this Indenture have the following meanings:
"indenture notes" means the Notes;
"indenture note holder" means a Holder or a Noteholder;
"indenture to be qualified" means this Indenture;
"indenture trustee" or "institutional trustee" means the
Trustee; and
"obligor" on the indenture securities means the Company or any
other obligor on the Notes.
<PAGE> 26
20
All other TIA terms used in this Indenture that are defined by
the TIA, defined by TIA reference to another statute or defined by a rule of the
Commission and not otherwise defined herein have the meanings assigned to them
therein.
SECTION 1.03. Rules of Construction. Unless the context
otherwise requires:
(i) a term has the meaning assigned to it;
(ii) an accounting term not otherwise defined has the meaning
assigned to it in accordance with GAAP;
(iii) "or" is not exclusive;
(iv) words in the singular include the plural, and words in
the plural include the singular;
(v) provisions apply to successive events and transactions;
(vi) "herein," "hereof" and other words of similar import
refer to this Indenture as a whole and not to any particular Article,
Section or other subdivision;
(vii) all ratios and computations based on GAAP contained in
this Indenture shall be computed in accordance with the definition of
GAAP set forth in Section 1.01; and
(viii) all references to Sections or Articles refer to
Sections or Articles of this Indenture unless otherwise indicated.
ARTICLE TWO
THE NOTES
SECTION 2.01. Form and Dating. The Notes and the Trustee's
certificate of authentication shall be substantially in the form annexed hereto
as Exhibit A with such appropriate insertions, omissions, substitutions and
other variations as are required or permitted by this Indenture. The Notes may
have notations, legends or endorsements required by law, stock exchange
agreements to which the Company is subject or usage. The Company shall approve
the form of the Notes and any notation, legend or endorsement on the Notes. Each
Note shall be dated the date of its authentication.
The terms and provisions contained in the form of the Notes
annexed hereto as Exhibit A shall constitute, and are hereby expressly made, a
part of this Indenture. To the extent
<PAGE> 27
21
applicable, the Company and the Trustee, by their execution and delivery of this
Indenture, expressly agree to such terms and provisions and to be bound thereby.
The Notes shall be issued initially in the form of one or more
global Notes in registered form, substantially in the form set forth in Exhibit
A (the "Global Notes"), deposited with the Trustee, as custodian for the
Depositary, duly executed by the Company and authenticated by the Trustee as
hereinafter provided. Each Global Note shall bear such legends as may be
required or reasonably requested by the Depositary.
The definitive Notes shall be typed, printed, lithographed or
engraved or produced by any combination of these methods or may be produced in
any other manner permitted by the rules of any securities exchange on which the
Notes may be listed, all as determined by the Officers executing such Notes, as
evidenced by their execution of such Notes.
Each Global Note shall also bear the following legend on the
face thereof:
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF
THE DEPOSITORY TRUST COMPANY, TO THE COMPANY OR ITS AGENT FOR
REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE
ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR TO SUCH OTHER ENTITY
AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST
COMPANY OR SUCH OTHER REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY OR
SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DEPOSITORY TRUST COMPANY (AND ANY PAYMENT HEREON IS MADE TO CEDE & CO.
OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE
OF THE DEPOSITORY TRUST COMPANY), ANY TRANSFER, PLEDGE OR OTHER USE
HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL SINCE THE
REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
TRANSFERS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS IN WHOLE,
BUT NOT IN PART, TO NOMINEES OF CEDE & CO. OR TO A SUCCESSOR THEREOF OR
SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL NOTE
SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE PROVISIONS OF
SECTION 2.06 OF THE INDENTURE.
SECTION 2.02. Execution, Authentication and Denominations.
Subject to Article Four, the aggregate principal amount of Notes which may be
authenticated and delivered under this Indenture is unlimited. The Notes shall
be executed by two Officers of the Company.
<PAGE> 28
22
The signature of any of these Officers on the Notes may be by facsimile or
manual signature in the name and on behalf of the Company.
If an Officer whose signature is on a Note no longer holds
that office at the time the Trustee or authenticating agent authenticates the
Note, the Note shall be valid nevertheless.
A Note shall not be valid until the Trustee or authenticating
agent manually signs the certificate of authentication on the Note. The
signature shall be conclusive evidence that the Note has been authenticated
under this Indenture.
At any time and from time to time after the execution of this
Indenture, the Trustee or an authenticating agent shall upon receipt of a
Company Order authenticate for original issue Notes in the aggregate principal
amount specified in such Company Order; provided that the Trustee shall be
entitled to receive an Officers' Certificate and an Opinion of Counsel of the
Company in connection with such authentication of Notes. Such Company Order
shall specify the amount of Notes to be authenticated and the date on which the
original issue of Notes is to be authenticated and in case of an issuance of
Notes pursuant to Section 2.13, shall certify that such issuance is in
compliance with Article Four.
The Trustee may appoint an authenticating agent to
authenticate Notes. An authenticating agent may authenticate Notes whenever the
Trustee may do so. Each reference in this Indenture to authentication by the
Trustee includes authentication by such authenticating agent. An authenticating
agent has the same rights as an Agent to deal with the Company or an Affiliate
of the Company.
The Notes shall be issuable only in registered form without
coupons and only in denominations of $1,000 in principal amount and any integral
multiple of $1,000 in excess thereof.
SECTION 2.03. Registrar and Paying Agent. The Company shall
maintain an office or agency where Notes may be presented for registration of
transfer or for exchange (the "Registrar"), an office or agency where Notes may
be presented for payment (the "Paying Agent") and an office or agency where
notices and demands to or upon the Company in respect of the Notes and this
Indenture may be served, which shall be in the Borough of Manhattan, The City of
New York. The Company shall cause the Registrar to keep a register of the Notes
and of their transfer and exchange (the "Security Register"). The Company may
have one or more co-Registrars and one or more additional Paying Agents.
The Company shall enter into an appropriate agency agreement
with any Agent not a party to this Indenture. The agreement shall implement the
provisions of this Indenture that relate to such Agent. The Company shall give
prompt written notice to the Trustee of the name and address of any such Agent
and any change in the address of such Agent. If the Company
<PAGE> 29
23
fails to maintain a Registrar, Paying Agent and/or agent for service of notices
and demands, the Trustee shall act as such Registrar, Paying Agent and/or agent
for service of notices and demands. The Company may remove any Agent upon
written notice to such Agent and the Trustee; provided that no such removal
shall become effective until (i) the acceptance of an appointment by a successor
Agent to such Agent as evidenced by an appropriate agency agreement entered into
by the Company and such successor Agent and delivered to the Trustee or (ii)
notification to the Trustee that the Trustee shall serve as such Agent until the
appointment of a successor Agent in accordance with clause (i) of this proviso.
The Company, any Subsidiary of the Company, or any Affiliate of any of them may
act as Paying Agent, Registrar or co-Registrar, and/or agent for service of
notice and demands.
The Company initially appoints the Trustee as Registrar,
Paying Agent, authenticating agent and agent for service of notice and demands.
If, at any time, the Trustee is not the Registrar, the Registrar shall make
available to the Trustee on or before each Interest Payment Date and at such
other times as the Trustee may reasonably request, the names and addresses of
the Holders as they appear in the Security Register.
SECTION 2.04. Paying Agent to Hold Money in Trust. Not later
than each due date of the principal, premium, if any, and interest on any Notes,
the Company shall deposit with the Paying Agent money in immediately available
funds sufficient to pay such principal, premium, if any, and interest so
becoming due. The Company shall require each Paying Agent other than the Trustee
to agree in writing that such Paying Agent shall hold in trust for the benefit
of the Holders or the Trustee all money held by the Paying Agent for the payment
of principal of, premium, if any, and interest on the Notes (whether such money
has been paid to it by the Company or any other obligor on the Notes), and such
Paying Agent shall promptly notify the Trustee of any default by the Company (or
any other obligor on the Notes) in making any such payment. The Company at any
time may require a Paying Agent to pay all money held by it to the Trustee and
account for any funds disbursed, and the Trustee may at any time during the
continuance of any payment default, upon written request to a Paying Agent,
require such Paying Agent to pay all money held by it to the Trustee and to
account for any funds disbursed. Upon doing so, the Paying Agent shall have no
further liability for the money so paid over to the Trustee. If the Company or
any Subsidiary of the Company or any Affiliate of any of them acts as Paying
Agent, it will, on or before each due date of any principal of, premium, if any,
or interest on the Notes, segregate and hold in a separate trust fund for the
benefit of the Holders a sum of money sufficient to pay such principal, premium,
if any, or interest so becoming due until such sum of money shall be paid to
such Holders or otherwise disposed of as provided in this Indenture, and will
promptly notify the Trustee of its action or failure to act.
SECTION 2.05. Transfer and Exchange. A Holder may transfer a
Note only by written application to the Registrar stating the name of the
proposed transferee and otherwise complying with the terms of this Indenture. No
such transfer shall be effected until, and such transferee shall succeed to the
rights of a Holder only upon, final acceptance and registration of
<PAGE> 30
24
the transfer by the Registrar in the Security Register. Prior to the
registration of any transfer by a Holder as provided herein, the Company, the
Trustee, and any agent of the Company shall treat the person in whose name the
Note is registered as the owner thereof for all purposes whether or not the Note
shall be overdue, and neither the Company, the Trustee, nor any such agent shall
be affected by notice to the contrary. Furthermore, any Holder of a Global Note
shall, by acceptance of such Global Note, agree that transfers of beneficial
interests in such Global Note may be effected only through a book entry system
maintained by the Holder of such Global Note (or its agent) and that ownership
of a beneficial interest in the Note shall be required to be reflected in a book
entry. When Notes are presented to the Registrar or a co-Registrar with a
request to register the transfer or to exchange them for an equal principal
amount of Notes of other authorized denominations, the Registrar shall register
the transfer or make the exchange as requested if its requirements for such
transactions are met. To permit registrations of transfers and exchanges, the
Company shall execute and the Trustee shall authenticate Notes at the
Registrar's request. No service charge shall be made for any registration of
transfer or exchange or redemption of the Notes, but the Company may require
payment of a sum sufficient to cover any transfer tax or similar governmental
charge payable in connection therewith (other than any such transfer taxes or
other similar governmental charge payable upon exchanges pursuant to Section
2.09, 3.08 or 9.04).
The Registrar shall not be required (i) to issue, register the
transfer of or exchange any Note during a period beginning at the opening of
business 15 days before the day of the mailing of a notice of redemption of
Notes selected for redemption under Section 3.03 and ending at the close of
business on the day of such mailing, or (ii) to register the transfer of or
exchange any Note so selected for redemption in whole or in part, except the
unredeemed portion of any Note being redeemed in part.
SECTION 2.06. Book-Entry Provisions for Global Notes. (a) The
Global Notes shall (i) be registered in the name of the Depositary for such
Global Notes or the nominee of such Depositary and (ii) be delivered to the
Trustee as custodian for such Depositary.
Members of, or participants in, the Depositary ("Agent
Members") shall have no rights under this Indenture with respect to any Global
Note held on their behalf by the Depositary, or the Trustee as its custodian, or
under the Global Note, and the Depositary may be treated by the Company, the
Trustee and any agent of the Company or the Trustee as the absolute owner of
such Global Note for all purposes whatsoever. Notwithstanding the foregoing,
nothing herein shall prevent the Company, the Trustee or any agent of the
Company or the Trustee, from giving effect to any written certification, proxy
or other authorization furnished by the Depositary or impair, as between the
Depositary and its Agent Members, the operation of customary practices governing
the exercise of the rights of a holder of any Note.
(b) Transfers of a Global Note shall be limited to transfers
of such Global Note in whole, but not in part, to the Depositary, its successors
or their respective nominees.
<PAGE> 31
25
Interests of beneficial owners in a Global Note may be transferred in accordance
with the rules and procedures of the Depositary. Permanent certificated Notes in
registered form in substantially the form set forth in Exhibit A ("Physical
Notes") shall be transferred to all beneficial owners in exchange for their
beneficial interests in the Global Notes (i) if the Depositary notifies the
Company that it is unwilling or unable to continue as Depositary for the Global
Notes and a successor depositary is not appointed by the Company within 90 days
of such notice, (ii) if an Event of Default has occurred and is continuing and
the Registrar has received a request therefor from the Depositary or (iii) in
accordance with the rules and procedures of the Depositary. In addition, the
Company may at any time and in its sole discretion determine that the Notes
shall no longer be represented by Global Notes.
(c) In connection with any transfer of a portion of the
beneficial interests in the Global Notes to beneficial owners pursuant to
paragraph (b) of this Section 2.06, the Registrar shall reflect on its books and
records the date and a decrease in the principal amount of the Global Notes in
an amount equal to the principal amount of the beneficial interest in the Global
Notes to be exchanged for Physical Notes, and the Company shall execute, and the
Trustee shall authenticate and deliver, one or more Physical Notes of like tenor
and amount.
(d) In connection with the transfer of all Notes represented
by Global Notes to beneficial owners pursuant to paragraph (b) of this Section
2.06, the Global Notes shall be deemed to be surrendered to the Trustee for
cancellation, and the Company shall execute, and the Trustee shall authenticate
and deliver, to each beneficial owner identified by the Depositary in exchange
for its beneficial interest in the Global Notes an equal aggregate principal
amount of Physical Notes of authorized denominations.
(e) The registered holder of a Global Note may grant proxies
and otherwise authorize any person, including Agent Members and persons that may
hold interests through Agent Members, to take any action which a Holder is
entitled to take under this Indenture or the Notes.
SECTION 2.07. Replacement Notes. If a mutilated Note is
surrendered to the Trustee or if the Holder claims that the Note has been lost,
destroyed or wrongfully taken, the Company shall issue and the Trustee shall
authenticate a replacement Note of like tenor and amount and bearing a number
not contemporaneously outstanding; provided that the requirements of this
Section 2.07 are met. If required by the Trustee or the Company, an indemnity
bond must be furnished that is sufficient in the judgment of both the Trustee
and the Company to protect the Company, the Trustee or any Agent from any loss
that any of them may suffer if a Note is replaced. The Company may charge such
Holder for its expenses and the expenses of the Trustee in replacing a Note. In
case any such mutilated, lost, destroyed or wrongfully taken Note has become or
is about to become due and payable, the Company in its discretion may pay such
Note instead of issuing a new Note in replacement thereof.
<PAGE> 32
26
Every replacement Note is an additional obligation of the
Company and shall be entitled to the benefits of this Indenture.
SECTION 2.08. Outstanding Notes. Notes outstanding at any time
are all Notes that have been authenticated by the Trustee except for those
cancelled by it, those delivered to it for cancellation and those described in
this Section 2.08 as not outstanding.
If a Note is replaced pursuant to Section 2.07, it ceases to
be outstanding unless and until the Trustee and the Company receive proof
satisfactory to them that the replaced Note is held by a bona fide purchaser.
If the Paying Agent (other than the Company or an Affiliate of
the Company) holds on the maturity date money sufficient to pay Notes payable on
that date, then on and after that date such Notes cease to be outstanding and
interest on them shall cease to accrue.
A Note does not cease to be outstanding because the Company or
one of its Affiliates holds such Note, provided, however, that, in determining
whether the Holders of the requisite principal amount of the outstanding Notes
have given any request, demand, authorization, direction, notice, consent or
waiver hereunder, Notes owned by the Company or any other obligor upon the Notes
or any Affiliate of the Company or of such other obligor shall be disregarded
and deemed not to be outstanding, except that, in determining whether the
Trustee shall be protected in relying upon any such request, demand,
authorization, direction, notice, consent or waiver, only Notes which a
Responsible Officer of the Trustee actually knows to be so owned shall be so
disregarded. Notes so owned which have been pledged in good faith may be
regarded as outstanding if the pledgee establishes to the satisfaction of the
Trustee the pledgee's right so to act with respect to such Notes and that the
pledgee is not the Company or any other obligor upon the Notes or any Affiliate
of the Company or of such other obligor.
SECTION 2.09. Temporary Notes. Until definitive Notes are
ready for delivery, the Company may prepare and the Trustee shall authenticate
temporary Notes. Temporary Notes shall be substantially in the form of
definitive Notes but may have insertions, substitutions, omissions and other
variations determined to be appropriate by the Officers executing the temporary
Notes, as evidenced by their execution of such temporary Notes. If temporary
Notes are issued, the Company will cause definitive Notes to be prepared without
unreasonable delay. After the preparation of definitive Notes, the temporary
Notes shall be exchangeable for definitive Notes upon surrender of the temporary
Notes at the office or agency of the Company designated for such purpose
pursuant to Section 4.02, without charge to the Holder. Upon surrender for
cancellation of any one or more temporary Notes the Company shall execute and
the Trustee shall authenticate and make available for delivery in exchange
therefor a like principal amount of definitive Notes of authorized
denominations. Until so exchanged, the temporary Notes shall be entitled to the
same benefits under this Indenture as definitive Notes.
<PAGE> 33
27
SECTION 2.10. Cancellation. The Company at any time may
deliver to the Trustee for cancellation any Notes previously authenticated and
delivered hereunder which the Company may have acquired in any manner
whatsoever, and may deliver to the Trustee for cancellation any Notes previously
authenticated hereunder which the Company has not issued and sold. The Registrar
and the Paying Agent shall forward to the Trustee any Notes surrendered to them
for transfer, exchange or payment. The Trustee shall cancel all Notes
surrendered for transfer, exchange, payment or cancellation in accordance with
its normal procedure.
SECTION 2.11. CUSIP Numbers. The Company in issuing the Notes
may use "CUSIP," "CINS" or "ISIN" numbers (if then generally in use), and the
Trustee shall use CUSIP, CINS or ISIN numbers, as the case may be, in notices of
redemption or exchange as a convenience to Holders; provided that any such
notice shall state that no representation is made as to the correctness of such
numbers either as printed on the Notes or as contained in any notice of
redemption or exchange and that reliance may be placed only on the other
identification numbers printed on the Notes, and any such redemption shall not
be affected by any defect or omission of such numbers. The Company will promptly
notify the Trustee of any change in the "CUSIP," "CINS" or "ISIN" numbers.
SECTION 2.12. Defaulted Interest. If the Company defaults in a
payment of interest on the Notes, it shall pay, or shall deposit with the Paying
Agent money in immediately available funds sufficient to pay the defaulted
interest, plus (to the extent lawful) any interest payable on the defaulted
interest, to the Persons who are Holders on a subsequent special record date. A
special record date, as used in this Section 2.12 with respect to the payment of
any defaulted interest, shall mean the 15th day next preceding the date fixed by
the Company for the payment of defaulted interest, whether or not such day is a
Business Day. At least 15 days before the subsequent special record date, the
Company shall mail to each Holder and to a Responsible Officer of the Trustee a
notice that states the subsequent special record date, the payment date and the
amount of defaulted interest to be paid.
SECTION 2.13. Issuance of Additional Notes. The Company may,
subject to Article Four of this Indenture, issue additional Notes under this
Indenture. The Notes issued on the Closing Date and any additional Notes
subsequently issued shall be treated as a single class for all purposes under
this Indenture.
ARTICLE THREE
REDEMPTION
SECTION 3.01. Right of Redemption. (a) The Notes may be
redeemed, at the Company's option, in whole or in part, at any time or from time
to time, on or after May 15, 2003 and prior to maturity, upon not less than 30
nor more than 60 days' prior notice mailed by first class mail to each Holder's
last address as it appears in the Security Register, at
<PAGE> 34
28
the Redemption Prices (expressed in percentages of principal amount) set forth
below, plus accrued and unpaid interest to the Redemption Date (subject to the
right of Holders of record on the relevant Regular Record Date that is on or
prior to the Redemption Date to receive interest due on an Interest Payment
Date), if redeemed during the 12-month period commencing May 15 of the years set
forth below:
<TABLE>
<CAPTION>
Redemption
Year Price
---- ----------
<S> <C>
2003 106.438%
2004 104.292%
2005 102.146%
2006 and thereafter 100.000%
</TABLE>
(b) In addition, at any time prior to May 15, 2001, the
Company may redeem up to 35% of the principal amount of the Notes originally
issued with the proceeds of one or more Public Equity Offerings following which
there is a Public Market, at any time or from time to time in part, at a
Redemption Price (expressed as a percentage principal amount) of 112.875% plus
accrued and unpaid interest to the Redemption Date (subject to the right of
Holders of record on the relevant Regular Record Date that is on or prior to the
Redemption Date to receive interest due on an Interest Payment Date); provided
that at least 65% of the aggregate principal amount of Notes originally issued
remains outstanding after each such redemption and notice of any such redemption
is mailed within 60 days after the related Public Equity Offering.
SECTION 3.02. Notices to Trustee. If the Company elects to
redeem Notes pursuant to Section 3.01(a) or 3.01(b), it shall notify the Trustee
in writing of the Redemption Date and the principal amount of Notes to be
redeemed.
The Company shall give each notice provided for in this
Section 3.02 in an Officers' Certificate at least 45 days before the Redemption
Date (unless a shorter period shall be satisfactory to the Trustee).
SECTION 3.03. Selection of Notes to Be Redeemed. If less than
all of the Notes are to be redeemed at any time, the Trustee shall select the
Notes to be redeemed in compliance with the requirements, as certified to it by
the Company, of the principal national securities exchange, if any, on which the
Notes are listed or, if the Notes are not listed on a national securities
exchange, by lot or by such other method as the Trustee in its sole discretion
shall deem fair and appropriate; provided that no Notes of $1,000 in principal
amount or less shall be redeemed in part.
The Trustee shall make the selection from the Notes
outstanding and not previously called for redemption. Notes in denominations of
$1,000 in principal amount may only be redeemed in whole. The Trustee may select
for redemption portions (equal to $1,000 in
<PAGE> 35
29
principal amount or any integral multiple thereof) of Notes that have
denominations larger than $1,000 in principal amount. Provisions of this
Indenture that apply to Notes called for redemption also apply to portions of
Notes called for redemption. The Trustee shall notify the Company and the
Registrar promptly in writing of the Notes or portions of Notes to be called for
redemption.
SECTION 3.04. Notice of Redemption. With respect to any
redemption of Notes pursuant to Section 3.01(a) or 3.01(b), at least 30 days but
not more than 60 days before a Redemption Date, the Company shall mail a notice
of redemption by first class mail to each Holder whose Notes are to be redeemed.
The notice shall identify the Notes (including CUSIP, CINS or
ISIN numbers) to be redeemed and shall state:
(i) the Redemption Date;
(ii) the Redemption Price;
(iii)the name and address of the Paying Agent;
(iv) that Notes called for redemption must be surrendered to
the Paying Agent in order to collect the Redemption Price;
(v) that, unless the Company defaults in making the redemption
payment, interest on Notes called for redemption ceases to accrue on
and after the Redemption Date and the only remaining right of the
Holders is to receive payment of the Redemption Price plus accrued
interest to the Redemption Date upon surrender of the Notes to the
Paying Agent;
(vi) that, if any Note is being redeemed in part, the portion
of the principal amount (equal to $1,000 in principal amount or any
integral multiple thereof) of such Note to be redeemed and that, on and
after the Redemption Date, upon surrender of such Note, a new Note or
Notes in principal amount equal to the unredeemed portion thereof will
be reissued; and
(vii) that, if any Note contains a CUSIP, CINS or ISIN number
as provided in Section 2.11, no representation is being made as to the
correctness of the CUSIP, CINS or ISIN number either as printed on the
Notes or as contained in the notice of redemption and that reliance may
be placed only on the other identification numbers printed on the
Notes.
<PAGE> 36
30
At the Company's request (which request may be revoked by the
Company at any time prior to the time at which the Trustee shall have given such
notice to the Holders), made in writing to the Trustee at least 30 days (or such
shorter period as shall be satisfactory to the Trustee) before a Redemption
Date, the Trustee shall give the notice of redemption in the name and at the
expense of the Company. If, however, the Company gives such notice to the
Holders, the Company shall concurrently deliver to the Trustee an Officers'
Certificate stating that such notice has been given.
SECTION 3.05. Effect of Notice of Redemption. Once notice of
redemption is mailed, Notes called for redemption become due and payable on the
Redemption Date and at the Redemption Price. Upon surrender of any Notes to the
Paying Agent, such Notes shall be paid at the Redemption Price, plus accrued
interest, if any, to the Redemption Date.
Notice of redemption shall be deemed to be given when mailed,
whether or not the Holder receives the notice. In any event, failure to give
such notice, or any defect therein, shall not affect the validity of the
proceedings for the redemption of Notes held by Holders to whom such notice was
properly given.
SECTION 3.06. Deposit of Redemption Price. On or prior to any
Redemption Date, the Company shall deposit with the Paying Agent (or, if the
Company is acting as its own Paying Agent, shall segregate and hold in trust as
provided in Section 2.04) money sufficient to pay the Redemption Price of and
accrued interest on all Notes to be redeemed on that date other than Notes or
portions thereof called for redemption on that date that have been delivered by
the Company to the Trustee for cancellation.
SECTION 3.07. Payment of Notes Called for Redemption. If
notice of redemption has been given in the manner provided above, the Notes or
portion of Notes specified in such notice to be redeemed shall become due and
payable on the Redemption Date at the Redemption Price stated therein, together
with accrued interest to such Redemption Date, and on and after such date
(unless the Company shall default in the payment of such Notes at the Redemption
Price and accrued interest to the Redemption Date, in which case the principal,
until paid, shall bear interest from the Redemption Date at the rate prescribed
in the Notes), such Notes shall cease to accrue interest. Upon surrender of any
Note for redemption in accordance with a notice of redemption, such Note shall
be paid and redeemed by the Company at the Redemption Price, together with
accrued interest, if any, to the Redemption Date; provided that installments of
interest whose Stated Maturity is on or prior to the Redemption Date shall be
payable to the Holders registered as such at the close of business on the
relevant Regular Record Date.
SECTION 3.08. Notes Redeemed in Part. Upon surrender of any
Note that is redeemed in part, the Company shall execute and the Trustee shall
authenticate and deliver to the
<PAGE> 37
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Holder a new Note equal in principal amount to the unredeemed portion of such
surrendered Note.
ARTICLE FOUR
COVENANTS
SECTION 4.01. Payment of Notes. The Company shall pay the
principal of, premium, if any, and interest on the Notes on the dates and in the
manner provided in the Notes and this Indenture. An installment of principal,
premium, if any, or interest shall be considered paid on the date due if the
Trustee or Paying Agent (other than the Company, a Subsidiary of the Company, or
any Affiliate of any of them) holds on that date money designated for and
sufficient to pay the installment. If the Company or any Subsidiary of the
Company or any Affiliate of any of them, acts as Paying Agent, an installment of
principal, premium, if any, or interest shall be considered paid on the due date
if the entity acting as Paying Agent complies with the last sentence of Section
2.04. As provided in Section 6.09, upon any bankruptcy or reorganization
procedure relative to the Company, the Trustee shall serve as the Paying Agent
and conversion agent, if any, for the Notes.
The Company shall pay interest on overdue principal, premium,
if any, and interest on overdue installments of interest, to the extent lawful,
at the rate per annum specified in the Notes.
SECTION 4.02. Maintenance of Office or Agency. The Company
will maintain in the Borough of Manhattan, The City of New York an office or
agency where Notes may be surrendered for registration of transfer or exchange
or for presentation for payment and where notices and demands to or upon the
Company in respect of the Notes and this Indenture may be served. The Company
will give prompt written notice to the Trustee of the location, and any change
in the location, of such office or agency. If at any time the Company shall fail
to maintain any such required office or agency or shall fail to furnish the
Trustee with the address thereof, such presentations, surrenders, notices and
demands may be made or served at the address of the Trustee set forth in Section
11.02.
The Company may also from time to time designate one or more
other offices or agencies where the Notes may be presented or surrendered for
any or all such purposes and may from time to time rescind such designations;
provided that no such designation or rescission shall in any manner relieve the
Company of its obligation to maintain an office or agency in the Borough of
Manhattan, The City of New York for such purposes. The Company will give prompt
written notice to the Trustee of any such designation or rescission and of any
change in the location of any such other office or agency.
<PAGE> 38
32
The Company hereby initially designates the Corporate Trust
Office of the Trustee, located in the Borough of Manhattan, The City of New
York, as such office of the Company in accordance with Section 2.03.
SECTION 4.03. Limitation on Indebtedness. (a) The Company will
not, and will not permit any of its Restricted Subsidiaries to, Incur any
Indebtedness (other than the Notes and Indebtedness existing on the Closing
Date); provided that the Company may Incur Indebtedness if, after giving effect
to the Incurrence of such Indebtedness and the receipt and application of the
proceeds therefrom, the Consolidated Leverage Ratio would be greater than zero
and less than 6:1.
Notwithstanding the foregoing, the Company and any Restricted
Subsidiary (except as specified below) may Incur each and all of the following:
(i) Indebtedness outstanding at any time in an aggregate
principal amount not to exceed $100 million, less any amount of such
Indebtedness permanently repaid as provided under Section 4.10;
(ii) Indebtedness owed (A) to the Company evidenced by a
promissory note or (B) to any Restricted Subsidiary; provided that any
event which results in any such Restricted Subsidiary ceasing to be a
Restricted Subsidiary or any subsequent transfer of such Indebtedness
(other than to the Company or another Restricted Subsidiary) shall be
deemed, in each case, to constitute an Incurrence of such Indebtedness
not permitted by this clause (ii);
(iii) Indebtedness issued in exchange for, or the net proceeds
of which are used to refinance or refund, then outstanding Indebtedness
(other than Indebtedness Incurred under clause (i), (ii), (iv), (vi),
(viii) or (ix) of this paragraph of this Section 4.03) and any
refinancings thereof in an amount not to exceed the amount so
refinanced or refunded (plus premiums, accrued interest, fees and
expenses); provided that Indebtedness the proceeds of which are used to
refinance or refund the Notes or Indebtedness that is pari passu with,
or subordinated in right of payment to, the Notes shall only be
permitted under this clause (iii) if (A) in case the Notes are
refinanced in part or the Indebtedness to be refinanced is pari passu
with the Notes, such new Indebtedness, by its terms or by the terms of
any agreement or instrument pursuant to which such new Indebtedness is
outstanding, is expressly made pari passu with, or subordinate in right
of payment to, the remaining Notes, (B) in case the Indebtedness to be
refinanced is subordinated in right of payment to the Notes, such new
Indebtedness, by its terms or by the terms of any agreement or
instrument pursuant to which such new Indebtedness is issued or remains
outstanding, is expressly made subordinate in right of payment to the
Notes at least to the extent that the Indebtedness to be refinanced is
subordinated to the Notes and (C) such new Indebtedness, determined as
of the date of Incurrence of such new Indebtedness,
<PAGE> 39
33
does not mature prior to the Stated Maturity of the Indebtedness to be
refinanced or refunded, and the Average Life of such new Indebtedness
is at least equal to the remaining Average Life of the Indebtedness to
be refinanced or refunded; and provided further that in no event may
Indebtedness of the Company be refinanced by means of any Indebtedness
of any Restricted Subsidiary pursuant to this clause (iii);
(iv) Indebtedness (A) in respect of performance, surety or
appeal bonds provided in the ordinary course of business, (B) under
Currency Agreements and Interest Rate Agreements; provided that such
agreements (a) are designed solely to protect the Company or its
Restricted Subsidiaries against fluctuations in foreign currency
exchange rates or interest rates and (b) do not increase the
Indebtedness of the obligor outstanding at any time other than as a
result of fluctuations in foreign currency exchange rates or interest
rates or by reason of fees, indemnities and compensation payable
thereunder; and (C) arising from agreements providing for
indemnification, adjustment of purchase price or similar obligations,
or from Guarantees or letters of credit, surety bonds or performance
bonds securing any obligations of the Company or any of its Restricted
Subsidiaries pursuant to such agreements, in any case Incurred in
connection with the disposition of any business, assets or Restricted
Subsidiary (other than Guarantees of Indebtedness Incurred by any
Person acquiring all or any portion of such business, assets or
Restricted Subsidiary for the purpose of financing such acquisition),
in a principal amount not to exceed the gross proceeds actually
received by the Company or any Restricted Subsidiary in connection with
such disposition;
(v) Indebtedness of the Company, to the extent the net
proceeds thereof are promptly (A) used to purchase Notes tendered in an
Offer to Purchase made as a result of a Change in Control or (B)
deposited to defease the Notes as set forth in Article Eight;
(vi) Guarantees of the Notes and Guarantees of Indebtedness of
the Company by any Restricted Subsidiary provided the Guarantee of such
Indebtedness is permitted by and made in accordance with Section 4.07;
(vii) Indebtedness (including Guarantees) Incurred to finance
the cost (including the cost of design, development, acquisition,
construction, installation, improvement, transportation or integration)
to acquire equipment, inventory or network assets (including
acquisitions by way of Capitalized Lease and acquisitions of the
Capital Stock of a Person that becomes a Restricted Subsidiary to the
extent of the fair market value of the equipment, inventory or network
assets so acquired) by the Company or a Restricted Subsidiary after the
Closing Date;
(viii) Indebtedness of the Company not to exceed, at any one
time outstanding, two times (A) the Net Cash Proceeds received by the
Company after February 3, 1998 as a capital contribution or from the
issuance and sale of its Capital Stock (other than
<PAGE> 40
34
Disqualified Stock) to a Person that is not a Subsidiary of the
Company, to the extent (I) such capital contribution or Net Cash
Proceeds have not been used pursuant to clause (C)(2) of the first
paragraph or clause (iii), (iv), (vi), (vii) or (viii) of the second
paragraph of Section 4.04 to make a Restricted Payment and (II) if such
capital contribution or Net Cash Proceeds are used to consummate a
transaction pursuant to which the Company Incurs Acquired Indebtedness,
the amount of such Net Cash Proceeds exceeds one-half of the amount of
Acquired Indebtedness so Incurred and (B) 80% of the fair market value
of property (other than cash and cash equivalents) received by the
Company after February 3, 1998 from the sale of its Capital Stock
(other than Disqualified Stock) to a Person that is not a Subsidiary of
the Company, to the extent (I) such capital contribution or sale of
Capital Stock has not been used pursuant to clause (iii), (iv), (vi) or
(vii) of the second paragraph of Section 4.04 to make a Restricted
Payment and (II) if such capital contribution or Capital Stock is used
to consummate a transaction pursuant to which the Company Incurs
Acquired Indebtedness, 80% of the fair market value of the property
received exceeds one-half of the amount of Acquired Indebtedness so
Incurred provided that such Indebtedness does not mature prior to the
Stated Maturity of the Notes and has an Average Life longer than the
Notes;
(ix) Acquired Indebtedness;
(x) Strategic Subordinated Indebtedness; and
(xi) subordinated Indebtedness of the Company (in addition to
Indebtedness permitted under clauses (i) through (x) above) in an
aggregate principal amount outstanding at any time not to exceed $100
million, less any amount of such Indebtedness permanently repaid as
provided under Section 4.10.
(b) Notwithstanding any other provision of this Section 4.03,
the maximum amount of Indebtedness that the Company or a Restricted Subsidiary
may Incur pursuant to this Section 4.03 shall not be deemed to be exceeded, with
respect to any outstanding Indebtedness due solely to the result of fluctuations
in the exchange rates of currencies.
(c) For purposes of determining any particular amount of
Indebtedness under this Section 4.03, (1) Guarantees, Liens or obligations with
respect to letters of credit supporting Indebtedness otherwise included in the
determination of such particular amount shall not be included and (2) any Liens
granted pursuant to the equal and ratable provisions referred to in Section 4.09
shall not be treated as Indebtedness. For purposes of determining compliance
with this Section 4.03, in the event that an item of Indebtedness meets the
criteria of more than one of the types of Indebtedness described in the above
clauses, the Company, in its sole discretion, shall classify, and from time to
time may reclassify, such item of Indebtedness and only be required to include
the amount and type of such Indebtedness in one of such clauses.
<PAGE> 41
35
SECTION 4.04. Limitation on Restricted Payments. The Company
will not, and will not permit any Restricted Subsidiary to, directly or
indirectly, (i) declare or pay any dividend or make any distribution on or with
respect to its Capital Stock (other than (x) dividends or distributions payable
solely in shares of its Capital Stock (other than Disqualified Stock) or in
options, warrants or other rights to acquire shares of such Capital Stock and
(y) pro rata dividends or distributions on Common Stock of Restricted
Subsidiaries held by minority stockholders) held by Persons other than the
Company or any of its Restricted Subsidiaries, (ii) purchase, redeem, retire or
otherwise acquire for value any shares of Capital Stock of (A) the Company or an
Unrestricted Subsidiary (including options, warrants or other rights to acquire
such shares of Capital Stock) held by any Person or (B) a Restricted Subsidiary
(including options, warrants or other rights to acquire such shares of Capital
Stock) held by any Affiliate of the Company (other than a Wholly Owned
Restricted Subsidiary) or any holder (or any Affiliate of such holder) of 5% or
more of the Capital Stock of the Company, (iii) make any voluntary or optional
principal payment, or voluntary or optional redemption, repurchase, defeasance,
or other acquisition or retirement for value, of Indebtedness of the Company
that is subordinated in right of payment to the Notes or (iv) make any
Investment, other than a Permitted Investment, in any Person (such payments or
any other actions described in clauses (i) through (iv) above being collectively
"Restricted Payments") if, at the time of, and after giving effect to, the
proposed Restricted Payment: (A) a Default or Event of Default shall have
occurred and be continuing, (B) the Company could not Incur at least $1.00 of
Indebtedness under the first paragraph of Section 4.03 or (C) the aggregate
amount of all Restricted Payments (the amount, if other than in cash, to be
determined in good faith by the Board of Directors, whose determination shall be
conclusive and evidenced by a Board Resolution) made after the Closing Date
shall exceed the sum of (1) 50% of the aggregate amount of the Adjusted
Consolidated Net Income (or, if the Adjusted Consolidated Net Income is a loss,
minus 100% of the amount of such loss) (determined by excluding income resulting
from transfers of assets by the Company or a Restricted Subsidiary to an
Unrestricted Subsidiary) accrued on a cumulative basis during the period (taken
as one accounting period) beginning on April 1, 1998 and ending on the last day
of the last fiscal quarter preceding the Transaction Date for which reports have
been filed with the Commission or provided to the Trustee pursuant to Section
4.17 plus (2) the aggregate Net Cash Proceeds received by the Company after
February 3, 1998 as a capital contribution or from the issuance and sale
permitted by this Indenture of its Capital Stock (other than Disqualified Stock)
to a Person who is not a Subsidiary of the Company, including an issuance or
sale permitted by this Indenture of Indebtedness of the Company for cash
subsequent to February 3, 1998 upon the conversion of such Indebtedness into
Capital Stock (other than Disqualified Stock) of the Company, or from the
issuance to a Person who is not a Subsidiary of the Company of any options,
warrants or other rights to acquire Capital Stock of the Company (in each case,
exclusive of any Disqualified Stock or any options, warrants or other rights
that are redeemable at the option of the holder, or are required to be redeemed,
prior to the Stated Maturity of the Notes), in each case except to the extent
such Net Cash Proceeds are used to Incur Indebtedness pursuant to clause (viii)
of the second paragraph under Section 4.03, plus (3) an amount equal to the net
reduction in Investments (other than reductions in Permitted Investments) in any
Person resulting
<PAGE> 42
36
from payments of interest on Indebtedness, dividends, repayments of loans or
advances, or other transfers of assets, in each case to the Company or any
Restricted Subsidiary or from the Net Cash Proceeds from the sale of any such
Investment (except, in each case, to the extent any such payment or proceeds are
included in the calculation of Adjusted Consolidated Net Income), or from
redesignations of Unrestricted Subsidiaries as Restricted Subsidiaries (valued
in each case as provided in the definition of "Investments"), not to exceed, in
each case, the amount of Investments previously made by the Company or any
Restricted Subsidiary in such Person or Unrestricted Subsidiary.
The foregoing provision shall not be violated by reason of:
(i) the payment of any dividend within 60 days after the date
of declaration thereof if, at said date of declaration, such payment
would comply with the foregoing paragraph;
(ii) the redemption, repurchase, defeasance or other
acquisition or retirement for value of Indebtedness that is
subordinated in right of payment to the Notes including premium, if
any, and accrued and unpaid interest, with the proceeds of, or in
exchange for, Indebtedness Incurred under clause (iii) of the second
paragraph of Section 4.03(a);
(iii) the repurchase, redemption or other acquisition of
Capital Stock of the Company or an Unrestricted Subsidiary (or options,
warrants or other rights to acquire such Capital Stock) in exchange
for, or out of the proceeds of a capital contribution or a
substantially concurrent offering of, shares of Capital Stock (other
than Disqualified Stock) of the Company (or options, warrants or other
rights to acquire such Capital Stock);
(iv) the making of any principal payment or the repurchase,
redemption, retirement, defeasance or other acquisition for value of
Indebtedness of the Company which is subordinated in right of payment
to the Notes in exchange for, or out of the proceeds of a capital
contribution or a substantially concurrent offering of, shares of the
Capital Stock (other than Disqualified Stock) of the Company (or
options, warrants or other rights to acquire such Capital Stock);
(v) payments or distributions, to dissenting stockholders
pursuant to applicable law, pursuant to or in connection with a
consolidation, merger or transfer of assets that complies with the
provisions of Article Five;
(vi) Investments in any Person the primary business of which
is related, ancillary or complementary to the business of the Company
and its Restricted Subsidiaries on the date of such Investments;
provided that the aggregate amount of Investments made pursuant to this
clause (vi) does not exceed the sum of (a) $20 million
<PAGE> 43
37
and (b) the amount of Net Cash Proceeds received by the Company after
February 3, 1998 as a capital contribution or from the sale of its
Capital Stock (other than Disqualified Stock) to a Person who is not a
Subsidiary of the Company, except to the extent such Net Cash Proceeds
are used to Incur Indebtedness pursuant to clause (viii) of the second
paragraph of Section 4.03(a) or to make Restricted Payments pursuant to
clause (C)(2) of the first paragraph, or clauses (iii), (iv) or (viii)
of this paragraph, of this Section 4.04, plus (z) the net reduction in
Investments made pursuant to this clause (vi) resulting from
distributions on or repayments of such Investments or from the Net Cash
Proceeds from the sale of any such Investment (except in each case to
the extent any such payment or proceeds is included in the calculation
of Adjusted Consolidated Net Income) or from such Person becoming a
Restricted Subsidiary (valued in each case as provided in the
definition of "Investments"), provided that the net reduction in any
Investment shall not exceed the amount of such Investment;
(vii) Investments acquired in exchange for Capital Stock
(other than Disqualified Stock) of the Company;
(viii) the declaration or payment of dividends on Capital
Stock (other than Disqualified Stock) of the Company in an aggregate
annual amount not to exceed 6% of the Net Cash Proceeds received by the
Company from the sale of such Capital Stock after the Closing Date;
(ix) repurchases of Warrants pursuant to a Repurchase Offer;
(x) any purchase of any fractional shares of Common Stock (or
other Capital Stock of the Company issuable upon exercise of the
Warrants) in connection with an exercise of the Warrants; and
(xi) other Restricted Payments in an aggregate amount not to
exceed $2 million;
provided that, except in the case of clauses (i) and (iii), no Default or Event
of Default shall have occurred and be continuing or occur as a consequence of
the actions or payments set forth therein.
Each Restricted Payment permitted pursuant to the preceding
paragraph (other than the Restricted Payment referred to in clause (ii) thereof,
an exchange of Capital Stock for Capital Stock or Indebtedness referred to in
clause (iii) or (iv) thereof and an Investment referred to in clause (vi)
thereof), and the Net Cash Proceeds from any capital contribution or any
issuance of Capital Stock referred to in clauses (iii), (iv) and (vi), shall be
included in calculating whether the conditions of clause (C) of the first
paragraph of this Section 4.04 have been met with respect to any subsequent
Restricted Payments. In the event the proceeds of an issuance of
<PAGE> 44
38
Capital Stock of the Company are used for the redemption, repurchase or other
acquisition of the Notes, or Indebtedness that is pari passu with the Notes,
then the Net Cash Proceeds of such issuance shall be included in clause (C) of
the first paragraph of this Section 4.04 only to the extent such proceeds are
not used for such redemption, repurchase or other acquisition of Indebtedness.
SECTION 4.05. Limitation on Dividend and Other Payment
Restrictions Affecting Restricted Subsidiaries. The Company will not, and will
not permit any Restricted Subsidiary to, create or otherwise cause or suffer to
exist or become effective any consensual encumbrance or restriction of any kind
on the ability of any Restricted Subsidiary to (i) pay dividends or make any
other distributions permitted by applicable law on any Capital Stock of such
Restricted Subsidiary owned by the Company or any other Restricted Subsidiary,
(ii) pay any Indebtedness owed to the Company or any other Restricted
Subsidiary, (iii) make loans or advances to the Company or any other Restricted
Subsidiary or (iv) transfer any of its property or assets to the Company or any
other Restricted Subsidiary.
The foregoing provisions shall not restrict any encumbrances
or restrictions:
(i) existing on the Closing Date in this Indenture or any
other agreements in effect on the Closing Date, and any extensions,
refinancings, renewals or replacements of such agreements; provided
that the encumbrances and restrictions in any such extensions,
refinancings, renewals or replacements are no less favorable in any
material respect to the Holders than those encumbrances or restrictions
that are then in effect and that are being extended, refinanced,
renewed or replaced;
(ii) existing under or by reason of applicable law;
(iii) existing with respect to any Person or the property or
assets of such Person acquired by the Company or any Restricted
Subsidiary, existing at the time of such acquisition and not incurred
in contemplation thereof, which encumbrances or restrictions are not
applicable to any Person or the property or assets of any Person other
than such Person or the property or assets of such Person so acquired;
(iv) in the case of clause (iv) of the first paragraph of this
Section 4.05, (A) that restrict in a customary manner the subletting,
assignment or transfer of any property or asset that is a lease,
license, conveyance or contract or similar property or asset, (B)
existing by virtue of any transfer of, agreement to transfer, option or
right with respect to, or Lien on, any property or assets of the
Company or any Restricted Subsidiary not otherwise prohibited by this
Indenture or (C) arising or agreed to in the ordinary course of
business, not relating to any Indebtedness, and that do not,
individually or in the aggregate, detract from the value of property or
assets of the Company or any Restricted Subsidiary in any manner
material to the Company or any Restricted Subsidiary;
<PAGE> 45
39
(v) with respect to a Restricted Subsidiary and imposed
pursuant to an agreement that has been entered into for the sale or
disposition of all or substantially all of the Capital Stock of, or
property and assets of, such Restricted Subsidiary; or
(vi) contained in the terms of any Indebtedness or any
agreement pursuant to which such Indebtedness was issued if (A) the
encumbrance or restriction applies only in the event of a payment
default or a default with respect to a financial covenant contained in
such Indebtedness or agreement, (B) the encumbrance or restriction is
not materially more disadvantageous to the Holders of the Notes than is
customary in comparable financings (as determined by the Company) and
(C) the Company determines that any such encumbrance or restriction
will not materially affect the Company's ability to make principal or
interest payments on the Notes.
Nothing contained in this Section 4.05 shall prevent the Company or any
Restricted Subsidiary from (1) creating, incurring, assuming or suffering to
exist any Liens otherwise permitted in Section 4.09 or (2) restricting the sale
or other disposition of property or assets of the Company or any of its
Restricted Subsidiaries that secure Indebtedness of the Company or any of its
Restricted Subsidiaries.
SECTION 4.06. Limitation on the Issuance and Sale of Capital
Stock of Restricted Subsidiaries. The Company will not sell, and will not permit
any Restricted Subsidiary, directly or indirectly, to issue or sell, any shares
of Capital Stock of a Restricted Subsidiary (including options, warrants or
other rights to purchase shares of such Capital Stock) except (i) to the Company
or a Wholly Owned Restricted Subsidiary; (ii) issuances of director's qualifying
shares or sales to foreign nationals of shares of Capital Stock of foreign
Restricted Subsidiaries, to the extent required by applicable law; (iii) if,
immediately after giving effect to such issuance or sale, such Restricted
Subsidiary would no longer constitute a Restricted Subsidiary and any Investment
in such Person remaining after giving effect to such issuance or sale would have
been permitted to be made under Section 4.04 if made on the date of such
issuance or sale; or (iv) issuances or sales of Common Stock of a Restricted
Subsidiary, provided that the Company or such Restricted Subsidiary applies the
Net Cash Proceeds, if any, of any such sale in accordance with clause (A) or (B)
of Section 4.10.
SECTION 4.07. Limitation on Issuances of Guarantees by
Restricted Subsidiaries. The Company will not permit any Restricted Subsidiary,
directly or indirectly, to Guarantee any Indebtedness of the Company which is
pari passu with or subordinate in right of payment to the Notes ("Guaranteed
Indebtedness"), unless (i) such Restricted Subsidiary simultaneously executes
and delivers a supplemental indenture to this Indenture providing for a
Guarantee (a "Subsidiary Guarantee") of payment of the Notes by such Restricted
Subsidiary and (ii) such Restricted Subsidiary waives and will not in any manner
whatsoever claim or take the benefit or advantage of, any rights of
reimbursement, indemnity or subrogation or any other rights against the Company
or any other Restricted Subsidiary as a result of any payment by such
<PAGE> 46
40
Restricted Subsidiary under its Subsidiary Guarantee; provided that this
paragraph shall not be applicable to any Guarantee of any Restricted Subsidiary
that existed at the time such Person became a Restricted Subsidiary and was not
Incurred in connection with, or in contemplation of, such Person becoming a
Restricted Subsidiary. If the Guaranteed Indebtedness is (A) pari passu with the
Notes, then the Guarantee of such Guaranteed Indebtedness shall be pari passu
with, or subordinated to, the Subsidiary Guarantee or (B) subordinated to the
Notes, then the Guarantee of such Guaranteed Indebtedness shall be subordinated
to the Subsidiary Guarantee at least to the extent that the Guaranteed
Indebtedness is subordinated to the Notes.
Notwithstanding the foregoing, any Subsidiary Guarantee by a
Restricted Subsidiary may provide by its terms that it shall be automatically
and unconditionally released and discharged upon (i) any sale, exchange or
transfer, to any Person not an Affiliate of the Company, of all of the Company's
and each Restricted Subsidiary's Capital Stock in, or all or substantially all
the assets of, such Restricted Subsidiary (which sale, exchange or transfer is
not prohibited by this Indenture) or (ii) the release or discharge of the
Guarantee which resulted in the creation of such Subsidiary Guarantee, except a
discharge or release by or as a result of payment under such Guarantee.
SECTION 4.08. Limitation on Transactions with Shareholders and
Affiliates. The Company will not, and will not permit any Restricted Subsidiary
to, directly or indirectly, enter into, renew or extend any transaction
(including, without limitation, the purchase, sale, lease or exchange of
property or assets, or the rendering of any service) with any holder (or any
Affiliate of such holder) of 5% or more of any class of Capital Stock of the
Company or with any Affiliate of the Company or any Restricted Subsidiary,
except upon fair and reasonable terms no less favorable to the Company or such
Restricted Subsidiary than could be obtained, at the time of such transaction
or, if such transaction is pursuant to a written agreement, at the time of the
execution of the agreement providing therefor, in a comparable arm's-length
transaction with a Person that is not such a holder or an Affiliate.
The foregoing limitation does not limit, and shall not apply
to:
(i) transactions (A) approved by a majority of the
disinterested members of the Board of Directors or (B) for which the
Company or a Restricted Subsidiary delivers to the Trustee a written
opinion of a nationally recognized investment banking firm stating that
the transaction is fair to the Company or such Restricted Subsidiary
from a financial point of view;
(ii) any transaction solely between the Company and any of its
Wholly Owned Restricted Subsidiaries or solely between Wholly Owned
Restricted Subsidiaries;
(iii) the payment of reasonable and customary regular fees to
directors of the Company who are not employees of the Company;
<PAGE> 47
41
(iv) any payments or other transactions pursuant to any
tax-sharing agreement between the Company and any other Person with
which the Company files a consolidated tax return or with which the
Company is part of a consolidated group for tax purposes; or
(v) any Restricted Payments not prohibited by Section 4.04.
Notwithstanding the foregoing, any transaction or series of related transactions
covered by the first paragraph of this Section 4.08 and not covered by clauses
(ii) through (v) of this paragraph, the aggregate amount of which exceeds $1
million in value, must be approved or determined to be fair in the manner
provided for in clause (i)(A) or (B) above.
SECTION 4.09. Limitation on Liens. The Company will not, and
will not permit any Restricted Subsidiary to, create, incur, assume or suffer to
exist any Lien on any of its assets or properties of any character (including,
without limitation, licenses), or any shares of Capital Stock or Indebtedness of
any Restricted Subsidiary, without making effective provision for all of the
Notes and all other amounts due under this Indenture to be directly secured
equally and ratably with (or, if the obligation or liability to be secured by
such Lien is subordinated in right of payment to the Notes, prior to) the
obligation or liability secured by such Lien.
The foregoing limitation does not apply to:
(i) Liens existing on the Closing Date;
(ii) Liens granted after the Closing Date on any assets or
Capital Stock of the Company or its Restricted Subsidiaries created in
favor of the Holders;
(iii) Liens with respect to the assets of a Restricted
Subsidiary granted by such Restricted Subsidiary to the Company or a
Wholly Owned Restricted Subsidiary to secure Indebtedness owing to the
Company or such other Restricted Subsidiary;
(iv) Liens securing Indebtedness which is Incurred to
refinance secured Indebtedness which is permitted to be Incurred under
clause (iii) of the second paragraph of Section 4.03(a); provided that
such Liens do not extend to or cover any property or assets of the
Company or any Restricted Subsidiary other than the property or assets
securing the Indebtedness being refinanced;
(v) Liens on the Capital Stock of, or any property or assets
of, a Restricted Subsidiary securing Indebtedness of such Restricted
Subsidiary permitted under Section 4.03;
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42
(vi) Liens on the Capital Stock of Restricted Subsidiaries
securing up to $100.0 million of Indebtedness Incurred under clause
(vii) of the second paragraph of Section 4.03(a); or
(vii) Permitted Liens.
SECTION 4.10. Limitation on Asset Sales. The Company will not,
and will not permit any Restricted Subsidiary to, consummate any Asset Sale,
unless (i) the consideration received by the Company or such Restricted
Subsidiary is at least equal to the fair market value of the assets sold or
disposed of and (ii) at least 75% of the consideration received consists of cash
or Temporary Cash Investments; provided, however, that this clause (ii) shall
not apply to long-term assignments in capacity in a telecommunications network.
In the event and to the extent that the Net Cash Proceeds received by the
Company or any of its Restricted Subsidiaries from one or more Asset Sales
occurring on or after the Closing Date in any period of 12 consecutive months
exceed 10% of Adjusted Consolidated Net Tangible Assets (determined as of the
date closest to the commencement of such 12-month period for which a
consolidated balance sheet of the Company and its Subsidiaries has been filed
with the Commission pursuant to Section 4.17), then the Company shall or shall
cause the relevant Restricted Subsidiary to (i) within 12 months after the date
Net Cash Proceeds so received exceed 10% of Adjusted Consolidated Net Tangible
Assets (A) apply an amount equal to such excess Net Cash Proceeds to permanently
repay unsubordinated Indebtedness of the Company, or any Restricted Subsidiary
providing a Subsidiary Guarantee pursuant to Section 4.07 or Indebtedness of any
other Restricted Subsidiary, in each case owing to a Person other than the
Company or any of its Restricted Subsidiaries or (B) invest an equal amount, or
the amount not so applied pursuant to clause (A) (or enter into a definitive
agreement committing to so invest within 12 months after the date of such
agreement), in property or assets (other than current assets) of a nature or
type or that are used in a business (or in a company having property and assets
of a nature or type, or engaged in a business) similar or related to the nature
or type of the property and assets of, or the business of, the Company and its
Restricted Subsidiaries existing on the date of such investment (as determined
in good faith by the Board of Directors, whose determination shall be conclusive
and evidenced by a Board Resolution) and (ii) apply (no later than the end of
the 12-month period referred to in clause (i)) such excess Net Cash Proceeds (to
the extent not applied pursuant to clause (i)) as provided in the following
paragraph of this Section 4.10. The amount of such excess Net Cash Proceeds
required to be applied (or to be committed to be applied) during such 12-month
period as set forth in clause (i) of the preceding sentence and not applied as
so required by the end of such period shall constitute "Excess Proceeds."
If, as of the first day of any calendar month, the aggregate
amount of Excess Proceeds not theretofore subject to an Offer to Purchase
pursuant to this Section 4.10 totals at least $5 million, the Company must
commence, not later than the fifteenth Business Day of such month, and
consummate an Offer to Purchase from the Holders on a pro rata basis an
aggregate principal amount of Notes equal to the Excess Proceeds on such date,
at a purchase price equal to
<PAGE> 49
43
100% of the principal amount of the Notes, plus, in each case, accrued interest
to the Payment Date.
SECTION 4.11. Repurchase of Notes upon a Change of Control.
The Company must commence, within 30 days of the occurrence of a Change of
Control, and consummate an Offer to Purchase for all Notes then outstanding, at
a purchase price equal to 101% of the principal amount thereof, plus accrued
interest to the Payment Date.
SECTION 4.12. Existence. Subject to Articles Four and Five of
this Indenture, the Company will do or cause to be done all things necessary to
preserve and keep in full force and effect its existence and the existence of
each Restricted Subsidiary in accordance with the respective organizational
documents of the Company and each Restricted Subsidiary and the rights (whether
pursuant to charter, partnership certificate, agreement, statute or otherwise),
material licenses and franchises of the Company and each Restricted Subsidiary;
provided that the Company shall not be required to preserve any such right,
license or franchise, or the existence of any Restricted Subsidiary, if the
maintenance or preservation thereof is no longer desirable in the conduct of the
business of the Company and its Restricted Subsidiaries taken as a whole.
SECTION 4.13. Payment of Taxes and Other Claims. The Company
will pay or discharge and shall cause each of its Restricted Subsidiaries to pay
or discharge, or cause to be paid or discharged, before the same shall become
delinquent (i) all material taxes, assessments and governmental charges levied
or imposed upon (a) the Company or any such Restricted Subsidiary, (b) the
income or profits of any such Restricted Subsidiary which is a corporation or
(c) the property of the Company or any such Restricted Subsidiaries and (ii) all
material lawful claims for labor, materials and supplies that, if unpaid, might
by law become a lien upon the property of the Company or any such Restricted
Subsidiary; provided that the Company shall not be required to pay or discharge,
or cause to be paid or discharged, any such tax, assessment, charge or claim the
amount, applicability or validity of which is being contested in good faith by
appropriate proceedings and for which adequate reserves have been established.
SECTION 4.14. Maintenance of Properties and Insurance. The
Company will cause all properties used or useful in the conduct of its business
or the business of any of its Restricted Subsidiaries, to be maintained and kept
in good condition, repair and working order and supplied with all necessary
equipment and will cause to be made all necessary repairs, renewals,
replacements, betterments and improvements thereof, all as in the judgment of
the Company may be necessary so that the business carried on in connection
therewith may be properly conducted at all times; provided that nothing in this
Section 4.14 shall prevent the Company or any such Restricted Subsidiary from
discontinuing the use, operation or maintenance of any of such properties or
disposing of any of them, if such discontinuance or disposal is, in the judgment
of the Company, desirable in the conduct of the business of the Company or such
Restricted Subsidiary.
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44
The Company will provide or cause to be provided, for itself
and its Restricted Subsidiaries, insurance (including appropriate
self-insurance) against loss or damage of the kinds customarily insured against
by corporations similarly situated and owning like properties, with reputable
insurers or with the government of the United States of America, or an agency or
instrumentality thereof, in such amounts, with such deductibles and by such
methods as shall be customary for corporations similarly situated in the
industry in which the Company or such Restricted Subsidiary, as the case may be,
is then conducting business.
SECTION 4.15. Notice of Defaults. In the event that the
Company becomes aware of any Default or Event of Default the Company, promptly
after it becomes aware thereof, will give written notice thereof to the Trustee.
SECTION 4.16. Compliance Certificates. (a) The Company shall
deliver to the Trustee, within 45 days after the end of each fiscal quarter (90
days after the end of the last fiscal quarter of each year), an Officers'
Certificate stating whether or not the signers know of any Default or Event of
Default that occurred during such fiscal quarter. In the case of the Officers'
Certificate delivered within 90 days of the end of the Company's fiscal year,
such certificate shall contain a certification from the principal executive
officer, principal financial officer or principal accounting officer that a
review has been conducted of the activities of the Company and its Restricted
Subsidiaries and the Company's and its Restricted Subsidiaries' performance
under this Indenture and that, to the knowledge of such Officers, the Company
has complied with all conditions and covenants under this Indenture. For
purposes of this Section 4.16, such compliance shall be determined without
regard to any period of grace or requirement of notice provided under this
Indenture. If they do know of such a Default or Event of Default, the
certificate shall describe any such Default or Event of Default and its status.
The first certificate to be delivered pursuant to this Section 4.16(a) shall be
for the first fiscal quarter beginning after the execution of this Indenture.
(b) So long as (and to the extent) not prohibited by the then
current recommendations of the American Institute of Certified Public
Accountants, the Company shall deliver to the Trustee, within 90 days after the
end of the Company's fiscal year, a certificate signed by the Company's
independent certified public accountants stating (i) that their audit
examination has included a review of the terms of this Indenture and the Notes
as they relate to accounting matters, (ii) that they have read the most recent
Officers' Certificate delivered to the Trustee pursuant to paragraph (a) of this
Section 4.16 and (iii) whether, in connection with their audit examination,
anything came to their attention that caused them to believe that the Company
was not in compliance with any of the terms, covenants, provisions or conditions
of Article Four and Section 5.01 of this Indenture as they pertain to accounting
matters and, if any Default or Event of Default has come to their attention,
specifying the nature and period of existence thereof; provided that such
independent certified public accountants shall not be liable in respect of such
statement by reason of any failure to obtain knowledge of any such Default or
Event of Default that would not come to the attention of such accountants in the
course of an audit examination conducted in accordance with generally accepted
auditing standards in effect at the date of such examination.
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(c) Within 90 days of the end of each of the Company's fiscal
years, the Company shall deliver to the Trustee a list of all Significant
Subsidiaries. The Trustee shall have no duty with respect to any such list
except to keep it on file and available for inspection by the Holders.
SECTION 4.17. Commission Reports and Reports to Holders. The
Company shall file with the Commission the annual, quarterly and other reports
and other information required by Sections 13(a) or 15(d) under the Securities
Exchange Act of 1934, regardless of whether such Sections of the Exchange Act
are applicable to the Company. The Company shall supply the Trustee and each
Holder or shall supply to the Trustee for forwarding to each such Holder,
without cost to such Holder, copies of such reports and other information.
Delivery of such reports, information and documents to the Trustee is for
informational purposes only and the Trustee's receipt of such shall not
constitute constructive notice of any information contained therein or
determinable from information (including mathematical calculations) contained
therein, including the Company's compliance with any of its covenants hereunder
(as to which the Trustee is entitled to rely exclusively on Officers'
Certificates). The Company also shall comply with the other provisions of TIA
Section 314(a).
SECTION 4.18. Waiver of Stay, Extension or Usury Laws. The
Company covenants (to the extent that it may lawfully do so) that it will not at
any time insist upon, or plead, or in any manner whatsoever claim or take the
benefit or advantage of, any stay or extension law or any usury law or other law
that would prohibit or forgive the Company from paying all or any portion of the
principal of, premium, if any, or interest on the Notes as contemplated herein,
wherever enacted, now or at any time hereafter in force, or that may affect the
covenants or the performance of this Indenture; and (to the extent that it may
lawfully do so) the Company hereby expressly waives all benefit or advantage of
any such law and covenants that it will not hinder, delay or impede the
execution of any power herein granted to the Trustee, but will suffer and permit
the execution of every such power as though no such law had been enacted.
SECTION 4.19. Limitation on Sale-Leaseback Transactions. The
Company will not, and will not permit any Restricted Subsidiary to, enter into
any sale-leaseback transaction involving any of its assets or properties whether
now owned or hereafter acquired, whereby the Company or a Restricted Subsidiary
sells or transfers such assets or properties and then or thereafter leases such
assets or properties or any part thereof or any other assets or properties which
the Company or such Restricted Subsidiary, as the case may be, intends to use
for substantially the same purpose or purposes as the assets or properties sold
or transferred.
<PAGE> 52
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The foregoing restriction does not apply to any sale-leaseback
transaction if:
(i) the lease is for a period, including renewal rights, of
not in excess of three years;
(ii) the lease secures or relates to industrial revenue or
pollution control bonds;
(iii) the transaction is solely between the Company and any
Wholly Owned Restricted Subsidiary or solely between Wholly Owned
Restricted Subsidiaries; or
(iv) the Company or such Restricted Subsidiary, within 12
months after the sale or transfer of any assets or properties is
completed, applies an amount not less than the net proceeds received
from such sale in accordance with clause (A) or (B) of the first
paragraph of Section 4.10.
ARTICLE FIVE
SUCCESSOR CORPORATION
SECTION 5.01. When Company May Merge, Etc. The Company shall
not consolidate with, merge with or into, or sell, convey, transfer, lease or
otherwise dispose of all or substantially all of its property and assets (as an
entirety or substantially an entirety in one transaction or a series of related
transactions) to, any Person or permit any Person to merge with or into the
Company unless:
(i) the Company shall be the continuing Person, or the
Person (if other than the Company) formed by such consolidation or into
which the Company is merged or that acquired or leased such property
and assets of the Company shall be a corporation organized and validly
existing under the laws of the United States of America or any
jurisdiction thereof and shall expressly assume, by a supplemental
indenture, executed and delivered to the Trustee, all of the
obligations of the Company on all of the Notes and under this
Indenture;
(ii) immediately after giving effect to such transaction, no
Default or Event of Default shall have occurred and be continuing;
(iii) immediately after giving effect to such transaction on
a pro forma basis, the Company or any Person becoming the successor
obligor of the Notes shall have a Consolidated Net Worth equal to or
greater than the Consolidated Net Worth of the Company immediately
prior to such transaction;
(iv) immediately after giving effect to such transaction on
a pro forma basis the Company, or any Person becoming the successor
obligor of the Notes, as the case may be, could Incur at least $1.00 of
Indebtedness under the first paragraph of Section 4.03;
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provided that this clause (iv) shall not apply to (x) a consolidation,
merger or sale of all (but not less than all) of the assets of the
Company if all Liens and Indebtedness of the Company or any Person
becoming the successor obligor on the Notes, as the case may be, and
its Restricted Subsidiaries outstanding immediately after such
transaction would, if Incurred at such time, have been permitted to be
Incurred (and all such Liens and Indebtedness, other than Liens and
Indebtedness of the Company and its Restricted Subsidiaries outstanding
immediately prior to the transaction, shall be deemed to have been
Incurred) for all purposes of this Indenture or (y) a consolidation,
merger or sale of all or substantially all of the assets of the Company
if immediately after giving effect to such transaction on a pro forma
basis, the Company or any Person becoming the successor obligor of the
Notes shall have a Consolidated Leverage Ratio equal to or less than
the Consolidated Leverage Ratio of the Company immediately prior to
such transaction; and
(v) the Company delivers to the Trustee an Officers'
Certificate (attaching the arithmetic computations to demonstrate
compliance with clauses (iii) and (iv) above) and Opinion of Counsel,
in each case stating that such consolidation, merger or transfer and
such supplemental indenture complies with this provision and that all
conditions precedent provided for herein relating to such transaction
have been complied with;
provided, however, that clauses (iii) and (iv) above do not apply if, in the
good faith determination of the Board of Directors of the Company, whose
determination shall be evidenced by a Board Resolution, the principal purpose of
such transaction is to change the state of incorporation of the Company; and
provided further that any such transaction shall not have as one of its purposes
the evasion of the foregoing limitations.
SECTION 5.02. Successor Substituted. Upon any consolidation or
merger, or any sale, conveyance, transfer, lease or other disposition of all or
substantially all of the property and assets of the Company in accordance with
Section 5.01 of this Indenture, the successor Person formed by such
consolidation or into which the Company is merged or to which such sale,
conveyance, transfer, lease or other disposition is made shall succeed to, and
be substituted for, and may exercise every right and power of, the Company under
this Indenture with the same effect as if such successor Person had been named
as the Company herein and thereafter the predecessor corporation shall be
relieved of all obligations and covenants under this Indenture and the Notes;
provided that the Company shall not be released from its obligation to pay the
principal of, premium, if any, or interest on the Notes in the case of a lease
of all or substantially all of its property and assets.
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ARTICLE SIX
DEFAULT AND REMEDIES
SECTION 6.01. Events of Default. An "Event of Default" shall
occur with respect to the Notes if:
(a) the Company defaults in the payment of principal of (or
premium, if any, on) any Note when the same becomes due and payable at
maturity, upon acceleration, redemption or otherwise;
(b) the Company defaults in the payment of interest on any
Note when the same becomes due and payable, and such default continues
for a period of 30 days; provided that a failure to make any of the
first six scheduled interest payments on the Notes on the applicable
Interest Payment Date will constitute an Event of Default with no grace
or cure period;
(c) the Company defaults in the performance, or breaches
the provisions of Article Five or the fails to make or consummate an
Offer to Purchase in accordance with Section 4.10 or Section 4.11;
(d) the Company defaults in the performance of or breaches
any other covenant or agreement of the Company in this Indenture or
under the Notes (other than a default specified in clause (a), (b) or
(c) above) and such default or breach continues for a period of 30
consecutive days after written notice by the Trustee or the Holders of
25% or more in aggregate principal amount of the Notes,
(e) there occurs with respect to any issue or issues of
Indebtedness of the Company or any Significant Subsidiary having an
outstanding principal amount of $5 million or more in the aggregate for
all such issues of all such Persons, whether such Indebtedness now
exists or shall hereafter be created, (I) an event of default that has
caused the holder thereof to declare such Indebtedness to be due and
payable prior to its Stated Maturity and such Indebtedness has not been
discharged in full or such acceleration has not been rescinded or
annulled within 30 days of such acceleration and/or (II) the failure to
make a principal payment at the final (but not any interim) fixed
maturity and such defaulted payment shall not have been made, waived or
extended within 30 days of such payment default;
(f) any final judgment or order (not covered by insurance)
for the payment of money in excess of $5 million in the aggregate for
all such final judgments or orders against all such Persons (treating
any deductibles, self-insurance or retention as not so covered) shall
be rendered against the Company or any Significant Subsidiary and shall
not be paid or discharged, and there shall be any period of 30
consecutive days following
<PAGE> 55
49
entry of the final judgment or order that causes the aggregate amount
for all such final judgments or orders outstanding and not paid or
discharged against all such Persons to exceed $5 million during which a
stay of enforcement of such final judgment or order, by reason of a
pending appeal or otherwise, shall not be in effect;
(g) a court having jurisdiction in the premises enters a
decree or order for (A) relief in respect of the Company or any
Significant Subsidiary in an involuntary case under any applicable
bankruptcy, insolvency or other similar law now or hereafter in effect,
(B) appointment of a receiver, liquidator, assignee, custodian,
trustee, sequestrator or similar official of the Company or any
Significant Subsidiary or for all or substantially all of the property
and assets of the Company or any Significant Subsidiary or (C) the
winding up or liquidation of the affairs of the Company or any
Significant Subsidiary and, in each case, such decree or order shall
remain unstayed and in effect for a period of 30 consecutive days;
(h) the Company or any Significant Subsidiary (A) commences
a voluntary case under any applicable bankruptcy, insolvency or other
similar law now or hereafter in effect, or consents to the entry of an
order for relief in an involuntary case under any such law, (B)
consents to the appointment of or taking possession by a receiver,
liquidator, assignee, custodian, trustee, sequestrator or similar
official of the Company or any Significant Subsidiary or for all or
substantially all of the property and assets of the Company or any
Significant Subsidiary or (C) effects any general assignment for the
benefit of creditors; or
(i) the Pledge Agreement shall cease to be in full force
and effect or enforceable in accordance with its terms, other than in
accordance with its terms.
SECTION 6.02. Acceleration. If an Event of Default (other than
an Event of Default specified in clause (g) or (h) of Section 6.01 that occurs
with respect to the Company) occurs and is continuing under this Indenture, the
Trustee or the Holders of at least 25% in aggregate principal amount of the
Notes, then outstanding, by written notice to the Company (and to the Trustee if
such notice is given by the Holders), may, and the Trustee at the request of
such Holders shall, declare the principal of, premium, if any, and accrued
interest on the Notes to be immediately due and payable. Upon a declaration of
acceleration, such principal of, premium, if any, and accrued interest shall be
immediately due and payable. In the event of a declaration of acceleration
because an Event of Default set forth in clause (e) of Section 6.01 has occurred
and is continuing, such declaration of acceleration shall be automatically
rescinded and annulled if the event of default triggering such Event of Default
pursuant to clause (e) shall be remedied or cured by the Company or the relevant
Significant Subsidiary or waived by the holders of the relevant Indebtedness
within 60 days after the declaration of acceleration with respect thereto. If an
Event of Default specified in clause (g) or (h) of Section 6.01 occurs with
respect to the Company, the principal of, premium, if any, and accrued interest
on the Notes then outstanding shall ipso facto become and be immediately due and
payable without any declaration or other act on the part of the Trustee or any
Holder.
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At any time after such a declaration of acceleration, but
before a judgment or decree for the payment of the money due has been obtained
by the Trustee, the Holders of at least a majority in principal amount of the
outstanding Notes by written notice to the Company and to the Trustee, may waive
all past Defaults and rescind and annul such declaration of acceleration and its
consequences if (i) all existing Events of Default, other than the non-payment
of the principal of, premium, if any, and accrued interest on the Notes that
have become due solely by such declaration of acceleration, have been cured or
waived and (ii) the rescission would not conflict with any judgment or decree of
a court of competent jurisdiction.
SECTION 6.03. Other Remedies. If an Event of Default occurs
and is continuing, the Trustee may pursue any available remedy by proceeding at
law or in equity to collect the payment of principal of, premium, if any, or
interest on the Notes or to enforce the performance of any provision of the
Notes or this Indenture.
The Trustee may maintain a proceeding even if it does not
possess any of the Notes or does not produce any of them in the proceeding.
SECTION 6.04. Waiver of Past Defaults. Subject to Sections
6.02, 6.07 and 9.02, the Holders of at least a majority in principal amount of
the outstanding Notes, by notice to the Trustee, may waive an existing Default
or Event of Default and its consequences, except a Default in the payment of
principal of, premium, if any, or interest on any Note as specified in clause
(a) or (b) of Section 6.01 or in respect of a covenant or provision of this
Indenture which cannot be modified or amended without the consent of the holder
of each outstanding Note affected. Upon any such waiver, such Default shall
cease to exist, and any Event of Default arising therefrom shall be deemed to
have been cured, for every purpose of this Indenture; but no such waiver shall
extend to any subsequent or other Default or Event of Default or impair any
right consequent thereto.
SECTION 6.05. Control by Majority. The Holders of at least a
majority in aggregate principal amount of the outstanding Notes may direct the
time, method and place of conducting any proceeding for any remedy available to
the Trustee or exercising any trust or power conferred on the Trustee. However,
the Trustee may refuse to follow any direction that conflicts with law or this
Indenture, that may involve the Trustee in personal liability, or that the
Trustee determines in good faith may be unduly prejudicial to the rights of
Holders of Notes not joining in the giving of such direction and may take any
other action it deems proper that is not inconsistent with any such direction
received from Holders of Notes.
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SECTION 6.06. Limitation on Suits. A Holder may not institute
any proceeding, judicial or otherwise, with respect to this Indenture or the
Notes, or for the appointment of a receiver or trustee, or for any other remedy
hereunder unless:
(i) the Holder gives the Trustee written notice of a
continuing Event of Default;
(ii) the Holders of at least 25% in aggregate principal
amount of outstanding Notes make a written request to the Trustee to
pursue the remedy;
(iii) such Holder or Holders offer the Trustee indemnity
satisfactory to the Trustee against any costs, liability or expense;
(iv) the Trustee does not comply with the request within 60
days after receipt of the request and the offer of indemnity; and
(v) during such 60-day period, the Holders of a majority in
aggregate principal amount of the outstanding Notes do not give the
Trustee a direction that is inconsistent with the request.
For purposes of Section 6.05 of this Indenture and this
Section 6.06, the Trustee shall comply with TIA Section 316(a) in making any
determination of whether the Holders of the required aggregate principal amount
of outstanding Notes have concurred in any request or direction of the Trustee
to pursue any remedy available to the Trustee or the Holders with respect to
this Indenture or the Notes or otherwise under the law.
A Holder may not use this Indenture to prejudice the rights of
another Holder or to obtain a preference or priority over such other Holder.
SECTION 6.07. Rights of Holders to Receive Payment.
Notwithstanding any other provision of this Indenture, the right of any Holder
of a Note to receive payment of the principal of, premium, if any, or interest
on, such Note or to bring suit for the enforcement of any such payment, on or
after the due date expressed in the Notes, shall not be impaired or affected
without the consent of such Holder.
SECTION 6.08. Collection Suit by Trustee. If an Event of
Default in payment of principal, premium or interest specified in clause (a),
(b) or (c) of Section 6.01 occurs and is continuing, the Trustee may recover
judgment in its own name and as trustee of an express trust against the Company
or any other obligor of the Notes for the whole amount of principal, premium, if
any, and accrued interest remaining unpaid, together with interest on overdue
principal, premium, if any, and, to the extent that payment of such interest is
lawful, interest on overdue installments of interest, in each case at the rate
specified in the Notes, and such further amount as shall be sufficient to cover
the costs and expenses of collection, including the reasonable compensation,
expenses, disbursements and advances of the Trustee, its agents and counsel.
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SECTION 6.09. Trustee May File Proofs of Claim. The Trustee
may file such proofs of claim and other papers or documents as may be necessary
or advisable in order to have the claims of the Trustee (including any claim for
the reasonable compensation, expenses, disbursements and advances of the
Trustee, its agents and counsel, and any other amounts due the Trustee under
Section 7.07) and the Holders allowed in any judicial proceedings relative to
the Company (or any other obligor of the Notes), its creditors or its property
and shall be entitled and empowered to collect and receive any monies,
securities or other property payable or deliverable upon conversion or exchange
of the Notes or upon any such claims and to distribute the same, and any
custodian, receiver, assignee, trustee, liquidator, sequestrator or other
similar official in any such judicial proceeding is hereby authorized by each
Holder to make such payments to the Trustee and, in the event that the Trustee
shall consent to the making of such payments directly to the Holders, to pay to
the Trustee any amount due to it for the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agent and counsel, and any other
amounts due the Trustee under Section 7.07. Nothing herein contained shall be
deemed to empower the Trustee to authorize or consent to, or accept or adopt on
behalf of any Holder, any plan of reorganization, arrangement, adjustment or
composition affecting the Notes or the rights of any Holder thereof, or to
authorize the Trustee to vote in respect of the claim of any Holder in any such
proceeding.
SECTION 6.10. Priorities. If the Trustee collects any money
pursuant to this Article Six, it shall pay out the money in the following order:
First: to the Trustee for all amounts due under Section 7.07;
Second: to Holders for amounts then due and unpaid for
principal of, premium, if any, and interest on the Notes in respect of
which or for the benefit of which such money has been collected,
ratably, without preference or priority of any kind, according to the
amounts due and payable on such Notes for principal, premium, if any,
and interest, respectively; and
Third: to the Company or any other obligors of the Notes, as
their interests may appear, or as a court of competent jurisdiction may
direct.
The Trustee, upon prior written notice to the Company, may fix
a record date and payment date for any payment to Holders pursuant to this
Section 6.10.
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SECTION 6.11. Undertaking for Costs. In any suit for the
enforcement of any right or remedy under this Indenture or in any suit against
the Trustee for any action taken or omitted by it as Trustee, a court may
require any party litigant in such suit to file an undertaking to pay the costs
of the suit, and the court may assess reasonable costs, including reasonable
attorneys' fees and expenses, against any party litigant in the suit having due
regard to the merits and good faith of the claims or defenses made by the party
litigant. This Section 6.11 does not apply to a suit by the Trustee, a suit by a
Holder pursuant to Section 6.07 of this Indenture, or a suit by Holders of more
than 10% in principal amount of the outstanding Notes.
SECTION 6.12. Restoration of Rights and Remedies. If the
Trustee or any Holder has instituted any proceeding to enforce any right or
remedy under this Indenture and such proceeding has been discontinued or
abandoned for any reason, or has been determined adversely to the Trustee or to
such Holder, then, and in every such case, subject to any determination in such
proceeding, the Company, the Trustee and the Holders shall be restored severally
and respectively to their former positions hereunder and thereafter all rights
and remedies of the Company, Trustee and the Holders shall continue as though no
such proceeding had been instituted.
SECTION 6.13. Rights and Remedies Cumulative. Except as
otherwise provided with respect to the replacement or payment of mutilated,
destroyed, lost or wrongfully taken Notes in Section 2.07, no right or remedy
herein conferred upon or reserved to the Trustee or to the Holders is intended
to be exclusive of any other right or remedy, and every right and remedy shall,
to the extent permitted by law, be cumulative and in addition to every other
right and remedy given hereunder or now or hereafter existing at law or in
equity or otherwise. The assertion or employment of any right or remedy
hereunder, or otherwise, shall not prevent the concurrent assertion or
employment of any other appropriate right or remedy.
SECTION 6.14. Delay or Omission Not Waiver. No delay or
omission of the Trustee or of any Holder to exercise any right or remedy
accruing upon any Event of Default shall impair any such right or remedy or
constitute a waiver of any such Event of Default or an acquiescence therein.
Every right and remedy given by this Article Six or by law to the Trustee or to
the Holders may be exercised from time to time, and as often as may be deemed
expedient, by the Trustee or by the Holders, as the case may be.
ARTICLE SEVEN
TRUSTEE
SECTION 7.01. General. The duties and responsibilities of the
Trustee shall be as provided by the TIA and as set forth herein. Notwithstanding
the foregoing, no provision of this Indenture shall require the Trustee to
expend or risk its own funds or otherwise incur any financial liability in the
performance of any of its duties hereunder, or in the exercise of any of its
rights or powers, if it shall have reasonable grounds for believing that
repayment of such funds or adequate indemnity against such risk or liability is
not reasonably assured to it. Whether or not
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54
therein expressly so provided, every provision of this Indenture relating to the
conduct or affecting the liability of or affording protection to the Trustee
shall be subject to the provisions of this Article Seven.
SECTION 7.02. Certain Rights of Trustee. Subject to TIA
Sections 315(a) through (d):
(i) the Trustee may conclusively rely and shall be
protected in acting or refraining from acting upon any resolution,
certificate, statement, instrument, opinion, report, notice, request,
direction, consent, order, bond, debenture, note, other evidence of
indebtedness or other paper or document (whether in its original or
facsimile form) believed by it to be genuine and to have been signed or
presented by the proper person. The Trustee need not investigate any
fact or matter stated in the document;
(ii) before the Trustee acts or refrains from acting, it may
require an Officers' Certificate and/or an Opinion of Counsel, which
shall conform to Section 11.03 or Section 11.04, as the case may be.
The Trustee shall not be liable for any action it takes or omits to
take in good faith in reliance on such certificate or opinion;
(iii) the Trustee may act through attorneys and agents of its
selection and the advice of such attorneys and agents shall be full and
complete authorization and protection in respect of any action taken,
suffered or omitted by it hereunder in good faith and in reliance
thereon. The Trustee shall not be responsible for the misconduct or
negligence of any agent appointed with due care;
(iv) the Trustee shall be under no obligation to exercise
any of the rights or powers vested in it by this Indenture at the
request or direction of any of the Holders, unless such Holders shall
have offered to the Trustee reasonable security or indemnity against
the costs, expenses and liabilities that might be incurred by it in
compliance with such request or direction;
(v) the Trustee shall not be liable for any action it takes
or omits to take in good faith that it believes to be authorized or
within its rights or powers or for any action it takes or omits to take
in accordance with the direction of the Holders of a majority in
principal amount of the outstanding Notes relating to the time, method
and place of conducting any proceeding for any remedy available to the
Trustee, or exercising any trust or power conferred upon the Trustee,
under this Indenture; provided that the Trustee's conduct does not
constitute gross negligence or bad faith;
(vi) whenever in the administration of this Indenture the
Trustee shall deem it desirable that a making be proved or established
prior to taking, suffering or omitting any action hereunder, the
Trustee (unless other evidence be herein specifically prescribed)
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55
may, in the absence of bad faith on its part, conclusively rely upon an
Officer's Certificate; and
(vii) the Trustee shall not be bound to make any
investigation into the facts or matters stated in any resolution,
certificate, statement, instrument, opinion, report, notice, request,
direction, consent, order, bond, debenture, note, other evidence of
indebtedness or other paper or document, but the Trustee, in its
discretion, may make such further inquiry or investigation into such
facts or matters as it may see fit, and, if the Trustee shall determine
to make such further inquiry or investigation, it shall be entitled to
examine the books, records and premises of the Company personally or by
agent or attorney at the sole cost of the Company and shall incur no
liability or additional liability of any kind by reason of such inquiry
or investigation.
SECTION 7.03. Individual Rights of Trustee. The Trustee, in
its individual or any other capacity, may become the owner or pledgee of Notes
and may otherwise deal with the Company or its Affiliates with the same rights
it would have if it were not the Trustee. Any Agent may do the same with like
rights. However, the Trustee is subject to TIA Sections 310(b) and 311.
SECTION 7.04. Trustee's Disclaimer. The Trustee (i) makes no
representation as to the validity or adequacy of this Indenture or the Notes,
(ii) shall not be accountable for the Company's use or application of the
proceeds from the Notes and (iii) shall not be responsible for any statement in
the Notes other than its certificate of authentication.
SECTION 7.05. Notice of Default. If any Default or any Event
of Default occurs and is continuing and if such Default or Event of Default is
actually known to a Responsible Officer of the Trustee, the Trustee shall mail
to each Holder in the manner and to the extent provided in TIA Section 313(c)
notice of the Default or Event of Default within 45 days after it occurs, unless
such Default or Event of Default has been cured; provided, however, that, except
in the case of a default in the payment of the principal of, premium, if any, or
interest on any Note, the Trustee shall be protected in withholding such notice
if and so long as the board of directors, the executive committee or a trust
committee of directors and/or Responsible Officers of the Trustee in good faith
determine that the withholding of such notice is in the interest of the Holders.
SECTION 7.06. Reports by Trustee to Holders. Within 60 days
after each May 15, beginning with May 15, 1999, the Trustee shall mail to each
Holder as provided in TIA Section 313(c) a brief report dated as of such May 15,
if required by TIA Section 313(a).
SECTION 7.07. Compensation and Indemnity. The Company shall
pay to the Trustee such compensation as shall be agreed upon in writing for its
services. The compensation of the Trustee shall not be limited by any law on
compensation of a trustee of an express trust.
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The Company shall reimburse the Trustee upon request for all reasonable
out-of-pocket expenses and advances incurred or made by the Trustee. Such
expenses shall include the reasonable compensation and expenses of the Trustee's
agents and counsel.
The Company shall indemnify each of the Trustee and any
predecessor Trustee for, and hold it harmless against, any and all claim,
damage, loss or liability or expense, including taxes (other than taxes based
upon, measured by or determined by the income of the Trustee) incurred by it
without negligence or bad faith on its part in connection with the acceptance or
administration of this Indenture and its duties under this Indenture and the
Notes, including the costs and expenses of defending itself against any claim or
liability and of complying with any process served upon it or any of its
officers in connection with the exercise or performance of any of its powers or
duties under this Indenture and the Notes.
To secure the Company's payment obligations in this Section
7.07, the Trustee shall have a lien prior to the Notes on all money or property
held or collected by the Trustee, in its capacity as Trustee, except money or
property held in trust pursuant to the Pledge Agreement and money or property
held in trust to pay principal of, premium, if any, and interest on particular
Notes.
If the Trustee incurs expenses or renders services after the
occurrence of an Event of Default specified in clause (g) or (h) of Section
6.01, the expenses and the compensation for the services will be intended to
constitute expenses of administration under Title 11 of the United States
Bankruptcy Code or any applicable federal or state law for the relief of
debtors.
The provisions of this Section 7.07 shall survive the
termination of this Indenture.
SECTION 7.08. Replacement of Trustee. A resignation or removal
of the Trustee and appointment of a successor Trustee shall become effective
only upon the successor Trustee's acceptance of appointment as provided in this
Section 7.08.
The Trustee may resign at any time by so notifying the Company
in writing at least 30 days prior to the date of the proposed resignation. The
Holders of a majority in principal amount of the outstanding Notes may remove
the Trustee by so notifying the Trustee in writing and may appoint a successor
Trustee with the consent of the Company. The Company may remove the Trustee if:
(i) the Trustee is no longer eligible under Section 7.10; (ii) the Trustee is
adjudged a bankrupt or an insolvent; (iii) a receiver or other public officer
takes charge of the Trustee or its property; or (iv) the Trustee becomes
incapable of acting.
If the Trustee resigns or is removed, or if a vacancy exists
in the office of Trustee for any reason, the Company shall promptly appoint a
successor Trustee. Within one year after the successor Trustee takes office, the
Holders of a majority in principal amount of the outstanding Notes may appoint a
successor Trustee to replace the successor Trustee appointed by
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the Company. If the successor Trustee does not deliver its written acceptance
required by the next succeeding paragraph of this Section 7.08 within 30 days
after the retiring Trustee resigns or is removed, the retiring Trustee, the
Company or the Holders of a majority in principal amount of the outstanding
Notes may, at the expense of the Company, petition any court of competent
jurisdiction for the appointment of a successor Trustee.
A successor Trustee shall deliver a written acceptance of its
appointment to the retiring Trustee and to the Company. Immediately after the
delivery of such written acceptance, subject to the lien provided in Section
7.07, (i) the retiring Trustee shall transfer all property held by it as Trustee
to the successor Trustee, (ii) the resignation or removal of the retiring
Trustee shall become effective and (iii) the successor Trustee shall have all
the rights, powers and duties of the Trustee under this Indenture. A successor
Trustee shall mail notice of its succession to each Holder.
If the Trustee is no longer eligible under Section 7.10, any
Holder who satisfies the requirements of TIA Section 310(b) may petition any
court of competent jurisdiction for the removal of the Trustee and the
appointment of a successor Trustee.
The Company shall give notice of any resignation and any
removal of the Trustee and each appointment of a successor Trustee to all
Holders. Each notice shall include the name of the successor Trustee and the
address of its Corporate Trust Office.
Notwithstanding replacement of the Trustee pursuant to this
Section 7.08, the Company's obligation under Section 7.07 shall continue for the
benefit of the retiring Trustee.
SECTION 7.09. Successor Trustee by Merger, Etc. If the Trustee
consolidates with, merges or converts into, or transfers all or substantially
all of its corporate trust business to, another corporation or national banking
association, the resulting, surviving or transferee corporation or national
banking association without any further act shall be the successor Trustee with
the same effect as if the successor Trustee had been named as the Trustee
herein.
SECTION 7.10. Eligibility. This Indenture shall always have a
Trustee who satisfies the requirements of TIA Section 310(a)(1). The Trustee
shall have a combined capital and surplus of at least $25,000,000 as set forth
in its most recent published annual report of condition.
SECTION 7.11. Money Held in Trust. The Trustee shall not be
liable for interest on any money received by it except as the Trustee may agree
with the Company. Money held in trust by the Trustee need not be segregated from
other funds except to the extent required by law and except for money held in
trust pursuant to the Pledge Agreement and under Article Eight of this
Indenture.
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SECTION 7.12. Withholding Taxes. The Trustee, as agent for the
Company, shall exclude and withhold from each payment of principal and interest
and other amounts due hereunder or under the Notes any and all withholding taxes
applicable thereto as required by law. The Trustee agrees to act as such
withholding agent and, in connection therewith, whenever any present or future
taxes or similar charges are required to be withheld with respect to any amounts
payable in respect of the Notes, to withhold such amounts and timely pay the
same to the appropriate authority in the name of and on behalf of the holders of
the Notes, that it will file any necessary withholding tax returns or statements
when due. The Company or the Trustee shall, as promptly as possible after the
payment of the taxes described above, deliver to each holder of a Note
appropriate documentation showing the payment thereof, together with such
additional documentary evidence as such holders may reasonably request from time
to time.
ARTICLE EIGHT
DISCHARGE OF INDENTURE
SECTION 8.01. Termination of Company's Obligations. Except as
otherwise provided in this Section 8.01, the Company may terminate its
obligations under the Notes and this Indenture if:
(i) all Notes previously authenticated and delivered (other
than destroyed, lost or stolen Notes that have been replaced or Notes
that are paid pursuant to Section 4.01 or Notes for whose payment money
or securities have theretofore been held in trust and thereafter repaid
to the Company, as provided in Section 8.05) have been delivered to the
Trustee for cancellation and the Company has paid all sums payable by
it hereunder; or
(ii) (A) the Notes mature within one year or all of them are
to be called for redemption within one year under arrangements
satisfactory to the Trustee for giving the notice of redemption, (B)
the Company irrevocably deposits in trust with the Trustee during such
one-year period, under the terms of an irrevocable trust agreement in
form and substance satisfactory to the Trustee, as trust funds solely
for the benefit of the Holders for that purpose, money or U.S.
Government Obligations sufficient (in the opinion of a nationally
recognized firm of independent public accountants expressed in a
written certification thereof delivered to the Trustee), without
consideration of any reinvestment of any interest thereon, to pay
principal, premium, if, any, and interest on the Notes to maturity or
redemption, as the case may be, and to pay all other sums payable by it
hereunder, (C) no Default or Event of Default with respect to the Notes
shall have occurred and be continuing on the date of such deposit, (D)
such deposit will not result in a breach or violation of, or constitute
a default under, this Indenture or any other agreement or instrument to
which the Company is a party or by which it is bound and (E) the
Company has delivered to the Trustee an Officers' Certificate and an
Opinion of
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Counsel, in each case stating that all conditions precedent provided
for herein relating to the satisfaction and discharge of this Indenture
have been complied with.
With respect to the foregoing clause (i), the Company's
obligations under Section 7.07 shall survive. With respect to the foregoing
clause (ii), the Company's obligations in Sections 2.02, 2.03, 2.04, 2.05, 2.06,
2.07, 2.12, 4.01, 4.02, 7.07, 7.08, 8.04, 8.05 and 8.06 shall survive until the
Notes are no longer outstanding. Thereafter, only the Company's obligations in
Sections 7.07, 8.05 and 8.06 shall survive. After any such irrevocable deposit,
the Trustee upon request shall acknowledge in writing the discharge of the
Company's obligations under the Notes and this Indenture except for those
surviving obligations specified above.
SECTION 8.02. Defeasance and Discharge of Indenture. The
Company will be deemed to have paid and will be discharged from any and all
obligations in respect of the Notes on the 123rd day after the date of the
deposit referred to in clause (A) of this Section 8.02, and the provisions of
this Indenture will no longer be in effect with respect to the Notes, and the
Trustee, at the expense of the Company, shall execute proper instruments
acknowledging the same, except as to (i) rights of registration of transfer and
exchange, (ii) substitution of apparently mutilated, defaced, destroyed, lost or
stolen Notes, (iii) rights of Holders to receive payments of principal thereof
and interest thereon, (iv) the Company's obligations under Section 4.02, (v) the
rights, obligations and immunities of the Trustee hereunder and (vi) the rights
of the Holders as beneficiaries of this Indenture with respect to the property
so deposited with the Trustee payable to all or any of them; provided that the
following conditions shall have been satisfied:
(A) with reference to this Section 8.02, the Company has
irrevocably deposited or caused to be irrevocably deposited with the
Trustee (or another trustee satisfying the requirements of Section 7.10
of this Indenture) and conveyed all right, title and interest for the
benefit of the Holders, under the terms of an irrevocable trust
agreement in form and substance satisfactory to the Trustee as trust
funds in trust, specifically pledged to the Trustee for the benefit of
the Holders as security for payment of the principal of, premium, if
any, and interest, if any, on the Notes, and dedicated solely to, the
benefit of the Holders, in and to (1) money in an amount, (2) U.S.
Government Obligations that, through the payment of interest, premium,
if any, and principal in respect thereof in accordance with their
terms, will provide, not later than one day before the due date of any
payment referred to in this clause (A), money in an amount or (3) a
combination thereof in an amount sufficient, in the opinion of a
nationally recognized firm of independent public accountants expressed
in a written certification thereof delivered to the Trustee, to pay and
discharge, without consideration of the reinvestment of such interest
and after payment of all federal, state and local taxes or other
charges and assessments in respect thereof payable by the Trustee, the
principal of, premium, if any, and accrued interest on the outstanding
Notes at the Stated Maturity of such principal or interest; provided
that the Trustee shall have been irrevocably instructed to apply such
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money or the proceeds of such U.S. Government Obligations to the
payment of such principal, premium, if any, and interest with respect
to the Notes;
(B) such deposit will not result in a breach or violation
of, or constitute a default under, this Indenture or any other
agreement or instrument to which the Company is a party or by which it
is bound;
(C) immediately after giving effect to such deposit on a
pro forma basis, no Default or Event of Default shall have occurred and
be continuing on the date of such deposit or during the period ending
on the 123rd day after such date of deposit;
(D) the Company shall have delivered to the Trustee (1)
either (x) a ruling directed to the Trustee received from the Internal
Revenue Service to the effect that the Holders will not recognize
income, gain or loss for federal income tax purposes as a result of the
Company's exercise of its option under this Section 8.02 and will be
subject to federal income tax on the same amount and in the same manner
and at the same times as would have been the case if such option had
not been exercised or (y) an Opinion of Counsel to the same effect as
the ruling described in clause (x) above accompanied by a ruling to
that effect published by the Internal Revenue Service, unless there has
been a change in the applicable federal income tax law since the date
of this Indenture such that a ruling from the Internal Revenue Service
is no longer required and (2) an Opinion of Counsel to the effect that
(x) the creation of the defeasance trust does not violate the
Investment Company Act of 1940 and (y) after the passage of 123 days
following the deposit (except, with respect to any trust funds for the
account of any Holder who may be deemed to be an "insider" for purposes
of the United States Bankruptcy Code, after one year following the
deposit), the trust funds will not be subject to the effect of Section
547 of the United States Bankruptcy Code or Section 15 of the New York
Debtor and Creditor Law in a case commenced by or against the Company
under either such statute, and either (I) the trust funds will no
longer remain the property of the Company (and therefore will not be
subject to the effect of any applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally)
or (II) if a court were to rule under any such law in any case or
proceeding that the trust funds remained property of the Company, (a)
assuming such trust funds remained in the possession of the Trustee
prior to such court ruling to the extent not paid to the Holders, the
Trustee will hold, for the benefit of the Holders, a valid and
perfected security interest in such trust funds that is not avoidable
in bankruptcy or otherwise except for the effect of Section 552(b) of
the United States Bankruptcy Code on interest on the trust funds
accruing after the commencement of a case under such statute and (b)
the Holders will be entitled to receive adequate protection of their
interests in such trust funds if such trust funds are used in such case
or proceeding;
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(E) if the Notes are then listed on a national securities
exchange, the Company shall have delivered to the Trustee an Opinion of
Counsel to the effect that such deposit defeasance and discharge will
not cause the Notes to be delisted; and
(F) the Company has delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, in each case stating that all
conditions precedent provided for herein relating to the defeasance
contemplated by this Section 8.02 have been complied with.
Notwithstanding the foregoing, prior to the end of the 123-day
(or one year) period referred to in clause (D)(2)(y) of this Section 8.02, none
of the Company's obligations under this Indenture shall be discharged.
Subsequent to the end of such 123-day (or one year) period with respect to this
Section 8.02, the Company's obligations in Sections 2.02, 2.03, 2.04, 2.05,
2.06, 2.07, 2.12, 4.01, 4.02, 7.07, 7.08, 8.05 and 8.06 shall survive until the
Notes are no longer outstanding. Thereafter, only the Company's obligations in
Sections 7.07, 8.05 and 8.06 shall survive. If and when a ruling from the
Internal Revenue Service or an Opinion of Counsel referred to in clause (D)(1)
of this Section 8.02 is able to be provided specifically without regard to, and
not in reliance upon, the continuance of the Company's obligations under Section
4.01, then the Company's obligations under such Section 4.01 shall cease upon
delivery to the Trustee of such ruling or Opinion of Counsel and compliance with
the other conditions precedent provided for herein relating to the defeasance
contemplated by this Section 8.02.
After any such irrevocable deposit, the Trustee upon request
shall acknowledge in writing the discharge of the Company's obligations under
the Notes and this Indenture except for those surviving obligations in the
immediately preceding paragraph.
SECTION 8.03. Defeasance of Certain Obligations. The Company
may omit to comply with any term, provision or condition set forth in clauses
(iii) and (iv) under Section 5.01 and Sections 4.03 through 4.10 and Section
4.19, clause (c) under Section 6.01 with respect to such clauses (iii) and (iv)
under Section 5.01, clause (d) under Section 6.01 with respect to Sections 4.01,
4.02, 4.11 through 4.18 and 4.20 and clauses (e) and (f) under Section 6.01
shall be deemed not to be Events of Default, in each case with respect to the
outstanding Notes if:
(i) with reference to this Section 8.03, the Company has
irrevocably deposited or caused to be irrevocably deposited with the
Trustee (or another trustee satisfying the requirements of Section
7.10) and conveyed all right, title and interest to the Trustee for the
benefit of the Holders, under the terms of an irrevocable trust
agreement in form and substance satisfactory to the Trustee as trust
funds in trust, specifically pledged to the Trustee for the benefit of
the Holders as security for payment of the principal of, premium, if
any, and interest, if any, on the Notes, and dedicated solely to, the
benefit of the Holders, in and to (A) money in an amount, (B) U.S.
Government Obligations that, through the payment of interest and
principal in respect thereof in accordance with their terms, will
provide, not later than one day before the due date of any payment
referred to
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in this clause (i), money in an amount or (C) a combination thereof in
an amount sufficient, in the opinion of a nationally recognized firm of
independent public accountants expressed in a written certification
thereof delivered to the Trustee, to pay and discharge, without
consideration of the reinvestment of such interest and after payment of
all federal, state and local taxes or other charges and assessments in
respect thereof payable by the Trustee, the principal of, premium, if
any, and interest on the outstanding Notes on the Stated Maturity of
such principal or interest; provided that the Trustee shall have been
irrevocably instructed to apply such money or the proceeds of such U.S.
Government Obligations to the payment of such principal, premium, if
any, and interest with respect to the Notes;
(ii) such deposit will not result in a breach or violation
of, or constitute a default under, this Indenture or any other
agreement or instrument to which the Company is a party or by which it
is bound;
(iii) no Default or Event of Default shall have occurred and
be continuing on the date of such deposit;
(iv) the Company has delivered to the Trustee an Opinion of
Counsel to the effect that (A) the creation of the defeasance trust
does not violate the Investment Company Act of 1940, (B) the Holders
have a valid first-priority security interest in the trust funds, (C)
the Holders will not recognize income, gain or loss for federal income
tax purposes as a result of such deposit and defeasance of certain
obligations and will be subject to federal income tax on the same
amount and in the same manner and at the same times as would have been
the case if such deposit and defeasance had not occurred and (D) after
the passage of 123 days following the deposit (except, with respect to
any trust funds for the account of any Holder who may be deemed to be
an "insider" for purposes of the United States Bankruptcy Code, after
one year following the deposit), the trust funds will not be subject to
the effect of Section 547 of the United States Bankruptcy Code or
Section 15 of the New York Debtor and Creditor Law in a case commenced
by or against the Company under either such statute, and either (1) the
trust funds will no longer remain the property of the Company (and
therefore will not be subject to the effect of any applicable
bankruptcy, insolvency, reorganization or similar laws affecting
creditors' rights generally) or (2) if a court were to rule under any
such law in any case or proceeding that the trust funds remained
property of the Company, (x) assuming such trust funds remained in the
possession of the Trustee prior to such court ruling to the extent not
paid to the Holders, the Trustee will hold, for the benefit of the
Holders, a valid and perfected security interest in such trust funds
that is not avoidable in bankruptcy or otherwise (except for the effect
of Section 552(b) of the United States Bankruptcy Code on interest on
the trust funds accruing after the commencement of a case under such
statute), (y) the Holders will be entitled to receive adequate
protection of their interests in such trust funds if such trust funds
are used in such case or proceeding and (z) no
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property, rights in property or other interests granted to the Trustee
or the Holders in exchange for, or with respect to, such trust funds
will be subject to any prior rights of holders of other Indebtedness of
the Company or any of its Subsidiaries;
(v) if the Notes are then listed on a national securities
exchange, the Company shall have delivered to the Trustee an Opinion of
Counsel to the effect that such deposit defeasance and discharge will
not cause the Notes to be delisted; and
(vi) the Company has delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, in each case stating that all
conditions precedent provided for herein relating to the defeasance
contemplated by this Section 8.03 have been complied with.
SECTION 8.04. Application of Trust Money. Subject to Section
8.06, the Trustee or Paying Agent shall hold in trust money or U.S. Government
Obligations deposited with it pursuant to Section 8.01, 8.02 or 8.03, as the
case may be, and shall apply the deposited money and the money from U.S.
Government Obligations in accordance with the Notes and this Indenture to the
payment of principal of, premium, if any, and interest on the Notes; but such
money need not be segregated from other funds except to the extent required by
law.
SECTION 8.05. Repayment to Company. Subject to Sections 7.07,
8.01, 8.02 and 8.03, the Trustee and the Paying Agent shall promptly pay to the
Company upon request set forth in an Officers' Certificate any excess money held
by them at any time and thereupon shall be relieved from all liability with
respect to such money. The Trustee and the Paying Agent shall pay to the Company
upon request any money held by them for the payment of principal, premium, if
any, or interest that remains unclaimed for two years; provided that the Trustee
or such Paying Agent before being required to make any payment may cause to be
published at the expense of the Company once in a newspaper of general
circulation in the City of New York or mail to each Holder entitled to such
money at such Holder's address (as set forth in the Security Register) notice
that such money remains unclaimed and that after a date specified therein (which
shall be at least 30 days from the date of such publication or mailing) any
unclaimed balance of such money then remaining will be repaid to the Company.
After payment to the Company, Holders entitled to such money must look to the
Company for payment as general creditors unless an applicable law designates
another Person, and all liability of the Trustee and such Paying Agent with
respect to such money shall cease.
SECTION 8.06. Reinstatement. If the Trustee or Paying Agent is
unable to apply any money or U.S. Government Obligations in accordance with
Section 8.01, 8.02 or 8.03, as the case may be, by reason of any legal
proceeding or by reason of any order or judgment of any court or governmental
authority enjoining, restraining or otherwise prohibiting such application, the
Company's obligations under this Indenture and the Notes shall be revived and
reinstated as though no deposit had occurred pursuant to Section 8.01, 8.02 or
8.03, as the case may be, until such time as the Trustee or Paying Agent is
permitted to apply all such money or U.S.
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Government Obligations in accordance with Section 8.01, 8.02 or 8.03, as the
case may be; provided that, if the Company has made any payment of principal of,
premium, if any, or interest on any Notes because of the reinstatement of its
obligations, the Company shall be subrogated to the rights of the Holders of
such Notes to receive such payment from the money or U.S. Government Obligations
held by the Trustee or Paying Agent.
ARTICLE NINE
AMENDMENTS, SUPPLEMENTS AND WAIVERS
SECTION 9.01. Without Consent of Holders. The Company, when
authorized by a resolution of its Board of Directors, and the Trustee may amend
or supplement this Indenture or the Notes without notice to or the consent of
any Holder:
(1) to cure any ambiguity, defect or inconsistency in this
Indenture; provided that such amendments or supplements shall not
adversely affect the interests of the Holders in any material respect;
(2) to comply with Article Five;
(3) to comply with any requirements of the Commission in
connection with the qualification of this Indenture under the TIA;
(4) to evidence and provide for the acceptance of
appointment hereunder by a successor Trustee; or
(5) to make any change that, in the good faith opinion of
the Board of Directors as evidenced by a Board Resolution, does not
materially and adversely affect the rights of any Holder.
SECTION 9.02. With Consent of Holders. Subject to Sections
6.04 and 6.07 and without prior notice to the Holders, the Company, when
authorized by its Board of Directors (as evidenced by a Board Resolution), and
the Trustee may amend this Indenture, the Pledge Agreement and the Notes with
the written consent of the Holders of a majority in aggregate principal amount
of the Notes then outstanding, and the Holders of a majority in aggregate
principal amount of the Notes then outstanding by written notice to the Trustee
may waive future compliance by the Company with any provision of this Indenture,
the Notes or the Pledge Agreement.
Notwithstanding the provisions of this Section 9.02, without
the consent of each Holder affected, an amendment or waiver, including a waiver
pursuant to Section 6.04, may not:
<PAGE> 71
65
(i) change the Stated Maturity of the principal of, or any
installment of interest on, any Note,
(ii) reduce the principal of, or premium, if any, or
interest on, any Note,
(iii) change the place or currency of payment of principal
of, or premium, if any, or interest on, any Note or adversely affect
any right of repayment at the option of any Holder of any Note,
(iv) impair the right to institute suit for the enforcement
of any payment on or after the Stated Maturity (or, in the case of a
redemption, on or after the Redemption Date) of any Note,
(v) reduce the above-stated percentage of outstanding Notes
the consent of whose Holders is necessary to modify or amend this
Indenture,
(vi) waive a Default in the payment of principal of,
premium, if any, or interest on the Notes,
(vii) modify any of the provisions of this Section 9.02,
except to increase any such percentage or to provide that certain other
provisions of this Indenture cannot be modified or waived without the
consent of the Holder of each outstanding Note affected thereby,
(viii) reduce the percentage or aggregate principal amount of
outstanding Notes the consent of whose Holders is necessary for waiver
of compliance with certain provisions of this Indenture or for waiver
of certain defaults, or
(ix) modify Article Ten or the Pledge Agreement in a manner
that adversely affects the right of any Holder in any material respect.
It shall not be necessary for the consent of the Holders under
this Section 9.02 to approve the particular form of any proposed amendment,
supplement or waiver, but it shall be sufficient if such consent approves the
substance thereof.
After an amendment, supplement or waiver under this Section
9.02 becomes effective, the Company shall mail to the Holders affected thereby a
notice briefly describing the amendment, supplement or waiver. The Company will
mail supplemental indentures to Holders upon request. Any failure of the Company
to mail such notice, or any defect therein, shall not, however, in any way
impair or affect the validity of any such supplemental indenture or waiver.
<PAGE> 72
66
SECTION 9.03. Revocation and Effect of Consent. Until an
amendment or waiver becomes effective, a consent to it by a Holder is a
continuing consent by the Holder and every subsequent Holder of a Note or
portion of a Note that evidences the same debt as the Note of the consenting
Holder, even if notation of the consent is not made on any Note. However, any
such Holder or subsequent Holder may revoke the consent as to its Note or
portion of its Note. Such revocation shall be effective only if the Trustee
receives the notice of revocation before the date the amendment, supplement or
waiver becomes effective. An amendment, supplement or waiver shall become
effective on receipt by the Trustee of written consents from the Holders of the
requisite percentage in principal amount of the outstanding Notes.
The Company may, but shall not be obligated to, fix a record
date for the purpose of determining the Holders entitled to consent to any
amendment, supplement or waiver. If a record date is fixed, then,
notwithstanding the last two sentences of the immediately preceding paragraph,
those persons who were Holders at such record date (or their duly designated
proxies) and only those persons shall be entitled to consent to such amendment,
supplement or waiver or to revoke any consent previously given, whether or not
such persons continue to be Holders after such record date. No such consent
shall be valid or effective for more than 90 days after such record date.
After an amendment, supplement or waiver becomes effective, it
shall bind every Holder unless it is of the type described in any of clauses (i)
through (viii) of Section 9.02. In case of an amendment or waiver of the type
described in clauses (i) through (viii) of Section 9.02, the amendment or waiver
shall bind each Holder who has consented to it and every subsequent Holder of a
Note that evidences the same indebtedness as the Note of the consenting Holder.
SECTION 9.04. Notation on or Exchange of Notes. If an
amendment, supplement or waiver changes the terms of a Note, the Trustee may
require the Holder to deliver it to the Trustee. The Trustee may place an
appropriate notation on the Note about the changed terms and return it to the
Holder and the Trustee may place an appropriate notation on any Note thereafter
authenticated. Alternatively, if the Company or the Trustee so determines, the
Company in exchange for the Note shall issue and the Trustee shall authenticate
a new Note that reflects the changed terms.
SECTION 9.05. Trustee to Sign Amendments, Etc. The Trustee
shall be entitled to receive, and shall be fully protected in relying upon, an
Opinion of Counsel stating that the execution of any amendment, supplement or
waiver authorized pursuant to this Article Nine is authorized or permitted by
this Indenture. Subject to the preceding sentence, the Trustee shall sign such
amendment, supplement or waiver if the same does not adversely affect the rights
of the Trustee. The Trustee may, but shall not be obligated to, execute any such
amendment, supplement or waiver that affects the Trustee's own rights, duties or
immunities under this Indenture or otherwise.
<PAGE> 73
67
SECTION 9.06. Conformity with Trust Indenture Act. Every
supplemental indenture executed pursuant to this Article Nine shall conform to
the requirements of the TIA as then in effect.
ARTICLE TEN
SECURITY
SECTION 10.01. Security. (a) On the Closing Date, the Company
shall (i) enter into the Pledge Agreement and comply with the terms and
provisions thereof and (ii) purchase the Pledged Securities to be pledged to the
Trustee for the benefit of the Holders in such amount as will be sufficient upon
receipt of scheduled interest and/or principal payments of such Pledged
Securities to provide for payment in full of the first six scheduled interest
payments due on the Notes. The Pledged Securities shall be pledged by the
Company to the Trustee for the benefit of the Holders and shall be held by the
Trustee in the Pledge Account pending disposition pursuant to the Pledge
Agreement.
(b) Each Holder, by its acceptance of a Note, consents and
agrees to the terms of the Pledge Agreement (including, without limitation, the
provisions providing for foreclosure and release of the Pledged Securities) as
the same may be in effect or may be amended from time to time in accordance with
its terms, and authorizes and directs the Trustee to enter into the Pledge
Agreement and to perform its respective obligations and exercise its respective
rights thereunder in accordance therewith. The Company will do or cause to be
done all such acts and things as may be necessary or proper, or as may be
required by the provisions of the Pledge Agreement, to assure and confirm to the
Trustee the security interest in the Pledged Securities contemplated hereby, by
the Pledge Agreement or any part thereof, as from time to time constituted, so
as to render the same available for the security and benefit of this Indenture
and of the Notes secured hereby, according to the intent and purposes herein
expressed. The Company shall take, or shall cause to be taken, upon request of
the Trustee, any and all actions reasonably required to cause the Pledge
Agreement to create and maintain, as security for the obligations of the Company
under this Indenture and the Notes, valid and enforceable first priority liens
in and on all the Pledged Securities, in favor of the Trustee, superior to and
prior to the rights of third Persons and subject to no other Liens.
(c) The release of any Pledged Securities pursuant to the
Pledge Agreement will not be deemed to impair the security under this Indenture
in contravention of the provisions hereof if and to the extent the Pledged
Securities are released pursuant to this Indenture and the Pledge Agreement. To
the extent applicable, the Company shall cause TIA Section 314(d) relating to
the release of property or securities from the Lien and security interest of the
Pledge Agreement and relating to the substitution therefor of any property or
securities to be subjected to the Lien and security interest of the Pledge
Agreement to be complied with. Any certificate or opinion required by TIA
Section 314(d) may be made by an officer of the Company, except in
<PAGE> 74
68
cases where TIA Section 314(d) requires that such certificate or opinion be made
by an independent Person, which Person shall be an independent engineer,
appraiser or other expert selected by the Company.
(d) The Company shall cause TIA Section 314(b), relating to
opinions of counsel regarding the Lien under the Pledge Agreement, to be
complied with. The Trustee may, to the extent permitted by Sections 7.01 and
7.02 hereof, accept as conclusive evidence of compliance with the foregoing
provisions the appropriate statements contained in such instruments.
(e) The Trustee may, in its sole discretion and without the
consent of the Holders, on behalf of the Holders, take all actions it deems
necessary or appropriate in order to (i) enforce any of the terms of the Pledge
Agreement and (ii) collect and receive any and all amounts payable in respect of
the obligations of the Company thereunder. The Trustee shall have power to
institute and to maintain such suits and proceedings as the Trustee may deem
expedient to preserve or protect its interests and the interests of the Holders
in the Pledged Securities (including power to institute and maintain suits or
proceedings to restrain the enforcement of or compliance with any legislative or
other governmental enactment, rule or order that may be unconstitutional or
otherwise invalid if the enforcement of, or compliance with, such enactment,
rule or order would impair the security interest hereunder or be prejudicial to
the interests of the Holders or of the Trustee).
ARTICLE ELEVEN
MISCELLANEOUS
SECTION 11.01. Trust Indenture Act of 1939. This Indenture is
subject to the provisions of the TIA that are required to be a part of this
Indenture and shall, to the extent applicable, be governed by such provisions.
SECTION 11.02. Notices. Any notice or communication shall be
sufficiently given if in writing and delivered in person or mailed by first
class mail addressed as follows:
if to the Company:
Allegiance Telecom, Inc.
1950 Stemmons Frwy., Suite 3026
Dallas, Texas 75207
Attention: Chief Financial Officer
<PAGE> 75
69
if to the Trustee:
The Bank of New York
101 Barclay Street
Floor 21 West
New York, New York 10286
Attention: Corporate Trust Administration
The Company or the Trustee by notice to the other may
designate additional or different addresses for subsequent notices or
communications.
Any notice or communication mailed to a Holder shall be mailed
to him at his address as it appears on the Security Register by first class mail
and shall be sufficiently given to him if so mailed within the time prescribed.
Copies of any such communication or notice to a Holder shall also be mailed to
the Trustee and each Agent at the same time.
Failure to mail a notice or communication to a Holder or any
defect in it shall not affect its sufficiency with respect to other Holders.
Except for a notice to the Trustee, which is deemed given only when received,
and except as otherwise provided in this Indenture, if a notice or communication
is mailed in the manner provided in this Section 11.02, it is duly given,
whether or not the addressee receives it.
Where this Indenture provides for notice in any manner, such
notice may be waived in writing by the Person entitled to receive such notice,
either before or after the event, and such waiver shall be the equivalent of
such notice. Waivers of notice by Holders shall be filed with the Trustee, but
such filing shall not be a condition precedent to the validity of any action
taken in reliance upon such waiver.
In case by reason of the suspension of regular mail service or
by reason of any other cause it shall be impracticable to give such notice by
mail, then such notification as shall be made with the approval of the Trustee
shall constitute a sufficient notification for every purpose hereunder.
SECTION 11.03. Certificate and Opinion as to Conditions
Precedent. Upon any request or application by the Company to the Trustee to take
any action under this Indenture, the Company shall furnish to the Trustee:
(i) an Officers' Certificate stating that, in the opinion
of the signers, all conditions precedent, if any, provided for in this
Indenture relating to the proposed action have been complied with; and
<PAGE> 76
70
(ii) an Opinion of Counsel in form and substance reasonably
satisfactory to the Trustee stating that, in the opinion of such
Counsel, all such conditions precedent have been complied with;
provided, however, that, with respect to matters of fact, an Opinion of
Counsel may rely on an Officers' Certificate or certificates of public
officials.
SECTION 11.04. Statements Required in Certificate. Each
certificate with respect to compliance with a condition or covenant provided for
in this Indenture shall include:
(i) a statement that each person signing such certificate
has read such covenant or condition and the definitions herein relating
thereto;
(ii) a brief statement as to the nature and scope of the
examination or investigation upon which the statements contained in
such certificate are based;
(iii) a statement that, in the opinion of each such person,
he has made such examination or investigation as is necessary to enable
him to express an informed opinion as to whether or not such covenant
or condition has been complied with; and
(iv) a statement as to whether or not, in the opinion of
each such person, such condition or covenant has been complied with.
SECTION 11.05. Rules by Trustee, Paying Agent or Registrar.
The Trustee may make reasonable rules for action by or at a meeting of Holders.
The Paying Agent or Registrar may make reasonable rules for its functions.
SECTION 11.06. Payment Date Other Than a Business Day. If an
Interest Payment Date, Redemption Date, Payment Date, Stated Maturity or date of
maturity of any Note shall not be a Business Day, then payment of principal of,
premium, if any, or interest on such Note, as the case may be, need not be made
on such date, but may be made on the next succeeding Business Day with the same
force and effect as if made on the Interest Payment Date, Payment Date, or
Redemption Date, or at the Stated Maturity or date of maturity of such Note;
provided that no interest shall accrue for the period from and after such
Interest Payment Date, Payment Date, Redemption Date, Stated Maturity or date of
maturity, as the case may be.
SECTION 11.07. Governing Law. The laws of the State of New
York shall govern this Indenture and the Notes. The Trustee, the Company and the
Holders agree to submit to the jurisdiction of the courts of the State of New
York in any action or proceeding arising out of or relating to this Indenture or
the Notes.
SECTION 11.08. No Adverse Interpretation of Other Agreements.
This Indenture may not be used to interpret another indenture, loan or debt
agreement of the Company
<PAGE> 77
71
or any Subsidiary of the Company. Any such indenture, loan or debt agreement may
not be used to interpret this Indenture.
SECTION 11.09. No Recourse Against Others. No recourse for the
payment of the principal of, premium, if any, or interest on any of the Notes,
or for any claim based thereon or otherwise in respect thereof, and no recourse
under or upon any obligation, covenant or agreement of the Company contained in
this Indenture, or in any of the Notes, or because of the creation of any
Indebtedness represented thereby, shall be had against any incorporator or
against any past, present or future partner, shareholder, other equityholder,
officer, director, employee or controlling person, as such, of the Company or of
any successor Person, either directly or through the Company or any successor
Person, whether by virtue of any constitution, statute or rule of law, or by the
enforcement of any assessment or penalty or otherwise; it being expressly
understood that all such liability is hereby expressly waived and released as a
condition of, and as a consideration for, the execution of this Indenture and
the issue of the Notes.
SECTION 11.10. Successors. All agreements of the Company in
this Indenture and the Notes shall bind its successors. All agreements of the
Trustee in this Indenture shall bind its successor.
SECTION 11.11. Duplicate Originals. The parties may sign any
number of copies of this Indenture. Each signed copy shall be an original, but
all of them together represent the same agreement.
SECTION 11.12. Separability. In case any provision in this
Indenture or in the Notes shall be invalid, illegal or unenforceable, the
validity, legality and enforceability of the remaining provisions shall not in
any way be affected or impaired thereby.
SECTION 11.13. Table of Contents, Headings, Etc. The Table of
Contents, Cross-Reference Table and headings of the Articles and Sections of
this Indenture have been inserted for convenience of reference only, are not to
be considered a part hereof and shall in no way modify or restrict any of the
terms and provisions hereof.
<PAGE> 78
72
SIGNATURES
IN WITNESS WHEREOF, the parties hereto have caused this
Indenture to be duly executed, all as of the date first written above.
ALLEGIANCE TELECOM, INC.
By: /s/ Royce J. Holland
-----------------------------------
Name: Royce J. Holland
Title: Chairman and Chief Executive
Officer
THE BANK OF NEW YORK
By: /s/ Walter N. Gitlin
-----------------------------------
Name: Walter N. Gitlin
Title: Vice President
<PAGE> 79
EXHIBIT A
[FACE OF NOTE]
ALLEGIANCE TELECOM, INC.
12 7/8% Senior Note Due 2008
CUSIP 01747TAF9
No. $_________
ALLEGIANCE TELECOM, INC., a Delaware corporation (the
"Company", which term includes any successor under the Indenture hereinafter
referred to), for value received, promises to pay to ___________, or its
registered assigns, the principal sum of __________ ($___ ) on May 15, 2008.
Interest Payment Dates: May 15 and November 15, commencing
November 15, 1998.
Regular Record Dates: May 1 and November 1.
Reference is hereby made to the further provisions of this
Note set forth on the reverse hereof, which further provisions shall for all
purposes have the same effect as if set forth at this place.
<PAGE> 80
A-2
IN WITNESS WHEREOF, the Company has caused this Note to be
signed manually or by facsimile by its duly authorized officers.
ALLEGIANCE TELECOM, INC.
By:
----------------------------------
Name:
Title:
By:
----------------------------------
Name:
Title:
(Trustee's Certificate of Authentication)
This is one of the 127/8% Senior Notes due 2008 described in
the within-mentioned Indenture.
Date: THE BANK OF NEW YORK,
as Trustee
By:
----------------------------------
Authorized Signatory
<PAGE> 81
A-3
[REVERSE SIDE OF NOTE]
ALLEGIANCE TELECOM, INC.
12 7/8% Senior Note due 2008
1. Principal and Interest.
The Company will pay the principal of this Note on May 15, 2008.
The Company promises to pay interest on the principal amount of this
Note on each Interest Payment Date, as set forth below, at the rate per annum
shown above.
Interest will be payable semiannually (to the holders of record of the
Notes at the close of business on the May 1 or November 1 immediately preceding
the Interest Payment Date) on each Interest Payment Date, commencing November
15, 1998.
Interest on the Notes will accrue from the most recent date to which
interest has been paid or, if no interest has been paid, from July 7, 1998;
provided that, if there is no existing default in the payment of interest and
this Note is authenticated between a Regular Record Date referred to on the face
hereof and the next succeeding Interest Payment Date, interest shall accrue from
such Interest Payment Date. Interest will be computed on the basis of a 360-day
year of twelve 30-day months.
The Company shall pay interest on overdue principal and premium, if
any, and interest on overdue installments of interest, to the extent lawful, at
a rate per annum that is 2% in excess of the rate otherwise payable.
2. Method of Payment.
The Company will pay interest (except defaulted interest) on the
principal amount of the Notes as provided above on each May 15 and November 15
to the persons who are Holders (as reflected in the Security Register at the
close of business on such May 1 and November 1 immediately preceding the
Interest Payment Date), in each case, even if the Note is cancelled on
registration of transfer or registration of exchange after such record date;
provided that, with respect to the payment of principal, the Company will make
payment to the Holder that surrenders this Note to a Paying Agent on or after
May 15, 2008.
The Company will pay principal, premium, if any, and as provided
above, interest in money of the United States that at the time of payment is
legal tender for payment of public and
<PAGE> 82
A-4
private debts. However, the Company may pay principal, premium, if any, and
interest by its check payable in such money. It may mail an interest check to a
Holder's registered address (as reflected in the Security Register). If a
payment date is a date other than a Business Day at a place of payment, payment
may be made at that place on the next succeeding day that is a Business Day and
no interest shall accrue for the intervening period.
3. Paying Agent and Registrar.
Initially, the Trustee will act as authenticating agent,
Paying Agent and Registrar. The Company may change any authenticating agent,
Paying Agent or Registrar without notice. The Company, any Subsidiary or any
Affiliate of any of them may act as Paying Agent, Registrar or co-Registrar.
4. Indenture; Limitations.
The Company issued the Notes under an Indenture dated as of
July 7, 1998 (the "Indenture"), between the Company and The Bank of New York
(the "Trustee"). Capitalized terms herein are used as defined in the Indenture
unless otherwise indicated. The terms of the Notes include those stated in the
Indenture and those made part of the Indenture by reference to the Trust
Indenture Act. The Notes are subject to all such terms, and Holders are referred
to the Indenture and the Trust Indenture Act for a statement of all such terms.
To the extent permitted by applicable law, in the event of any inconsistency
between the terms of this Note and the terms of the Indenture, the terms of the
Indenture shall control.
The Notes are general unsecured obligations of the Company.
The Company may, subject to Article Four of the Indenture and
applicable law, issue additional Notes under the Indenture.
5. Redemption.
The Notes may be redeemed, at the Company's option, in whole
or in part, at any time or from time to time, on or after May 15, 2003 and prior
to maturity, upon not less than 30 nor more than 60 days' prior notice mailed by
first class mail to each Holder's last address as it appears in the Security
Register, at the Redemption Prices (expressed in percentages of principal
amount) set forth below, plus accrued and unpaid interest to the Redemption Date
(subject to the right of Holders of record on the relevant Regular Record Date
that is on or prior to the
<PAGE> 83
A-5
Redemption Date to receive interest due on an Interest Payment Date), if
redeemed during the 12- month period commencing May 15 of the years set forth
below:
Redemption
Year Price
---- ----------
2003 106.438%
2004 104.292%
2005 102.146%
2006 and thereafter 100.000%
In addition, at any time prior to May 15, 2001, the Company
may redeem up to 35% of the principal amount of the Notes originally issued with
the proceeds of one or more Public Equity Offerings following which there is a
Public Market, at any time or from time to time in part, at a Redemption Price
(expressed as a percentage of principal amount) of 112.875% plus accrued and
unpaid interest to the Redemption Date (subject to the right of Holders of
record on the relevant Regular Record Date that is on or prior to the Redemption
Date to receive interest due on an Interest Payment Date); provided that at
least 65% of the aggregate principal amount of Notes originally issued remains
outstanding after each such redemption and notice of any such redemption is
mailed within 60 days after the related Public Equity Offering.
Notice of any optional redemption will be mailed at least 30
days but not more than 60 days before the Redemption Date to each Holder of
Notes to be redeemed at his last address as it appears in the Security Register.
Notes in original denominations larger than $1,000 may be redeemed in part. On
and after the Redemption Date, interest ceases to accrue on Notes or portions of
Notes called for redemption, unless the Company defaults in the payment of the
Redemption Price.
6. Repurchase upon Change in Control.
Upon the occurrence of any Change of Control, each Holder
shall have the right to require the repurchase of its Notes by the Company in
cash pursuant to the offer described in the Indenture at a purchase price equal
to 101% of the principal amount thereof plus accrued interest, if any, to the
date of purchase (the "Change of Control Payment").
A notice of such Change of Control will be mailed within 30
days after any Change of Control occurs to each Holder at his last address as it
appears in the Security Register. Notes in original denominations larger than
$1,000 may be sold to the Company in part. On and after the Change of Control
Payment Date, interest ceases to accrue on Notes or portions of Notes
surrendered for purchase by the Company, unless the Company defaults in the
payment of the Change of Control Payment.
<PAGE> 84
A-6
7. Denominations; Transfer; Exchange.
The Notes are in registered form without coupons in
denominations of $1,000 of principal amount and multiples of $1,000 in excess
thereof. A Holder may register the transfer or exchange of Notes in accordance
with the Indenture. The Registrar may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents and to pay any taxes and
fees required by law or permitted by the Indenture. The Registrar need not
register the transfer or exchange of any Notes selected for redemption. Also, it
need not register the transfer or exchange of any Notes for a period of 15 days
before a selection of Notes to be redeemed is made.
8. Persons Deemed Owners.
A Holder shall be treated as the owner of a Note for all
purposes.
9. Unclaimed Money.
If money for the payment of principal, premium, if any, or
interest remains unclaimed for two years, the Trustee and the Paying Agent will
pay the money back to the Company at its request. After that, Holders entitled
to the money must look to the Company for payment, unless an abandoned property
law designates another Person, and all liability of the Trustee and such Paying
Agent with respect to such money shall cease.
10. Discharge Prior to Redemption or Maturity.
If the Company deposits with the Trustee money or U.S.
Government Obligations sufficient to pay the then outstanding principal of,
premium, if any, and accrued interest on the Notes (a) to redemption or
maturity, the Company will be discharged from the Indenture and the Notes,
except in certain circumstances for certain sections thereof, and (b) to the
Stated Maturity, the Company will be discharged from certain covenants set forth
in the Indenture.
11. Amendment; Supplement; Waiver.
Subject to certain exceptions, the Indenture, the Pledge
Agreement or the Notes may be amended or supplemented with the consent of the
Holders of at least a majority in principal amount of the Notes then
outstanding, and any existing default or compliance with any provision may be
waived with the consent of the Holders of at least a majority in principal
amount of the Notes then outstanding. Without notice to or the consent of any
Holder, the parties thereto may amend or supplement the Indenture or the Notes
to, among other things, cure any ambiguity, defect or inconsistency and make any
change that does not materially and adversely affect the rights of any Holder.
<PAGE> 85
A-7
12. Restrictive Covenants.
The Indenture imposes certain limitations on the ability of
the Company and its Restricted Subsidiaries, among other things, to Incur
additional Indebtedness, make Restricted Payments, use the proceeds from Asset
Sales, engage in transactions with Affiliates or merge, consolidate or transfer
substantially all of its assets. Within 45 days after the end of each fiscal
quarter (90 days after the end of the last fiscal quarter of each year), the
Company must report to the Trustee on compliance with such limitations.
13. Successor Persons.
When a successor person or other entity assumes all the
obligations of its predecessor under the Notes and the Indenture, the
predecessor person will be released from those obligations.
14. Defaults and Remedies.
The following events constitute "Events of Default" under the
Indenture: (a) default in the payment of principal of (or premium, if any, on)
any Note when the same becomes due and payable, upon acceleration, redemption or
otherwise; (b) default in the payment of interest on any Note when the same
becomes due and payable, and such default continues for a period of 30 days;
provided that a failure to make any of the first six scheduled interest payments
on the Notes on the applicable Interest Payment Date will constitute an Event of
Default with no grace or cure period; (c) default in the performance, or breach
of the provisions of Article Five or the failure to make or consummate an Offer
to Purchase in accordance with Section 4.10 or Section 4.11; (d) default in the
performance of or breach of any other covenant or agreement of the Company in
the Indenture or under the Notes (other than a default specified in clause (a),
(b) or (c) above) and such default or breach continues for a period of 30
consecutive days after written notice by the Trustee or the Holders of 25% or
more in aggregate principal amount of the Notes, (e) there occurs with respect
to any issue or issues of Indebtedness of the Company or any Significant
Subsidiary having an outstanding principal amount of $5 million or more in the
aggregate for all such issues of all such Persons, whether such Indebtedness now
exists or shall hereafter be created, (I) an event of default that has caused
the holder thereof to declare such Indebtedness to be due and payable prior to
its Stated Maturity and such Indebtedness has not been discharged in full or
such acceleration has not been rescinded or annulled within 30 days of such
acceleration and/or (II) the failure to make a principal payment at the final
(but not any interim) fixed maturity and such defaulted payment shall not have
been made, waived or extended within 30 days of such payment default; (f) any
final judgment or order (not covered by insurance) for the payment of money in
excess of $5 million in the aggregate for all such final judgments or orders
against all such Persons (treating any deductibles, self-insurance or retention
as not so covered) shall be rendered against the Company or any Significant
Subsidiary and shall not be paid or discharged, and there shall be any period of
30 consecutive days following entry of the final
<PAGE> 86
A-8
judgment or order that causes the aggregate amount for all such final judgments
or orders outstanding and not paid or discharged against all such Persons to
exceed $5 million during which a stay of enforcement of such final judgment or
order, by reason of a pending appeal or otherwise, shall not be in effect; (g) a
court having jurisdiction in the premises enters a decree or order for (A)
relief in respect of the Company or any Significant Subsidiary in an involuntary
case under any applicable bankruptcy, insolvency or other similar law now or
hereafter in effect, (B) appointment of a receiver, liquidator, assignee,
custodian, trustee, sequestrator or similar official of the Company or any
Significant Subsidiary or for all or substantially all of the property and
assets of the Company or any Significant Subsidiary or (C) the winding up or
liquidation of the affairs of the Company or any Significant Subsidiary and, in
each case, such decree or order shall remain unstayed and in effect for a period
of 30 consecutive days; (h) the Company or any Significant Subsidiary (A)
commences a voluntary case under any applicable bankruptcy, insolvency or other
similar law now or hereafter in effect, or consents to the entry of an order for
relief in an involuntary case under any such law, (B) consents to the
appointment of or taking possession by a receiver, liquidator, assignee,
custodian, trustee, sequestrator or similar official of the Company or any
Significant Subsidiary or for all or substantially all of the property and
assets of the Company or any Significant Subsidiary or (C) effects any general
assignment for the benefit of creditors; or (i) the Pledge agreement shall cease
to be in full force and effect or enforceable in accordance with its terms,
other than in accordance with its terms.
If an Event of Default (other than an Event of Default specified in
clauses (g) or (h) of Section 6.01 of the Indenture that occur with respect to
the Company) occurs and is continuing, the Trustee or the Holders of at least
25% in principal amount of the Notes may declare all the Notes to be due and
payable. If a bankruptcy or insolvency default with respect to the Company
occurs and is continuing, the Notes automatically become due and payable.
Holders may not enforce the Indenture or the Notes except as provided in the
Indenture. The Trustee may require indemnity satisfactory to it before it
enforces the Indenture or the Notes. Subject to certain limitations, Holders of
at least a majority in principal amount of the Notes then outstanding may direct
the Trustee in its exercise of any trust or power.
15. Security.
The Company has entered into the Pledge Agreement and purchased and
pledged to the Trustee for the benefit of the Holders Pledged Securities in an
amount sufficient upon receipt of scheduled interest and principal payments on
such securities to provide for payment in full of the first six scheduled
interest payments due on the Notes. The Pledged Securities will be pledged by
the Company to the Trustee for the benefit of the Holders and will be held by
the Trustee in the Pledge Account pending disbursement pursuant to the Pledge
Agreement.
<PAGE> 87
A-9
16. Trustee Dealings with Company.
The Trustee under the Indenture, in its individual or any
other capacity, may make loans to, accept deposits from and perform services for
the Company or its Affiliates and may otherwise deal with the Company or its
Affiliates as if it were not the Trustee.
17. No Recourse Against Others.
No incorporator or any past, present or future partner,
shareholder, other equity holder, officer, director, employee or controlling
person as such, of the Company or of any successor Person shall have any
liability for any obligations of the Company under the Notes or the Indenture or
for any claim based on, in respect of or by reason of, such obligations or their
creation. Each Holder by accepting a Note waives and releases all such
liability. The waiver and release are part of the consideration for the issuance
of the Notes.
18. Authentication.
This Note shall not be valid until the Trustee or
authenticating agent signs the certificate of authentication on the other side
of this Note.
19. Abbreviations.
Customary abbreviations may be used in the name of a Holder or
an assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by the
entireties), JT TEN (= joint tenants with right of survivorship and not as
tenants in common), CUST (= Custodian) and U/G/M/A (= Uniform Gifts to Minors
Act).
The Company will furnish to any Holder upon written request
and without charge a copy of the Indenture. Requests may be made to Allegiance
Telecom, Inc., 1950 Stemmons Frwy., Suite 3026, Dallas, Texas 75207, Attention:
Chief Financial Officer.
<PAGE> 88
A-10
[FORM OF TRANSFER NOTICE]
FOR VALUE RECEIVED the undersigned registered holder hereby
sell(s), assign(s) and transfer(s) unto
Insert Taxpayer Identification No.
- ----------------------------------------------------------------------
Please print or typewrite name and address including zip code of assignee
- ----------------------------------------------------------------------
the within Note and all rights thereunder, hereby irrevocably constituting and
appointing__________________________ attorney to transfer said Note on the books
of the Company with full power of substitution in the premises.
<PAGE> 89
A-11
OPTION OF HOLDER TO ELECT PURCHASE
If you wish to have this Note purchased by the Company
pursuant to Section 4.10 or Section 4.11 of the Indenture, check the Box: |_|
If you wish to have a portion of this Note purchased by the
Company pursuant to Section 4.10 or Section 4.11 of the Indenture, state the
amount (in principal amount):
$_______________.
Date:
----------------
Your Signature:
-----------------------------------------------------------------
(Sign exactly as your name appears on the other side of this Note)
Signature Guarantee:
----------------------------------
<PAGE> 1
EXHIBIT 4.4
COLLATERAL PLEDGE AND SECURITY AGREEMENT
This COLLATERAL PLEDGE AND SECURITY AGREEMENT (this "Pledge
Agreement") is made and entered into as of July 7, 1998 by ALLEGIANCE TELECOM,
INC., a Delaware corporation (the "Pledgor"), having its principal office at
1950 Stemmons Freeway, Suite 3026, Dallas, Texas 75207, in favor of THE BANK OF
NEW YORK, a New York banking corporation, having an office at 101 Barclay
Street, 21 West, New York, New York, 10286, as trustee (the "Trustee") for the
holders (the "Holders") of the Notes (as defined herein) issued by the Pledgor
under the Indenture referred to below. Capitalized terms used herein and not
otherwise defined herein shall have the meanings given to such terms in the
Indenture.
W I T N E S S E T H
WHEREAS, the Pledgor and The Bank of New York, as Trustee,
have entered into that certain indenture dated as of the date hereof (as
amended, restated, supplemented or otherwise modified from time to time, the
"Indenture"), pursuant to which the Pledgor is issuing on the date hereof
$205,000,000 in aggregate principal amount of 12 7/8% Senior Notes due 2008 (the
"Notes"); and
WHEREAS, the Pledgor has agreed, pursuant to the Indenture,
to (i) purchase or cause the purchase of Pledged Securities (as defined herein)
in an amount that will be sufficient upon receipt of scheduled interest and
principal payments in respect thereof to provide for the payment of the first
six scheduled interest payments due on the Notes and (ii) place such Pledged
Securities (as defined herein) (or cause them to be placed) in an account held
by the Trustee for the benefit of Holders of the Notes; and
WHEREAS, to secure the obligations of the Pledgor under the
Indenture and the Notes to pay in full each of the first six scheduled interest
payments on the Notes and to secure repayment of the principal, premium (if
any) and interest on the Notes in the event that the Notes become due and
payable prior to such time as the first six scheduled interest payments thereon
shall have been paid in full (collectively, the "Obligations"), the Pledgor has
agreed (i) to pledge to the Trustee for its benefit and the ratable benefit of
the Holders of the Notes, a security interest in the Pledged Securities (as
defined herein) and related collateral and (ii) to execute and deliver this
Pledge Agreement in order to secure the payment and performance by the Pledgor
of all the Obligations; and
WHEREAS, it is a condition precedent to the initial purchase
of the Notes by the initial Holders thereof that the Pledgor shall have granted
the security interest and made the pledge contemplated by this Pledge
Agreement; and
<PAGE> 2
2
WHEREAS, unless otherwise defined herein or in the Indenture,
terms used in Articles 8 or 9 of the Uniform Commercial Code ("UCC") as in
effect in the State of New York are used herein as therein defined.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual promises
herein contained, and in order to induce the Holders of the Notes to purchase
the Notes, the Pledgor hereby agrees with the Trustee, for the benefit of the
Trustee and for the ratable benefit of the Holders of the Notes, as follows:
SECTION 1. Pledge and Grant of Security Interest. The Pledgor
hereby pledges to the Trustee for its benefit and for the ratable benefit of
the Holders of the Notes, and hereby grants to the Trustee for its benefit and
for the ratable benefit of the Holders of the Notes, a continuing first
priority security interest in and to all of the Pledgor's right, title and
interest in, to and under the following (hereinafter collectively referred to
as the "Collateral"), whether characterized as investment property, general
intangibles or otherwise: (a) the United States Treasury securities identified
by CUSIP No. in Annex 1 to Exhibit A to this Pledge Agreement (the "Pledged
Securities"), (b) any and all applicable security entitlements to the Pledged
Securities, (c) The Bank of New York account in the name of "Allegiance Telecom
Pledge A/C" (the "Pledge Account") established and maintained by the Trustee
pursuant to this Pledge Agreement, (d) any and all related securities accounts
in which security entitlements to the Pledged Securities are carried, (e) all
notes, certificates of deposit, deposit accounts, checks and other instruments
from time to time hereafter delivered to or otherwise possessed by the Trustee
for or on behalf of the Pledgor in substitution for or in addition to any or
all the then existing Collateral, (f) all interest, dividends, cash,
instruments and other property from time to time received, receivable or
otherwise distributed in respect of or in exchange for any or all of the then
existing Collateral, and (g) all proceeds of any and all of the foregoing
Collateral (including, without limitation, proceeds that constitute property of
the types described in clauses (a) - (f) of this Section 1) and, to the extent
not otherwise included, all cash in the Pledge Account.
SECTION 2. Security for Obligation. This Pledge Agreement and
the grant of a security interest in the Pledged Securities and the Pledge
Account hereunder secures the prompt and complete payment and performance when
due (whether at stated maturity, by acceleration or otherwise) of all the
Obligations. Without limiting the generality of the foregoing, this Pledge
Agreement and the grant of a security interest in the Pledged Securities and
the Pledge Account hereunder secures the payment of all amounts that constitute
part of the Obligations and would be owed by the Pledgor to the Trustee or the
Holders under the Notes or the Indenture but for the fact that they are
unenforceable or not allowable due to the existence of a bankruptcy,
reorganization or similar proceeding involving the Pledgor.
<PAGE> 3
3
SECTION 3. Maintaining the Pledge Account. So long as any
Obligation shall remain outstanding:
(a) The Pledgor will maintain separately the Pledge Account
with The Bank of New York.
(b) It shall be a term and condition of the Pledge Account,
notwithstanding any term or condition to the contrary in any other
agreement relating to the Pledge Account, and except as otherwise
provided by the provisions of Section 5 and Section 15.9, that no
amount shall be paid or released to or for the account of, or
withdrawn by or for the account of, the Pledgor or any other Person
from the Pledge Account.
The Pledge Account shall be subject to such applicable laws,
and such applicable regulations of the Board of Governors of the Federal
Reserve System and of any other appropriate banking or governmental authority,
as may now or hereafter be in effect.
SECTION 4. Delivery of Collateral; Pledge Account; Interest.
(a) The Pledged Securities shall be pledged and transferred to the Trustee and
the Trustee shall become the holder of a security entitlement to the Pledged
Securities, through action by the Federal Reserve Bank of New York ("FRBNY"),
The Bank of New York or another securities intermediary, as confirmed (in
writing or electronically or otherwise in accordance with standard industry
practice) to the Trustee by FRBNY, The Bank of New York or such other
securities intermediary (i) indicating by book-entry that the Pledged
Securities or a security entitlement thereto has been credited to the Trustee's
account, or (ii) acquiring the Pledged Securities or a security entitlement
thereto for the Trustee and accepting the same for credit to a securities
account of the Trustee.
(b) With respect to any Collateral that constitutes a
security and is not represented or evidenced by a certificate or an
instrument, the Pledgor shall cause the issuer thereof either (i) to
register the Trustee as the registered owner of such security or (ii)
to agree in writing with the Pledgor and the Trustee that such issuer
will comply with instructions with respect to such security originated
by the Trustee without further consent of the Pledgor, such agreement
to be in form and substance reasonably satisfactory to the Trustee.
(c) With respect to any Collateral that constitutes a
security entitlement, the Pledgor shall cause the securities
intermediary with respect to such security entitlement either (i) to
identify in its records the Trustee as having such security
entitlement against such securities intermediary or (ii) to agree in
writing with the Pledgor and the Trustee that such securities
intermediary will comply with entitlement orders (that is,
notifications communicated to such securities intermediary directing
transfer or
<PAGE> 4
4
redemption of the financial asset to which the Pledgor has a security
entitlement) originated by the Trustee without further consent of the
Pledgor, such agreement to be in form and substance reasonably
satisfactory to the Trustee.
(d) With respect to any Collateral that constitutes a
securities account, the Pledgor will comply with subsection (c) of
this Section 4 with respect to all security entitlements carried in
such securities account.
(e) Prior to or concurrently with the execution and delivery
hereof and prior to the transfer to the Trustee of the Pledged
Securities (or acquisition by the Trustee of any security entitlement
thereto), as provided in subsection (a) of this Section 4, the Trustee
shall establish the Pledge Account on its books as an account
segregated from all other custodial or collateral accounts at its
office at 101 Barclay Street, 21 West, New York, New York, 10286,
Attention: Van Brown, Corporate Trust Administration. Upon transfer of
the Pledged Securities to the Trustee (or the Trustee's acquisition of
a security entitlement thereto), as confirmed to the Trustee by FRBNY,
The Bank of New York or another securities intermediary, the Trustee
shall make appropriate book entries indicating that the Pledged
Securities and/or such security entitlements have been credited to and
are held in the Pledge Account. Subject to the other terms and
conditions of this Pledge Agreement, all funds or other property held
by the Trustee pursuant to this Pledge Agreement shall be held in the
Pledge Account subject (except as expressly provided in Sections 5(a),
(b), (c), (d) and (e) hereof) to the exclusive dominion and control of
the Trustee and exclusively for the benefit of the Trustee and for the
ratable benefit of the Holders of the Notes and segregated from all
other funds or other property otherwise held by the Trustee.
(f) All Collateral shall be retained in the Pledge Account
pending disbursement pursuant to the terms hereof.
(g) Concurrently with the execution and delivery of this
Pledge Agreement, the Trustee is delivering to the Pledgor and Morgan
Stanley & Co. Incorporated a duly executed Notification and Control
Agreement ("Control Agreement"), in the form of Exhibit A hereto,
executed by an officer of the Trustee, confirming the Trustee's
establishment and separate maintenance of the Pledge Account, its
receipt and holding of the Pledged Securities or any security
entitlement thereto and the crediting of the Pledged Securities or
such security entitlements to the Pledge Account, all in accordance
with this Pledge Agreement.
(h) Concurrently with the execution and delivery of this
Pledge Agreement, the Pledgor is delivering to the Trustee
acknowledgment copies or stamped receipt copies of proper financing
statements, duly filed on or before the Closing Date under the UCC of
<PAGE> 5
5
the States of New York and Texas, covering the Collateral described in
this Pledge Agreement.
SECTION 5. Disbursements. (a) Three business days prior to
the due date of any of the first six scheduled interest payments on the Notes,
the Pledgor may, pursuant to written instructions given by the Pledgor to the
Trustee (an "Issuer Order"), direct the Trustee to release from the Pledge
Account and pay to the Holders of the Notes proceeds sufficient to provide for
payment in full of such interest then due on the Notes. Upon receipt of an
Issuer Order, the Trustee will release funds in an amount sufficient to provide
for the payment of the interest on the Notes in accordance with such Issuer
Order and the payment provisions of the Indenture to the Holders of the Notes
from (and to the extent of) proceeds of the Pledged Securities in the Pledge
Account. If no such Issuer Order is issued by the Pledgor, the Trustee will act
as if it had received an Issuer Order for the payment in full of the interest
then due from the Pledge Account. Nothing in this Section 5 shall affect the
Trustee's rights to apply the Collateral to the payments of amounts due on the
Notes upon acceleration thereof.
(b) If the Pledgor makes any interest payment or portion of
an interest payment for which the Collateral is security from a source
of funds other than the Pledge Account ("Pledgor Funds"), the Pledgor
may, after payment in full of such interest payment, direct the
Trustee pursuant to an Issuer Order to release to the Pledgor or to
another party at the direction of the Pledgor (the "Pledgor's
Designee") proceeds from the Pledge Account in an amount less than or
equal to the amount of Pledgor Funds applied to such interest payment.
Upon receipt by the Trustee of such Issuer Order and provided the
Trustee has received such interest payment, the Trustee shall pay over
to the Pledgor or the Pledgor's Designee, as the case may be, the
requested amount from proceeds in the Pledge Account as soon as
practicable.
(c) If at any time the principal of and interest on the
Pledged Securities exceeds 100% of the amount sufficient, in the
written opinion of a nationally recognized firm of independent
accountants selected by the Pledgor and delivered to the Trustee, to
provide for payment in full of the remaining first six scheduled
interest payments due on the Notes, the Pledgor may direct the Trustee
to release any such excess amount to the Pledgor or to the Pledgor's
Designee. Upon receipt of an Issuer Order (which shall include a
certificate from such nationally recognized firm of independent
accountants stating the amount by which the Pledged Securities exceeds
the amount required to be held in the Pledge Account) the Trustee
shall pay over to the Pledgor or the Pledgor's Designee, as the case
may be, any such excess amount.
(d) Upon payment in full of the first six scheduled interest
payments on the Notes, the security interest in the Collateral
evidenced by this Pledge Agreement will automatically terminate and be
of no further force and effect and the Collateral shall promptly be
paid over and transferred to the Pledgor. Furthermore, upon the
release of
<PAGE> 6
6
any Collateral from the Pledge Account in accordance with the terms
of this Pledge Agreement, whether upon release of Collateral to
Holders as payment of interest or otherwise, the security interest
evidenced by this Pledge Agreement in such released Collateral will
automatically terminate and be of no further force and effect and the
Trustee shall deliver such documents as may be necessary to discharge
any security interest with respect to the Collateral under the UCC.
(e) At least three Business Days prior to the due date of
each of the first six scheduled interest payments on the Notes, the
Pledgor may give the Trustee notice (by Issuer Order) as to whether
such interest payment will be made pursuant to Section 5(a) or 5(b)
above and the respective amounts of interest that will be paid from
the Pledge Account and from Pledgor Funds. Any Pledgor Funds to be
used to make any interest payment shall be delivered to the Trustee,
in immediately available funds, at or prior to 10:00 a.m. (New York
City time) on such interest payment date. If no such Issuer Order is
given or such Pledgor Funds have not been so delivered, the Trustee
will act pursuant to Section 5(a) above as if it had received an
Issuer Order pursuant thereto for the payment in full of the interest
then due from the Pledge Account.
(f) The Trustee shall liquidate Collateral in the Pledge
Account (pursuant to written instructions from Pledgor) in order to
make any scheduled payment of interest unless there are sufficient
funds in the Pledge Account on such interest payment date.
(g) Nothing contained in this Pledge Agreement shall (i)
afford the Pledgor any right to issue entitlement orders with respect
to any security entitlement to the Pledged Securities or any
securities account in which any such security entitlement may be
carried, or otherwise afford the Pledgor control of any such security
entitlement or (ii) otherwise give rise to any rights of the Pledgor
with respect to the Pledged Securities, any security entitlement
thereto or any securities account in which any such security
entitlement may be carried, other than the Pledgor's rights under this
Pledge Agreement as the beneficial owner of collateral pledged to and
subject to the exclusive dominion and control (except as expressly
provided in Sections 5(a), (b) and (c) hereof) of the Trustee in its
capacity as such (and not as a securities intermediary). The Pledgor
acknowledges, confirms and agrees that the Trustee holds a security to
the Pledged Securities solely as Trustee for the Holders of the Notes
and not as a securities intermediary.
<PAGE> 7
7
SECTION 6. Representations and Warranties. The Pledgor hereby
represents and warrants that:
(a) The execution and delivery by the Pledgor of, and the
performance by the Pledgor of its obligations under, this Pledge
Agreement will not contravene any provision of applicable law or the
certificate of incorporation of the Pledgor or any agreement or other
instrument binding upon the Pledgor or any of its subsidiaries that is
material to the Company and its subsidiaries, taken as a whole, or any
judgment, order or decree of any governmental body, agency or court
having jurisdiction over the Pledgor or any of its subsidiaries, or
result in the creation or imposition of any Lien on any assets of the
Pledgor, except for the security interests granted under this Pledge
Agreement.
(b) No consent of any other person and no approval,
authorization, order of, action by or qualification with, any
governmental authority, regulatory body, agency or other third party
is required, other than such consents, approvals, authorizations,
orders, actions or qualifications that have been received, (i) for the
execution, delivery or performance by the Pledgor of its obligations
under this Pledge Agreement, (ii) for the grant by the Pledgor of the
security interest created hereby, for the pledge by the Pledgor of the
Collateral pursuant to this Pledge Agreement or (iii) except for any
such consents, approvals, authorizations or orders required to be
obtained by the Trustee (or the Holders) for reasons other than the
consummation of this transaction, for the exercise by the Trustee of
the rights provided for in this Pledge Agreement or the remedies in
respect of the Collateral pursuant to this Pledge Agreement.
(c) The Pledgor is the beneficial owner of the Collateral,
free and clear of any Lien or claims of any person or entity (except
for the security interests created by this Pledge Agreement). No
financing statement or instrument similar in effect covering all or
any part of the Pledgor's interest in the Pledged Securities is on
file in any public or recording office, other than the financing
statements filed pursuant to this Pledge Agreement. The Pledgor has no
trade names.
(d) This Pledge Agreement has been duly authorized, validly
executed and delivered by the Pledgor and constitutes a valid and
binding agreement of the Pledgor, enforceable against the Pledgor in
accordance with its terms, except as (i) the enforceability hereof may
be limited by bankruptcy, insolvency, fraudulent conveyance,
preference, reorganization, moratorium or similar laws now or
hereafter in effect relating to or affecting creditors' rights or
remedies generally, (ii) the availability of equitable remedies may be
limited by equitable principles of general applicability, (iii) the
exculpation provisions and rights to indemnification hereunder may be
limited by U.S. federal and state securities laws and public policy
considerations and (iv) the waiver of rights and defenses contained in
Section 12(d), Section 15.11 and Section 15.15 hereof may be limited
by applicable law.
<PAGE> 8
8
(e) Upon the delivery to the securities intermediary of the
certificates, if any, representing the Pledged Securities, any filing
of financing statements required by the UCC and notation on the
records of the securities intermediary that it holds the Pledged
Securities as pledgee, the pledge and grant of a security interest in
the Collateral pursuant to this Pledge Agreement for the benefit of
the Trustee and the Holders of the Notes creates a valid and perfected
first priority security interest in such Collateral, securing the
payment of the Obligations enforceable as such against all creditors
of the Pledgor (and any persons purporting to purchase any of the
Collateral from the Pledgor).
(f) There are no legal or governmental proceedings pending
or, to the best of the Pledgor's knowledge, threatened to which the
Pledgor or any of its subsidiaries is a party or to which any of the
properties of the Pledgor or any such subsidiary is subject that would
materially adversely affect the power or ability of the Pledgor to
perform its obligations under this Pledge Agreement or to consummate
the transactions contemplated hereby.
(g) The pledge of the Collateral pursuant to this Pledge
Agreement is not prohibited by law or governmental regulation
(including, without limitation, Regulations G, T, U and X of the Board
of Governors of the Federal Reserve System) applicable to the Pledgor.
(h) No Event of Default (as defined herein) exists.
SECTION 7. Further Assurances. (a) The Pledgor agrees that
from time to time, at the expense of the Pledgor, the Pledgor will, promptly
upon request by the Trustee, execute and deliver or cause to be executed and
delivered, or use its reasonable best efforts to procure, all assignments,
instruments and other documents, all in form and substance satisfactory to the
Trustee, deliver any instruments to the Trustee and take any other actions that
may be necessary or, in the reasonable opinion of the Trustee, desirable to
perfect, continue the perfection of, or protect the first priority of the
Trustee's security interest in and to the Collateral, to protect the Collateral
against the rights, claims, or interests of third persons (other than any such
rights, claims or interests created by or arising through the Trustee) or to
effect the purposes of this Pledge Agreement.
(b) The Pledgor hereby authorizes the Trustee to file any
financing or continuation statements in the United States with respect
to the Collateral without the signature of the Pledgor (to the extent
permitted by applicable law). A photocopy or other reproduction of
this Pledge Agreement or any financing statement covering the
Collateral or any part thereof shall be sufficient as a financing
statement where permitted by law.
<PAGE> 9
9
(c) The Pledgor will promptly pay all costs incurred in
connection with any of the foregoing within 45 days of receipt of an
invoice therefor. The Pledgor also agrees, whether or not requested by
the Trustee, to take all actions that are necessary to perfect or
continue the perfection of, or to protect the first priority of, the
Trustee's security interest in and to the Collateral, including the
filing of all necessary financing and continuation statements, and to
protect the Collateral against the rights, claims or interests of
third persons (other than any such rights, claims or interests created
by or arising through the Trustee).
SECTION 8. Covenants. The Pledgor covenants and agrees with
the Trustee and the Holders of the Notes that from and after the date of this
Pledge Agreement until the earlier of payment in full in cash of (x) each of
the first six scheduled interest payments due on the Notes under the terms of
the Indenture or (y) all obligations due and owing under the Indenture and the
Notes in the event such obligations become due and payable prior to the payment
in full of the first six scheduled interest payments on the Notes:
(a) that (i) it will not (and will not purport to) sell or
otherwise dispose of, or grant any option or warrant with respect to,
any of the Collateral or its beneficial interest therein, and (ii) it
will not create or permit to exist any Lien or other adverse interest
in or with respect to its beneficial interest in any of the Collateral
(except for the security interests granted under this Pledge Agreement
and any Lien created by or arising through the Trustee); and
(b) that it will not (i) enter into any agreement or
understanding that restricts or inhibits or purports to restrict or
inhibit the Trustee's rights or remedies hereunder, including, without
limitation, the Trustee's right to sell or otherwise dispose of the
Collateral or (ii) fail to pay or discharge any tax, assessment or
levy of any nature with respect to its beneficial interest in the
Collateral not later than five days prior to the date of any proposed
sale under any judgment, writ or warrant of attachment with respect to
such beneficial interest.
SECTION 9. Power of Attorney. In addition to all of the
powers granted to the Trustee pursuant to the Indenture, the Pledgor hereby
appoints and constitutes the Trustee as the Pledgor's attorney-in-fact (with
full power of substitution), with full authority in the place and stead of the
Pledgor and in the name of the Pledgor or otherwise, to the extent permitted by
law upon and at any time after the occurrence and during the continuance of an
Event of Default (as defined herein):
(a) to collect the proceeds of any Collateral;
(b) to convey any item of Collateral to any purchaser thereof
as specified herein;
<PAGE> 10
10
(c) to give any notices or records of any Liens pursuant to
Section 7 hereof; and
(d) to pay or discharge taxes or Liens levied or placed upon
the Collateral, the legality or validity thereof and the amounts
necessary to discharge the same to be determined by the Trustee in its
sole reasonable discretion, and such payments made by the Trustee to
become part of the Obligations of the Pledgor to the Trustee, due and
payable immediately upon demand;
provided, however, that the Trustee shall have no obligation to perform any of
the foregoing actions. The Trustee's authority under this Section 9 shall
include, without limitation, the authority to endorse and negotiate any checks
or instruments representing proceeds of Collateral in the name of the Pledgor,
execute and give receipt for any certificate of ownership or any document
constituting Collateral, transfer title to any item of Collateral, sign the
Pledgor's name on all financing statements (to the extent permitted by
applicable law) or any other documents deemed necessary or appropriate by the
Trustee to preserve, protect or perfect the security interest in the Collateral
and to file the same, prepare, file and sign the Pledgor's name on any notice
of Lien, and to take any other reasonable actions arising from or incident to
the powers granted to the Trustee in this Pledge Agreement. This power of
attorney is coupled with an interest and is irrevocable by the Pledgor.
SECTION 10. No Assumption of Duties; Reasonable Care. The
rights and powers conferred on the Trustee hereunder are solely to preserve and
protect the security interest of the Trustee and the Holders of the Notes in
and to the Collateral granted hereby and shall not be interpreted to, and shall
not impose any duties on the Trustee in connection therewith other than those
expressly provided herein or imposed under applicable law. Except as provided
by applicable law or by the Indenture, the Trustee shall be deemed to have
exercised reasonable care in the custody and preservation of the Collateral in
its possession if the Collateral is accorded treatment substantially equal to
that which the Trustee accords similar property held by the Trustee for its own
account, it being understood that the Trustee in its capacity as such shall not
have any responsibility for (a) ascertaining or taking action with respect to
calls, conversions, exchanges, maturities or other matters relative to any
Collateral, whether or not the Trustee has or is deemed to have knowledge of
such matters, (b) taking any necessary steps to preserve rights against any
parties with respect to any Collateral or (c) investing or reinvesting any of
the Collateral or any loss on any investment.
SECTION 11. Indemnity. The Pledgor shall indemnify, hold
harmless and defend the Trustee and its directors, officers, agents and
employees, from and against any and all claims, actions, obligations,
liabilities and expenses, including reasonable defense costs, reasonable
investigative fees and costs, and reasonable legal fees and damages arising
from the Trustee's performance as Trustee under this Pledge Agreement, except
to the extent that such claim, action, obligation, liability or expense is
directly attributable to the bad faith, negligence or
<PAGE> 11
11
wilful misconduct of such indemnified person. The obligations of the Pledgor
under this Section 11 shall survive the termination of this Agreement.
SECTION 12. Remedies Upon Event of Default. If any Event of
Default under the Indenture or default hereunder (any such Event of Default or
default being referred to in this Pledge Agreement as an "Event of Default")
shall have occurred and be continuing:
(a) The Trustee and the Holders of the Notes may exercise, in
addition to all other rights given by law or by this Pledge Agreement
or the Indenture, all of the rights and remedies with respect to the
Collateral of a secured party under the UCC in effect in the State of
New York at that time or to exercise any other remedy given to it
under the Indenture, may hire investment advisers or other experts,
and may cause the sale of the Collateral or any part thereof in one or
more parcels at any broker's board or at public or private sale, in
one or more sales or lots, at any of the Trustee's offices or
elsewhere, for cash, on credit or for future delivery, at such price
or prices as the Trustee or any such investment adviser or other
expert reasonably may deem best, and upon such other terms as the
Trustee or any such investment adviser or other expert may deem
commercially reasonable. Unless any of the Collateral threatens, in
the reasonable judgment of the Trustee or any such investment adviser
or other expert, to decline speedily in value or is or becomes of a
type sold in a recognized market, which shall be deemed to include the
Pledged Securities, the Trustee will give at least ten business days'
notice to the Pledgor in accordance with Section 15.1 of the time and
place of any public sale or the time after which any private sale is
to be made. The Trustee shall not be obligated to cause any sale of
Collateral regardless of notice of sale having been given. The Trustee
may adjourn any public or private sale from time to time by
announcement at the time and place fixed therefor, and such sale may,
without further notice, be made at the time and place to which it was
so adjourned. The purchaser of any or all Collateral so sold shall
thereafter hold the same absolutely, free from any claim, encumbrance
or right of any kind whatsoever created by or through the Pledgor. Any
sale of the Collateral conducted in conformity with reasonable
commercial practices of banks, insurance companies, commercial finance
companies, or other financial institutions disposing of property
similar to the Collateral shall be deemed to be commercially
reasonable. The Trustee or any Holder of Notes may, in its own name or
in the name of a designee or nominee, buy any of the Collateral at any
public sale and, if permitted by applicable law, at any private sale.
All reasonable expenses (including court costs and reasonable
attorneys' fees, expenses and disbursements) of, or incident to, the
enforcement of any of the provisions hereof shall be recoverable from
the proceeds of the sale or other disposition of the Collateral.
(b) All cash proceeds received by the Trustee in respect of
any sale of, collection from, or other realization upon all or any
part of the Collateral may, in the
<PAGE> 12
12
reasonable discretion of the Trustee, be held by the Trustee as
collateral for, and/or then or at any time thereafter applied (after
payment of any amounts payable to the Trustee pursuant to Section 13)
in whole or in part by the Trustee for the ratable benefit of the
Holders of the Notes against, all or any part of the Obligations in
such order as the Trustee shall elect. Any surplus of such cash or cash
proceeds held by the Trustee and remaining after payment in full of all
the Obligations shall promptly be paid over to the Pledgor or to
whomsoever may be entitled to receive such surplus as ordered by a
court of competent jurisdiction.
(c) The Trustee may, without notice to the Pledgor except as
required by law and at any time or from time to time, charge, set-off
and otherwise apply all or any part of the Obligations against the
Pledge Account or any part thereof.
(d) The Pledgor further agrees to use its reasonable best
efforts to do or cause to be done all such other acts as may be
reasonably necessary to make such sale or sales of all or any portion
of the Collateral pursuant to this Section 12 valid and binding and in
compliance with any and all other applicable requirements of law. The
Pledgor further agrees that a breach of any of the covenants contained
in this Section 12 will cause irreparable injury to the Trustee and
the Holders of the Notes, that the Trustee and the Holders of the
Notes have no adequate remedy at law in respect of such breach and, as
a consequence, that each and every covenant contained in this Section
12 shall be specifically enforceable against the Pledgor, and the
Pledgor hereby waives and agrees not to assert any defenses against an
action for specific performance of such covenants except for a defense
that no Event of Default has occurred.
SECTION 13. Expenses. The Pledgor will upon demand pay to the
Trustee the amount of any and all reasonable expenses, including, without
limitation, the reasonable fees, expenses and disbursements of its counsel,
experts and agents retained by the Trustee, that the Trustee may incur in
connection with (a) the review, negotiation and administration of this Pledge
Agreement, (b) the custody or preservation of, or the sale of, collection from,
or other realization upon, any of the Collateral, (c) the exercise or
enforcement of any of the rights of the Trustee and the Holders of the Notes
hereunder or (d) the failure by the Pledgor to perform or observe any of the
provisions hereof.
SECTION 14. Security Interest Absolute. All rights of the
Trustee and the Holders of the Notes and security interests hereunder, and all
obligations of the Pledgor hereunder, shall be absolute and unconditional
irrespective of:
(a) any lack of validity or enforceability of the Indenture
or Notes or any other agreement or instrument relating thereto;
<PAGE> 13
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(b) any change in the time, manner or place of payment of, or
in any other term of, all or any of the Obligations, or any other
amendment or waiver of or any consent to any departure from the
Indenture;
(c) any taking, exchange, surrender, release or
non-perfection of any Liens on any other collateral for all or any of
the Obligations;
(d) any manner of application of collateral, or proceeds
thereof, to all or any of the Obligations, or any manner of sale or
other disposition of any collateral for all or any of the Obligations
or any other assets of the Pledgor;
(e) any change, restructuring or termination of the corporate
structure or existence of the Pledgor; or
(f) to the extent permitted by applicable law, any other
circumstance which might otherwise constitute a defense available to,
or a discharge of, the Pledgor in respect of the Obligations or of
this Pledge Agreement.
SECTION 15. Miscellaneous Provisions.
Section 15.1. Notices. Any notice or communication given
hereunder shall be sufficiently given if in writing and delivered in person or
mailed by first class mail, commercial courier service or telecopier
communication, addressed as follows:
if to the Pledgor:
Allegiance Telecom, Inc.
1950 Stemmons Freeway
Suite 3026
Dallas, Texas 75207
Fax: (214) 853-7110
Attention: Chief Financial Officer
if to the Trustee:
The Bank of New York
101 Barclay Street
21 West
New York, New York 10286
Fax: (212) 815-5915
Attention: Van Brown, Corporate Trust Administration
<PAGE> 14
14
All such notices and other communications shall, when mailed, delivered or
telecopied, respectively, be effective three business days after deposit in the
mails, when delivered or telecopied, respectively, addressed as aforesaid.
Section 15.2. No Adverse Interpretation of Other Agreements.
This Pledge Agreement may not be used to interpret another pledge, security or
debt agreement of the Pledgor or any subsidiary thereof. No such pledge,
security or debt agreement (other than the Indenture) may be used to interpret
this Pledge Agreement.
Section 15.3. Severability. The provisions of this Pledge
Agreement are severable, and if any clause or provision shall be held invalid,
illegal or unenforceable in whole or in part in any jurisdiction, then such
invalidity or unenforceability shall affect in that jurisdiction only such
clause or provision, or part thereof, and shall not in any manner affect such
clause or provision in any other jurisdiction or any other clause or provision
of this Pledge Agreement in any jurisdiction.
Section 15.4. Headings. The headings in this Pledge Agreement
have been inserted for convenience of reference only, are not to be considered
a part hereof and shall in no way modify or restrict any of the terms or
provisions hereof.
Section 15.5. Counterpart Originals. This Pledge Agreement
may be signed in two or more counterparts, each of which shall be deemed an
original, but all of which shall together constitute one and the same
agreement.
Section 15.6. Benefits of Pledge Agreement. Nothing in this
Pledge Agreement, express or implied, shall give to any person, other than the
parties hereto and their successors hereunder, and the Holders of the Notes,
any benefit or any legal or equitable right, remedy or claim under this Pledge
Agreement.
Section 15.7. Amendments, Waivers and Consents. Any amendment
or waiver of any provision of this Pledge Agreement and any consent to any
departure by the Pledgor from any provision of this Pledge Agreement shall be
effective only if made or duly given in compliance with all of the terms and
provisions of the Indenture, and then such waiver or consent shall be effective
only in the specific instance and for the specific purpose for which given.
Neither the Trustee nor any Holder of Notes shall be deemed, by any act, delay,
indulgence, omission or otherwise, to have waived any right or remedy hereunder
or to have acquiesced in any Default or Event of Default or in any breach of
any of the terms and conditions hereof. Failure of the Trustee or any Holder of
Notes to exercise, or delay in exercising, any right, power or privilege
hereunder shall not preclude any other or further exercise thereof or the
exercise of any other right, power or privilege. A waiver by the Trustee or any
Holder of Notes of any right or remedy hereunder on any one occasion shall not
be construed as a bar to any right or remedy that the Trustee or such Holder of
Notes would otherwise have on any future occasion. The
<PAGE> 15
15
rights and remedies herein provided are cumulative, may be exercised singly or
concurrently and are not exclusive of any rights or remedies provided by law.
Section 15.8. Interpretation of Agreement. To the extent a
term or provision of this Pledge Agreement conflicts with the Indenture, the
Indenture shall control with respect to the subject matter of such term or
provision. Acceptance of or acquiescence in a course of performance rendered
under this Pledge Agreement shall not be relevant to determine the meaning of
this Pledge Agreement even though the accepting or acquiescing party had
knowledge of the nature of the performance and opportunity for objection.
Section 15.9. Continuing Security Interest; Termination. (a)
This Pledge Agreement shall create a continuing security interest in and to the
Collateral and shall, unless otherwise provided in this Pledge Agreement,
remain in full force and effect until the payment in full in cash of the
Obligations. This Pledge Agreement shall be binding upon the Pledgor, its
transferees, successors and assigns, and shall inure, together with the rights
and remedies of the Trustee hereunder, to the benefit of the Trustee, the
Holders of the Notes and their respective successors, transferees and assigns.
(b) This Pledge Agreement (other than Pledgor's obligations
under Sections 11 and 13) shall terminate upon the payment in full in
cash of the Obligations. At such time, the Trustee shall, pursuant to
an Issuer Order, reassign and redeliver to the Pledgor all of the
Collateral hereunder that has not been sold, disposed of, retained or
applied by the Trustee in accordance with the terms of this Pledge
Agreement and the Indenture and take all actions that are necessary to
release the security interest created by this Pledge Agreement in and
to the Collateral, including the execution and delivery of all
termination statements necessary to terminate any financing or
continuation statements filed with respect to the Collateral. Such
reassignment and redelivery shall be without warranty by or recourse
to the Trustee in its capacity as such, except as to the absence of
any Liens on the Collateral created by or arising through the Trustee,
and shall be at the reasonable expense of the Pledgor.
Section 15.10. Survival of Representations and Covenants. All
representations, warranties and covenants of the Pledgor contained herein shall
survive the execution and delivery of this Pledge Agreement, and shall
terminate only upon the termination of this Pledge Agreement.
Section 15.11. Waivers. The Pledgor waives presentment and
demand for payment of any of the Obligations, protest and notice of dishonor or
default with respect to any of the Obligations, and all other notices to which
the Pledgor might otherwise be entitled, except as otherwise expressly provided
herein or in the Indenture.
<PAGE> 16
16
Section 15.12. Authority of the Trustee. (a) The Trustee
shall have and be entitled to exercise all powers hereunder that are
specifically granted to the Trustee by the terms hereof, together with such
powers as are reasonably incident thereto. The Trustee may perform any of its
duties hereunder or in connection with the Collateral by or through agents or
employees and shall be entitled to retain counsel and to act in reliance upon
the advice of counsel concerning all such matters. Except as otherwise
expressly provided in this Pledge Agreement or the Indenture, neither the
Trustee nor any director, officer, employee, attorney or agent of the Trustee
shall be liable to the Pledgor for any action taken or omitted to be taken by
the Trustee, in its capacity as Trustee, hereunder, except for its own bad
faith, negligence or willful misconduct, and the Trustee shall not be
responsible for the validity, effectiveness or sufficiency hereof or of any
document or security furnished pursuant hereto. The Trustee and its directors,
officers, employees, attorneys and agents shall be entitled to rely on any
communication, instrument or document believed by it or them to be genuine and
correct and to have been signed or sent by the proper person or persons.
(b) The Pledgor acknowledges that the rights, privileges,
immunities, protections and responsibilities of the Trustee under this
Pledge Agreement with respect to any action taken by the Trustee or
the exercise or non-exercise by the Trustee of any option, right,
request, judgment or other right or remedy provided for herein or
resulting or arising out of this Pledge Agreement shall, as between
the Trustee and the Holders of the Notes, be governed by the Indenture
and by such other agreements with respect thereto as may exist from
time to time among them, but, as between the Trustee and the Pledgor,
the Trustee shall be conclusively presumed to be acting as agent for
the Holders of the Notes with full and valid authority so to act or
refrain from acting, and the Pledgor shall not be obligated or
entitled to make any inquiry respecting such authority.
Section 15.13. Final Expression. This Pledge Agreement,
together with the Indenture and any other agreement executed in connection
herewith, is intended by the parties as a final expression of this Pledge
Agreement and is intended as a complete and exclusive statement of the terms
and conditions thereof. In the event of a conflict between this Agreement and
the Indenture, the terms of the Indenture shall control.
Section 15.14. Rights of Holders of the Notes. No Holder of
Notes shall have any independent rights hereunder other than those rights
granted to individual Holders of the Notes pursuant to Section 6.07 of the
Indenture; provided that nothing in this subsection shall limit any rights
granted to the Trustee under the Notes or the Indenture.
Section 15.15. GOVERNING LAW; SUBMISSION TO JURISDICTION;
WAIVER OF JURY TRIAL; WAIVER OF DAMAGES. (a) THIS PLEDGE AGREEMENT SHALL BE
GOVERNED BY AND INTERPRETED UNDER THE LAWS OF THE STATE OF NEW YORK, AND ANY
DISPUTE ARISING OUT OF, CONNECTED WITH, RELATED TO, OR INCIDENTAL TO THE
RELATIONSHIP ESTABLISHED BETWEEN THE
<PAGE> 17
17
PLEDGOR, THE TRUSTEE AND THE HOLDERS OF THE NOTES IN CONNECTION WITH THIS
PLEDGE AGREEMENT, AND WHETHER ARISING IN CONTRACT, TORT, EQUITY OR OTHERWISE,
SHALL BE RESOLVED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
(b) THE PLEDGOR HEREBY APPOINTS LOEB & LOEB LLP, 345 PARK
AVENUE, NEW YORK, NY 10154 AS ITS AGENT FOR SERVICE OF PROCESS IN ANY SUIT,
ACTION OR PROCEEDING WITH RESPECT TO THIS PLEDGE AGREEMENT AND FOR ACTIONS
BROUGHT UNDER U.S. FEDERAL OR STATE SECURITIES LAWS BROUGHT IN ANY FEDERAL OR
STATE COURT LOCATED IN THE CITY OF NEW YORK AND AGREES TO SUBMIT TO THE
JURISDICTION OF ANY SUCH COURT.
(c) THE PLEDGOR AGREES THAT THE TRUSTEE SHALL, IN ITS
CAPACITY AS TRUSTEE OR IN THE NAME AND ON BEHALF OF ANY HOLDER OF NOTES, HAVE
THE RIGHT, TO THE EXTENT PERMITTED BY APPLICABLE LAW, TO PROCEED AGAINST THE
PLEDGOR OR THE COLLATERAL IN A COURT IN ANY LOCATION REASONABLY SELECTED IN
GOOD FAITH (AND HAVING PERSONAL OR IN REM JURISDICTION OVER THE PLEDGOR OR THE
COLLATERAL, AS THE CASE MAY BE) TO ENABLE THE TRUSTEE TO REALIZE ON SUCH
COLLATERAL, OR TO ENFORCE A JUDGMENT OR OTHER COURT ORDER ENTERED IN FAVOR OF
THE TRUSTEE. THE PLEDGOR AGREES THAT IT WILL NOT ASSERT ANY COUNTERCLAIMS,
SETOFFS OR CROSSCLAIMS IN ANY PROCEEDING BROUGHT BY THE TRUSTEE TO REALIZE ON
SUCH PROPERTY OR TO ENFORCE A JUDGMENT OR OTHER COURT ORDER IN FAVOR OF THE
TRUSTEE, EXCEPT FOR SUCH COUNTERCLAIMS, SETOFFS OR CROSSCLAIMS WHICH, IF NOT
ASSERTED IN ANY SUCH PROCEEDING, COULD NOT OTHERWISE BE BROUGHT OR ASSERTED.
THE PLEDGOR WAIVES ANY OBJECTION THAT IT MAY HAVE TO THE LOCATION OF THE COURT
IN THE CITY OF NEW YORK ONCE THE TRUSTEE HAS COMMENCED A PROCEEDING DESCRIBED
IN THIS PARAGRAPH INCLUDING, WITHOUT LIMITATION, ANY OBJECTION TO THE LAYING OF
VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS.
(d) THE PLEDGOR AGREES THAT NEITHER ANY HOLDER OF NOTES NOR
(EXCEPT AS OTHERWISE PROVIDED IN THIS PLEDGE AGREEMENT OR THE INDENTURE) THE
TRUSTEE IN ITS CAPACITY AS TRUSTEE SHALL HAVE ANY LIABILITY TO THE PLEDGOR
(WHETHER ARISING IN TORT, CONTRACT OR OTHERWISE) FOR LOSSES SUFFERED BY THE
PLEDGOR IN CONNECTION WITH, ARISING OUT OF, OR IN ANY WAY RELATED TO, THE
TRANSACTIONS CONTEMPLATED AND THE RELATIONSHIP ESTABLISHED BY THIS PLEDGE
AGREEMENT, OR ANY ACT, OMISSION OR EVENT OCCURRING IN CONNECTION THEREWITH,
UNLESS IT IS DETERMINED BY A FINAL AND NONAPPEALABLE JUDGMENT OF A COURT THAT
IS BINDING ON THE TRUSTEE OR SUCH HOLDER OF
<PAGE> 18
18
NOTES, AS THE CASE MAY BE, THAT SUCH LOSSES WERE THE RESULT OF ACTS OR
OMISSIONS ON THE PART OF THE TRUSTEE OR SUCH HOLDERS OF NOTES, AS THE CASE MAY
BE, CONSTITUTING BAD FAITH, NEGLIGENCE OR WILLFUL MISCONDUCT.
(e) TO THE EXTENT PERMITTED BY APPLICABLE LAW, THE PLEDGOR
WAIVES THE POSTING OF ANY BOND OTHERWISE REQUIRED OF THE TRUSTEE OR ANY HOLDER
OF NOTES IN CONNECTION WITH ANY JUDICIAL PROCESS OR PROCEEDING TO ENFORCE ANY
JUDGMENT OR OTHER COURT ORDER PERTAINING TO THIS PLEDGE AGREEMENT OR ANY
RELATED AGREEMENT OR DOCUMENT ENTERED IN FAVOR OF THE TRUSTEE OR ANY HOLDER OF
NOTES, OR TO ENFORCE BY SPECIFIC PERFORMANCE, TEMPORARY RESTRAINING ORDER OR
PRELIMINARY OR PERMANENT INJUNCTION, THIS PLEDGE AGREEMENT OR ANY RELATED
AGREEMENT OR DOCUMENT BETWEEN THE PLEDGOR ON THE ONE HAND AND THE TRUSTEE
AND/OR THE HOLDERS OF THE NOTES ON THE OTHER HAND.
<PAGE> 19
19
IN WITNESS WHEREOF, the Pledgor and the Trustee have each
caused this Pledge Agreement to be duly executed and delivered as of the date
first above written.
Pledgor:
ALLEGIANCE TELECOM, INC.
By: /s/ Royce J. Holland
-----------------------------------
Name: Royce J. Holland
Title: Chairman and Chief Executive
Officer
Trustee:
THE BANK OF NEW YORK
By: /s/ Walter N. Gitlin
-----------------------------------
Name: Walter N. Gitlin
Title: Vice President
<PAGE> 20
EXHIBIT A
NOTIFICATION AND CONTROL AGREEMENT
THIS NOTIFICATION AND CONTROL AGREEMENT (the "Agreement")
dated as of July 7, 1998 between Allegiance Telecom, Inc. (the "Pledgor") and
The Bank of New York, a New York banking corporation, in its capacity as
trustee (the "Trustee") and in its capacity as a bank (the "Bank") at which the
Pledgor maintains the Pledge Account (as defined herein).
A. The Pledgor has granted to the Trustee a security interest
in certain U.S. Treasury securities and security entitlements related thereto
(the "Pledged Securities") maintained by the Pledgor with the Bank and carried
in an account in the name of "Allegiance Telecom Pledge A/C" (the "Pledge
Account") and all additions thereto and substitutions and proceeds thereof
(collectively, the "Collateral"), pursuant to, and as more particularly
described in, a Collateral Pledge and Security Agreement dated as of July 7,
1998 between the Pledgor and the Trustee (as the same may hereafter be amended,
supplemented or otherwise modified from time to time, the "Pledge Agreement";
terms defined in the Pledge Agreement and not otherwise defined herein are used
herein as therein defined).
B. Terms defined in Articles 8 or 9 of the Uniform Commercial
Code as in effect in the State of New York (the "UCC") are used in this
Agreement (including, without limitation, paragraph A above) as defined in
Articles 8 or 9, respectively, of the UCC.
C. Pursuant to the Pledge Agreement, the Trustee has required
the execution and delivery of this Agreement.
NOW, THEREFORE, for valuable consideration and intending to
be legally bound, the parties hereto agree and acknowledge as follows:
1. NOTICE OF SECURITY INTEREST. The Pledgor and Trustee are
entering into this Agreement to perfect, and confirm the first priority lien
of, the Trustee's security interest in the Collateral. The Bank agrees to
promptly make all necessary entries or notations in its books and records to
reflect the Trustee's security interest in the Collateral and to apply any
value distributed on account of any Pledged Securities as directed by the
Trustee without further consent from the Pledgor. The Bank acknowledges that
the Trustee has control over the Pledge Account and all Pledged Securities
contained therein from time to time.
2. SEPARATE PLEDGE ACCOUNT; TRUSTEE REPRESENTATIONS AND
WARRANTIES. (a) The Trustee hereby instructs the Bank, and the Bank hereby
confirms and agrees that, unless the Trustee shall otherwise direct the Bank in
writing, (i) the Pledge Account is to be
<PAGE> 21
2
maintained separately at all times and (ii) the Pledged Securities shall be
carried only in the Pledge Account.
(b) The Trustee hereby represents and warrants that it has
acquired its security interest in, and security entitlement to, the Collateral
for value and without notice of any adverse claim thereto. Without limiting the
generality of the foregoing, the Collateral is not, to the Trustee's knowledge,
subject to any Lien granted by the Trustee in favor of any securities
intermediary (including, without limitation, the Bank or the Federal Reserve
Bank of New York) and the Trustee has not caused or permitted the Collateral to
become subject to any Lien created by or arising through the Bank.
3. CONTROL. The Bank hereby agrees, upon written direction
from the Trustee and without further consent from the Pledgor, (a) to comply
with all instructions, entitlement orders and directions of any kind originated
by the Trustee concerning the Collateral, to liquidate or otherwise dispose of
the Collateral as and to the extent directed by the Trustee and pay over to the
Trustee all proceeds and other value therefrom or otherwise distributed with
respect thereto without any set off or deduction, and (b) except as otherwise
directed by the Trustee, not to comply with the instructions or directions of
the Pledgor or any other person.
4. OTHER AGREEMENTS; TERMINATION; SUCCESSOR TRUSTEES. The
Bank shall simultaneously send to the Trustee copies of all notices given and
statements rendered pursuant to the Pledge Account. So long as the Pledge
Agreement remains in effect, neither the Pledgor nor the Bank shall terminate
the Pledge Account without thirty (30) days' prior written notice to the other
party and the Trustee. In the event of any conflict between the provisions of
this Agreement and any other agreement governing the Pledge Account, the
provisions hereof shall control. In the event the Trustee no longer serves as
Trustee for the Collateral, the Pledge Account and Pledged Securities carried
therein shall be transferred to a successor trustee satisfactory to the
Trustee, provided that prior to such transfer, such successor trustee executes
an agreement that is in all material respects the same as this Agreement or is
otherwise in form and substance satisfactory to the Trustee.
5. INDEMNITY. The Pledgor shall indemnify and hold the
Trustee and the Bank harmless from any and all losses, claims, damages,
liabilities, expenses and fees, including reasonable counsel fees, resulting
from the execution of or performance under this Agreement and delivery by the
Trustee of all or any part of the Collateral to the Bank pursuant to this
Agreement, except claims, losses or liabilities resulting from the Trustee's or
the Bank's negligence, bad faith or willful misconduct as determined by a final
judgment of a court of competent jurisdiction. This indemnification shall
survive the termination of this Agreement.
<PAGE> 22
3
6. PROTECTION OF BANK. Except as required by Paragraph 3
hereof, the Bank shall have no duty to determine that the amount and form of
assets constituting Collateral comply with any applicable requirements. The
Bank may rely and shall be protected in acting upon any notice, instruction, or
other communication which it reasonably believes to be genuine and authorized.
7. TERMINATION/RELEASE OF COLLATERAL. This Agreement shall
terminate automatically upon receipt by the Bank of written notice executed by
two officers of the Trustee holding titles of Vice President or higher that (a)
all of the obligations secured by the Collateral have been satisfied, or (b)
all of the Collateral has been released, whichever is sooner, and the Bank
shall thereafter be relieved of all duties and obligations hereunder.
8. WAIVER AND SUBORDINATION OF RIGHTS. The Bank hereby waives
its right to set off any obligations of the Pledgor to the Bank against any or
all assets held by the Trustee as Collateral, and hereby agrees that any and
all liens, encumbrances, claims or security interests which the Bank may have
against the Collateral, either now or in the future are and shall be
subordinate and junior to the prior payment in full of all obligations of the
Pledgor now or hereafter existing under the Indenture, Notes and all other
documents related thereto whether for principal, interest (including, without
limitation, interest, as provided in the Notes, whether or not such interest
accrues after the filing of such petition for purposes of the Bankruptcy Code
or is an allowed claim in such proceeding), indemnities, fees, premiums,
expenses or otherwise. The Bank will not agree with any third party that the
Bank will comply with any instructions or directions of any kind concerning the
Collateral originated by such third party without the prior written consent of
the Trustee. Except for the claims and interests of the Trustee and the Pledgor
in the Collateral, the Bank does not know of any claim to or security interest
or other interest in the Collateral.
9. EXPENSES. The Pledgor shall pay all fees, costs and
expenses (including reasonable fees and expenses of counsel) of enforcing the
Bank's rights and remedies upon any breach (by the Trustee or the Pledgor) of
any of the provisions of this Agreement.
10. NOTICES. All notices, demands, requests, consents,
approvals and other communications required or permitted hereunder must be in
writing and will be effective upon receipt if delivered personally, or if sent
by facsimile transmission with confirmation of delivery, or by nationally
recognized overnight courier service, to the Pledgor's and the Trustee's
addresses as set forth in the Pledge Agreement, and to the Bank's address as
set forth below, or to such other address as any party may give to the others
in writing for such purpose.
11. CHANGES IN WRITING. No modification, amendment or waiver
of any provision of this Agreement nor consent to any departure by any party
therefrom will be
<PAGE> 23
4
effective unless made in writing signed by the parties hereto, and then such
waiver or consent shall be effective only in the specific instance and for the
purpose for which given.
12. ENTIRE AGREEMENT. This Agreement (including the documents
and instruments referred to herein) constitutes the entire agreement and
supersedes all other prior agreements and understandings, both written and
oral, among the parties with respect to the subject matter hereof.
13. COUNTERPARTS. This Agreement may be signed in any number
of counterpart copies and by the parties hereto on separate counterparts
(including by facsimile transmission), but all such copies shall constitute one
and the same instrument.
14. SUCCESSORS AND ASSIGNS. This Agreement will be binding
upon and inure to the benefit of the parties hereto and their respective heirs,
executors, administrators, successors and assigns.
15. GOVERNING LAW AND JURISDICTION. This Agreement has been
delivered to and accepted by the Trustee and will be deemed to be made in the
State of New York. THIS AGREEMENT WILL BE INTERPRETED AND THE RIGHTS AND
LIABILITIES OF THE PARTIES HERETO DETERMINED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF NEW YORK. Each of the parties hereby irrevocably submits for itself
and its property in any legal action or proceeding relating to this Agreement,
or for recognition and enforcement of any judgment in respect thereof, to the
non-exclusive general jurisdiction and venue of the courts of the State of New
York, the courts of the United States of America in New York, and appellate
courts from any thereof.
16. WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO
IRREVOCABLY WAIVES ANY AND ALL RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY
ACTION, PROCEEDING OR CLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) OF
ANY NATURE RELATING TO THIS AGREEMENT, ANY DOCUMENTS EXECUTED IN CONNECTION
WITH THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED IN ANY OF SUCH DOCUMENTS.
EACH PARTY HERETO ACKNOWLEDGES THAT THE FOREGOING WAIVER IS KNOWING AND
VOLUNTARY.
<PAGE> 24
5
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their respective officers thereunto duly
authorized, as of the date first above written.
PLEDGOR:
ALLEGIANCE TELECOM, INC.
By:
----------------------------------------------
Name:
--------------------------------------------
Title:
--------------------------------------------
TRUSTEE:
THE BANK OF NEW YORK, as Trustee
By:
----------------------------------------------
Name:
--------------------------------------------
Title:
--------------------------------------------
BANK'S ADDRESS FOR BANK:
NOTICES:
BANK OF NEW YORK
101 Barclay Street By:
21 West ----------------------------------------------
New York, NY 10286
Name:
--------------------------------------------
Title:
-------------------------------------------
Attention: Van Brown,
Corporate Trust Administration
Facsimile Number: (212) 815-5917
<PAGE> 25
ANNEX 1
Pledged Securities
<TABLE>
<CAPTION>
Security CUSIP No. Coupon (%) Maturity Amount
- -------- --------- ---------- -------- ------
<S> <C> <C> <C> <C>
United States 912820AQ0 0 11/15/98 $9,385,000
Treasury
United States 912820AS6 0 05/15/99 $13,197,000
Treasury
United States 912820AU1 0 11/15/99 $13,197,000
Treasury
United States 912820AW7 0 05/15/00 $13,197,000
Treasury
United States 912827AY3 0 11/15/00 $13,197,000
Treasury
United States 912820BA4 0 05/15/01 $13,197,000
Treasury
</TABLE>
<PAGE> 1
EXHIBIT 5.1
[Kirkland & Ellis Letterhead]
December 22, 1998
Allegiance Telecom, Inc.
1950 Stemmons Freeway, Suite 3026
Dallas, Texas 75207
Re: Allegiance Telecom, Inc.
Registration Statement on Form S-1
Ladies and Gentlemen:
We are acting as special counsel to Allegiance Telecom, Inc., a Delaware
corporation (the "Company"), in connection with the proposed registration by the
Company of its Senior Discount Notes due 2008 (the "Notes") pursuant to a
Registration Statement on Form S-1, filed on the date hereof with the Securities
and Exchange Commission (the "Commission") under the Securities Act of 1933, as
amended (the "Act") (such Registration Statement, as amended or supplemented, is
hereinafter referred to as the "Registration Statement"). The Notes were
originally sold pursuant to an underwriting agreement dated as of July 7, 1998,
among the Company, Morgan Stanley & Co. Incorporated, Salomon Brothers Inc.,
Donaldson, Lufkin & Jenrette Securities Corporation and Goldman, Sachs & Co., as
representatives of the several Underwriters named therein. The Notes were issued
pursuant to an indenture (the "Indenture") dated as of July 7, 1998, between the
Company and The Bank of New York, as trustee. The Notes may be sold from time
to time by Morgan Stanley Dean Witter in connection with market-making
activities.
In that connection, we have examined such corporate proceedings, documents,
records and matters of law as we have deemed necessary to enable us to render
this opinion.
For purposes of this opinion, we have assumed the authenticity of all
documents submitted to us as originals, the conformity to the originals of all
documents submitted to us as copies and the authenticity of the originals of all
documents submitted to us as copies. We have also assumed the legal capacity of
all natural persons, the genuineness of the signatures of persons signing all
documents in connection with which this opinion is rendered, the authority of
such persons signing on behalf of the parties thereto other than the Company and
the due authorization, execution and delivery of all documents by the parties
thereto other than the Company. As to any facts material to the opinions
expressed herein, we have relied upon the statements and representations of
officers and other representations of the Company and others. For purposes of
numbered paragraph 1, we have relied exclusively upon certificates issued by
governmental authorities in the relevant jurisdiction and such opinion is not
intended to provide any conclusion or assurance beyond that conveyed by such
certificates.
Our opinion expressed below is subject to the qualifications that we
express no opinion as to the applicability of, compliance with, or effect of (i)
any bankruptcy, insolvency, reorganization, fraudulent transfer, fraudulent
conveyance, moratorium or other similar law affecting the enforcement of
creditors' rights generally, (ii) general principles of equity (regardless of
whether enforcement is considered in a proceeding in equity or at law), (iii)
public policy considerations which may limit the rights of parties to
<PAGE> 2
Allegiance Telecom, Inc.
December 22, 1998
Page 2
obtain certain remedies and (iv) any laws except the internal laws of the State
of New York, the General Corporation Law of the State of Delaware and the
federal law of the United States of America.
Based upon and subject to the foregoing qualifications, assumptions and
limitations and the further limitations set forth below, we hereby advise you
that in our opinion:
(1) The Company is a corporation existing and in good standing under the
laws of the State of Delaware.
(2) The Notes are legally issued, fully paid and nonassessable and
constitute valid and binding obligations of the Company.
We hereby consent to the filing of this opinion with the Commission as
Exhibit 5.1 to the Registration Statement. We also consent to the reference to
our firm under the heading "Legal Matters" in the Registration Statement. In
giving this consent, we do not hereby admit that we are in the category of
persons whose consent is required under Section 7 of the Act or the rules and
regulations of the Commission.
We do not find it necessary for the purposes of this opinion, and
accordingly we do not purport to cover herein, the application of the securities
or "Blue Sky" laws of the various states to the issuance and sale of the Notes.
This opinion is limited to the specific issues addressed herein, and no
opinion may be inferred or implied beyond that expressly stated herein. We
assume no obligation to revise or supplement this opinion should the present
laws of the State of New York, the General Corporation Law of the State of
Delaware or the federal law of the United States be changed by legislative
action, judicial decision or otherwise.
Very truly yours,
/s/ Kirkland & Ellis
KIRKLAND & ELLIS
<PAGE> 1
EXHIBIT 11.1
ALLEGIANCE TELECOM, INC.
COMPUTATION OF PRO FORMA PER SHARE EARNINGS (LOSS)
Nine Months Ended September 30, 1998
(Dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
PRO FORMA NET LOSS PER SHARE,
-----------------------------------------------------------
Number of Shares Percent Outstanding Equivalent Shares
---------------- ------------------- -----------------
<S> <C> <C> <C>
COMMON STOCK
1997 Common Stock Offering 426 100.00% 426
1998 Common Stock Offering 10,000,000 100.00% 10,000,000
Preferred Stock Converted to Common Stock 40,341,128 100.00% 40,341,128
-------------- --------------
50,341,554 50,341,554
WEIGHTED AVERAGE SHARES OUTSTANDING 50,341,554
NET LOSS APPLICABLE TO COMMON STOCK $ (254,271.4)
NET LOSS PER SHARE, BASIC AND BASIC $ (5.05)
==============
</TABLE>
<PAGE> 1
EXHIBIT 11.2
ALLEGIANCE TELECOM, INC.
COMPUTATION OF PRO FORMA PER SHARE EARNINGS (LOSS)
Period From Inception (April 22, 1997) Through December 31, 1997
(Dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
PRO FORMA NET LOSS PER SHARE
---------------------------------------------------------
Number of Shares Percent Outstanding Equivalent Shares
---------------- ------------------- -----------------
<S> <C> <C> <C>
COMMON STOCK
1997 Common Stock Offering 426 100.00% 426
1998 Common Stock Offering 10,000,000 100.00% 10,000,000
Preferred Stock Converted to Common Stock 40,067,766 100.00% 40,067,766
-------------- --------------
50,068,192 50,068,192
WEIGHTED AVERAGE SHARES OUTSTANDING 50,068,192
NET LOSS APPLICABLE TO COMMON STOCK $ (220,746.6)
NET LOSS PER SHARE, BASIC AND DILUTED $ (4.41)
==============
</TABLE>
<PAGE> 1
EXHIBIT 12.1
ALLEGIANCE TELECOM, INC.
COMPUTATION OF RATIO OF EARNINGS (LOSS) TO FIXED CHARGES
(Dollars in thousands)
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION
NINE MONTHS ENDED (APRIL 22, 1997)
SEPTEMBER 30, 1998 THROUGH DECEMBER 31, 1997
----------------------------- ---------------------------
PRO FORMA PRO FORMA
AS ADJUSTED FOR AS ADJUSTED FOR
THE IPO AND THE IPO AND
ACTUAL DEBT OFFERINGS ACTUAL DEBT OFFERINGS
----------- --------------- --------- ---------------
<S> <C> <C> <C> <C>
Earnings:
Net loss................ $(206,598.3) $ (242,420.0) $(3,687.9) $(216,643.8)
Add: Fixed charges...... 25,278.4 48,542.4 -- 41,212.5
----------- ------------- --------- -----------
(181,319.9) (193,877.6) (3,687.9) (175,431.3)
Fixed charges:
Interest in
indebtedness......... 26,199.2 48,891.4 -- 39,946.7
Amortization of debt
discount and debt
issuance costs....... 873.6 1,445.4 -- 1,265.8
Interest portion of
rental and lease
expense.............. .3 .3 -- --
----------- ------------- --------- -----------
27,073.1 50,337.1 -- 41,212.5
Deficiency of earnings
available to cover fixed
charges................. $(208,393.0) $ (244,214.7) $(3,687.9) $(216,643.8)
=========== ============= ========= ===========
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this Registration Statement of our report dated November 19, 1998,
for the nine months ended September 30, 1998, and for the period from inception
(April 22, 1997) through December 31, 1997, and to all references to our Firm
included in this Registration Statement on Form S-1.
ARTHUR ANDERSEN LLP
Dallas, Texas
December 22, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AT SEPTEMBER 30, 1998 AND FROM THE
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
CONSOLIDATED FINANCIAL STATEMENT.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 404,851
<SECURITIES> 49,367
<RECEIVABLES> 2,185
<ALLOWANCES> 153
<INVENTORY> 0
<CURRENT-ASSETS> 480,105
<PP&E> 106,714
<DEPRECIATION> 3,718
<TOTAL-ASSETS> 649,227
<CURRENT-LIABILITIES> 34,848
<BONDS> 463,752
0
0
<COMMON> 503
<OTHER-SE> 141,618
<TOTAL-LIABILITY-AND-EQUITY> 649,227
<SALES> 0
<TOTAL-REVENUES> 4,201
<CGS> 0
<TOTAL-COSTS> 4,506
<OTHER-EXPENSES> 167,998
<LOSS-PROVISION> 153
<INTEREST-EXPENSE> 25,278
<INCOME-PRETAX> (218,442)
<INCOME-TAX> 0
<INCOME-CONTINUING> (218,442)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (218,442)
<EPS-PRIMARY> (13.02)
<EPS-DILUTED> (13.02)
</TABLE>
