<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 31, 1998
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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ALLEGIANCE TELECOM, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 4832 75-2721491
(State or other jurisdiction (Primary Standard Industrial (IRS Employer
of incorporation or
organization) Classification Code Number) Identification Number)
</TABLE>
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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 registrants' 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) 853-7100
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copy to:
MARK B. TRESNOWSKI
Kirkland & Ellis
200 East Randolph Drive
Chicago, Illinois 60601
(312) 861-2000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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TITLE OF EACH CLASS PROPOSED MAXIMUM PROPOSED MAXIMUM
OF SECURITIES TO BE AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
REGISTERED REGISTERED PER UNIT(1)(2) PRICE(1)(2) REGISTRATION FEE(1)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
11 3/4 Senior Discount Notes
due 2008, Series B........... $445,000,000 55% $244,811,510 $72,219
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</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Calculated in accordance with Rule 457(f)(2) based on the book value on
February 28, 1998 of the securities be received by the registrant
THE REGISTRANTS HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
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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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO THE REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH
STATE.
SUBJECT TO COMPLETION, DATED MARCH 31, 1998
PROSPECTUS
, 1998
ALLEGIANCE TELECOM, INC.
OFFER TO EXCHANGE ITS 11 3/4% SERIES B SENIOR DISCOUNT NOTES DUE 2008 FOR ANY
AND ALL OF ITS OUTSTANDING 11 3/4% SENIOR DISCOUNT NOTES DUE 2008
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
, 1998, UNLESS EXTENDED.
Allegiance Telecom, Inc., a Delaware corporation (the "Company"), hereby
offers (the "Exchange Offer"), upon the terms and conditions set forth in this
Prospectus (the "Prospectus") and the accompanying Letter of Transmittal (the
"Letter of Transmittal"), to exchange $1,000 principal amount of its Series B
11 3/4% Senior Discount Notes due 2008, (the "New Notes"), registered under the
Securities Act of 1933, as amended (the "Securities Act"), pursuant to a
Registration Statement of which this Prospectus is a part, for each $1,000
principal amount of its outstanding 11 3/4% Senior Discount Notes due 2008 (the
"Old Notes"), of which $445,000,000 principal amount at maturity is outstanding.
The form and terms of the New Notes are the same as the form and term of the Old
Notes (which they replace), except that the New Notes will bear a Series B
designation and will have been registered under the Securities Act and,
therefore, will not bear legends restricting their transfer and will not contain
certain provisions relating to liquidated damages which were included in the
terms of the Old Notes in certain circumstances relating to the timing of the
Exchange Offer. The New Notes will evidence the same debt as the Old Notes
(which they replace) and will be issued under and be entitled to the benefits of
an Indenture, dated as of February 3, 1998 (the "Indenture"), between the
Company and The Bank of New York, as trustee, governing the Old Notes and the
New Notes. The Old Notes and the New Notes are sometimes referred to herein
collectively as the "Notes." See "The Exchange Offer" and "Description of the
Notes."
Interest on the Notes will not be payable prior to August 15, 2003. From
and after February 15, 2003, interest on the Notes will accrue on the principal
amount at maturity at a rate of 11 3/4% per annum, payable semi-annually on
February 15 and August 15 of each year, commencing on August 15, 2003. The Notes
will mature on February 15, 2008 and will not be subject to any sinking fund
requirement. The Notes will be redeemable by the Company, in whole or in part,
at any time on or after February 15, 2003, at the redemption prices set forth
herein, plus accrued and unpaid interest, if any, to the redemption date. Prior
to February 15, 2001, the Company, at its option, may redeem in the aggregate up
to 35% of the original principal amount of the Notes at the redemption prices
set forth herein with the net proceeds of one or more Public Equity Offerings
(as defined herein), provided that at least $289.3 million of the aggregate
principal amount of the Notes originally issued remains outstanding immediately
after the occurrence of any such redemption. See "Description of the
Notes -- Optional Redemption."
The New Notes will be, as the Old Notes (which they replace) are, senior
unsecured obligations of the Company, and will, as the Old Notes (which they
replace), rank pari passu in right of payment to all existing and future senior
unsecured indebtedness of the Company and senior in right of payment to any
subordinated indebtedness of the Company. The Notes will be effectively
subordinated to all existing and future indebtedness of the Company to the
extent of the value of the assets securing such indebtedness and will be
structurally subordinated to all existing and future indebtedness of its
subsidiaries. As of December 31, 1997, after giving pro forma effect to the
Initial Offering (as defined herein), the Company would have had no indebtedness
other than the Notes.
(Cover continued on following page)
SEE "RISK FACTORS," BEGINNING ON PAGE 10, FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY HOLDERS WHO TENDER THEIR OLD NOTES IN THE EXCHANGE
OFFER.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE> 3
(Cover page continued)
In the event of a Change of Control (as defined herein), each holder of the
Notes will have the right to require the Company to purchase its Notes at a
purchase price equal to 101% of the Accreted Value (as defined herein) thereof
on the relevant Payment Date (as defined herein) plus accrued interest, if any,
to the Payment Date. See "Description of the Notes -- Covenants," "-- Certain
Definitions" and "-- Repurchase of Notes Upon a Change of Control." In addition,
the Company is obligated in certain instances to make offers to repurchase the
Notes at a purchase price in cash equal to 100% of the Accreted Value thereof
plus accrued interest, if any, to the relevant Payment Date with the proceeds of
certain asset sales. See "Description of the Notes -- Certain Covenants."
The Company will accept for exchange any and all Old Notes validly tendered
and not withdrawn prior to 5:00 p.m., New York City time on 1998,
unless extended by the Company in its sole discretion (the "Expiration Date").
Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m. on the
Expiration Date. The Exchange Offer is subject to certain customary conditions.
The Old Notes were sold by the Company on February 3, 1998 to the Initial
Purchasers (as defined herein) in a transaction not registered under the
Securities Act in reliance upon an exemption under the Securities Act (the
"Initial Offering"). The Initial Purchasers subsequently placed the Old Notes
with qualified institutional buyers in reliance upon Rule 144A under the
Securities Act and qualified buyers outside the United States in reliance upon
Regulation S under the Securities Act. Accordingly, the Old Notes may not be
reoffered, resold or otherwise transferred in the United States unless
registered under the Securities Act or unless an applicable exemption from the
registration requirements of the Securities Act is available. The New Notes are
being offered hereunder in order to satisfy the obligations of the Company under
the Notes Registration Rights Agreement (as defined herein) entered into by the
Company and the Initial Purchasers in connection with the Initial Offering. See
"The Exchange Offer."
Based on no-action letters issued by the staff of the Securities and
Exchange Commission (the "Commission") to third parties, the Company believes
the New Notes issued pursuant to the Exchange Offer may be offered for resale,
resold and otherwise transferred by any holder thereof (other than any such
holder that is an "affiliate" of the Company within the meaning of Rule 405
under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such New
Notes are acquired in the ordinary course of such holder's business and such
holder has no arrangement or understanding with any person to participate in the
distribution of such New Notes. See "The Exchange Offer -- Resale of the New
Notes." Each broker-dealer (a "Participating Broker-Dealer") that receives New
Notes for its own account pursuant to the Exchange Offer must acknowledge that
it will deliver a prospectus in connection with any resale of such New Notes.
The Letter of Transmittal states that by so acknowledging and by delivering a
prospectus, a Participating Broker-Dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act. This Prospectus, as
it may be amended or supplemented from time to time, may be used by a
Participating Broker-Dealer in connection with resales of New Notes received in
exchange for Old Notes where such Old Notes were acquired by such Participating
Broker-Dealer as a result of market making activities or other trading
activities. The Company has agreed that, for a period of 180 days after the
Expiration Date, it will make this Prospectus available to any Participating
Broker-Dealer for use in connection with any such resale. See "Plan of
Distribution."
Holders of Old Notes not tendered and accepted in the Exchange Offer will
continue to hold such Old Notes and will be entitled to all the rights and
benefits and will be subject to the limitations applicable thereto under the
Indenture and with respect to transfer under the Securities Act. The Company
will pay all the expenses incurred by it incident to the Exchange Offer. See
"The Exchange Offer."
There has not previously been any public market for the Old Notes or the
New Notes. The Company does not intend to list the New Notes on any securities
exchange or to seek approval for quotation through any automated quotation
system. The Old Notes are currently eligible for trading in the Private
Offerings, Resales and Trading through Automated Linkages ("PORTAL") market.
However, there can be no assurance that an active market for the New Notes will
develop. See "Risk Factors -- Absence of a Public Market Could Adversely Affect
the Value of Notes." Moreover, to the extent that Old Notes are tendered and
accepted in the Exchange Offer, the trading market for untendered and tendered
but unaccepted Old Notes could be adversely affected.
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AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-4 (the "Exchange Offer Registration Statement," which term shall encompass all
amendments, exhibits, annexes and schedules thereto) pursuant to the Securities
Act, and the rules and regulations promulgated thereunder, covering the New
Notes being offered hereby. This Prospectus does not contain all the information
set forth in the Exchange Offer Registration Statement. For further information
with respect to the Company and the Exchange Offer, reference is made to the
Exchange Offer Registration Statement. Statements made in this Prospectus as to
the contents of any contract, agreement or other document referred to are not
necessarily complete. With respect to each such contract, agreement or other
document filed as an exhibit to the Exchange Offer Registration Statement,
reference is made to the exhibit for a more complete description of the document
or matter involved, and each such statement shall be deemed qualified in its
entirety by such reference. The Exchange Offer Registration Statement, including
the exhibits thereto, can be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at the Regional Offices of the Commission at 7 World
Trade Center, 13th Floor, New York, New York 10048 and at Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
materials can be obtained from the Public Reference Section of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The
Commission maintains a Web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission. The address of such site is http://www.sec.gov.
As a result of the filing of the Exchange Offer Registration Statement with
the Commission, the Company will become subject to the informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and in accordance therewith will be required to file periodic reports and
other information with the Commission. The obligation of the Company to file
periodic reports and other information with the Commission will be suspended if
the New Notes are held of record by fewer than 300 holders as of the beginning
of any fiscal year of the Company other than the fiscal year in which the
Exchange Offer Registration Statement is declared effective. The Company has
agreed pursuant to the Indenture that, whether or not it is required to do so by
the rules and regulations of the Commission, for so long as any of the Notes
remain outstanding, it will furnish to the holders of the Notes (within 15 days
after it is or would have been required to file with the Commission) and file
with the Commission (unless the Commission will not accept such a filing) (i)
all quarterly and annual financial information that would be required to be
contained in a filing with the Commission on Forms 10-Q and 10-K if the Company
was required to file such forms, including a "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and, with respect to
the annual information only, a report thereon by the Company's certified
independent accountants and (ii) all current reports that would be required to
be filed with the Commission on Form 8-K if the Company was required to file
such reports.
i
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SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements,
including the notes thereto, appearing elsewhere in this Prospectus. Unless the
context otherwise requires, references herein to "Allegiance" and the "Company"
refer to Allegiance Telecom, Inc., a Delaware corporation, and its subsidiaries.
Certain information contained in this summary and elsewhere in this Prospectus,
including information under "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and information with respect to the
Company's plans and strategy for its business and related financing, includes
forward-looking statements that involve risk and uncertainties. Prospective
investors should carefully consider the factors set forth under "Risk Factors"
and are urged to read this Prospectus in its entirety.
THE COMPANY
Allegiance Telecom, Inc. 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 competitive
local exchange carrier ("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 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. The Company's initial equity financing commitment of $100 million
has been provided by this management team and Madison Dearborn Capital Partners,
Morgan Stanley Capital Partners, Frontenac Company and Battery Ventures.
The Company believes that the Telecommunications Act of 1996 (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 established a framework
for CLECs to acquire the unbundled network elements ("UNEs") from the incumbent
local exchange carriers ("ILECs") that are necessary for the cost-effective
provision of service. As such, the Telecommunications Act will enable the
Company to deploy efficiently its network infrastructure by initially leasing
only the necessary network elements from the ILEC and, over time, replacing
these leased facilities with owned infrastructure as economically justified by
traffic volume growth. 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 ("OSS"); (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 OSS
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 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 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 and costs of
upgrading legacy systems are often prohibitive for companies whose existing
systems support a large number of customers with ongoing service.
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Allegiance plans to deploy networks in 24 Tier I markets. The Company
estimates that these 24 markets will include 18 basic trading areas ("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. The Company plans to deploy its networks
principally in two phases of development. The first, or "Phase I," is to offer
services in 12 of the largest metropolitan areas in the U.S., which the Company
believes include approximately 26.0% of the nation's total non-residential
access lines. Allegiance is currently deploying networks in six Phase I markets:
New York City, Dallas, Atlanta, Chicago, Los Angeles and San Francisco, with
initial facilities-based service scheduled to begin in the first three of these
markets in March and April of 1998. In each of these markets, the Company is
using a Lucent Technologies, Inc. ("Lucent") Series 5ESS(R)-2000 digital switch,
which provides local and long distance functionality. Pending securing
additional financing, the Company intends to begin its "Phase II" network
buildout, which will encompass an additional 12 major U.S. metropolitan markets.
The Company is a Delaware corporation with its principal executive offices
located at 1950 Stemmons Freeway, Suite 3026, Dallas, Texas 75207, and its
telephone number is (214) 853-7100.
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,
Inc. ("WorldCom") in 1996. Other key Allegiance executives have significant
experience in the critical functions of network operations, sales and marketing,
back office and OSS, 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 expected 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 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 Internet service providers ("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 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 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.
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<PAGE> 7
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. Thereafter,
Allegiance plans to lease capacity or overbuild specific network segments as
economically justified by traffic volume growth. Allegiance expects that this
"smart build" strategy will allow entry into a new market in a six- to
nine-month time frame as compared to 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
acquire unbundled network elements. The Company believes that this "smart build"
approach has the additional advantage of reducing up-front capital requirements.
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 Federal Communications Commission ("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 using its own
facilities should generate significantly higher gross network margins than could
be obtained by reselling such services. As a result, Allegiance plans to deploy
its marketing activities in 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
through direct sales, a full suite of turn-key product offerings and
personalized customer care. Management believes that its targeted small and
medium-sized business customers have been neglected by the ILECs with respect to
these functions. 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 OSS, 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 a team of engineering and
information technology professionals experienced in the CLEC industry. This team
will work to develop, with the assistance of key third party vendors, OSS 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
intends to work actively toward "electronic bonding" between the Allegiance OSS
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
3
<PAGE> 8
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.
FINANCING PLAN
Allegiance's financing plan is predicated on the pre-funding of 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 the Company to be opportunistic
and raise capital on more favorable terms and conditions.
Equity Commitments. In August 1997, Allegiance received equity commitments
aggregating $95 million from affiliates of four private equity investment funds
with extensive experience in financing telecommunications companies: Morgan
Stanley Capital Partners, Madison Dearborn Capital Partners, Frontenac Company,
and Battery Ventures (such affiliates collectively, the "Fund Investors"). The
Company simultaneously received an aggregate of $5 million of equity commitments
from certain members of the Allegiance management team (the "Management
Investors"). The equity commitments from the Fund Investors and the Management
Investors are collectively referred to as the "Equity Commitments." Drawdowns of
these Equity Commitments are subject to certain conditions, including the
approval of individual market business plans and operating budgets by the Fund
Investors and the Allegiance Board of Directors. If an initial public offering
or a sale, liquidation or dissolution of the Company (a "Liquidity Event") has
not occurred by August 13, 2004, the Company may be required, subject to the
covenants in the Indenture relating to the Notes, to repurchase the Fund
Investors' and Management Investors' equity securities, provided that any claim
for payment will be subordinated in right of payment to the Notes. See "Certain
Transactions." As of March 31, 1998, approximately $49 million had been drawn
down to fund the Company's start-up costs and ongoing network development in the
Dallas, New York City and Atlanta markets (such amount, the "Equity
Contribution")
Equipment Lease Financing. AT&T Capital Corporation ("AT&T Capital") and
the Company are in the process of negotiating up to $100.0 million of lease
financing (the "Lease Facility") for the acquisition of digital switches,
software, electronics and associated transmission equipment. The implementation
of the Lease Facility and the terms and conditions thereof remain subject to a
number of conditions, including negotiation of definitive documents, completion
of due diligence and receipt of AT&T Capital internal approvals.
The Company believes, based on its current business plan, that the net
proceeds from the Initial Offering, together with funding expected to be
available from the Equity Commitments and the Lease Facility, will provide the
Company with sufficient financing to pre-fund its Phase I market deployment to
Positive Free Cash Flow. The actual amount and timing of the Company's future
capital requirements may differ materially from the Company's estimates as a
result of, among other things, the demand for the Company's services and
regulatory, technological and competitive developments (including additional
market developments and new opportunities) in the Company's industry. The
Company also expects that it will require additional financing (or require
financing sooner than anticipated) if: (i) the Company's development plans or
projections change or prove to be inaccurate; (ii) the amounts that actually
become available under the Lease Facility and the Equity Commitments are less
than the Company presently expects or are not received on a timely basis; (iii)
the Company engages in any acquisitions; or (iv) the Company accelerates
implementation of its Phase II network deployment or otherwise 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. See "Risk
Factors -- Significant Capital Requirements; Uncertainty of Additional
Financing."
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<PAGE> 9
The Company will be required to seek additional financing to fund its
deployment of networks in the Phase II markets and the operating losses of such
networks until they reach Positive Free Cash Flow. There can be no assurance
that such financing will be available on terms acceptable to the Company or at
all.
RECENT DEVELOPMENTS
On February 3, 1998, the Company consummated a private placement (the
"Initial Offering") under Rule 144A of the Securities Act, pursuant to which the
Company issued and sold 445,000 units (the "Units"), each consisting of one Old
Note and one warrant (a "Warrant") to purchase .0034224719 shares of common
stock, par value $.01 per share of the Company. The Units were initially sold to
Morgan Stanley & Co. Incorporated; Salomon Brothers Inc; Bear, Stearns & Co.
Inc.; and Donaldson, Lufkin & Jenrette Securities Corporation (the "Initial
Purchasers"). The aggregate purchase price of the Units was $250,447,150. The
Old Notes were issued pursuant to the terms of the Indenture. Concurrently with
the consummation of the private placement, the Company and the Initial
Purchasers entered into a Registration Rights Agreement, dated as of February 3,
1998 (the "Notes Registration Rights Agreement"), which grants the holders of
the Old Notes certain exchange and registration rights. The Exchange Offer is
intended to satisfy such exchange rights which terminate upon the consummation
of the Exchange Offer.
THE EXCHANGE OFFER
Securities Offered......... $445,000,000 aggregate principal amount at maturity
of 11 3/4% Series B Senior Discount Notes due 2008
of the Company.
The Exchange Offer......... $1,000 principal amount at maturity of New Notes in
exchange for each $1,000 principal amount at
maturity of Old Notes. As of the date hereof,
$445,000,000 aggregate principal amount at maturity
of Old Notes are outstanding. The Company will
issue the New Notes to holders on or promptly after
the Expiration Date.
Based on an interpretation by the staff of the
Commission set forth in no-action letters issued to
third parties, the Company believes that New Notes
issued pursuant to the Exchange Offer in exchange
for Old Notes may be offered for resale, resold and
otherwise transferred by any holder thereof (other
than any such holder which is an "affiliate" of the
Company within the meaning of Rule 405 under the
Securities Act) without compliance with the
registration and prospectus delivery provisions of
the Securities Act, provided that such New Notes
are acquired in the ordinary course of such
holder's business and that such holder does not
intend to participate and has no arrangement or
understanding with any person to participate in the
distribution of such New Notes. Each holder
accepting the Exchange Offer is required to
represent to the Company in the Letter of
Transmittal that, among other things, the New Notes
will be acquired by the holder in the ordinary
course of business and the holder does not intend
to participate and has no arrangement or
understanding with any person to participate in the
distribution of such New Notes.
Any Participating Broker-Dealer that acquired Old
Notes for its own account as a result of
market-making activities or other trading
activities may be a statutory underwriter. Each
Participating Broker-Dealer that receives New Notes
for its own account pursuant to the Exchange Offer
must acknowledge that it will deliver a Prospectus
in connection with any resale of such New Notes.
The Letter of Transmittal states that by so
acknowledging and by delivering a Prospectus, a
Participating Broker-
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<PAGE> 10
Dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities
Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a
Participating Broker-Dealer in connection with
resale of New Notes received in exchange for Old
Notes where such Old Notes were acquired by such
Participating Broker-Dealer as a result of
market-making activities or other trading
activities. The Company has agreed that, for a
period of 180 days after the Expiration Date, it
will make this Prospectus available to any
Participating Broker-Dealer for use in connection
with any such resale. See "Plan of Distribution."
Any holder who tenders in the Exchange Offer with
the intention to participate, or for the purpose of
participating, in a distribution of the New Notes
could not rely on the position of the staff of the
Commission enunciated in no-action letters and, in
the absence of an exemption therefrom, must comply
with the registration and prospectus delivery
requirements of the Securities Act in connection
with any resale transaction. Failure to comply with
such requirements in such instance may result in
such holder incurring liability under the
Securities Act for which the holder is not
indemnified by the Company.
Expiration Date............ 5:00 p.m., New York City time, on ,
1998 unless the Exchange Offer is extended, in
which case the term "Expiration Date" means the
latest date and time to which the Exchange Offer is
extended.
Accreted Value and Accrued
Interest on the New Notes
and the Old Notes........ No cash interest will be payable in respect of the
New Notes prior to August 15, 2003. From and after
February 15, 2003, interest on the New Notes will
accrue on the principal amount at maturity at the
rate of 11 3/4% per annum and will be payable
semi-annually on each February 15 and August 15,
commencing August 15, 2003. The Old Notes will
continue to accrete at the rate of 11 3/4% per
annum to, but excluding, the date of issuance of
the New Notes. Any Old Notes not tendered or
accepted for exchange will continue to accrete at
the rate of 11 3/4% per annum in accordance with
their terms. The Accreted Value of New Notes upon
issuance will equal the Accreted Value of the Old
Notes accepted for exchange immediately prior to
issuance of the New Notes.
Conditions to the Exchange
Offer...................... The Exchange Offer is subject to certain customary
conditions, which may be waived by the Company. See
"The Exchange Offer -- Conditions."
Procedures for Tendering
Old Notes.................. Each holder of Old Notes wishing to accept the
Exchange Offer must complete, sign and date the
accompanying Letter of Transmittal, or a facsimile
thereof or transmit an Agent's Message in
connection with a book-entry transfer, in
accordance with the instructions contained herein
and therein, and mail or otherwise deliver such
Letter of Transmittal, or such facsimile, or such
Agent's Message, together with the Old Notes and
any other required documentation to the Exchange
Agent (as defined herein) at the address set forth
herein. By executing the Letter of Transmittal or
Agent's Message, each holder will represent to the
Company that, among other things, the New Notes
acquired pursuant to
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<PAGE> 11
the Exchange Offer are being obtained in the
ordinary course of business of the person receiving
such New Notes, whether or not such person is the
holder, that neither the holder nor any such other
person (i) has any arrangement or understanding
with any person to participate in the distribution
of such New Notes, (ii) is engaging or intends to
engage in the distribution of such New Notes, or
(iii) is an "affiliate," as defined under Rule 405
of the Securities Act, of the Company. See "The
Exchange Offer -- Purpose and Effect of the
Exchange Offer" and "-- Procedures for Tendering."
Untendered Old Notes....... Following the consummation of the Exchange Offer,
holders of Old Notes eligible to participate but
who do not tender their Old Notes will not have any
further exchange rights and such Old Notes will
continue to be subject to certain restrictions on
transfer. Accordingly, the liquidity of the market
for such Old Notes could be adversely affected.
Consequences of Failure to
Exchange................. The Old Notes that are not exchanged pursuant to
the Exchange Offer will remain restricted
securities. Accordingly, such Old Notes may be
resold only (i) to the Company, (ii) pursuant to
Rule 144A or Rule 144 under the Securities Act or
pursuant to some other exemption under the
Securities Act, (iii) outside the United States to
a foreign person pursuant to the requirements of
Rule 904 under the Securities Act, or (iv) pursuant
to an effective registration statement under the
Securities Act. See "The Exchange
Offer -- Consequences of Failure to Exchange."
Shelf Registration
Statement.................. In the event applicable interpretations of the
staff of the Commission do not permit the Company
to effect the Exchange Offer, or under certain
other circumstances, the Company has agreed to
register the Old Notes on a shelf registration
statement (the "Shelf Registration Statement") and
use its best efforts to cause it to be declared
effective by the Commission. The Company has agreed
to maintain the effectiveness of the Shelf
Registration Statement for, under certain
circumstances, a maximum of two years, to cover
resales of the Old Notes held by any such holders.
Special Procedures for
Beneficial Owners.......... Any beneficial owner whose Old Notes are registered
in the name of a broker, dealer, commercial bank,
trust company or other nominee and who wishes to
tender should contact such registered holder
promptly and instruct such registered holder to
tender on such beneficial owner's behalf. If such
beneficial owner wishes to tender on such owner's
own behalf, such owner must, prior to completing
and executing the Letter of Transmittal and
delivering its Old Notes, either make appropriate
arrangements to register ownership of the Old Notes
in such owner's name or obtain a properly completed
bond power from the registered holder. The transfer
of registered ownership may take considerable time.
The Company will keep the Exchange Offer open for
not less than twenty business days in order to
provide for the transfer of registered ownership.
Guaranteed Delivery
Procedures................. Holders of Old Notes who wish to tender their Old
Notes and whose Old Notes are not immediately
available or who cannot deliver their Old
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<PAGE> 12
Notes, the Letter of Transmittal or any other
documents required by the Letter of Transmittal to
the Exchange Agent (or comply with the procedures
for book-entry transfer) prior to the Expiration
Date must tender their Old Notes according to the
guaranteed delivery procedures set forth in "The
Exchange Offer -- Guaranteed Delivery Procedures."
Withdrawal Rights.......... Tenders may be withdrawn at any time prior to 5:00
p.m., New York City time, on the Expiration Date.
Acceptance of Old Notes and
Delivery of New Notes.... The Company will accept for exchange any and all
Old Notes which are properly tendered in the
Exchange Offer prior to 5:00 p.m., New York City
time, on the Expiration Date. The New Notes issued
pursuant to the Exchange Offer will be delivered
promptly following the Expiration Date. See "The
Exchange Offer -- Terms of the Exchange Offer."
Use of Proceeds............ There will be no cash proceeds to the Company from
the exchange pursuant to the Exchange Offer.
Exchange Agent............. The Bank of New York.
Certain United States
Federal Income Tax
Consequences............. The Company believes that the exchange of the New
Notes for the Old Notes will not be treated as an
"exchange" for federal income tax purposes, and as
a result there will be no federal income tax
consequences to holders exchanging Old Notes for
New Notes pursuant to the Exchange Offer. See
"Certain United States Federal Tax Considerations."
THE NEW NOTES
General.................... The form and terms of the New Notes are the same as
the form and terms of the Old Notes (which they
replace) except that (i) the New Notes bear a
Series B designation, (ii) the New Notes have been
registered under the Securities Act and, therefore,
will not bear legends restricting the transfer
thereof, and (iii) the holders of the New Notes
will not be entitled to certain rights under the
Notes Registration Rights Agreement, including the
provisions providing for liquidated damages in
certain circumstances relating to the timing of the
Exchange Offer, which rights will terminate when
the Exchange Offer is consummated. See "The
Exchange Offer -- Purpose and Effect of the
Exchange Offer." The New Notes will evidence the
same debt as the Old Notes and will be entitled to
the benefits of the Indenture. See "Description of
the Notes." The Old Notes and the New Notes are
referred to herein collectively as the "Notes."
Aggregate Amount........... $445,000,000 aggregate principal amount at maturity
of 11 3/4% Series B Senior Discount Notes due 2008.
Maturity................... February 15, 2008.
Yield and Interest......... The New Notes were issued at a substantial discount
from their principal amount at maturity and there
will not be any payment of interest on the Notes
prior to August 15, 2003. For a discussion of the
U.S. federal income tax treatment of the New Notes
under the original issue discount rules, see
"Certain United States Federal Tax Considerations."
From and after February 15, 2003, the Notes will
bear interest, which will be
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<PAGE> 13
payable semi-annually in cash, at a rate of 11 3/4%
per annum on each February 15 and August 15,
commencing August 15, 2003.
Optional Redemption........ The New Notes are redeemable at the option of the
Company, in whole or in part, at any time on or
after February 15, 2003, at 105.875% of their
principal amount at maturity, plus accrued
interest, declining ratably to 100% of their
principal amount at maturity, plus accrued
interest, on or after February 15, 2006. In
addition, prior to February 15, 2001, the Company
may redeem up to 35% of the aggregate principal
amount at maturity of the Notes with the proceeds
of one or more Public Equity Offerings (as defined
herein) at 111.75% of their Accreted Value on the
redemption date; provided, however, that after any
such redemption at least $289.3 million aggregate
principal amount at maturity of the Notes remains
outstanding. See "Description of the
Notes -- Optional Redemption."
Change of Control.......... Upon a Change of Control (as defined herein), the
Company will be required to make an offer to
purchase the New Notes at a purchase price equal to
101% of their Accreted Value on the date of
purchase plus accrued interest, if any. There can
be no assurance that the Company will have
sufficient funds available at the time of any
Change of Control to make any required debt
repayment (including repurchases of the Notes). See
"Description of the Notes -- Repurchase of Notes
upon a Change of Control."
Ranking.................... The New Notes will be, as the Old Notes (which they
replace are), unsubordinated, unsecured
indebtedness of the Company, will rank pari passu
in right of payment with all unsubordinated
unsecured indebtedness of the Company and will be
senior in right of payment to all subordinated
indebtedness of the Company. At December 31, 1997,
after giving pro forma effect to the offering of
the Notes hereby, the Company would have had no
indebtedness other than the Notes. See "Risk
Factors -- Substantial Leverage; Possible Inability
to Service Indebtedness," "-- Holding Company
Structure; Structural Subordination of Notes," and
"-- Effective Subordination of Notes to Secured
Indebtedness."
Certain Covenants.......... The Indenture contains certain covenants that,
among other things, restrict the ability of the
Company and its Restricted Subsidiaries (as defined
herein) 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 Restricted
Subsidiaries, enter into transactions with
stockholders or affiliates or effect a
consolidation or merger. However, these limitations
are subject to a number of important qualifications
and exceptions. See "Risk Factors -- Restrictive
Covenants" and "Description of the
Notes -- Covenants."
RISK FACTORS
See "Risk Factors" for a discussion of certain factors relating to the
Company, its business, and an investment in the New Notes. Prior to tendering
any Old Notes in exchange for New Notes, holders of Old Notes should carefully
consider such risk factors in addition to the other information contained in
this Prospectus.
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<PAGE> 14
RISK FACTORS
Prior to tendering their Old Notes in the Exchange Offer, holders of Old
Notes should carefully consider the following risk factors in addition to the
other information contained in this Prospectus.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes, as set forth in the legend thereon, as a
consequence of the issuance of the Old Notes pursuant to exemptions from, or in
transactions not subject to, the registration requirements of the Securities Act
and applicable state securities laws. The Company does not currently anticipate
that it will register the Old Notes under the Securities Act. Based on
interpretations by the staff of the Commission set forth in no-action letters
issued to third parties, including Exxon Capital Holdings Corporation, SEC
No-Action Letter (available April 13, 1988) (the "Exxon Capital Letter"), Morgan
Stanley & Co. Incorporated, SEC No-Action Letter (available June 5, 1991) (the
"Morgan Stanley Letter"), and similar letters, the Company believes that the New
Notes issued pursuant to the Exchange Offer may be offered for resale, resold or
otherwise transferred by any holder thereof (other than any such holder which is
an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act) without compliance with the registration and prospectus delivery
provisions of the Securities Act provided that such New Notes are acquired in
the ordinary course of such holder's business and such Holder has no arrangement
with any person to participate in the distribution of such New Notes.
Notwithstanding the foregoing, each broker-dealer that receives New Notes for
its own account pursuant to the Exchange Offer must acknowledge that it will
deliver a prospectus in connection with any resale of such New Notes. The Letter
of Transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with any resale of New Notes received in exchange for Old Notes where such Old
Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities (other than Old Notes acquired directly
from the Company). The Company has agreed that, for a period of 180 days from
the Expiration Date, it will make this Prospectus available to any broker-dealer
for use in connection with any such resale. See "Plan of Distribution." Any
holder who tenders in the Exchange Offer for the purpose of participating in a
distribution of the New Notes cannot rely on the Morgan Stanley Letter or
similar letters and must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction. To the extent that Old Notes are tendered and accepted in the
Exchange Offer, the trading market, if any, for the Old Notes not so tendered
could be adversely affected. See "The Exchange Offer."
FAILURE TO FOLLOW EXCHANGE OFFER PROCEDURES COULD ADVERSELY AFFECT HOLDERS
Issuance of the New Notes in exchange for the Old Notes pursuant to the
Exchange Offer will be made only after a timely receipt by the Company of such
Old Notes, a properly completed and duly executed Letter of Transmittal or
Agent's Message and all other required documents. Therefore, holders of the Old
Notes desiring to tender such Old Notes in exchange for New Notes should allow
sufficient time to ensure timely delivery. The Company is under no duty to give
notification of defects or irregularities with respect to the tenders of Old
Notes for exchange. Old Notes that are not tendered or are tendered but not
accepted will, following the consummation of the Exchange Offer, continue to be
subject to the existing restrictions upon transfer thereof, and, upon
consummation of the Exchange Offer, certain registration rights under the Notes
Registration Rights Agreement will terminate. In addition, any holder of Old
Notes who tenders in the Exchange Offer for the purpose of participating in a
distribution of the New Notes may be deemed to have received restricted
securities, and if so, will be required to comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
resale transaction. Each broker-dealer that receives New Notes for its own
account in exchange for Old Notes, where such Old Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a Prospectus in connection
with any resale of such New Notes. See "Plan of Distribution." To the
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<PAGE> 15
extent that Old Notes are tendered and accepted in the Exchange Offer, the
trading market for untendered and tendered but unaccepted Old Notes could be
adversely affected. See "The Exchange Offer."
ABSENCE OF A PUBLIC MARKET COULD ADVERSELY AFFECT THE VALUE OF THE NOTES
Prior to this Exchange Offer, there has been no public market for the Old
Notes. The New Notes will constitute a new issue of securities with no
established trading market. The Company does not intend to apply for listing of
the New Notes on any securities exchange or for quotation through the Nasdaq
National Market. The Initial Purchasers have informed the Company that they
currently intend to make a market in the New Notes, but they are not obligated
to do so and may discontinue such market making at any time without notice.
Accordingly, no assurance can be given that an active public or other market for
the New Notes will develop for the New Notes. If a trading market does not
develop or is not maintained, holders of New Notes may experience difficulty in
reselling the New Notes or may be unable to sell them at all. If a public
trading market develops for the New Notes, future trading prices of such
securities will depend on many factors, including among other things, prevailing
interest rates, the Company's results of operations and the market for similar
securities and, depending on such factors, the New Notes may trade at a discount
from their principal amount.
LIMITED HISTORY OF OPERATIONS; HISTORICAL AND ANTICIPATED FUTURE NEGATIVE EBITDA
AND OPERATING LOSSES
The Company was formed in April 1997 and has generated operating losses and
negative cash flow from its limited operating activities to date. The Company's
primary activities have consisted of the procurement of governmental
authorizations, the acquisition of equipment and facilities, the hiring of
management and other key personnel, the raising of capital, the development,
acquisition and integration of OSS and other back office systems and the
negotiation of interconnection agreements. As a result of the Company's limited
operating history, prospective investors have limited operating and financial
data about the Company upon which to base an evaluation of the Company's
performance and an investment in the Notes. The Company's 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 its ability, among other things, to: (i) develop its operational support and
other back office systems; (ii) obtain state authorizations to operate as a CLEC
and any other required governmental authorizations; (iii) attract and retain an
adequate customer base; (iv) raise additional capital; (v) attract and retain
qualified personnel; and (vi) enter into and implement interconnection
agreements with ILECs. See "Business -- Business Strategy." There can be no
assurance that it will be able to achieve any of these objectives, generate
sufficient revenues to make principal and interest payments on the Notes or its
other indebtedness or compete successfully in the telecommunications industry.
The development of the Company's business and the deployment of its
services and systems will require significant capital expenditures, a
substantial portion of which will need to be incurred before the realization of
significant revenues. The Company expects to continue to generate negative
earnings before interest, income taxes, depreciation and amortization ("EBITDA")
while it emphasizes development, construction, and expansion of its
telecommunications services business and until the Company establishes a
sufficient revenue-generating customer base. From inception (April 22, 1997)
through December 31, 1997, the Company had operating losses of $3.6 million, net
losses of $4.3 million (after accrued redeemable preferred stock dividends) and
negative EBITDA of $3.6 million. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations." The Company expects that each
targeted market will generally produce negative EBITDA for at least two to three
years after operations commence in such market, and the Company expects to
experience increasing operating losses and negative EBITDA as it expands its
operations. There can be no assurance that the Company will achieve or sustain
profitability or generate sufficient EBITDA to meet its working capital and debt
service requirements, which could have a material adverse effect on the Company
and its ability to meet its obligations on the Notes. See "-- Substantial
Leverage; Possible Inability to Service Indebtedness."
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<PAGE> 16
SIGNIFICANT CAPITAL REQUIREMENTS; UNCERTAINTY OF ADDITIONAL FINANCING
The expansion and development of the Company's business and deployment of
its networks, services and systems will require significant capital to fund
capital expenditures, working capital, debt service and cash flow deficits. The
Company's principal capital expenditure requirements involve the purchase and
installation of collocation equipment, network switches and switch electronics
and network operations center expenditures. The Company estimates, based on its
current business plan, that its aggregate capital requirements (including
requirements to fund capital expenditures, working capital, debt service and
cash flow deficits) to fund the deployment and operation of its networks in all
Phase I markets to Positive Free Cash Flow will total between approximately $300
million and $350 million. Actual capital requirements may vary based upon the
timing and success of the Company's implementation of its business plan.
The Company believes, based on its current business plan, that the net
proceeds from the Initial Offering, together with funding expected to be
available from the Equity Commitments and the Lease Facility, will provide the
Company with sufficient financing to pre-fund its Phase I market deployment to
Positive Free Cash Flow. The actual amount and timing of the Company's future
capital requirements may differ materially from the Company's estimates as a
result of, among other things, the demand for the Company's services and
regulatory, technological and competitive developments (including additional
market developments and new opportunities) in the Company's industry. The
Company's revenues and costs are dependent upon factors that are not within the
Company's 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, possibly to a material degree, and
such variations are likely to affect the Company's future capital requirements.
The Company also expects that it will require additional financing (or require
financing sooner than anticipated) if: (i) the Company's development plans or
projections change or prove to be inaccurate; (ii) the amounts that actually
become available under the Lease Facility and the Equity Commitments are less
than the Company presently expects or are not received on a timely basis; (iii)
the Company engages in any acquisitions; or (iv) the Company accelerates
implementation of its Phase II network deployment or otherwise 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. Availability of amounts under the Lease
Facility and the Equity Commitments are contingent upon various conditions.
Drawdowns of the Equity Commitments require, among other things, the approval of
individual market business plans and operating budgets by the Fund Investors and
the Allegiance Board of Directors. See "Certain Transactions." The
implementation of the Lease Facility and the terms and conditions thereof remain
subject to a number of conditions, including negotiation of definitive
documents, completion of due diligence and receipt of AT&T Capital internal
approvals. See "Description of Certain Indebtedness."
There can be no assurance that the Company will be successful in raising
sufficient additional capital at all or on terms that it will consider
acceptable, that the terms of additional indebtedness are within the limitations
contained in the Company's financing agreements, including the Indenture, or
that the terms of such indebtedness will not impair the Company's ability to
develop its business. See "-- Restrictive Covenants." Failure to raise
sufficient funds may require the Company to modify, delay or abandon some of its
planned future expansion or expenditures, which could have a material adverse
effect on the Company and its ability to meet its obligations on the Notes. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
BUSINESS DEVELOPMENT AND EXPANSION RISKS; POSSIBLE INABILITY TO MANAGE GROWTH
The Company is in the early stages of its operations and has only recently
begun to deploy networks in its first three target markets. The success of the
Company will depend, among other things, upon the Company's ability to assess
potential markets, obtain required governmental authorizations, franchises and
permits, secure financing, provision new customers, implement interconnection
and collocation with 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, and develop a sufficient
customer base. The successful implementation of the Company's business plan will
result in rapid expansion of its operations and the
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<PAGE> 17
\provision of bundled telecommunications services on a widespread basis. Rapid
expansion of the Company's operations may place a significant strain on the
Company's management, financial and other resources.
The Company's ability to manage future growth, should it occur, will depend
upon its ability to develop efficient OSS and other back office systems, monitor
operations, control costs, maintain regulatory compliance, maintain effective
quality controls and significantly expand the Company's internal management,
technical, information and accounting systems and to attract, assimilate and
retain additional qualified personnel. See "-- Dependence on Key Personnel."
Failure of the Company to manage its future growth effectively could adversely
affect the expansion of the Company's customer base and service offerings. There
can be no assurance that the Company will successfully implement and maintain
such operational and financial systems or successfully obtain, integrate and
utilize the employees and management, operational 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 the Company's business
could have a material adverse effect on the Company and its ability to meet its
obligations on the Notes.
If the Company were unable to hire sufficient qualified personnel or
develop, acquire and integrate successfully its operational and information
systems, customers could experience delays in connection of service and/or lower
levels of customer service. Failure by the Company to meet the demands of
customers and to manage the expansion of its business and operations could have
a material adverse effect on the Company and its ability to meet its obligations
on the Notes.
DEPENDENCE ON KEY PERSONNEL
The Company is managed by a small number of key executive officers, most
notably Royce J. Holland, the Company's 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 the business of the Company and
its prospects. The Company believes that its success will depend in large part
on its ability to develop a large and effective sales force and its ability to
attract and retain highly skilled and qualified personnel. Most of the executive
officers of the Company, including the regional vice presidents of its operating
subsidiaries, do not have employment agreements, and the Company does not
maintain key person life insurance for any of its executive officers. Although
the Company has been successful in attracting and retaining qualified personnel,
the competition for qualified managers in the telecommunications industry is
intense and, accordingly, there can be no assurance that the Company will be
able to hire or retain necessary personnel in the future.
DEPENDENCE ON BILLING, CUSTOMER SERVICE AND INFORMATION SYSTEMS
Sophisticated back office information and processing systems are vital to
the Company's growth and its ability to monitor costs, bill customers, provision
customer orders and achieve operating efficiencies. The Company's plans for the
development and implementation of these OSS 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 operational solutions. There
can be no assurance that these systems will be successfully implemented on a
timely basis or at all or will perform as expected. Failure of these vendors to
deliver proposed products and services in a timely and effective manner and at
acceptable costs, failure of the Company to adequately identify all of its
information and processing needs, failure of the Company's related processing or
information systems, failure of the Company to effectively integrate such
products or services, or the failure of the Company to upgrade systems as
necessary could have a material adverse effect on the Company and its ability to
meet its obligations on the Notes. In addition, the Company's right to use these
systems is dependent 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 the Company.
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While the Company believes that its systems will be year 2000 compliant,
there can be no assurance until the year 2000 occurs that all systems will then
function adequately. Further, if the systems of the ILECs, long distance
carriers and others on whose services the Company depends or with whom the
Company's systems interface are not year 2000 compliant, it could have a
material adverse effect on the Company and its ability to meet its obligations
on the Notes.
SUBSTANTIAL LEVERAGE; POSSIBLE INABILITY TO SERVICE INDEBTEDNESS
As a result of the Initial Offering, the Company is highly leveraged. After
giving pro forma effect to the Initial Offering and the Equity Contribution, as
of December 31, 1997, the Company's aggregate outstanding indebtedness would
have been $242.3 million, its redeemable warrants would have been $8.2 million,
its redeemable preferred stock would have been $50.1 million and the Company's
stockholder's deficit would have been $4.3 million. The Company also expects to
have the ability to incur up to $100.0 million of additional indebtedness under
the Lease Facility. See "Selected Financial Data," "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources," "Description of Certain Indebtedness," and "Description of
the Notes." If a Liquidity Event has not occurred by August 13, 2004, the
Company may be required, subject to the covenants in the Indenture, to
repurchase the Fund Investors' and Management Investors' preferred and common
stock at the higher of fair market value and original cost plus accrued
dividends at 12% per annum, provided that any claim for payment will be
subordinated in right of payment to the Notes. In addition, to fund the
deployment of its Phase II markets and any future acquisitions, the Company will
be required to raise additional financing. See "-- Significant Capital
Requirements; Uncertainty of Additional Financing." The Indenture limits, but
does not prohibit, the incurrence of additional indebtedness by the Company. In
particular, the Indenture permits the Company and its subsidiaries to incur an
unlimited amount of indebtedness to finance the cost of equipment, inventory and
network assets. See "Description of the Notes -- Covenants."
The Company's high degree of leverage could have important consequences to
holders of Notes, including but not limited to: (i) impairing the Company's
ability to obtain additional financing for working capital, capital
expenditures, acquisitions or general corporate purposes; (ii) requiring the
Company to dedicate a substantial portion of its cash flow from operations to
the payment of principal and interest on its indebtedness, thereby reducing the
funds available to the Company for its operations and other purposes, including
acquisitions and investments in product development and capital spending; (iii)
placing the Company at a competitive disadvantage with those of its competitors
which are not as highly leveraged as the Company; (iv) impairing the Company's
ability to adjust rapidly to changing market conditions; and (v) making the
Company more vulnerable in the event of a downturn in general economic
conditions or in its business or of changing market conditions and regulations.
There can be no assurance that the Company will be able to meet its debt
service obligations. If the Company is unable to generate sufficient cash flow
or otherwise obtain funds necessary to make required payments, or if the Company
otherwise fails to comply with the various covenants in its debt obligations, it
would be in default under the terms thereof, which would permit the holders of
such indebtedness to accelerate the maturity of such indebtedness and could
cause defaults under other indebtedness of the Company. The Company's ability to
repay or to refinance its obligations with respect to its indebtedness will
depend on its 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 the Company's
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 the Company's business strategy, including
deployment of its networks and obtaining and retaining a significant number of
customers, and significant and sustained growth in the Company's cash flow are
necessary for the Company to be able to meet its debt service and working
capital requirements. There can be no assurance that the Company will
successfully implement its business strategy, that the anticipated results of
its strategy will be realized, or that the Company will be able to generate
sufficient cash flow from operating activities to meet its debt service
obligations and working capital
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requirements. See "Business -- Business Strategy." If the Company's cash flow
and capital resources are insufficient to fund its debt service and working
capital obligations, the Company may be forced to reduce or delay product
development or capital expenditures (including switch and network expenditures),
sell assets, or seek to obtain additional equity capital, or to refinance or
restructure its debt. A disposition of assets in order to make up for any
shortfall in the payments due on the Company's indebtedness could take place
under circumstances that might not be favorable to realizing the highest price
for such assets. There can be no assurance that the Company's cash flow and
capital resources will be sufficient for payment of principal of, and premium,
if any, and interest on, its indebtedness (including the Notes) in the future,
or that any such alternative measures would be successful or would permit the
Company to meet its debt service and working capital obligations. In addition,
because the Company's obligations under the Lease Facility are expected to bear
interest at floating rates, an increase in interest rates could adversely
affect, among other things, the Company's ability to meet its debt service
obligations. See "Description of Certain Indebtedness."
CONTROL BY VENTURE INVESTORS; POTENTIAL CONFLICTS OF INTEREST
The Fund Investors, through their significant equity ownership, have the
ability to control the direction and future operations of the Company. See
"Security Ownership of Certain Beneficial Owners and Management" and "Certain
Transactions." Certain decisions concerning the operations or financial
structure of the Company may present conflicts of interest between these
investors and the holders of the Notes. For example, if the Company encounters
financial difficulties or is unable to pay its debts as they mature, the
interest of these investors may conflict with those of the holders of Notes. In
addition, these investors may have an interest in pursuing acquisitions,
divestitures, financings or other transactions that, in their judgment, could
enhance their equity investment in the Company, even though such transactions
might involve increased risk to the holders of the Notes. In addition to their
investment in the Company, the Fund 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 engaged in business in areas in which the
Company operates). As a result, these investors have, and may develop,
relationships with businesses that are or may be competitive with the Company.
Conflicts may also arise in the negotiation or enforcement of arrangements
entered into by the Company and entities in which these investors have an
interest. In addition, the Company and these investors have agreed that such
investors are under no obligation to bring to the Company any investment or
business opportunities of which they become aware, even if such opportunities
are within the scope and objectives of the Company.
HOLDING COMPANY STRUCTURE; STRUCTURAL SUBORDINATION OF NOTES
The Company is a holding company and its principal assets consist of the
common stock of its operating subsidiaries. The Company will rely upon dividends
and other payments from its subsidiaries to generate the funds necessary to meet
its obligations, including the payment of principal of and interest on the
Notes. The subsidiaries, however, are legally distinct from the Company and such
subsidiaries will have no obligation, contingent or otherwise, to pay amounts
due pursuant to the Notes or to make funds available for such payment. The
Company's subsidiaries will not guarantee the Notes. The ability of the
Company's subsidiaries to make such payments to the Company will be subject to,
among other things, the availability of funds, the terms of such subsidiaries'
indebtedness and applicable state laws. Claims of creditors of the Company's
subsidiaries, including trade creditors, will generally have priority as to the
assets of such subsidiaries over the claims of the holders of the Company's
indebtedness, including the Notes. Accordingly, the Notes will be effectively
subordinated to the liabilities (including trade payables and indebtedness under
the Lease Facility) of the subsidiaries of the Company.
EFFECTIVE SUBORDINATION OF NOTES TO SECURED INDEBTEDNESS
The Notes will not be secured by any of the Company's or its subsidiaries'
assets. The Company's obligations under the Lease Facility will be secured by a
security interest in the capital stock of the subsidiaries of the Company that
are lessees under the Lease Facility. In the event that a default were to occur
with respect to any of the Company's secured indebtedness (including the Lease
Facility) and the holders
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thereof were to foreclose on the collateral, or in the event of a bankruptcy,
liquidation or reorganization of the Company, the holders of such indebtedness
would be entitled to payment out of the proceeds of their collateral prior to
any holders of general unsecured indebtedness, including the Notes,
notwithstanding the existence of an event of default with respect to the Notes.
Also, to the extent that the value of such collateral is insufficient to satisfy
such secured indebtedness, holders of amounts remaining outstanding on such
secured indebtedness would be entitled to share pari passu with holders of the
Notes with respect to any other assets of the Company. Such assets may not be
sufficient to pay amounts due on any or all of the Notes then outstanding. See
"Description of Certain Indebtedness." In addition, the Indenture permits the
Company to incur additional secured indebtedness, and such secured indebtedness
would have a prior claim over the Notes to the assets of the Company that secure
such indebtedness. See "Descriptions of the Notes -- Covenants."
RESTRICTIVE COVENANTS
The Lease Facility, the Indenture, and the agreements entered into in
connection with the Equity Commitments contain a number of covenants that will
limit the discretion of the Company's management with respect to certain
business matters. These covenants, among other things, restrict the ability of
the Company 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. See "Certain
Transactions," "Description of Certain Indebtedness," and "Description of the
Notes." In addition, the Lease Facility is expected to require the Company to
meet certain financial ratios.
A failure to comply with the covenants and restrictions contained in the
Lease Facility, the Indenture, or agreements relating to any subsequent
financing could result in an event of default under such agreements which could
permit acceleration of the related debt and acceleration of debt under other
debt agreements that may contain cross-acceleration or cross-default provisions,
and the commitments of the lenders to make further extensions under the Lease
Facility or such other agreements could be terminated. If the Company were
unable to repay its indebtedness to the lenders under the Lease Facility, such
lenders could proceed against the collateral securing such indebtedness as
described under "Description of Certain Indebtedness."
DIFFICULTIES IN IMPLEMENTING LOCAL AND ENHANCED SERVICES
The Company has begun, and plans to continue, to deploy high capacity
digital switches in the cities in which it will operate networks and plans
initially to rely on ILEC or CLEC facilities for certain aspects of
transmission. Subject to obtaining interconnection, this will enable the Company
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 the Company to purchase only the
origination and termination services it needs, thereby decreasing operating
expenses, there can be no assurance that such unbundling will be effected in a
timely manner and result in prices favorable to the Company. In addition, the
Company's ability to implement successfully its switched and enhanced services
will require the negotiation of resale agreements with ILECs and other CLECs and
the 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
decision creates uncertainty about the rules governing pricing, terms and
conditions of interconnection agreements, and could make negotiating and
enforcing such agreements
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more difficult and protracted and may require renegotiation of existing
agreements. See "-- Competition." The Supreme Court has granted a writ of
certiorari to review the Eighth Circuit decision. 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
the Company to provide local service to customers on a timely and competitive
basis. The FCC has recently created a task force to examine problems that have
slowed the development of local telephone competition. In addition, 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 there is adequate competition at the local level. A federal District Court
has recently held these provisions of the Telecommunications Act
unconstitutional, which decision is subject to appeal. See "-- Government
Regulation." The ILECs in the Company's markets are not yet permitted by the FCC
to offer long distance services and there can be no assurance that these ILECs
will be accommodating to the Company once they are permitted to offer long
distance service. If the Company is unable to obtain the cooperation of an ILEC
in a region, whether or not such ILEC has been authorized to offer long distance
service, the Company's ability to offer local services in such region on a
timely and cost-effective basis would be adversely affected.
A number of ILECs around the country have been contesting whether the
obligation to pay reciprocal compensation to CLECs should apply to local
telephone calls terminating to ISPs. The ILECs claim that this traffic is
interstate in nature and therefore should be exempt from compensation
arrangements applicable to local, intrastate calls. The FCC, however, has
determined on a number of occasions, most recently in its May 16, 1997 access
charge reform order, that calls to ISPs should be exempt from interstate access
charges and should be governed by local exchange tariffs. Currently, the state
commissions in Maryland, New York, Virginia, Arizona, Connecticut, Colorado,
Illinois, Michigan, Minnesota, Oregon, Washington, West Virginia and Texas have
ruled that reciprocal compensation arrangements do apply to ISP traffic. An
Associate Law Judge in Oklahoma ruled that reciprocal compensation arrangements
do not apply to ISP traffic. While an arbitrator in Texas had previously ruled
that reciprocal compensation arrangements do not apply to ISP traffic, the Texas
Public Utility Commission reversed the arbitrator's ruling on February 5, 1998,
when it unanimously ruled that Internet traffic is local and is therefore
subject to reciprocal compensation. However, the Texas Public Utility Commission
indicated that it would examine in the near future whether per-minute
compensation is the best way to handle Internet traffic in future contracts and
the New York Public Service Commission is continuing to look at this issue.
Disputes over the appropriate treatment of ISP traffic are pending in
California, Georgia and Massachusetts. The National Association of Regulatory
Utility Commissioners ("NARUC") adopted a resolution in favor of reciprocal
compensation for ISP traffic. The Company anticipates that ISPs will be among
its target customers, and adverse decisions in these proceedings could limit the
Company's ability to serve this group of customers profitably.
The profitability of the Company's Internet access services, and related
services such as Web site hosting, may be affected by its 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 its system from its "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 its 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. There can be no assurance that the Company 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 pending 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 the Company's ability to obtain
favorable peering terms.
The Company is 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
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complexities associated with providing these services. The Company will be
required to develop new products, services and systems and will need to develop
new marketing initiatives to sell these services.
The Company's switched services may not be profitable due to, among other
factors, lack of customer demand, inability to secure access to ILEC facilities
on acceptable terms, and competition and pricing pressure from the ILECs and
other CLECs. There can be no assurance that the Company will be able to
successfully implement its switched and enhanced services strategy.
Implementation of the Company's switched and enhanced services is also
dependent upon equipment manufacturers' ability to meet the Company's switch
deployment schedule. There can be no assurance that switches will be deployed on
the schedule contemplated by the Company or that, if deployed, such switches
will be utilized to the degree contemplated by the Company.
DEPENDENCE ON LEASED TRUNKING CAPACITY; FUTURE NEED TO OBTAIN PERMITS,
RIGHTS-OF-WAY, AND OTHER THIRD-PARTY AGREEMENTS
Under the Company's "smart build" strategy, the Company will initially seek
to lease from ILECs and other CLECs local fiber trunking capacity connecting the
Allegiance switch to particular ILEC central offices and then replace this
leased trunk capacity in the future with its own fiber on a "success basis" as
warranted by traffic volume growth. There can be no assurance that all such
required trunking capacity will be available to the Company on a timely basis or
on terms acceptable to the Company. The failure to obtain such leased fiber
could delay the Company's ability to penetrate certain market areas or require
it to make additional unexpected up-front capital expenditures to install its
own fiber and could have a material adverse effect on the Company and its
ability to meet its obligations on the Notes. If and when the Company seeks to
install its own fiber, the Company 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. There can be no assurance that the Company will be able
to obtain and maintain the franchises, permits and rights needed to implement
its network buildout on acceptable terms. The failure to enter into and maintain
any such required arrangements for a particular network may affect the Company's
ability to develop that network and may have a material adverse effect on the
Company. See "Business -- Network Architecture."
RISKS RELATING TO LONG DISTANCE BUSINESS
As part of its "one-stop shopping" offering of bundled telecommunications
services to its customers, the Company plans to offer long distance services to
its 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. The Company will initially rely on other carriers to provide
transmission and termination services for all of its long distance traffic. The
Company will need resale agreements with long distance carriers to provide it
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 the Company's future customers. In the event the Company
fails to meet its minimum volume commitments, it may be obligated to pay
underutilization charges and in the event it underestimates its need for
transmission capacity, the Company may be required to obtain capacity through
more expensive means.
COMPETITION
The telecommunications industry is highly competitive. In each of the
markets targeted by the Company, the Company 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
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also 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 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 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 ILEC
competitors such as the Company.
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 marketplace
such as AT&T Corp. ("AT&T"), MCI Communications Corporation ("MCI"), Sprint
Corporation ("Sprint"), and WorldCom, 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 to the Company. The
Company also competes with equipment vendors and installers, and
telecommunications management companies with respect to certain portions of its
business. Many of the Company's current and potential competitors have
financial, technical, marketing, personnel and other resources, including brand
name recognition, substantially greater than those of the Company, as well as
other competitive advantages over the Company.
The Telecommunications Act includes provisions which impose certain
regulatory requirements on all local exchange carriers, including ILEC
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.
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, marketing,
personnel and other 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 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 accompanied by increased pricing
flexibility for and relaxation of regulatory oversight of the ILECs.
To the extent the Company interconnects with and uses ILEC networks to
service its customers, the Company will be dependent upon the technology and
capabilities of the ILECs to meet certain telecommunications needs of the
Company's customers and to maintain its service standards, and the Company must
interface with the ILECs' legacy OSS systems in order to properly provision new
customers. The Telecommunications Act imposes interconnection obligations on
ILECs, but there can be no assurance that the Company will be able to obtain the
interconnection it requires at rates, and on terms and conditions, that permit
the Company to offer switched services that are both competitive and profitable.
See "-- Difficulties in Implementing Local and Enhanced Services." In the event
that the Company experiences difficulties in obtaining high quality, reliable
and reasonably priced services from the ILECs, the attractiveness of the
Company's services to its 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
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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. The Company will face competition from large carriers such as AT&T,
MCI, Sprint, and 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. See "-- Government Regulation."
The Internet services market is highly competitive and the Company expects
that competition will continue to intensify. The Company's 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 the Company.
The Company believes that the principal competitive factors affecting its
business operations are pricing levels and clear pricing policies, reliable
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, offered by others. Any such
reductions could adversely affect the Company.
The recent World Trade Organization ("WTO") agreement on basic
telecommunications services could increase the level of competition faced by the
Company. 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. 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. See "Business -- Competition."
A continuing trend toward consolidation, mergers, acquisitions and
strategic alliances in the telecommunications industry could also increase the
level of competition faced by the Company. In December 1996, for example,
WorldCom, a national long distance carrier, acquired MFS, and in January 1998
AT&T announced its intention to acquire Teleport Communications Group Inc. These
types of consolidations and alliances could put the Company at a competitive
disadvantage.
GOVERNMENT REGULATION
The Company's 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
the Company and its ability to meet its obligations on the Notes.
The FCC exercises jurisdiction over the Company with respect to interstate
and international services. Additionally, the Company files 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 the Company. On February 13, 1997, the United
States Court of Appeals for the District of Columbia Circuit stayed the FCC
order, and the Company is required to continue filing tariffs while this 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 interstate
services. While tariffs offered 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. In addition, the
Company must obtain (and has obtained through its 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.
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State regulatory commissions exercise jurisdiction over the Company to the
extent it provides intrastate services. As such a provider, the Company is
required to obtain regulatory authorization and/or file tariffs at state
agencies in most of the states in which it operates. If and when the Company
seeks to overbuild certain network segments, local authorities regulate the
Company's 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. See
"Business -- Regulation."
There can be no assurance that the FCC or state commissions will grant
required authority or refrain from taking action against the Company if it is
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 the Company 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 the Company and
its 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. There can be no assurance that
these changes will not have a material adverse effect upon the Company.
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 SBC
Decision has been stayed pending appeal. If the SBC Decision is upheld on
appeal, 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 Telecommunications 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.
In addition to requirements placed on ILECs, the Telecommunications Act
subjects the Company 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 $2.3 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 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
21
<PAGE> 26
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 and 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. 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.
To the extent the Company provides interexchange telecommunications
service, it is required to pay access charges to ILECs when it uses the
facilities of those companies to originate or terminate interexchange calls.
Also, as a CLEC, the Company provides 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 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 are expected to be
established sometime in 1998 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 have appealed the May 16th order. Those appeals have been consolidated
and transferred to the United States Court of Appeals for the Eighth Circuit
where they are currently pending.
NEED TO ADAPT TO TECHNOLOGICAL CHANGE
The telecommunications industry is subject to rapid and significant changes
in technology, with the Company relying on third parties for the development of
and access to new technology. The effect of technological changes on the
business of the Company cannot be predicted. The Company believes its future
success will depend, in part, on its ability to anticipate or adapt to such
changes and to offer, on a timely basis, services that meet customer demands.
There can be no assurance that the Company will obtain access to new technology
on a timely basis or on satisfactory terms. Any failure by the Company to obtain
new technology could have a material adverse effect on the Company.
ACQUISITION RELATED RISKS
The Company may, as part of its business strategy, acquire other businesses
that will complement its existing business. Management is 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. The
Company's ability to finance acquisitions may be constrained by, among other
things, its high degree of leverage following the Initial Offering. The Lease
Facility and the Indenture may significantly limit the Company's ability to make
acquisitions and to incur indebtedness in connection with acquisitions. Such
transactions commonly involve certain risks, including, among others: the
difficulty of assimilating the acquired operations and personnel; the potential
disruption of the Company's ongoing business and diversion of resources and
management time; the possible inability of management to maintain uniform
standards, controls, procedures and policies; the risks of entering markets in
which the Company has little or no direct prior experience; and
22
<PAGE> 27
the potential impairment of relationships with employees or customers as a
result of changes in management. There can be no assurance that any acquisition
will be made, that the Company will be able to obtain additional financing
needed to finance such acquisitions and, if any acquisitions are so made, that
the acquired business will be successfully integrated into the Company's
operations or that the acquired business will perform as expected. The Company
has no definitive agreement with respect to any acquisition, although from time
to time it has discussions with other companies and assesses opportunities on an
ongoing basis.
The Company 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 with those of
the Company. Joint venture partners may also be unable to meet their economic or
other obligations, thereby forcing the Company to fulfill these obligations.
SHARES ELIGIBLE FOR FUTURE SALES
The Company will have 96,524 shares of Common Stock outstanding, assuming
the conversion of its currently outstanding 12% Cumulative Convertible Preferred
Stock, par value $.01 per share (the "Preferred Stock"), and the exercise of the
Warrants, and the Company has an additional 5,000 shares of Common Stock
reserved for issuance under current and future employee stock options. All of
these shares of Common Stock will be "restricted securities" as that term is
defined under Rule 144 under the Securities Act and may not be sold other than
pursuant to an effective registration statement under the Securities Act or
pursuant to an exemption from such registration requirement. The shares of
Common Stock issuable upon conversion of the Preferred Stock and the shares
issuable upon exercise of the Warrants will also be entitled to registration
rights. See "Description of Capital Stock -- Registration Rights" and
"Description of the Warrants -- Certain Terms." Following an initial public
offering of the Common Stock, sales of a substantial number of shares of Common
Stock in the public market under Rule 144 or otherwise, or the perception that
such sales could occur, could adversely affect the prevailing market price of
the Common Stock.
ORIGINAL ISSUE DISCOUNT; POSSIBLE UNFAVORABLE TAX AND OTHER LEGAL CONSEQUENCES
FOR HOLDERS OF NOTES AND THE COMPANY
The Old Notes were issued at a substantial discount from their principal
amount at maturity. The New Notes are treated as a continuation of the Old Notes
for federal income tax purposes and New Notes will also be considered to have
been issued at a substantial discount. Although cash interest will not accrue on
the Notes prior to February 15, 2003, and there will be no payments of cash
interest on the Notes prior to August 15, 2003, original issue discount (the
difference between the stated redemption price at maturity and the issue price
of the Notes) has accrued from the issue date of the Old Note and will continue
to accrue with respect to the New Notes from the issue date of the Old Notes.
Original issue discount will be includable as interest income periodically
(including for periods ending prior to February 15, 2003) in a U.S. Holder's (as
defined in "Certain United States Federal Tax Considerations") gross income for
United States federal income tax purposes in advance of receipt of the cash
payments to which the income is attributable.
If a bankruptcy case under the U.S. Bankruptcy Code were to be commenced by
or against the Company after the issuance of the Notes, the claim of a holder of
Notes with respect to the principal amount thereof may be limited to an amount
equal to the sum of (i) the initial offering price and (ii) that portion of the
original issue discount that is not deemed to constitute "unmatured interest"
for purposes of the U.S. Bankruptcy Code. Any original issue discount that was
not amortized as of the time of any such bankruptcy filing would constitute
"unmatured interest."
RISKS REGARDING FORWARD LOOKING STATEMENTS
The Prospectus contains "forward-looking statements" (as such term is
defined in the Private Securities Litigation Reform Act of 1995), 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.
23
<PAGE> 28
Management wishes to caution the reader that these forward-looking statements,
such as the Company's plans and strategies, its anticipation of revenues from
designated markets, and statements regarding the development of the Company's
businesses, the markets for the Company's services and products, the Company's
anticipated capital expenditures, possible 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 risks facing the Company. Such risks include, but are not limited
to, the Company's ability to successfully market its services to current and new
customers, interconnect with ILECs, develop efficient OSS and other back office
systems, provision new customers, 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, all in a timely
manner, at reasonable costs and on satisfactory terms and conditions, as well as
regulatory, legislative and judicial developments that could 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 the Company or persons acting on its
behalf are expressly qualified in their entirety by such cautionary statements.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of their dates. The Company undertakes 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 net proceeds received by the Company from the Initial Offering were
approximately $240.7 million, after deducting estimated underwriting discounts
and commissions and other expenses payable by the Company.
The Company intends to use the net proceeds from the Initial Offering,
along with funding expected to be available from the Equity Commitments and the
Lease Facility, to fund the costs of deploying networks in all 12 Phase I
markets and the operation of those networks to Positive Free Cash Flow,
including the costs to develop, acquire and integrate the necessary OSS and
other back office systems. The Company's principal capital expenditure
requirements include the purchase and installation of digital switches,
transmission equipment collocated in ILEC central offices, customer premise
equipment, and the overbuilding of leased transmission facilities as traffic
volume growth makes it economically attractive.
As part of its strategy, the Company may make acquisitions and enter into
joint ventures, and a portion of the net proceeds from the Offering may be used
for such purposes. The Company has no definitive agreement with respect to any
acquisition or joint venture, although from time to time it has discussions with
other companies and assesses opportunities on an ongoing basis. The Company may
be required to obtain additional financing to complete its Phase I market
buildout if, among other reasons, the Company uses a portion of the proceeds
from the Initial Offering to fund acquisitions or to deploy networks in Phase II
or other attractive target markets, if the amounts that actually become
available under the Lease Facility and the Equity Commitments are less than the
Company presently expects or are not received on a timely basis, or if the
Company's plans or projections change or prove to be inaccurate. There can be no
assurance that such additional financing will be available on terms acceptable
to the Company or at all. See "Risk Factors -- Significant Capital Requirements;
Uncertainty of Additional Financing" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
The Exchange Offer is intended to satisfy certain of the Company's
obligations under the Notes Registration Rights Agreement. The Company will not
receive any cash proceeds from the issuance of the New Notes offered hereby. In
consideration for issuing the New Notes contemplated in this Prospectus, the
Company will receive Old Notes in like principal amount, the form and terms of
which are the same as the form and terms of the New Notes (which replace the Old
Notes), except as described herein.
24
<PAGE> 29
DIVIDEND POLICY
The Company has not paid any dividends since its inception and does not
anticipate declaring or paying cash dividends in the foreseeable future, as it
intends to retain future earnings, if any, for reinvestment in its business and
repayment of indebtedness. Any determination to declare or pay cash dividends
will be at the discretion of the Company's Board of Directors, will be subject
to compliance with the Company's debt financing arrangements and will depend on
the Company's financial condition, results of operations, capital requirements
and such other factors as the Company's Board of Directors considers relevant.
Certain covenants in the Indenture will prohibit or limit the ability of the
Company and its subsidiaries to declare or pay cash dividends. See "Description
of the Notes."
25
<PAGE> 30
CAPITALIZATION
The following table sets forth the cash and capitalization of the Company
as of December 31, 1997, and as adjusted to give effect to the Initial Offering
and the Equity Contribution. The Old Notes surrendered in exchange for the New
Notes will be retired and canceled and cannot be reissued. Accordingly, issuance
of the New Notes will not result in any increase or decrease in the indebtedness
of the Company. As such, no effect has been given to the Exchange Offer in this
capitalization table. This table should be read in conjunction with "Selected
Financial Data," "Management's Discussion and Analysis of Financial Condition
and Results of Operations," and the consolidated financial statements, including
the notes thereto, and other financial data contained elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
----------------------------
ACTUAL AS ADJUSTED
----------- ------------
(AUDITED) (UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents................................... $ 5,726,359 $266,106,709
=========== ============
Long-term debt(1):
Senior Notes, at accreted value(2)........................ $ -- $242,293,600
----------- ------------
Total long-term debt................................. -- 242,293,600
----------- ------------
Redeemable convertible preferred stock, $.01 par value,
95,000 shares authorized, issued and outstanding(3)....... 30,455,214 50,125,114
Redeemable warrants(2)...................................... -- 8,183,550
Stockholder's deficit:
Common stock, $.01 par value per share, 100,001 shares
authorized (101,524, as adjusted), 1 share issued and
outstanding(3)......................................... 100 100
Accumulated deficit....................................... (4,338,000) (4,338,000)
----------- ------------
Total stockholder's deficit.......................... (4,337,900) (4,337,900)
----------- ------------
Total capitalization.............................. $26,117,314 $296,264,364
=========== ============
</TABLE>
- ---------------
(1) Does not reflect any of the up to $100 million of financing that could
become available under the Lease Facility. See "Description of Certain
Indebtedness."
(2) Of the $250,477,150 gross proceeds from the issuance of the Units,
$242,293,600 was allocated to the initial accreted value of the Old Notes,
and $8,183,550 has been allocated to the estimated fair value of the
Warrants. The Warrants may be required to be redeemed by the Company for
cash upon the occurrence of a Repurchase Event, as defined in the provisions
of the Warrant Agreement. No assurance can be given that the value allocated
to the Warrants will be indicative of the price at which the Warrants may
actually trade.
(3) As adjusted includes the Equity Contribution. Future drawdowns of the Equity
Commitments are contingent upon a number of conditions, including the
approval of individual market business plans and operating budgets by the
Fund Investors and the Company's Board of Directors. If a Liquidity Event
has not occurred by August 13, 2004, the Company may be required, subject to
the covenants in the Indenture, to repurchase the Fund Investors' and
Management Investors' preferred and common stock at the higher of fair
market value and original cost plus accrued dividends at 12% per annum,
provided that any claim for payment will be subordinated in right of payment
to the Notes. See "Certain Transactions."
26
<PAGE> 31
SELECTED FINANCIAL DATA
The selected consolidated financial data presented below as of December 31,
1997, and for the period from inception (April 22, 1997) to 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.
Operating results for this period are not necessarily indicative of the results
that may be expected for the entire year.
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 limited operating activities to date. As a
result of the Company's limited operating history, prospective investors have
limited operating and financial data about the Company upon which to base an
evaluation of the Company's performance and an investment in the Notes. 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>
PERIOD FROM INCEPTION
(APRIL 22, 1997) THROUGH
DECEMBER 31, 1997
---------------------------
<S> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................................................... $ 403
Operating expenses:
Technical................................................. 151,269
Selling, general and administrative....................... 3,425,912
Depreciation and amortization............................. 12,639
-----------
Total operating expenses................................ 3,589,820
-----------
Loss from operations........................................ (3,589,417)
Interest income............................................. 111,417
-----------
Net loss.................................................... $(3,478,000)
Accrued redeemable preferred stock dividends................ (860,000)
-----------
Net loss applicable to common stock......................... $(4,338,000)
===========
Net loss per common share................................... $(4,338,000)
===========
FINANCIAL DATA:
EBITDA(1)................................................... $(3,576,778)
Capital expenditures........................................ 23,912,659
Ratio of earnings to fixed charges(2)....................... --
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 5,726,359
Property and equipment, net................................. 23,900,020
Total assets................................................ 30,047,014
Redeemable convertible preferred stock(3)................... 30,455,214
Stockholder's deficit....................................... (4,337,900)
</TABLE>
- ---------------
(1) EBITDA represents earnings before interest, income taxes, depreciation and
amortization. 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.
(2) 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 interest (estimated to be 1/3 of such expense).
The Company's earnings for the period from inception (April 22, 1997)
through December 31, 1997, were insufficient to cover fixed charges by
$3,478,000. After giving pro forma effect to the increase in interest
expense resulting from the Offering as of the beginning of such period,
earnings would have been insufficient to cover fixed charges by $26,023,119.
(3) If a Liquidity Event has not occurred by August 13, 2004, the Company may be
required, subject to the covenants in the Indenture, to repurchase the Fund
Investors' and Management Investors' preferred stock at the higher of fair
market value and original cost plus accrued dividends at 12% per annum,
provided that any claim for payment will be subordinated in right of payment
to the Notes.
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<PAGE> 32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with the consolidated
financial statements and the notes thereto contained elsewhere in this
Prospectus. Certain information contained in the discussion and analysis set
forth below and elsewhere in this Prospectus, including information with respect
to the Company's plans and strategy for its business and related financing,
includes forward-looking statements that involve risk and uncertainties. See
"Risk Factors" for a discussion of important factors that could cause actual
results to differ materially from the results described in or implied by the
forward-looking statements contained herein.
OVERVIEW
Allegiance seeks to be a premier provider of telecommunications services to
business, government and other institutional users in major metropolitan areas
across the United States. As a CLEC, Allegiance anticipates offering an
integrated set of telecommunications products and services including local
exchange, local access, domestic and international long distance, enhanced
voice, data and a full suite of Internet services. 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 commitment of $100 million has been provided
by the Management Investors and the Fund Investors.
The Company has generated only nominal revenues to date. 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 OSS, acquiring
equipment and facilities and negotiating interconnection agreements. 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. As a result of
its development activities, the Company has experienced significant operating
losses and negative EBITDA to date. Although the Company is currently deploying
networks in six Phase I markets, New York City, Dallas, Atlanta, Chicago, Los
Angeles and San Francisco, with initial facilities-based service scheduled to
begin in the first three of these markets in March and April of 1998, the
Company expects to continue to experience increasing operating losses and
negative EBITDA as it expands its operations. See "Risk Factors -- Development
Stage Company; Limited History of Operations; Historical and Anticipated Future
Negative EBITDA and Operating Losses."
As a result of the Company's limited operating history, prospective
investors have limited operating and financial data about the Company upon which
to base an evaluation of the Company's performance and an investment in the
Notes.
FACTORS AFFECTING FUTURE OPERATIONS
Revenues
Allegiance expects to generate most of its revenues from sales to end user
customers in the business, government, and other institution market segments,
but may augment this core revenue source by selectively supplying wholesale
services including equipment collocation and facilities management services to
ISPs. Allegiance plans to deploy its sales teams in areas where the Company 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 currently 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). Allegiance believes that it will be able to generate
significantly higher gross margins by providing local exchange, local access and
long distance services using its own facilities than could be obtained by
reselling such services.
Allegiance will seek to price its services competitively in relation to
that of the ILECs and may offer combined service discounts designed to give
customers incentives to buy a portfolio of services through the
28
<PAGE> 33
Company. Although pricing will be an important part of the Company's strategy,
management believes that, especially for small to medium-sized business
customers, customer relationships, customer care, "one stop shopping" and
consistent quality will be the key to generating customer loyalty. During the
past several years, market prices for many telecommunications services have been
declining, which is a trend that the Company believes will likely continue. This
decline will have a negative effect on the Company's gross margin that may not
be offset completely by savings from decreases in the Company's cost of
services.
Current industry statistics demonstrate that there is significant churn of
customers within the industry, and the Company believes that the churn is
especially high when customers are only buying long distance services from a
carrier or when customers are buying resold services. Allegiance believes that
by offering LAN interconnection, frame relay, Internet services, ISDN, DSL and
other enhanced services not generally available from the ILECs (or available
only at high prices) in conjunction with traditional local and local distance
services and providing superior customer care, it will be in a position to
minimize customer churn.
Operating Expenses
The Company expects that its primary operating expenses will consist of
cost of services and selling, general and administrative expenses.
Cost of Services. Under its "smart build" strategy, Allegiance plans to
deploy digital switching platforms with local and long distance capability and
initially lease fiber trunking capacity from the ILECs and other CLECs to
connect the Company's switch with its transmission equipment collocated in ILEC
central offices. Allegiance will lease unbundled copper loop lines and high
capacity digital lines from the ILECs to connect the Company's customers and
other carriers' networks to the Company's network. Allegiance plans to lease
capacity or overbuild specific network segments as economically justified by
traffic volume growth. In addition, Allegiance expects to increase the capacity
of its switches, and may add additional switches, in a market as demand
warrants.
In October 1997, the Company entered into a five-year general agreement
with Lucent establishing terms and conditions for the purchase of Lucent
products, services and licensed materials. The agreement includes a three-year
exclusivity commitment for the purchase of products and services related to new
switches. The agreement contains no minimum purchase requirements.
The Company expects switch site lease costs will be a significant part of
the Company's ongoing cost of services. For use of their central offices for
collocation, ILECs typically charge both a start-up fee as well as a monthly
recurring fee. 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. Collocation costs are also
expected to be a significant part of the Company's network development and
ongoing cost of services. The Company will be required to invest a significant
amount of funds to develop the central office collocation sites and to deploy
the transmission and distribution electronics. The Company believes that in most
of the markets it plans to enter there are multiple carriers in addition to the
ILEC from which it could lease trunking capacity. The Company expects that the
costs associated with these leases will increase with customer volume and will
be a significant part of the Company's ongoing cost of services.
In order to enter a market, Allegiance must enter into an interconnection
agreement with the ILEC to make ubiquitous calling available to its customers.
Typically these agreements set the cost per minute to be charged by each party
for the calls which have traversed between each carrier's network. These costs
will grow in proportion to the Company's customers outbound call volume and are
expected to be a major portion of the Company's cost of services. However, the
Company does expect to generate increased revenue from the ILECs as the
Company's customers inbound calling volume increases. To the extent the
Company's customers' outbound call volume is equivalent to their inbound call
volume, the Company expects that its interconnection costs paid to the ILECs
will be substantially offset by the interconnection revenues received from the
ILECs.
The Company will enter into resale agreements with long distance carriers
to provide the Company 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. In the event the Company fails to meet its
minimum volume commitments, it may be obligated to pay underutilization charges
and in the event it
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underestimates its need for transmission capacity, the Company may be required
to obtain capacity through more expensive means. These costs will increase as
the Company's customers' long distance calling volume increases, and the Company
expects that these costs will be a significant portion of its cost of long
distance services. As traffic on specific routes increases, the Company may
lease long distance trunk capacity.
Selling, General and Administrative Expenses. The Company's selling,
general and administrative expenses will include its infrastructure costs,
including selling and marketing costs, customer care, billing, corporate
administration, personnel and network maintenance.
The Company plans to employ a large direct sales force in each market and
to build a national sales force as the Company grows. To attract and retain a
highly qualified sales force, the Company plans to offer its sales and customer
care personnel a compensation package emphasizing commissions and stock options.
The Company expects to incur significant selling and marketing costs as it
continues to expand its operations. In addition, Allegiance plans to offer sales
promotions to win customers, especially in the first few years as its
establishes its market presence.
Allegiance is currently developing tailored systems and procedures for OSS
and other back office systems that are required to enter, schedule, provision,
track a customer order from point of sale to the installation and testing of
service and that will include or interface with trouble management, inventory,
billing, collection and customer care service systems. Along with the
development cost of the systems, the Company will also incur ongoing expenses
for customer care and billing. As the Company's strategy stresses the importance
of personalized customer care, the Company expects that its customer care
department will become a larger part of the Company's ongoing administrative
expenses. The Company also expects billing costs to increase as its number of
customers, and the call volume, increases. Billing is expected to be a
significant part of the Company's ongoing administrative expenses.
Allegiance will incur other costs and expenses, including the costs
associated with the maintenance of its network, administrative overhead, office
leases and bad debt. The Company expects that these costs will grow
significantly as its expands its operations and that administrative overhead
will be a large portion of these expenses during the start-up phase of the
Company's business. However, the Company expects these expenses to become
smaller as a percentage of the Company's revenue as the Company builds its
customer base.
RESULTS OF OPERATIONS
From its inception on April 22, 1997 through December 16, 1997, the Company
was in the development stage of operations. Its principle activities during that
period included developing its business plans, raising capital, hiring
management and other key personnel, working on the design and development of its
local exchange telephone networks and OSS and negotiating interconnection
agreements. From April 30, 1997 through December 31, 1997, the Company's
operations resulted in a $4.3 million net loss (after accrued redeemable
preferred stock dividends). As of December 31, 1997, the Company generated only
nominal revenues.
LIQUIDITY AND CAPITAL RESOURCES
Allegiance plans to establish networks in 24 Tier I U.S. markets. The
Company plans to deploy its networks principally in two phases of development,
each to contain 12 major U.S. metropolitan markets.
The development of the Company's business and deployment and start-up of
its networks in these markets and the establishment of reliable OSS will require
significant capital to fund capital expenditures, working capital, debt service
and cash flow deficits. The Company's principal capital expenditure requirements
include the purchase and installation of digital switches, transmission
equipment collocated in ILEC central offices, and customer premise equipment,
the development of efficient OSS and other automated back office systems, and
the overbuilding of leased transmission facilities as traffic volume growth
makes it economically attractive. Additional capital will be required for office
space, switch site, and collocation space buildout at ILEC central offices,
corporate overhead and personnel and the development, acquisition and
integration of the Company's back office systems. Future overbuilds of leased
transmissions facilities and potential strategic acquisitions may increase
capital requirements, although cash requirements may be reduced if network
expansions are accomplished over a longer time frame or market penetration rates
are less than expected.
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Allegiance's financing plan is predicated on the pre-funding of each
market's expansion to Positive Free Cash Flow (operating cash flow from a market
sufficient to fund such market's operating costs and capital expenditures). This
approach is designed to allow the Company to be opportunistic and raise capital
on more favorable terms and conditions.
The Company currently estimates that its cumulative cash requirements to
reach Positive Free Cash Flow for the 12 Phase I markets will be between
approximately $300 million and $350 million. The Company has already commenced
its Phase I network deployment with the purchase of switches and the initiation
of network development in New York City, Dallas, Atlanta, Chicago, Los Angeles
and San Francisco and it expects to begin offering facilities-based services in
the first three of these markets in March and April of 1998. As part of this
effort, in October 1997, the Company acquired two Lucent Series 5ESS(R)-2000
digital switches in New York City and Atlanta and certain furniture and fixtures
in Dallas from US ONE Communications, Inc. for an aggregate purchase price of
$19.3 million. The Company has also purchased such a switch for the Dallas
market which it expects to have installed before the end of April 1998. The cost
of this switch and related equipment and installation will be approximately $7.0
million.
The Company believes, based on its current business plan, that the net
proceeds from the Offering, together with funding expected to be available from
the Equity Commitments and the Lease Facility, will provide the Company with
sufficient financing to pre-fund its Phase I market deployment to Positive Free
Cash Flow. The actual amount and timing of the Company's future capital
requirements may differ materially from the Company's estimates as a result of,
among other things, the demand for the Company's services and regulatory,
technological and competitive developments (including additional market
developments and new opportunities) in the Company's industry. The Company also
expects that it will require additional financing (or require financing sooner
than anticipated) if: (i) the Company's development plans or projections change
or prove to be inaccurate; (ii) the amounts that actually become available under
the Lease Facility and the Equity Commitments are less than the Company
presently expects or are not received on a timely basis; (iii) the Company
engages in any acquisitions; or (iv) the Company accelerates implementation of
its Phase II network deployment or otherwise 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. See "Risk Factors -- Significant
Capital Requirements; Uncertainty of Additional Financing."
The Company will be required to seek additional financing to fund its
deployment and operation of networks in the Phase II markets to Positive Free
Cash Flow. There can be no assurance that such financing will be available on
terms acceptable to the Company or at all.
The Equity Commitments consist of commitments aggregating $95 million from
the Fund Investors and $5 million from the Management Investors. Drawdowns of
these Equity Commitments are contingent upon certain conditions, including the
approval of individual market business plans and operating budgets by the Fund
Investors and the Allegiance Board of Directors. See "Certain Transactions." As
of March 31, 1998, approximately $49 million had been drawn down to fund the
Company's start-up costs and ongoing network development in the Dallas, New York
City and Atlanta markets. If a Liquidity Event has not occurred by August 13,
2004, the Company may be required, subject to the covenants in the Indenture, to
repurchase the Fund Investors' and Management Investors' preferred and common
stock at the higher of fair market value and original cost plus accrued
dividends at 12% per annum, provided that any claim for payment will be
subordinated in right of payment to the Notes.
AT&T Capital and the Company are in the process of negotiating the Lease
Facility for up to $100.0 million of lease financing for the acquisition of
digital switches, software, electronics and associated transmission equipment.
The implementation of the Lease Facility and the terms and conditions thereof
remain subject to a number of conditions, including negotiation of definitive
documents, completion of due diligence and receipt of AT&T Capital internal
approvals.
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
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necessary OSS and other back office systems, as well as the number of customers
and the services for which they subscribe, the nature and penetration of new
services that may be offered by the Company, regulatory changes and changes in
technology), actual costs and revenues will vary from expected amounts, possibly
to a material degree, and such variations are likely to affect the Company's
future capital requirements. Accordingly, there can be no assurance that the
Company's actual capital requirements will not exceed the anticipated amounts
described above. Further, the exact amount of the Company's future capital
requirements will depend upon many factors, including the cost of the
development of its networks in each of its markets, the extent of competition
and pricing of telecommunications services in its markets, and the acceptance of
the Company's services. Also, the Company expects that the expansion into
additional markets will require additional financing, which may include
commercial bank borrowing, additional vendor financing, or the public or private
sale of equity or debt securities. There can be no assurance that the Company
will be successful in raising sufficient additional capital at all or on terms
acceptable to the Company. See "Risk Factors -- Significant Capital
Requirements; Uncertainty of Additional Financing."
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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 commitment of $100 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 established a framework for CLECs to acquire the UNEs
from the ILECs that are necessary for the cost-effective provision of service.
As such, the Telecommunications Act will enable the Company to deploy
efficiently its network infrastructure by initially leasing only the necessary
network elements from the ILEC and, over time, replacing these leased facilities
with owned infrastructure as economically justified by traffic volume growth.
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 OSS; (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 OSS
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 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 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 and costs of
upgrading legacy systems are often prohibitive for companies whose existing
systems support a large number of customers with ongoing service.
Allegiance plans to deploy networks in 24 Tier I 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 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.
The Company plans to deploy its networks principally in two phases of
development. Phase I is to offer services in 12 of the largest metropolitan
areas in the U.S., which the Company believes include approximately 26.0% of the
nation's total non-residential access lines. Allegiance is currently deploying
networks in six Phase I markets: New York City, Dallas, Atlanta, Chicago, Los
Angeles and San Francisco, with initial facilities-based service scheduled to
begin in the first three of these markets in March and April of 1998. In each of
these markets, the Company is using a Lucent Series 5ESS(R)-2000 digital switch,
which provides local and long distance functionality. Pending securing
additional financing, the Company intends to begin its Phase II network
buildout, which will encompass an additional 12 major U.S. metropolitan markets.
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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
OSS, 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 expected 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 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. Thereafter,
Allegiance plans to lease capacity or overbuild specific network segments as
economically justified by traffic volume growth. Allegiance expects that this
"smart build" strategy will allow entry into a new market in a six- to
nine-month time frame as compared to 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
acquire unbundled network elements. The Company believes that this "smart build"
approach has the additional advantage of reducing up-front capital requirements.
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"
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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 using its own
facilities should generate significantly higher gross network margins than could
be obtained by reselling such services. As a result, Allegiance plans to deploy
its marketing activities in 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
through direct sales, a full suite of turn-key product offerings and
personalized customer care. Management believes that its targeted small and
medium-sized business customers have been neglected by the ILECs with respect to
these functions. 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 OSS, 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 a team of engineering and
information technology professionals experienced in the CLEC industry. This team
will work to develop, with the assistance of key third party vendors, OSS 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
intends to work actively toward "electronic bonding" between the Allegiance OSS
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
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access and content) purchased by non-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 priced services rapidly and accurately, and to issue
concise, accurate integrated billing statements.
Allegiance plans to deploy networks in 24 Tier I 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
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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 ("WAN") 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.
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 WANs, 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,
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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 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 OSS 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:
[INFORMATION REQUIREMENTS 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, OSS 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 is being 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 ILEC's to create standards
for automation of these interfaces.
Network Element Administration. The Company has identified a network
element administration software solution, and it is currently negotiating a
contract to license this product. Subsequent to obtaining a license, the Company
will work to develop 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 OSS 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 OSS and those of the ILECs,
which would permit creation of service requests on-line.
NETWORK DEPLOYMENT
Allegiance plans to deploy networks in 24 Tier I 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. The Company plans to deploy its
networks principally in two phases of development, with Phase I to offer service
in 12 of the largest U.S. metropolitan markets, which the Company believes
include approximately 26.0% of the nation's non-residential access lines. Phase
II will offer service in an additional 12 major U.S. metropolitan markets, which
the Company believes include approximately an additional 18.7% of total U.S.
non-residential access lines. Allegiance is currently deploying its networks in
six Phase I markets: New York City, Dallas, Atlanta, Chicago, Los Angeles and
San Francisco. The following table sets forth the markets targeted by the
Company in Phase I 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 and the existence of specific
market opportunities,
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<PAGE> 45
such as acquisitions, and no assurance can be given that the Company will deploy
networks in each such market:
PHASE I MARKET SIZE AND BUILDOUT SCHEDULE
<TABLE>
<CAPTION>
ESTIMATED TOTAL NON- % OF TOTAL U.S. NON- PROJECTED INITIAL FACILITIES-
MARKET RESIDENTIAL ACCESS LINES(1) RESIDENTIAL ACCESS LINES(2) BASED SERVICE DATE
------ --------------------------- --------------------------- -----------------------------
(THOUSANDS)
<S> <C> <C> <C>
New York City................. 3,298(3) 6.7%(3) 1Q, 1998 (3)
Dallas, TX.................... 867(4) 1.8%(4) 2Q, 1998
Atlanta, GA................... 612 1.2% 2Q, 1998
Fort Worth, TX................ --(4) --(4) 3Q, 1998
Chicago, IL................... 1,951 4.0% 3Q, 1998
Northern New Jersey........... --(3) --(3) 3Q, 1998
Los Angeles, CA............... 3,430(5) 7.0%(5) 3Q, 1998
San Francisco, CA............. 2,148(6) 4.4%(6) 4Q, 1998
Boston, MA.................... 649 1.3% 4Q, 1998
Long Island, NY............... --(3) --(3) 1999
Washington, D.C............... 871 1.8% 1999
Orange County, CA............. --(5) --(5) 1999
------ -----
Total............... 13,826(6) 28.2%(6)
</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.
(3) Data for New York City also includes Northern New Jersey and Long Island,
NY. The Company began providing facilities-based services in New York City
on March 27, 1998.
(4) Data for Dallas, TX also includes Fort Worth, TX.
(5) Data for Los Angeles, CA also includes Orange County, CA.
(6) Data for San Francisco, CA also includes San Jose, CA and Oakland, CA, both
of which are Phase II markets.
The Company believes, based on its current business plan, that the net
proceeds from the Offering, together with funding expected to be available from
the Equity Commitments and the Lease Facility, will provide the Company with
sufficient financing to pre-fund its Phase I market deployment to Positive Free
Cash Flow. The actual amount and timing of the Company's future capital
requirements may differ materially from the Company's estimates as a result of,
among other things, the demand for the Company's services and regulatory,
technological and competitive developments (including additional market
developments and new opportunities) in the Company's industry. The Company also
expects that it will require additional financing (or require financing sooner
than anticipated) if: (i) the Company's development plans or projections change
or prove to be inaccurate; (ii) the amounts that actually become available under
the Lease Facility and the Equity Commitments are less than the Company
presently expects or are not received on a timely basis; (iii) the Company
engages in any acquisitions; or (iv) the Company accelerates implementation of
its Phase II network deployment or otherwise 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 additional financing will be
available on terms acceptable to the Company or at all. See "Risk
Factors -- Significant Capital Requirements; Uncertainty of Additional
Financing" and "Management's Discussion and Analysis of Operating
Results -- Liquidity and Capital Resources."
Assuming the Company secures the financing necessary to pre-fund the
deployment of networks in the Phase II markets to Positive Free Cash Flow, the
following table sets forth the markets targeted by the Company in Phase II 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 and the
41
<PAGE> 46
existence of specific market opportunities, such as acquisitions, and no
assurance can be given that the Company will deploy networks in each such
market:
PHASE II MARKET SIZE AND BUILDOUT SCHEDULE
<TABLE>
<CAPTION>
ESTIMATED TOTAL NON- % OF TOTAL U.S. NON-
MARKET RESIDENTIAL ACCESS LINES(1) RESIDENTIAL ACCESS LINES(2) PROJECTED INITIAL SERVICE DATE
------ --------------------------- --------------------------- ------------------------------
(THOUSANDS)
<S> <C> <C> <C>
San Jose, CA............... --(3) --(3) 1999-2000
Oakland, CA................ --(3) --(3) 1999-2000
San Diego, CA.............. 790 1.6% 1999-2000
Houston, TX................ 765 1.6% 1999-2000
Philadelphia, PA........... 1,754 3.6% 2000
Detroit, MI................ 821 1.7% 2000
Denver, CO................. 632 1.3% 2000
Baltimore, MD.............. 639 1.3% 2000
Seattle, WA................ 779 1.6% 2000
Miami, FL.................. 769 1.6% 2000
St. Louis, MO.............. 449 0.9% 2000
Cleveland, OH.............. 654 1.3% 2000
----- ----
Total............ 8,052(3) 16.5%(3)
</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.
(3) Data for San Jose, CA and Oakland, CA is included in data for San Francisco,
CA in Phase I above.
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.
NETWORK ARCHITECTURE
Allegiance is deploying Lucent Series 5ESS(R)-2000 digital switches in New
York City, Dallas, Atlanta, Chicago, Los Angeles and San Francisco. 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
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<PAGE> 47
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:
[ALLEGIANCE NETWORK 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 when it experiences sufficient traffic volume
growth between its switch and specific ILEC central offices.
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 and New York, where
the Company has obtained certificates to provide
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<PAGE> 48
local exchange and intrastate toll service as well as in Georgia where the
Company was granted a certificate to provide local exchange service and in
California where the Company was granted authority to provide intrastate toll
service. Applications for other such authority are pending in California (for
local exchange service), Georgia (for intrastate toll and operator assistance
services), Illinois, Maryland and the District of Columbia; and the Company
intends to file similar applications in the near future for Massachusetts, New
Jersey and Virginia.
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 Communications, 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 circuits, a significant joint implementation effort must be made
with the ILEC in order to establish operationally efficient and reliable traffic
interchange arrangements. Such interchange arrangements must include those
between the new entrant's network and the facilities of other service providers
as well as public service agencies. For example, Allegiance is currently working
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 has begun to meet 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 interchange 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
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<PAGE> 49
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 decision creates
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
decision.
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 notices 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 ILECs and CLECs to complete calls
originated by competing carriers 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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<PAGE> 50
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 $2.3 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. 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.
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 Act permit a RBOC to
enter the long distance market in its traditional service area 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 SBC
Decision has been stayed pending appeal. If the SBC Decision is upheld on
appeal, however, the RBOCs would be able to provide such in-region services
immediately without satisfying the statutory conditions. The Company believes
that the factual assumptions and legal reasoning in
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<PAGE> 51
the SBC Decision are erroneous and that the decision will likely be reversed on
appeal, although there can be no assurance of this outcome. If the SBC Decision
is upheld on appeal, it 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 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 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 decrease
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 are
expected to be established sometime in 1998 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 have appealed the May 16th order. Those appeals have
been consolidated and transferred to the United States Court of Appeals for the
Eighth Circuit where they are currently pending.
A number of ILECs around the country have been contesting whether the
obligation to pay reciprocal compensation to CLECs should apply to local
telephone calls terminating to ISPs. The ILECs claim that this
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<PAGE> 52
traffic is interstate in nature and therefore should be exempt from compensation
arrangements applicable to local, intrastate calls. The FCC, however, has
determined on a number of occasions, most recently in its May 16, 1997, access
charge reform order, that calls to ISPs should be exempt from interstate access
charges and should be governed by local exchange tariffs. Currently, the state
commissions in Maryland, New York, Virginia, Arizona, Connecticut, Colorado,
Illinois, Michigan, Minnesota, Oregon, Washington, West Virginia and Texas have
ruled that reciprocal compensation arrangements do apply to ISP traffic.
However, certain of these rulings are subject to appeal. Disputes over the
appropriate treatment of ISP traffic are pending in California, Georgia, and
Massachusetts. The Company anticipates that ISPs will be among its target
customers, and adverse decisions in these proceedings could limit the Company's
ability to serve 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 and
New York; as well as in Georgia where the Company was granted a certificate to
provide local exchange service and in California where the Company was granted
authority to provide intrastate toll service. Applications for other such
authority are pending in California (for local exchange service), Georgia (for
intrastate toll and operator assistance services), Illinois, Maryland and the
District of Columbia; and the Company intends to file similar applications in
the near future for Massachusetts, New Jersey and Virginia. 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.
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.
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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 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 1998 and in all
states by mid-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 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, 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, in December 1996 WorldCom, a national long distance carrier,
acquired MFS, and in January 1998 AT&T announced its intention to acquire
Teleport Communications Group Inc. 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
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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, Sprint) in the short term
have a two pronged strategy: (1) keep the RBOCs out of in-region long distance
as long as possible and (2) develop a local resale product with adequate margins
to stem RBOC attacks on the major IXCs' market shares. The Company believes the
IXCs' longer term strategy is to develop facilities-based and unbundled local
service, an approach already being pursued by WorldCom with the acquisition of
MFS, and more recently by AT&T with its proposed 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.
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 March 27, 1998, the Company had a total of 119 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
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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 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 but concluded that the claim for
abuse of process stated a cause of action against WorldCom.
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.
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.................................................. January 2008 40,000
Atlanta, GA................................................. February 2003 7,400
Atlanta, GA................................................. August 1998 1,000
Atlanta, GA................................................. November 2001 7,900
New York, NY................................................ August 2006 8,700
New York, NY................................................ April 2008 19,500
Westchester, IL............................................. January 2001 10,600
</TABLE>
The Company believes that its leased facilities are adequate to meet its
current needs in the three markets in which its 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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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 December 31, 1997:
<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............... 49 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............ 49 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.............. 36 Director
James E. Crawford, III(1).... 52 Director
John B. Ehrenkranz........... 32 Director
Paul J. Finnegan............. 44 Director
Richard D. Frisbie........... 48 Director
Reed E. Hundt................ 49 Director
Robert H. Niehaus (1)........ 42 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 and was elected to the Company's Board of Directors in
March 1998. Mr. Yost 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,
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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 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, 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.
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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, and Mastering Computers Inc., a publicly traded information
technology training 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 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,
a publicly held document imaging software company, and Cornerstone, a publicly
held document imaging displays 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 is also a Principal of Morgan Stanley
Capital Partners III, Inc., the general partner of the general partner of
certain Fund Investors.
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 boards of
directors of Focal and of XCOM Technologies, Inc., privately held CLECs 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. 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 American Italian Pasta Company,
Fort James Corporation, Silgan Holdings Inc., and Waterford Wedgewood, plc. Mr.
Niehaus is also a Managing Director and a Director of Morgan Stanley Capital
Partners III, Inc., the general partner of the general partner of certain Fund
Investors.
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
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Omnipoint Corporation, a publicly traded PCS provider, and Clearnet
Communications, a Canadian publicly traded PCS and enhanced specialized mobile
radio company.
ELECTION OF DIRECTORS; VOTING AGREEMENT; EXECUTIVE COMMITTEE
The Company's bylaws establish the size of the Company's Board of Directors
at 13 Directors; there is presently 1 vacancy. The Company's certificate of
incorporation and by-laws provide that its Directors will be appointed and
removed by majority vote of the Company's stockholders (without cumulative
voting).
The current direct and indirect stockholders of the Company 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 Directorship may be
filled by a representative designated by the Fund Investors and acceptable to
the Management Investors.
The Company's Board of Directors presently has only one committee, the
Executive Committee. The current direct and indirect stockholders of the Company
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).
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.
COMPENSATION OF EXECUTIVE OFFICERS
The compensation of executive officers and other key employees of the
Company will be determined by the Company's Board of Directors. During the
Company's 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.
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 an aggregate of 5,000
shares of the Company's Common Stock (subject to adjustment in the Board's
discretion upon the occurrence of certain events that might otherwise lead to
the expansion or dilution of the rights of participants under the Option Plan).
The Option Plan authorizes the Board to issue Options in such forms and amounts
and on such terms as determined by the Board. The per-share exercise price for
Options will be set by the Board, 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 Board). The Board currently intends to issue Options under the
Option Plan to all Company employees other than the Management Investors, and to
set the number of Options issued as an annual component of an employee's
compensation package. The terms of the Options issued under the Option Plan to
date are, and the Board presently anticipates that the terms of all Options
issued under the Option Plan in the future will be, as follows:
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Grant; Vesting. The Company will establish an annual amount of Options to
be granted to an employee each year. Three years' amount of Options will be
issued on the first quarter-end after 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 100.0% 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 100.0% upon such
termination.
Expiration of Options. Options expire if not exercised within six years
after the date of grant. If a participant is terminated for any reason prior to
a public offering of the Company's securities (an "IPO") or a sale of the
Company, all unexercised (both vested and unvested) Options expire. If a
participant is terminated for any reason after an IPO or a sale of the Company,
all unvested Options immediately expire and all vested Options must be exercised
within 90 days after termination.
Repurchase upon Termination. If a participant is terminated for any reason
prior to an IPO or a sale of the Company, the Company may repurchase all Options
and shares issued upon exercise of Options for original cost (or, if the
participant is terminated for cause, at the lesser of fair market value and
cost).
Restrictions on Transfer; Holdback and "Drag Along" Agreements. 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 an IPO or other public
offering of the Company's securities, provisions requiring the holder of such
shares to approve an IPO approved by the Board 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.
EXECUTIVE AGREEMENTS
Royce J. Holland Executive Agreement
In August 1997, in connection with Royce J. Holland's purchase of an
ownership interest in Allegiance Telecom, L.L.C. ("Allegiance LLC"), the
Company's sole shareholder (see "Certain Transactions" and "Security Ownership
of Certain Beneficial Owners and Management"), 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 would be
accelerated by one year upon an IPO, 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 an IPO or other public offering of the
Company's securities, provisions requiring the holder of such shares to approve
an IPO approved by the Board 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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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 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) the Company's five targeted markets of
Dallas, New York City, Atlanta, Chicago, and Los Angeles; (iii) once the Board
of Directors and the Fund Investors have approved business plans for the five
markets referenced in (ii), an additional 15 Phase I and Phase II markets; and
(iv) 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, in connection with C. Daniel Yost's purchase of an
ownership interest in Allegiance LLC, the Company's sole shareholder (see
"Certain Transactions" and "Security Ownership of Certain Beneficial Owners and
Management"), the Company, Allegiance LLC, and Mr. Yost entered into an
Executive Purchase Agreement (the "Yost Executive Agreement"), containing the
same terms as the Holland Executive Agreement described above.
Thomas M. Lord Executive Agreement
In August 1997, in connection with Thomas M. Lord's purchase of an
ownership interest in Allegiance LLC, the Company's sole shareholder (see
"Certain Transactions" and "Security Ownership of Certain Beneficial Owners and
Management"), the Company, Allegiance LLC, and Mr. Lord entered into an
Executive Purchase Agreement (the "Lord Executive 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 would be accelerated by one year upon
an IPO, 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
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Investor's vested Executive Securities at fair market 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 an IPO or other public offering of the
Company's securities, provisions requiring the holder of such shares to approve
an IPO approved by the Board 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
The compensation of executive officers and other key employees of the
Company is 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.
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CERTAIN TRANSACTIONS
STOCK PURCHASE AGREEMENT
On August 13, 1997, Allegiance LLC and the Company entered into a stock
purchase agreement (the "Stock Purchase Agreement") including, among others, the
following terms:
Purchase of Preferred Stock. Allegiance LLC purchased 95,000 shares of the
Company's Preferred Stock for an aggregate purchase price of $5 million and a
commitment to make capital contributions to the Company of up to an additional
$95 million on the terms and conditions discussed in "-- Subsequent Capital
Contributions." For a description of the terms of the Preferred Stock, see
"Description of Capital Stock -- Preferred Stock."
Subsequent Capital Contributions. The Company may at any time require
Allegiance LLC to make subsequent capital contributions to the Company, up to an
aggregate amount of $95 million (approximately $45 million of which will have
been drawn down after giving effect to the Equity Contribution), so long as at
the time of the drawdown such amounts are contemplated by Approved Business
Plans (as defined below) of the Company and certain other closing conditions are
satisfied (including the absence of a material breach or default by the Company
under its contractual obligations and the absence of a material adverse change
in the business, financial condition, operations, assets, or business prospects
of the Company as a whole). For purposes of the Stock Purchase Agreement, an
"Approved Business Plan" means a business plan prepared by the Company's
management describing proposed business activities in a target market and the
capital requirements to pre-fund such market to Positive Free Cash Flow (a
"Business Plan") that has been approved by the Company's Board of Directors and
the Fund Investors; provided that an "Approved Business Plan" will cease to be
such during any period in which the actual results of operations or other
factors applicable to that market substantially deviate (in the good faith
judgment of Allegiance LLC) from the Company's estimates and projections in such
Business Plan or in Company annual budgets based on such Business Plan and
approved by the Board of Directors and the Fund Investors. Under this mechanism,
once the Board of Directors and the Fund Investors have approved a Business Plan
relating to a targeted market, Allegiance LLC is essentially required to fund
capital requirements for such market to Positive Free Cash Flow unless the
Company is in material breach or default of its contractual obligations, there
is a substantial deviation in the results of that market, or there has occurred
a material adverse change affecting the Company as a whole. The Board of
Directors and the Fund Investors have approved, and initial required funding has
been made under, Business Plans relating to the Dallas-Fort Worth, Atlanta, and
New York City-Long Island-Northern New Jersey markets. Additional funding under
the Atlanta Business Plan is subject to the Company's successfully selecting and
hiring a Chief Operating Officer. As of March 31, 1998, approximately $49
million had been drawn down to fund the Company's start-up costs and ongoing
network development in Dallas, New York City and Atlanta.
Restrictive Covenants. Allegiance LLC has the power (which power is
exercised by the Fund Investors) to approve the Company's taking or agreeing to
take certain actions, including, among other things (i) declaring dividends on,
redeeming or issuing any equity securities, any securities convertible into or
exercisable for equity securities, or any debt with equity features, (ii)
loaning monies, (iii) disposing of significant assets, (iv) making acquisitions,
(v) entering into affiliated transactions, (vi) incurring significant
indebtedness, and (vii) entering into or modifying any employment arrangement
with senior management. Allegiance LLC has approved the Company's consummation
of the Lease Facility and the Offering.
Preemptive Rights. Allegiance LLC and its equity holders have the right to
participate pro rata in any issuance of Common Stock (or securities convertible
into or exercisable for Common Stock), other than issuances upon conversion of
Preferred Stock or exercise of Options, as part of financing an acquisition, or
in an IPO.
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
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presently holds the one outstanding share of the Company's Common Stock and all
95,000 outstanding shares of the Company's Preferred Stock. The LLC Agreement
includes, among others, the following terms:
Capital Structure. The LLC Agreement authorizes the issuance of (i)
95,000,000 Class A Units, (ii) 5,000,000 Class B Units, and (iii) certain other
Units issuable in limited circumstances.
Capital Contributions. The Fund Investors purchased 95,000,000 Class A Unit
interests in Allegiance LLC, and 5,000,000 Class B Unit interests in Allegiance
LLC were purchased by Management Investors (or reserved for issuance to Company
managers as they join the Company). The Fund Investors and the Management
Investors are required to fund Allegiance LLC's capital contribution obligations
under the Stock Purchase Agreement in proportion to the respective number of
Units held by each of them. If any holder of Units fails to make a capital
contribution when due, Allegiance LLC may (in addition to its other legal or
equitable rights) repurchase such defaulting Unitholder's equity interest for an
amount equal to such Unitholder's capital contributions to the date of
repurchase (including interest at the prime rate), payable in the form of
Allegiance LLC Units that are subordinated in right of payment to the return of
capital (including interest thereon at a rate of 12% per annum) to Allegiance
LLC's other Unitholders.
Allocations and Distributions. Upon an IPO, sale of the Company, or
liquidation or dissolution of the Company (a "Liquidity Event"), Allegiance LLC
will dissolve and its assets (which are expected to consist almost entirely of
Company stock) will be distributed up to the Fund Investors and the Management
Investors in accordance with a final allocation calculated immediately prior to
such dissolution. The final allocation between the Fund Investors and the
Management Investors will range between 95.0%/5.0% and 66.7%/33.3% according to
certain multiple of invested capital and internal rate of return tests
calculated based upon the valuation of the Company's Common Stock implied by the
Liquidity Event.
HOLLAND RIGHTS TO APPROVE IPO, SALE OF THE COMPANY, AND CERTAIN PRIVATE EQUITY
AND DEBT FINANCINGS.
So long as Royce J. Holland and his family continue to hold at least 90% of
the Holland Executive Securities: (i) the Company, Allegiance LLC, and the Fund
Investors and Management Investors may not approve or consummate an IPO or a
sale of the Company prior to August 13, 2000 without Mr. Holland's approval,
unless (x) such a transaction would result in a 66.7%/33.3% allocation between
the Fund Investors and the Management Investors under the LLC Agreement, or (y)
the Company has insufficient liquidity to fund its operations for a six-month
period and lacks any other adequate means of financing (including available
monies under the Equity Commitments); and (ii) the Company may not incur
additional private equity or debt financing (other than equipment financing,
indebtedness specified in an Approved Business Plan, or pursuant to an IPO)
prior to a Liquidity Event without Mr. Holland's approval, unless (x) the entire
Equity Commitments have been drawn down or (y) there has occurred a material
adverse change in the business, financial condition, operations, assets, or
business prospects of the Company as a whole. Mr. Holland has approved issuance
of the Notes offered hereby.
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, the Fund Investors may not transfer their Allegiance LLC or Company
securities prior to August 13, 1998 other than to their affiliates or as part of
a sale of the Company. Sales by the Fund Investors after August 13, 1998 (other
than to affiliates or the public, or as part of a sale of the Company) are
subject to first refusal rights in favor of the other Fund Investors, and to the
"tag-along" rights of the Fund Investors (and, in connection with a
greater-than-50%-sale of the Fund Investors' securities, the Management
Investors with respect to their vested securities) to participate pro rata in
such sale. In the event of an approved sale of the Company, each of the Fund
Investors (and their transferees) agrees to approve and, if requested, sell its
shares in such sale of the Company. If a Liquidity Event has not occurred by
August 13, 2004, each Fund Investor and Management Investor will have the right
to require Allegiance LLC and the Company to take all actions necessary to
purchase its securities at the greater of fair market value and original cost
plus accrued dividends at 12% per annum. The Indenture limits the ability of
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the Company to repurchase shares of Preferred Stock or Common Stock. In
connection with the Offering, the Fund Investors and Management Investors have
acknowledged that the Indenture could restrict the Company from repurchasing
their stock for cash and agreed in writing that any claim for such payment would
be subordinated in right of payment to the Notes.
REGISTRATION RIGHTS AGREEMENT
The Fund Investors, the Management Investors, and the Company are parties
to a registration rights agreement dated as of August 13, 1997. See "Description
of Capital Stock -- Registration Rights."
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Company's outstanding capital stock consists of one share of Common
Stock and 95,000 shares of Preferred Stock. All of these shares of capital stock
are owned by Allegiance LLC. In addition, employees of the Company own options
to purchase Common Stock and the Company has reserved 5,000 shares of Common
Stock for these and future employee options. The power of Allegiance LLC to vote
and dispose of the capital stock of the Company owned by it is exercised by the
board of managers of Allegiance LLC which is elected by the holders of
Allegiance LLC Class A and Class B Units. Thus, the holders of these units could
be deemed to be beneficial owners of the capital stock of the Company owned by
Allegiance LLC.
The following table sets forth certain information regarding the beneficial
ownership of the equity securities of Allegiance LLC 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 Allegiance LLC ("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. The address of Allegiance LLC
is c/o Madison Dearborn Partners Inc., Three First National Plaza, Suite 3800,
Chicago, IL 60602.
<TABLE>
<CAPTION>
ALLEGIANCE LLC
-----------------------------------------------------------
PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER CLASS A UNITS(1) CLASS B UNITS(1) CLASS A AND B UNITS
------------------------------------ ---------------- ---------------- -------------------
<S> <C> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS:
Royce J. Holland(2)........................ -- 1,437,500 1.44
C. Daniel Yost............................. -- 600,000 0.60
Thomas M. Lord(3).......................... -- 675,000 0.68
John J. Callahan........................... -- 150,000 0.15
Paul D. Carbery(4)......................... 15,000,000 -- 15.00
James E. Crawford, III(4).................. 15,000,000 -- 15.00
John B. Ehrenkranz......................... -- -- --
Paul J. Finnegan(5)........................ -- -- --
Richard D. Frisbie(6)...................... 7,500,000 -- 7.50
Reed E. Hundt.............................. -- -- --
Robert H. Niehaus(7)....................... -- -- --
James N. Perry, Jr.(5)..................... -- -- --
All directors and executive officers as a
group (12 persons)....................... 37,500,000 2,862,500 40.37
5% OWNERS:
Madison Dearborn Capital Partners(8)....... 36,250,000 -- 36.25
Morgan Stanley Capital Partners(9)......... 36,250,000 -- 36.25
Frontenac Company(10)...................... 15,000,000 -- 15.00
Battery Ventures(11)....................... 7,500,000 -- 7.50
</TABLE>
- ---------------
(1) The Class A Units of Allegiance LLC have been issued to the Fund Investors
in Allegiance LLC and the Class B Units have been issued to the Management
Investors. These units require ongoing proportionate capital contributions
but provide for different distributions depending upon the value of the
Company at the time of certain liquidity events. See "Certain
Transactions."
(2) Includes 718,750 Class B Units owned by the Royce J. Holland Family Limited
Partnership, of which Royce J. Holland is the sole general partner. All of
the Class B Units owned by Mr. Holland and the Royce J. Holland Family
Limited Partnership are subject to vesting, with 20% of such Class B Units
vested on August 13, 1997 and an additional 20% vesting on each of the
first four anniversaries of such date. See "Management -- Executive
Agreements."
(3) Includes 337,500 Class B Units owned by Mr. Lord's wife and children, as to
which Mr. Lord disclaims beneficial ownership. All of the Class B Units
owned by Mr. Lord and his family are subject to vesting with 20% of such
Class B Units vested on August 13, 1997 and an additional 20% vesting on
each of the first four anniversaries of such date. See
"Management -- Executive Agreements."
(4) All Class A Units shown are owned by Frontenac VII, L.P. Messrs. Carbery
and Crawford are general partners of Frontenac Company, the general partner
of Frontenac VII, L.P. and their address is c/o Frontenac Company, 135 S.
LaSalle Street, Suite 3800, Chicago, IL 60603. They disclaim beneficial
ownership of these Class A Units.
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(5) Messrs. Finnegan and Perry are vice presidents 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 Class A Units 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 Class A Units.
(7) Mr. Niehaus is a managing director and director of Morgan Stanley Capital
Partners III, Inc., the general partner of the general partner of these
funds and their address is c/o Morgan Stanley Capital Partners, 1221 Avenue
of the Americas, New York, NY 10020.
(8) These Class A Units are owned by Madison Dearborn Capital Partners II, L.P.
(9) These Class A Units are owned by Morgan Stanley Capital Partners III, L.P.,
MSCP III 892 Investors, L.P. and Morgan Stanley Capital Investors, L.P.
(10) These Class A Units are owned by Frontenac VII, L.P.
(11) These Class A Units are owned by Battery Ventures, IV, L.P. and Battery
Investment Partners IV, LLC.
DESCRIPTION OF CERTAIN INDEBTEDNESS
The Company and AT&T Capital are in the process of negotiating the Lease
Facility. The implementation of the Lease Facility and the terms and conditions
thereof remain subject to numerous conditions including negotiation of
definitive documents, completion of due diligence review and receipt of AT&T
Capital internal approvals. The actual terms and conditions of the Lease
Facility remain subject to further negotiation and may differ from those
summarized below.
The Company currently contemplates that: (i) the Lease Facility will
provide for up to $100.0 million of lease financing for digital switches,
software, electronics and associated transmission equipment; (ii) wholly owned
subsidiaries of the Company will be the lessees; (iii) certain obligations under
the Lease Facility will be secured by stock of these subsidiaries; (iv) each
lease entered into under the Lease Facility will have a seven and one-half year
term; (v) each lessee will have an option under which the financed equipment
could be purchased by such lessee five and one-half years after such lessee's
lease commencement date at approximately 52% of the equipment cost; (vi) the
implicit lease rates in the rental payments under the Lease Facility will be
subject to adjustment from time to time based on changes in the yield of
five-year Treasury Notes; (vii) all tax benefits will be for the account of AT&T
Capital; and (viii) the covenants under the Lease Facility will include certain
performance tests.
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THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Old Notes were originally sold by the Company on February 3, 1998 to
the Initial Purchasers pursuant to the Purchase Agreement. The Initial
Purchasers subsequently resold the Old Notes to qualified institutional buyers
in reliance on Rule 144A under the Securities Act and qualified buyers outside
the United States in reliance upon Regulation S under the Securities Act. As a
condition to the Purchase Agreement, the Company entered into the Notes
Registration Rights Agreement with the Initial Purchasers pursuant to which the
Company has agreed, for the benefit of the holders of the Old Notes, at the
Company's cost, to use its best efforts to file and cause to become effective
the Exchange Offer Registration Statement and unless the Exchange Offer would
not be permitted by applicable law or Commission policy, commence the Exchange
Offer and use their best efforts to issue the New Notes in exchange for the Old
Notes on or prior to the date that is six months after the date of the original
issuance of the Old Notes. Upon the Exchange Offer Registration Statement being
declared effective, the Company will offer the New Notes in exchange for
surrender of the Old Notes. The Company will keep the Exchange Offer open for
not less than 20 business days (or longer if required by applicable law) after
the date on which notice of the Exchange Offer is mailed to the holders of the
Old Notes. For each Old Note surrendered to the Company pursuant to the Exchange
Offer, the holder of such Old Note will receive a New Note having a principal
amount equal to that of the surrendered Old Note.
Under existing interpretations of the staff of the Commission contained in
several no-action letters to third parties, the New Notes will, in general, be
freely tradeable after the Exchange Offer without further registration under the
Securities Act. However, any purchaser of Old Notes who is an "affiliate" (as
defined in the Securities Act) of the Company or who intends to participate in
the Exchange Offer for the purpose of distributing the New Notes (i) will not be
able to rely on the interpretation of the staff of the Commission, (ii) will not
be able to tender its Old Notes in the Exchange Offer and (iii) must comply with
the registration and prospectus delivery requirements of the Securities Act in
connection with any sale or transfer of the Old Notes, unless such sale or
transfer is made pursuant to an exemption from such requirements.
As contemplated by these no-action letters and the Notes Registration
Rights Agreement, each holder accepting the Exchange Offer is required to
represent to the Company in the Letter of Transmittal that (i) the New Notes are
to be acquired by the holder or the person receiving such New Notes, whether or
not such person is the holder, in the ordinary course of business, (ii) the
holder or any such other person (other than a broker-dealer referred to in the
next sentence) is not engaging and does not intend to engage, in distribution of
the New Notes, (iii) the holder or any such other person has no arrangement or
understanding with any person to participate in the distribution of the New
Notes, (iv) neither the holder nor any such other person is an "affiliate" of
the Company within the meaning of Rule 405 under the Securities Act, and (v) the
holder or any such other person acknowledges that if such holder or any other
person participates in the Exchange Offer for the purpose of distributing the
New Notes it must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale of the New
Notes and cannot rely on those no-action letters. As indicated above, each
Participating Broker-Dealer that receives an New Note for its own account in
exchange for Old Notes must acknowledge that it (i) acquired the Old Notes for
its own account as a result of market-making activities or other trading
activities, (ii) has not entered into any arrangement or understanding with the
Company or any "affiliate" of the Company (within the meaning of Rule 405 under
the Securities Act) to distribute the New Notes to be received in the Exchange
Offer and (iii) will deliver a prospectus meeting the requirements of the
Securities Act in connection with any resale of such New Notes. For a
description of the procedures for resales by Participating Broker-Dealers, see
"Plan of Distribution."
In the event that applicable interpretations of the staff of the Commission
do not permit the Company to effect the Exchange Offer, or under certain other
circumstances, the Company will at its sole expense, (a) as promptly as
practicable, file a shelf registration statement covering resales of the Notes
(a "Shelf Registration Statement"), (b) use its reasonable best efforts to cause
such Shelf Registration Statement to be declared effective under the Securities
Act and (c) use its reasonable best efforts to keep effective such Shelf
Registration Statement until the earlier of two years after the Issue Date and
such time as all of the applicable
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Notes have been sold thereunder. The Company will, in the event of the filing of
a Shelf Registration Statement, provide to each holder of the Old Notes copies
of the prospectus which is a part of such Shelf Registration Statement, notify
each such holder when such Shelf Registration Statement has become effective and
take certain other actions as are required to permit unrestricted resales of the
Notes. A holder that sells its Notes pursuant to a Shelf Registration Statement
generally will be required to be named as a selling security holder in the
related prospectus and to deliver a prospectus to purchasers, will be subject to
certain of the civil liability provisions under the Securities Act in connection
with such sales and will be bound by the provisions of the Notes Registration
Rights Agreement which are applicable to such holder (including certain
indemnification obligations).
In the event that the Exchange Offer is not consummated or a Shelf
Registration Statement is not declared effective on or prior to the date that is
six months after the date of the original issuance of the Old Notes, interest
(in addition to the accrual of original issue discount during the period ending
February 15, 2003 and in addition to interest otherwise due on the Notes after
such date) will accrue, at the rate of .5% per annum of the Accreted Value on
the preceding Semi-Annual Accrual Date (as defined herein), on the Notes and be
payable in cash semi-annually on February 15 and August 15 of each year,
commencing February 15, 1999, until the Exchange Offer is consummated or the
Shelf Registration Statement is declared effective.
Holders of the Old Notes will be required to make certain representations
to the Company (as described in the Notes Registration Rights Agreement) in
order to participate in the Exchange Offer and will be required to deliver
information to be used in connection with the Shelf Registration Statement and
to provide comments on the Shelf Registration Statement within the time periods
set forth in the Notes Registration Rights Agreement in order to have their Old
Notes included in the Shelf Registration Statement and benefit from the
provisions regarding additional interest set forth above.
The summary herein of certain provisions of the Notes Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified in
its entirety by, all the provisions of the Notes Registration Rights Agreement,
a copy of which is filed as an exhibit to the Exchange Offer Registration
Statement of which this Prospectus is a part.
Following the consummation of the Exchange Offer, holders of the Old Notes
who were eligible to participate in the Exchange Offer but who did not tender
their Old Notes will not have any further registration rights and such Old Notes
will continue to be subject to certain restrictions on transfer. Accordingly,
the liquidity of the market for such Old Notes could be adversely affected.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Old Notes
validly tendered and not withdrawn prior to 5:00 p.m., New York City time, on
the Expiration Date. The Company will issue $1,000 principal amount at maturity
of New Notes in exchange for each $1,000 principal amount at maturity of
outstanding Old Notes accepted in the Exchange Offer. Holders may tender some or
all of their Old Notes pursuant to the Exchange Offer. However, Old Notes may be
tendered only in integral multiples of $1,000 principal amount at maturity.
The form and terms of the New Notes are the same as the form and terms of
the Old Notes except that (i) the New Notes bear a Series B designation and a
different CUSIP Number from the Old Notes, (ii) the New Notes have been
registered under the Securities Act and hence will not bear legends restricting
the transfer thereof and (iii) the holders of the New Notes will not be entitled
to certain rights under the Notes Registration Rights Agreement, including the
provisions providing for liquidated damages in certain circumstances relating to
the timing of the Exchange Offer, all of which rights will terminate when the
Exchange Offer is terminated. The New Notes will evidence the same debt as the
Old Notes and will be entitled to the benefits of the Indenture.
As of the date of this Prospectus, $445,000,000 aggregate principal amount
at maturity of Old Notes were outstanding. The Company has fixed the close of
business on , 1998 as the record date for the
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Exchange Offer for purposes of determining the persons to whom this Prospectus
and the Letter of Transmittal will be mailed initially.
Holders of Old Notes do not have any appraisal or dissenters' rights under
the General Corporation Law of Delaware, or the Indenture in connection with the
Exchange Offer. The Company intends to conduct the Exchange Offer in accordance
with the applicable requirements of the Exchange Act and the rules and
regulations of the Commission thereunder.
The Company shall be deemed to have accepted validly tendered Old Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
for the purpose of receiving the New Notes from the Company.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, the certificates for any such unaccepted Old Notes will be returned,
without expense, to the tendering holder thereof as promptly as practicable
after the Expiration Date.
Holders who tender Old Notes in the Exchange Offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the Letter
of Transmittal, transfer taxes with respect to the exchange of Old Notes
pursuant to the Exchange Offer. The Company will pay all charges and expenses,
other than transfer taxes in certain circumstances, in connection with the
exchange fees and expenses.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
, 1998, unless the Company, in its sole discretion, extends the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will notify the Exchange
Agent of any extension by oral or written notice and will mail to the registered
holders an announcement thereof, each prior to 9:00 a.m., New York City time, on
the next business day after the previously scheduled expiration date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Old Notes, to extend the Exchange Offer or to terminate the
Exchange Offer if any of the conditions set forth below under "Conditions" shall
not have been satisfied, by giving oral or written notice of such delay,
extension or termination to the Exchange Agent or (ii) to amend the terms of the
Exchange Offer in any manner. Any such delay in acceptance, extension,
termination or amendment will be followed as promptly as practicable by oral or
written notice thereof to the registered holders.
ACCRETION OF THE NOTES; INTEREST
The Old Notes will continue to accrete at the rate of 11 3/4% per annum to,
but excluding the date of issuance of the New Notes and will cease to accrete
upon cancellation of the Old Notes and issuance of the New Notes. Any Old Notes
not tendered or accepted for exchange will continue to accrete at the rate of
11 3/4% per annum in accordance with their terms. From and after the date of
issuance of the New Notes, the New Notes shall accrete at the rate of 11 3/4%
per annum, but no cash interest will be payable in respect of the New Notes
prior to August 15, 2003. From and after February 3, 2003, interest on the New
Notes will accrue on the principal amount at maturity at the rate of 11 3/4% per
annum and will be payable semi-annually on each February 15 and August 15,
commencing August 15, 2003.
PROCEDURES FOR TENDERING
Only a holder of Old Notes may tender such Old Notes in the Exchange Offer.
To tender in the Exchange Offer, a holder must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, have the signatures thereon
guaranteed if required by the Letter of Transmittal or transmit an Agent's
Message in connection with a book-entry transfer, and mail or otherwise deliver
such Letter of Transmittal or such facsimile, or Agent's Message, together with
the Old Notes and any other required documents, to the
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<PAGE> 71
Exchange Agent prior to 5:00 p.m., New York City time, on the Expiration Date.
To be tendered effectively, the Old Notes, Letter of Transmittal or an Agent's
Message and other required documents must be completed and received by the
Exchange Agent at the address set forth below under "Exchange Agent" prior to
5:00 p.m., New York City time, on the Expiration Date. Delivery of the Old Notes
may be made by book-entry transfer in accordance with the procedures described
below. Confirmation of such book-entry transfer must be received by the Exchange
Agent prior to the Expiration Date.
The term "Agent's Message" means a message, transmitted by a book-entry
transfer facility to, and received by, the Exchange Agent forming a part of a
confirmation of a book-entry, which states that such book-entry transfer
facility has received an express acknowledgment from the participant in such
book-entry transfer facility tendering the Old Notes that such participant has
received and agrees: (i) to participate in the Automated Tender Option Program
("ATOP"); (ii) to be bound by the terms of the Letter of Transmittal; and (iii)
that the Company may enforce such agreement against such participant.
By executing the Letter of Transmittal or Agent's Message, each holder will
make to the Company the representations set forth above in the third paragraph
under the heading "-- Purpose and Effect of the Exchange Offer."
The tender by a holder and the acceptance thereof by the Company will
constitute agreement between such holder and the Company in accordance with the
terms and subject to the conditions set forth herein and in the Letter of
Transmittal or Agent's Message.
THE METHOD OF DELIVERY OF OLD NOTES AND THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND SOLE RISK
OF THE HOLDER. AS AN ALTERNATIVE TO DELIVERY BY MAIL, HOLDERS MAY WISH TO
CONSIDER OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME
SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION
DATE. NO LETTER OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE COMPANY.
HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST
COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner whose Old Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered holder promptly and instruct such
registered holder to tender on such beneficial owner's behalf. See "Instructions
to Registered Holder and/or Book-Entry Transfer Facility Participant from
Beneficial Owner" included with the Letter of Transmittal.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an Eligible Institution (as defined herein)
unless the Old Notes tendered pursuant thereto are tendered (i) by a registered
holder who has not completed the box entitled "Special Registration
Instructions" or "Special Delivery Instructions" on the Letter of Transmittal or
(ii) for the account of an Eligible Institution. In the event that signatures on
a Letter of Transmittal or a notice of withdrawal, as the case may be, are
required to be guaranteed, such guarantee must be by a member firm of the
Medallion System (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the
registered holder of any Old Notes listed therein, such Old Notes must be
endorsed or accompanied by a properly completed bond power, signed by such
registered holder as such registered holder's name appears on such Old Notes
with the signature thereon guaranteed by an Eligible Institution.
If the Letter of Transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, offices of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and evidence satisfactory to the
Company of their authority to so act must be submitted with the Letter of
Transmittal.
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<PAGE> 72
The Company understands that the Exchange Agent will make a request
promptly after the date of this Prospectus to establish accounts with respect to
the Old Notes at the Book-Entry Transfer Facility (as defined in the Letter of
Transmittal) for the purpose of facilitating the Exchange Offer, and subject to
the establishment thereof, any financial institution that is a participant in
the Book-Entry Transfer Facility's system may make book-entry delivery of Old
Notes by causing such Book-Entry Transfer Facility to transfer such Old Notes
into the Exchange Agent's account with respect to the Old Notes in accordance
with the Book-Entry Transfer Facility's procedures for such transfer. Although
delivery of the Old Notes may be effected through book-entry transfer into the
Exchange Agent's account at the Book-Entry Transfer Facility, unless an Agent's
Message is received by the Exchange Agent in compliance with ATOP, an
appropriate Letter of Transmittal properly completed and duly executed with any
required signature guarantee and all other required documents must in each case
be transmitted to and received or confirmed by the Exchange Agent at its address
set forth below on or prior to the Expiration Date, or, if the guaranteed
delivery procedures described below are complied with, within the time period
provided under such procedures. Delivery of documents to the Book-Entry Transfer
Facility does not constitute delivery to the Exchange Agent.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Old Notes and withdrawal of tendered Old Notes
will be determined by the Company in its sole discretion, which determination
will be final and binding. The Company reserves the absolute right to reject any
and all Old Notes not properly tendered or any Old Notes the Company's
acceptance of which would, in the opinion of counsel for the Company, be
unlawful. The Company also reserves the right in its sole discretion to waive
any defects, irregularities or conditions of tender as to particular Old Notes.
The Company's interpretation of the terms and conditions of the Exchange Offer
(including the instructions in the Letter of Transmittal) will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Old Notes must be cured within such time as the
Company shall determine. Although the Company intends to notify holders of
defects or irregularities with respect to tenders of Old Notes, neither the
Company, the Exchange Agent nor any other person shall incur any liability for
failure to give such notification. Tenders of Old Notes will not be deemed to
have been made until such defects or irregularities have been cured or waived.
Any Old Notes received by the Exchange Agent that are not properly tendered and
as to which the defects or irregularities have not been cured or waived will be
returned by the Exchange Agent to the tendering holders, unless otherwise
provided in the Letter of Transmittal, as soon as practicable following the
Expiration Date.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available, (ii) who cannot deliver their Old Notes, the Letter of
Transmittal or any other required documents to the Exchange Agent or (iii) who
cannot complete the procedures for book-entry transfer, prior to the Expiration
Date, may effect a tender if:
(a) the tender is made through an Eligible Institution,
(b) prior to the Expiration Date, the Exchange Agent receives from
such Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the holder, the certificate number(s)
of such Old Notes and the principal amount of Old Notes tendered, stating
that the tender is being made thereby and guaranteeing that, within five
New York Stock Exchange trading days after the Expiration Date, the Letter
of Transmittal (or facsimile thereof) together with the certificate(s)
representing the Old Notes (or a confirmation of book-entry transfer of
such Notes into the Exchange Agent's account at the Book-Entry Transfer
Facility), and any other documents required by the Letter of Transmittal
will be deposited by the Eligible Institution with the Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal (of
facsimile thereof), as well as the certificate(s) representing all tendered
Old Notes in proper form for transfer (or a confirmation of book-entry
transfer of such Old Notes into the Exchange Agent's account at the
Book-Entry Transfer
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<PAGE> 73
Facility), and all other documents required by the Letter of Transmittal
are received by the Exchange Agent within five New York Stock Exchange
trading days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Old Notes according to the guaranteed
delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the Expiration Date.
To withdraw a tender of Old Notes in the Exchange Offer, a telegram, telex,
letter or facsimile transmission notice of withdrawal must be received by the
Exchange Agent at its address set forth herein prior to 5:00 p.m., New York City
time, on the Expiration Date. Any such notice of withdrawal must (i) specify the
name of the person having deposited the Old Notes to be withdrawn (the
"Depositor"); (ii) identify the Old Notes to be withdrawn (including the
certificate number(s) and principal amount of such Old Notes, or, in the case of
Old Notes transferred by book-entry transfer, the name and number of the account
at the Book-Entry Transfer Facility to be credited); (iii) be signed by the
holder in the same manner as the original signature on the Letter of Transmittal
by which such Old Notes were tendered (including any required signature
guarantees) or be accompanied by documents of transfer sufficient to have the
Trustee with respect to the Old Notes register the transfer of such Old Notes
into the name of the person withdrawing the tender and (iv) specify the name in
which any such Old Notes are to be registered, if different from that of the
Depositor. All questions as to the validity, form and eligibility (including
time of receipt) of such notices will be determined by the Company, whose
determination shall be final and binding on all parties. Any Old Notes so
withdrawn will be deemed not to have been validly tendered for purposes of the
Exchange Offer and no New Notes will be issued with respect thereto unless the
Old Notes so withdrawn are validly retendered. Any Old Notes which have been
tendered but which are not accepted for exchange will be returned to the holder
thereof without cost to such holder as soon as practicable after withdrawal,
rejection of tender or termination of the Exchange Offer. Properly withdrawn Old
Notes may be retendered by following one of the procedures described above under
"-- Procedures for Tendering" at any time prior to the Expiration Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company shall not
be required to accept for exchange, or exchange New Notes for, any Old Notes,
and may terminate or amend the Exchange Offer as provided herein before the
acceptance of such Old Notes, if:
(a) any action or proceeding is instituted or threatened in any court
or by or before any governmental agency with respect to the Exchange Offer
which, in the reasonable judgment of the Company, might materially impair
the ability of the Company to proceed with the Exchange Offer or any
material adverse development has occurred in any existing action or
proceeding with respect to the Company, Holdings or any of their
subsidiaries; or
(b) any law, statute, rule, regulation or interpretation by the staff
of the Commission is proposed, adopted or enacted, which, in the reasonable
judgment of the Company, might materially impair the ability of the Company
to proceed with the Exchange Offer or materially impair the contemplated
benefits of the Exchange Offer to the Company; or
(c) any governmental approval has not been obtained, which approval
the Company shall, in its reasonable discretion, deem necessary for the
consummation of the Exchange Offer as contemplated hereby.
If the Company determines in its reasonable discretion that any of the
conditions are not satisfied, the Company may (i) refuse to accept any Old Notes
and return all tendered Old Notes to the tendering holders, (ii) extend the
Exchange Offer and retain all Old Notes tendered prior to the expiration of the
Exchange Offer, subject, however, to the rights of holders to withdraw such Old
Notes (see "-- Withdrawal of
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Tenders") or (iii) waive such unsatisfied conditions with respect to the
Exchange Offer and accept all properly tendered Old Notes which have not been
withdrawn.
EXCHANGE AGENT
The Bank of New York has been appointed as Exchange Agent for the Exchange
Offer. Questions and requests for assistance, requests for additional copies of
this Prospectus or of the Letter of Transmittal and requests for Notice of
Guaranteed Delivery should be directed to the Exchange Agent addressed as
follows:
<TABLE>
<S> <C>
By Registered or Certified Mail: By Overnight Courier:
Attention:
Attention: Reorganization Section
Reorganization Section The Bank of New York
The Bank of New York 101 Barclay Street, Ground Level
101 Barclay Street, 7E Corporate Trust Services Window
New York, NY 10286 New York, NY 10286
By Hand: By Facsimile:
Attention: (212) 815-6339
Reorganization Section Attention:
The Bank of New York Reorganization Section
101 Barclay Street, Ground Level
Corporate Trust Services Window Confirm by telephone:
New York, NY 10286 (212) 815-3687
</TABLE>
Delivery to an address other than as set forth above, or transmission of
instructions via a facsimile number other than the one set forth above, will not
constitute a valid delivery.
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telecopy, telephone or in person by officers and
regular employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers, or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company. Such expenses include fees and expenses of the Exchange
Agent and Trustee, accounting and legal fees and printing costs, among others.
ACCOUNTING TREATMENT
The New Notes will be recorded at the same carrying value as the Old Notes,
which is face value, as reflected in the Company's accounting records on the
date of exchange. Accordingly, no gain or loss for accounting purposes will be
recognized by the Company. The expenses of the Exchange Offer will be expensed
over the term of the New Notes.
CONSEQUENCES OF FAILURE TO EXCHANGE
The Old Notes that are not exchanged for New Notes pursuant to the Exchange
Offer will remain restricted securities. Accordingly, such Old Notes may be
resold only (i) to the Company (upon redemption thereof or otherwise), (ii) so
long as the Old Notes are eligible for resale pursuant to Rule 144A, to a person
inside the United States whom the seller reasonably believes is a qualified
institutional buyer within the meaning of Rule 144A under the Securities Act in
a transaction meeting the requirements of Rule 144A, in
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<PAGE> 75
accordance with Rule 144 under the Securities Act, or pursuant to another
exemption from the registration requirements of the Securities Act (and based
upon an opinion of counsel reasonably acceptable to the Company), (iii) outside
the United States to a foreign person in a transaction meeting the requirements
of Rule 904 under the Securities Act, or (iv) pursuant to an effective
registration statement under the Securities Act, in each case in accordance with
any applicable securities laws of any state of the United States.
RESALE OF THE NEW NOTES
With respect to resales of New Notes, based on interpretations by the staff
of the Commission set forth in no-action letters issued to third parties, the
Company believes that a holder or other person who receives the New Notes,
whether or not such person is the holder (other than a person that is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act) who receives New Notes in exchange for Old Notes in the ordinary course of
business and who is not participating, does not intend to participate, and has
no arrangement or understanding with any person to participate, in the
distribution of the New Notes, will be allowed to resell the New Notes to the
public without further registration under the Securities Act and without
delivering to the purchasers of the New Notes a prospectus that satisfies the
requirements of Section 10 of the Securities Act. However, if any holder
acquires New Notes in the Exchange Offer for the purpose of distributing or
participating in a distribution of the New Notes, such holder cannot rely on the
position of the staff of the Commission enunciated in such no-action letters or
any similar interpretive letters, and must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
resale transaction, unless an exemption from registration is otherwise
available. Further, each Participating Broker-Dealer that receives New Notes for
its own account in exchange for Old Notes, where such Old Notes were acquired by
such Participating Broker-Dealer as a result of market-making activities or
other trading activities, must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes.
As contemplated by these no-action letters and the Notes Registration
Rights Agreement, each holder accepting the Exchange Offer is required to
represent to the Company in the Letter of Transmittal that (i) the New Notes are
to be acquired by the holder or the person receiving such New Notes, whether or
not such person is the holder, in the ordinary course of business, (ii) the
holder or any such other person (other than a broker-dealer referred to in the
next sentence) is not engaging and does not intend to engage, in the
distribution of the New Notes, (iii) the holder or any such other person has no
arrangement or understanding with any person to participate in the distribution
of the New Notes, (iv) neither the holder nor any such other person is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act, and (v) the holder or any such other person acknowledges that if such
holder or other person participates in the Exchange Offer for the purpose of
distributing the New Notes it must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any resale of the
New Notes and cannot rely on those no-action letters. As indicated above, each
Participating Broker-Dealer that receives an New Note for its own account in
exchange for Old Notes must acknowledge that it will deliver a Prospectus in
connection with any resale of such New Notes. For a description of the
procedures for such resales by Participating Broker-Dealers, see "Plan of
Distribution."
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DESCRIPTION OF THE NOTES
The Notes are to be issued under an Indenture, dated as of February 3,
1998, between the Company, as issuer, and The Bank of New York (the "Trustee").
The terms of the New 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") as in effect on the date of the Indenture.
The form and terms of the New Notes are the same as the form and terms of the
Old Notes (which they replace) except that (i) the New Notes bear a Series B
designation, (ii) the New Notes have been registered under the Securities Act
and, therefore, will not bear legends restricting the transfer thereof, and
(iii) the holders of New Notes will not be entitled to certain rights under the
Notes Registration Rights Agreement, including the provisions providing for
liquidated damages in certain circumstances relating to the timing of the
Exchange Offer, which rights will terminate when the Exchange Offer is
consummated. The New Notes are subject to all such terms, and holders of the New
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
New Notes. This summary does not purport to be a complete description of the New
Notes and is subject to the detailed provisions of, and qualified in its
entirety by reference to, the New Notes and the Indenture (including the
definitions contained therein). A copy of the form of Indenture may be obtained
from the Company by any holder or prospective investor upon request. Definitions
relating to certain capitalized terms are set forth under "-- Certain
Definitions" and throughout this description. Capitalized terms that are used
but not otherwise defined herein have the meanings assigned to them in the
Indenture. The Old Notes and the New Notes are sometimes referred to herein
collectively as the "Notes."
GENERAL
The Notes are unsecured unsubordinated obligations of the Company,
initially limited to $445,000,000 aggregate principal amount at maturity, and
will mature on February 15, 2008. Although for federal income tax purposes a
significant amount of original issue discount, taxable as ordinary income, will
be recognized by a Holder as such discount accrues from the issue date of the
Notes, no interest will be payable on the Notes prior to August 15, 2003. From
and after February 15, 2003, interest on the Notes will accrue at the rate of
11 3/4% from February 15, 2003 or from the most recent Interest Payment Date to
which interest has been paid or provided for, payable semiannually (to Holders
of record at the close of business on the February 1 or August 1 immediately
preceding the Interest Payment Date) on February 15 and August 15 of each year,
commencing August 15, 2003. Interest will be computed on the basis of a 360-day
year of twelve 30-day months.
Principal of, premium, if any, and interest on the Notes will be payable,
and the Notes may be exchanged or transferred, at the office or agency of the
Company in the Borough of Manhattan, the City of New York (which initially will
be the corporate trust office of the Trustee at 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 at maturity and any integral
multiple thereof. 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 any additional Notes subsequently issued would be treated as
a single class for all purposes under the Indenture.
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OPTIONAL REDEMPTION
The Notes are redeemable, at the Company's option, in whole or in part, at
any time or from time to time, on or after February 15, 2003 and prior to
maturity, upon not less than 30 nor more than 60 days' prior notice mailed by
first class mail to each Holder's last address as it appears in the Security
Register, at the Redemption Prices (expressed in percentages of principal amount
at maturity) set forth below, plus accrued and unpaid interest, if any, to the
Redemption Date (subject to the right of Holders of record on the relevant
Regular Record Date that is on or prior to the Redemption Date to receive
interest due on an Interest Payment Date), if redeemed during the 12-month
period commencing February 15 of the years set forth below:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
---- ----------------
<S> <C>
2003........................................................ 105.8750%
2004........................................................ 103.9167
2005........................................................ 101.9583
2006 and thereafter......................................... 100.0000
</TABLE>
In addition, at any time prior to February 15, 2001, the Company may redeem
up to 35% of the principal amount at maturity 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 Accreted Value on the Redemption Date) of
111.75%; provided that at least $289,250,000 aggregate principal amount at
maturity of Notes remains outstanding after each such redemption.
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 at
maturity or less shall be redeemed in part. If any Note is to be redeemed in
part only, the notice of redemption relating to such Note shall state the
portion of the principal amount 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.
RANKING
The Indebtedness evidenced by the Notes ranks pari passu in right of
payment with all existing and future unsubordinated indebtedness of the Company
and senior in right of payment to all subordinated indebtedness of the Company.
After giving pro forma effect to the Offering, as of December 31, 1997, the
Company and its subsidiaries would have had no indebtedness outstanding other
than the Notes. The Company also expects to have the ability to incur up to
$100.0 million of additional indebtedness under the Lease Facility. The AT&T
Lease Facility is expected to be secured by a security interest in the capital
stock of the subsidiaries of the Company that are lessees under the Lease
Facility. The Notes will be effectively subordinated to such indebtedness to the
extent of such security interests. In addition, all existing and future
liabilities (including trade payables) of the Company's subsidiaries will be
effectively senior to the Notes. See "Risk Factors -- Holding Company Structure;
Structural Subordination of Notes" and "Effective Subordination of Notes to
Secured Indebtedness."
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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.
"Accreted Value" means, for any Specified Date, the amount provided below
for each $1,000 principal amount at maturity of Notes:
(i) if the Specified Date occurs on one of the following dates (each a
"Semi-Annual Accrual Date"), the Accreted Value will equal the amount set
forth below for such Semi-Annual Accrual Date:
<TABLE>
<CAPTION>
SEMI-ANNUAL ACCRUAL DATE ACCRETED VALUE
------------------------ --------------
<S> <C>
August 15, 1998............................................. $ 598.21
February 15, 1999........................................... $ 633.36
August 15, 1999............................................. $ 670.57
February 15, 2000........................................... $ 709.96
August 15, 2000............................................. $ 751.67
February 15, 2001........................................... $ 795.84
August 15, 2001............................................. $ 842.59
February 15, 2002........................................... $ 892.09
August 15, 2002............................................. $ 944.51
February 15, 2003........................................... $1,000.00
</TABLE>
(ii) if the Specified Date occurs before the first Semi-Annual Accrual
Date, the Accreted Value will equal the sum of (a) $562.87 and (b) an
amount equal to the product of (1) the Accreted Value for the first
Semi-Annual Accrual Date less $562.87 multiplied by (2) a fraction, the
numerator of which is the number of days from the Closing Date to the
Specified Date, using a 360-day year of twelve 30-day months, and the
denominator of which is the number of days from the Closing Date to the
first Semi-Annual Accrual Date, using a 360-day year of twelve 30-day
months;
(iii) if the Specified Date occurs between two Semi-Annual Accrual
Dates, the Accreted Value will equal the sum of (a) the Accreted Value for
the Semi-Annual Accrual Date immediately preceding such Specified Date and
(b) an amount equal to the product of (1) the Accreted Value for the
immediately following Semi-Annual Accrual Date less the Accreted Value for
the immediately preceding Semi-Annual Accrual Date multiplied by (2) a
fraction, the numerator of which is the number of days from the immediately
preceding Semi-Annual Accrual Date to the Specified Date, using a 360-day
year of twelve 30-day months, and the denominator of which is 180; or
(iv) if the Specified Date occurs after the last Semi-Annual Accrual
Date, the Accreted Value will equal $1,000.
"Acquired Indebtedness" means Indebtedness of a Person existing at the time
such Person becomes a Restricted Subsidiary or 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 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
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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
(including Capital Stock of the Company held by Allegiance LLC).
"Adjusted Consolidated Net Tangible Assets" means the total amount of
assets of the Company and its Restricted Subsidiaries (less applicable
depreciation, amortization and other valuation reserves), except to the extent
resulting from write-ups of capital assets (excluding write-ups in connection
with accounting for acquisitions in conformity with GAAP), after deducting
therefrom (i) all current liabilities of the Company and its Restricted
Subsidiaries (excluding intercompany items) and (ii) all goodwill, trade names,
trademarks, patents, unamortized debt discount and expense and other like
intangibles, all as set forth on the most recent quarterly or annual
consolidated balance sheet of the Company and its Restricted Subsidiaries,
prepared in conformity with GAAP and filed with the Commission or provided to
the Trustee pursuant to the "Commission Reports and Reports to Holders"
covenant.
"Affiliate" means, as applied to any Person, any other Person directly or
indirectly controlling, controlled by, or under direct or indirect common
control with, such Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as applied to any Person, means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities, by contract or otherwise.
"Asset Acquisition" means (i) an investment by the Company or any of its
Restricted Subsidiaries in any other Person pursuant to which such Person shall
become a Restricted Subsidiary or shall be merged into or consolidated with the
Company or any of its Restricted Subsidiaries; provided that such Person's
primary business is related, ancillary or complementary to the businesses of the
Company and its Restricted Subsidiaries on the date of such investment or (ii)
an acquisition by the Company or any of its Restricted Subsidiaries of the
property and assets of any Person other than the Company or any of its
Restricted Subsidiaries that 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
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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.
"Capitalized Lease Obligations" means the discounted present value of the
rental obligations under a Capitalized Lease.
"Change of Control" means such time as (i) (a) prior to the occurrence of a
Public Market, a "person" or "group" (within the meaning of 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 Voting Stock representing a
greater percentage of the total voting power of the Voting Stock of (x)
Allegiance LLC, on a fully diluted basis, than is beneficially owned by the Fund
Investors on such date or (y) the Company, on a fully diluted basis, than is
beneficially owned by the Existing Stockholders on such date and (b) after the
occurrence of a Public Market, 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 (x) 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 or (y)
so long as the Fund Investors and their Affiliates beneficially own a majority
of the Voting Stock of Allegiance LLC, whose election was approved by Allegiance
LLC) cease for any reason to constitute a majority of the members of the Board
of Directors then in office.
"Closing Date" means the date on which the Notes are originally issued
under the Indenture.
"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
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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 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 Units, 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
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any of its Restricted Subsidiaries, each item to be determined in conformity
with GAAP (excluding the effects of foreign currency exchange adjustments under
Financial Accounting Standards Board Statement of Financial Accounting Standards
No. 52).
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement.
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Disqualified Stock" means any class or series of Capital Stock of any
Person that by its terms or otherwise is (i) required to be redeemed prior to
the Stated Maturity of the Notes, (ii) redeemable at the option of the holder of
such class or series of Capital Stock at any time prior to the Stated Maturity
of the Notes or (iii) convertible into or exchangeable for Capital Stock
referred to in clause (i) or (ii) above or Indebtedness having a scheduled
maturity prior to the Stated Maturity of the Notes; provided that any Capital
Stock that would not constitute Disqualified Stock but for provisions thereof
giving holders thereof the right to require such Person to repurchase or redeem
such Capital Stock upon the occurrence of an "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 (i) 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 (the
"Fund Investors") and (ii) Allegiance LLC, so long as the Fund Investors, in the
aggregate, beneficially own a majority of the Voting Stock of Allegiance LLC.
"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 offering of the Units and (ii) except as otherwise provided,
the amortization of any amounts required or permitted by Accounting Principles
Board Opinion Nos. 16 and 17.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any other Person and,
without limiting the generality of the foregoing, any obligation, direct or
indirect, contingent or otherwise, of such Person (i) to purchase or pay (or
advance or
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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 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
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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 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 (or original issue discount) pursuant to its terms; (iv) that, unless
the Company defaults in the payment of the purchase price, any Note accepted for
payment pursuant to the Offer to Purchase shall cease to accrue interest (or
original issue discount) on and after the Payment Date; (v) that Holders
electing to have a Note purchased pursuant to the Offer to Purchase will be
required to surrender the Note, together with
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the form entitled "Option of the Holder to Elect Purchase" on the reverse side
of the Note completed, to the Paying Agent at the address specified in the
notice prior to the close of business on the Business Day immediately preceding
the Payment Date; (vi) that Holders will be entitled to withdraw their election
if the Paying Agent receives, not later than the close of business on the third
Business Day immediately preceding the Payment Date, a telegram, facsimile
transmission or letter setting forth the name of such Holder, the principal
amount at maturity of Notes delivered for purchase and a statement that such
Holder is withdrawing his election to have such Notes purchased; and (vii) that
Holders whose Notes are being purchased only in part will be issued new Notes
equal in principal amount to the unpurchased portion of the Notes surrendered;
provided that each Note purchased and each new Note issued shall be in a
principal amount at maturity of $1,000 or an integral multiple thereof. On the
Payment Date, the Company shall (i) accept for payment on a pro rata basis Notes
or portions thereof tendered pursuant to an Offer to Purchase; (ii) deposit with
the Paying Agent money sufficient to pay the purchase price of all Notes or
portions thereof so accepted; and (iii) deliver, or cause to be delivered, to
the Trustee all Notes or portions thereof so accepted together with an Officers'
Certificate specifying the Notes or portions thereof accepted for payment by the
Company. The Paying Agent shall promptly mail to the Holders of Notes so
accepted payment in an amount equal to the purchase price, and the Trustee shall
promptly authenticate and mail to such Holders a new Note equal in principal
amount at maturity to any unpurchased portion of the Note surrendered; provided
that each Note purchased and each new Note issued shall be in a principal amount
at maturity of $1,000 or an integral multiple thereof. The Company will publicly
announce the results of an Offer to Purchase as soon as practicable after the
Payment Date. The Trustee shall act as the Paying Agent for an Offer to
Purchase. The Company will comply with Rule 14e-1 under the Exchange Act and any
other securities laws and regulations thereunder to the extent such laws and
regulations are applicable, in the event that the Company is required to
repurchase Notes pursuant to an Offer to Purchase.
"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 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
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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.
"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.
"Specified Date" means any Redemption Date, any Payment Date for an Offer
to Purchase or any date on which the Notes first become due and payable after an
Event of Default.
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"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.
"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
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assets of $1,000 or less or (II) if such Subsidiary has assets greater than
$1,000, such designation would be permitted under the "Limitation on Restricted
Payments" covenant described below and (C) if applicable, the Incurrence of
Indebtedness and the Investment referred to in clause (A) of this proviso would
be permitted under the "Limitation on Indebtedness" and "Limitation on
Restricted Payments" covenants described below. The Board of Directors may
designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided
that (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 (ix) 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 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
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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 the Closing Date
as a capital contribution or from the issuance and sale of its Capital Stock
(other than Disqualified Stock) to a Person that is not a Subsidiary of the
Company, to the extent (I) such capital contribution or Net Cash Proceeds have
not been used pursuant to clause (C)(2) of the first paragraph or clause (iii),
(iv), (vi) of (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 Net Cash Proceeds are used to consummate a transaction
pursuant to which the Company Incurs Acquired Indebtedness, the amount of such
Net Cash Proceeds exceeds one-half of the amount of Acquired Indebtedness so
Incurred and (B) 80% of the fair market value of property (other than cash and
cash equivalents) received by the Company after the Closing Date 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.
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(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, 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
the first day of the fiscal quarter immediately following the Closing Date and
ending on the last day of the last fiscal quarter preceding the Transaction Date
for which reports have been filed with the Commission 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 the Closing Date
as a capital contribution or from the issuance and sale permitted by the
Indenture of its Capital Stock (other than Disqualified Stock) to a Person who
is not a Subsidiary of the Company, including an issuance or sale permitted by
the Indenture of Indebtedness of the Company for cash subsequent to the Closing
Date upon the conversion of such Indebtedness into Capital Stock (other than
Disqualified Stock) of the Company, or from the issuance to a Person who is not
a Subsidiary of the Company of any options, warrants or other rights to acquire
Capital Stock of the Company (in each case, exclusive of any Disqualified Stock
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
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calculation of Adjusted Consolidated Net Income), or from redesignations of
Unrestricted Subsidiaries as Restricted Subsidiaries (valued in each case as
provided in the definition of "Investments"), not to exceed, in each case, the
amount of Investments previously made by the Company or any Restricted
Subsidiary in such Person or Unrestricted Subsidiary.
The foregoing provision shall not be violated by reason of: (i) the payment
of any dividend within 60 days after the date of declaration thereof if, at said
date of declaration, such payment would comply with the foregoing paragraph;
(ii) the redemption, repurchase, defeasance or other acquisition or retirement
for value of Indebtedness that is subordinated in right of payment to the Notes
including premium, if any, and accrued and unpaid interest, with the proceeds
of, or in exchange for, Indebtedness Incurred under clause (iii) of the second
paragraph of part (a) of the "Limitation on Indebtedness" covenant; (iii) the
repurchase, redemption or other acquisition of Capital Stock of the Company or
an Unrestricted Subsidiary (or options, warrants or other rights to acquire such
Capital Stock) in exchange for, or out of the proceeds of a capital contribution
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 the Closing Date
as a capital contribution or from the sale of its Capital Stock (other than
Disqualified Stock) to a Person who is not a Subsidiary of the Company, except
to the extent such Net Cash Proceeds are used to Incur Indebtedness pursuant to
clause (viii) under the "Limitation on Indebtedness" covenant or to make
Restricted Payments pursuant to clause (C)(2) of the first paragraph, or clauses
(iii) or (iv) 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 the Common Stock of the Company following a Public Equity Offering
of such Common Stock, of up to 6% per annum of the Net Cash Proceeds received by
the Company in such Public Equity Offering; (ix) prior to the occurrence of a
Public Market, the purchase, redemption, retirement or other acquisition for
value of shares of Capital Stock of the Company or options to purchase such
shares, held by directors, employees or officers, or former directors, employees
or officers, of the Company or a Restricted Subsidiary (or their estates or
beneficiaries under their estates), upon the death, disability, retirement,
termination of employment or pursuant to the terms of any agreement under which
such shares of Capital Stock or options were issued; provided that the aggregate
consideration paid for such purchase, redemption, retirement or other
acquisition for value of such shares or options after the Closing Date does not
exceed $5 million in the aggregate (unless such repurchases are made with the
proceeds of insurance policies and the shares are purchased from the executors,
administrators, testamentary trustees, heirs, legatees or beneficiaries); (x)
repurchases of Warrants pursuant to a Repurchase Offer; (xi) 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 (xii) other Restricted Payments in an aggregate amount not to exceed $2
million; provided that, except in the case of clauses (i) and (iii), no
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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 "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 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
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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 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.
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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 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.
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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 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 Accreted Value of Notes equal to the Excess Proceeds on such date, at
a purchase price equal to 100% of the Accreted Value of the Notes on the
relevant Payment Date, plus, in each case, accrued interest (if any) 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 Accreted Value thereof on the relevant
Payment Date, plus accrued interest (if any) to the Payment Date.
There can be no assurance that the Company will have sufficient funds
available at the time of any Change of Control to make any debt payment
(including repurchases of Notes) required by the foregoing covenant (as well as
may be contained in other securities of the Company which might be outstanding
at the time). The above covenant requiring the Company to repurchase the Notes
will, unless consents are obtained, require the Company to repay all
indebtedness then outstanding which by its terms would prohibit such Note
repurchase, either prior to or concurrently with such Note repurchase.
COMMISSION REPORTS AND REPORTS TO HOLDERS
At all times from and after the earlier of (i) the date of the commencement
of an Exchange Offer or the effectiveness of a Shelf Registration Statement (the
"Registration") and (ii) the date that is six months after
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the Closing Date, in either case, 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. In addition, at
all times prior to the earlier of the date of the Registration and the date that
is six months after the Closing Date, the Company shall, at its cost, deliver to
each Holder of the Notes quarterly and annual reports substantially equivalent
to those which would be required by the Exchange Act. In addition, at all times
prior to the Registration, upon the request of any Holder or any prospective
purchaser of the Notes designated by a Holder, the Company shall supply to such
Holder or such prospective purchaser the information required under Rule 144A
under the Securities Act.
EVENTS OF DEFAULT
The following events are 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; (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 substantially all of the property and assets of the Company or any
Significant Subsidiary or (C) the winding up or liquidation of the affairs of
the Company or any Significant Subsidiary and, in each case, such decree or
order shall remain unstayed and in effect for a period of 30 consecutive days;
or (h) the Company or any Significant Subsidiary (A) commences a voluntary case
under any applicable bankruptcy, insolvency or other similar law now or
hereafter in effect, or consents to the entry of an order for relief in an
involuntary case under any such law, (B) consents to the appointment of or
taking possession by a receiver, liquidator, assignee, custodian, trustee,
sequestrator or similar official of the Company or any Significant Subsidiary or
for all or substantially all of the property and assets of the Company or any
Significant Subsidiary or (C) effects any general assignment for the benefit of
creditors.
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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 Accreted Value
of, premium, if any, and accrued interest on the Notes to be immediately due and
payable. Upon a declaration of acceleration, such Accreted Value 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 Accreted Value 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 Accreted Value of, premium, if any, and interest on
the Notes that have become due solely by such declaration of acceleration, have
been cured or waived and (ii) the rescission would not conflict with any
judgment or decree of a court of competent jurisdiction. For information as to
the waiver of defaults, see "-- Modification and Waiver."
The Holders of at least a majority in aggregate principal amount of the
outstanding Notes may direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred on the Trustee. However, the Trustee may refuse to follow any
direction that conflicts with law or the Indenture, that may involve the Trustee
in personal liability, or that the Trustee determines in good faith may be
unduly prejudicial to the rights of Holders of Notes not joining in the giving
of such direction and may take any other action it deems proper that is not
inconsistent with any such direction received from Holders of Notes. A Holder
may not pursue any remedy with respect to the Indenture or the Notes unless: (i)
the Holder gives the Trustee written notice of a continuing Event of Default;
(ii) the Holders of at least 25% in aggregate principal amount 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
Accreted Value of, premium, if any, or interest on, such Note or to bring suit
for the enforcement of any such payment, on or after the due date expressed in
the Notes, which right shall not be impaired or affected without the consent of
the Holder.
The Indenture 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)
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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 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
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effect to such deposit on a pro forma basis, no Event of Default, or event that
after the giving of notice or lapse of time or both would become an Event of
Default, shall have occurred and be continuing on the date of such deposit or
during the period ending on the 123rd day after the date of such deposit, and
such deposit shall not result in a breach or violation of, or constitute a
default under, any other agreement or instrument to which the Company or any of
its Subsidiaries is a party or by which the Company or any of its Subsidiaries
is bound and (D) if at such time the Notes are listed on a national securities
exchange, the Company has delivered to the Trustee an Opinion of Counsel to the
effect that the Notes will not be delisted as a result of such deposit,
defeasance and discharge.
Defeasance of Certain Covenants and Certain Events of Default. The
Indenture further 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 Accreted Value of, or premium, if any,
or interest on, any Note, (iii) change the place or currency of payment of
principal of, or premium, if any, or interest on, any Note, (iv) impair the
right to institute suit for the enforcement of any payment on or after the
Stated Maturity (or, in the case of a redemption, on or after the Redemption
Date) of any Note, (v) reduce the above-stated percentage of outstanding Notes
the consent of whose Holders is necessary to modify or amend the Indenture, (vi)
waive a default in the payment of principal of, premium, if any, or interest on
the Notes or (vii) reduce the percentage or aggregate principal amount 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,
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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.
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DESCRIPTION OF THE WARRANTS
GENERAL
On February 3, 1998, the Company issued the Warrants pursuant to the
Warrant Agreement between the Company and The Bank of New York (the "Warrant
Agent"). The following summary of certain provisions of the Warrant Agreement
does not purport to be complete and is subject to, and qualified in its entirety
by reference to, the provisions of the Warrant Agreement, including the
definitions of certain terms therein. Wherever particular defined 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
available upon request from the Company.
Each Warrant is evidenced by a Warrant Certificate which entitles the
holder thereof to purchase .0034224719 shares of Common Stock of the Company at
a price (the "Exercise Price") of $.01 per share, subject to adjustment as
provided in the Warrant Agreement. The Warrants may be exercised at any time
beginning one year after the date of original issuance of the Warrants and prior
to the close of business on the tenth anniversary of the date of original
issuance of the Warrants; provided that the Warrants will become exercisable in
connection with the initial public offering of the Company. Warrants not
exercised by such date will expire. The aggregate number of the shares of Common
Stock issuable upon exercise of the Warrants is equal to approximately 1.5% of
the outstanding shares of Common Stock, on a fully diluted basis as of the date
of this Prospectus, assuming exercise of the Warrants, conversion of the
Company's Preferred Stock, and exercise of all employee options currently
outstanding or authorized under the Company's existing stock option plan.
The Warrants will become separately transferable from the Notes on the
earliest to occur of (i) the date that is six months following the date of
original issuance of the Warrants, (ii) the commencement of the Exchange Offer
and (iii) the effective date of a shelf registration statement with respect to
the Notes.
Upon the occurrence of a merger with a person in connection with which the
consideration to shareholders of the Company is not all cash and where the
Common Stock (or other securities) issuable upon exercise of the Warrants would
not be registered under the Exchange Act, the Company or its successor by merger
will be required, upon the expiration of the time periods discussed below, to
offer to repurchase the Warrants for cash.
CERTAIN DEFINITIONS
The Warrant Agreement contains, among others, the following definitions:
A "Financial Expert" is one of the persons listed in Appendix A to the
Warrant Agreement, all of which are nationally recognized investment banking
firms.
An "Independent Financial Expert" is it Financial Expert that does not (and
whose directors, executive officers and 5% stockholders do not) have a direct or
indirect financial interest in the Company or any of its subsidiaries or
affiliates, which has not been for at least five years and, at the time that it
is called upon to give independent financial advice to the Company, is not (and
none of its directors, executive officers or 5% stockholders is) a promoter,
director or officer of the Company or any of its subsidiaries or affiliates.
A "Repurchase Event" is defined to occur on any date when the Company (i)
consolidates with or merges into or with another person (but only where the
holders of Common Stock receive consideration in exchange for all or part of
such Common Stock), if the Common Stock (or other securities) thereafter
issuable upon exercise of the Warrants is not registered under the Exchange Act
or (ii) sells all or substantially all of its assets to another person, if the
Common Stock (or other securities) thereafter issuable upon exercise of the
Warrants is not registered under the Exchange Act; provided that, in each case,
a "Repurchase Event" shall not be deemed to have occurred if the consideration
for such transaction consists solely of cash.
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CERTAIN TERMS
Repurchase
Following the occurrence of a Repurchase Event, the Company must make an
offer to repurchase for cash all outstanding Warrants (a "Repurchase Offer").
The holders of the Warrants may, until 5:00 p.m. (New York City time) on the
date (the "Final Surrender Time") at least 30 but not more than 60 days
following the date on which the Company gives notice of such Repurchase Offer to
such holders, surrender all or part of their Warrants for repurchase by the
Company. Except as otherwise provided in the Warrant Agreement, Warrants
received by the Warrant Agent in proper form for purchase during a Repurchase
Offer prior to the Final Surrender Time are to be repurchased by the Company at
a price in cash (the "Repurchase Price") equal to the value (the "Relevant
Value") on the Valuation Date (as defined in the Warrant Agreement) relating
thereto of the Warrant Shares (and other securities issuable upon exercise of
the Warrants), had the Warrants then been exercised, less the Exercise Price
therefor. The "Relevant Value" of the Common Stock (or other securities) shall
be (i) if the Common Stock (or other securities) is registered under the
Exchange Act, the average of the closing sales prices (on the stock exchange
that is the primary trading market for the Common Stock (or other securities))
of the Common Stock (or other securities) for the 20 consecutive trading days
immediately preceding such Valuation Date or, if the Common Stock (or other
securities) has been registered under the Exchange Act for less than 20 days
trading days before such date, then the average of the closing sales prices for
all of the trading days before such date for which closing sales prices are
available or (ii) if the Common Stock (or other securities) is not registered
under the Exchange Act or if the value cannot be computed under clause (i)
above, the value determined (without giving effect to any discount for lack of
liquidity, the fact that the Company has no class of equity securities
registered under the Exchange Act or the fact that the Common Stock (or other
securities) issuable upon exercise of the Warrants represent a minority in the
Company) by an Independent Financial Expert.
If clause (ii) of the preceding paragraph is applicable, the Board of
Directors of the Company is required to select an Independent Financial Expert
not more than five business days following a Repurchase Event. Within two days
after its selection of the Independent Financial Expert, the Company must
deliver to the Warrant Agent a notice setting forth the name of such Independent
Financial Expert. The Company must use its best efforts (including by selecting
another Independent Financial Expert) to cause the Independent Financial Expert
to deliver to the Company, with a copy to the Warrant Agent, a value report (a
"Value Report") which states the Relevant Value of the Common Stock (or other
securities) being valued as of the Valuation Date and contains a brief statement
as to the nature and scope of the methodologies upon which the determination was
made. The Warrant Agent will have no duty with respect to the Value Report of
any Independent Financial Expert, except to keep it on file available for
inspection by the holders of the Warrants. The determination of the Independent
Financial Expert as to the Relevant Value in accordance with the provisions of
the Warrant Agreement shall be conclusive on all persons.
Exercise
In order to exercise all or any of the Warrants represented by a Warrant
Certificate, the holder thereof is required to surrender to the Warrant Agent
the Warrant Certificate, a duly executed copy of the subscription form set forth
in the Warrant Certificate, and payment in full of the Exercise Price for each
share of Common Stock or other securities issuable upon exercise of such
Warrants, which payment may be made in cash or by certified or official bank or
bank cashier's check payable to the order of the Company or through the
surrender of Warrant Certificates. Upon the exercise of any Warrant in
accordance with the Warrant Agreement, the Warrant Agent will instruct the
Company to transfer promptly to or upon the written order of the holder of such
Warrant Certificate appropriate evidence of ownership of any shares of Common
Stock or other security or property to which it is entitled as a result of such
exercise, registered or otherwise placed in such name or names as it may direct
in writing, and will deliver such evidence of ownership to the person or persons
entitled to receive the same and fractional shares, if any, or an amount in
cash, in lieu of any fractional shares, if any. All shares of Common Stock or
other securities issuable by the Company upon the exercise of the Warrants must
be validly issued, fully paid and nonassessable. The Warrant Agreement provides
that, if the Company conducts an initial public offering of equity securities
other than Common Stock, the Company will give
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holders of Warrants and Common Stock (or other securities) issued or issuable
upon exercise of Warrants the opportunity to convert such Warrants into warrants
to purchase such equity securities and the opportunity to convert such Common
Stock (or other securities) into such equity securities. Such conversion
opportunity will be on terms and conditions determined to be fair and reasonable
by the Company's Board of Directors.
Holders of Warrants will be able to exercise their Warrants only if a
registration statement relating to the Common Stock underlying the Warrants is
then effective and available, or the exercise of such Warrants is exempt from
the registration requirements of the Securities Act, as reasonably determined by
the Company, and such securities are qualified for sale or exempt from
qualification under the applicable securities laws of the states or other
jurisdictions in which the various holders of the Warrants reside.
Anti-dilution Provisions
The Warrant Agreement contains provisions adjusting the Exercise Price and
the number of shares of Common Stock or other securities issuable upon exercise
of a Warrant in the event of (i) a division, consolidation or reclassification
of the shares of Common Stock, (ii) the issuance of rights, options, warrants or
convertible or exchangeable securities to all holders of shares of Common Stock
entitling such holders to subscribe for or purchase shares of Common Stock at a
price per share which is lower than the then current value per share of Common
Stock, subject to certain exceptions, (iii) the issuance of shares of Common
Stock at a price per share that is lower than the then current value of such
shares, except for issuances in connection with an acquisition, merger or
similar transaction with a third party, (iv) certain distributions to all
holders of shares of Common Stock of evidences of indebtedness or assets and (v)
in the discretion of the Company's Board of Directors, in certain other
circumstances. No adjustment in the number of shares of Common Stock purchasable
upon exercise of the Warrants is required, however, for certain bona fide public
offerings or private placements, for grants (or exercises) of options or other
rights to purchase (or the exercise thereof) granted to employees of the Company
under the Company's stock option plans, for issuances of shares of Common Stock
to employees of the Company, for grants (or exercises) of options, warrants or
other agreements or rights to purchase capital stock of the Company existing on
the date of original issuance of the Warrants and in certain other
circumstances, or unless such adjustment would require an increase or decrease
of at least one percent in the number of shares of Common Stock purchasable upon
the exercise of a Warrant and such anti-dilution provisions will not apply to
certain additional limited exceptions.
No Rights as Stockholders
The holders of unexercised Warrants are not entitled, as such, to receive
dividends or other distributions, receive notice of any meeting of the
stockholders, consent to any action of the stockholders, receive notice of any
other stockholder proceedings, or to any other rights as stockholders of the
Company.
Mergers, Consolidations, etc.
Except as provided below, in the event that the Company consolidates with,
merges with or into, or sells all or substantially all of its property and
assets to another person, each Warrant thereafter shall entitle the holder
thereof to receive upon exercise thereof the number of shares of capital stock
or other securities or property which the holder of Common Stock is entitled to
receive upon completion of such consolidation, merger or sale of assets. If the
Company merges or consolidates with, or sells all or substantially all of the
property and assets of the Company to, another person and, in connection
therewith, consideration to the holders of Common Stock in exchange for their
shares is payable solely in cash, or in the event of the dissolution,
liquidation or winding-up of the Company, then the holders of the Warrants will
be entitled to receive distributions on an equal basis with the holders of
Common Stock or other securities issuable upon exercise of the Warrants assuming
the Warrants had been exercised immediately prior to such event, less the
Exercise Price. Upon receipt of such payment, if any, the Warrants will expire
and the rights of the holders thereof will cease. If the Company has made a
Repurchase Offer that has not expired at the time of such transaction, the
holders of the Warrants will be entitled to receive the higher of (i) the amount
payable to the holders of the Warrants described above and (ii) the Repurchase
Price payable to the holders of the Warrants pursuant to such Repurchase Offer.
In case of any such merger, consolidation or sale of assets, the surviving or
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acquiring person and, in the event of any dissolution, liquidation or winding-up
of the Company, the Company must deposit promptly with the Warrant Agent the
funds, if any, necessary to pay to the holders of the Warrants. After such funds
and the surrendered Warrant Certificate are received, the Warrant Agent must
make payment by delivering a check in such amount as is appropriate (or, in the
case of consideration other than cash, such other consideration as is
appropriate) to such person or persons as it may be directed in writing by the
holders surrendering such Warrants.
Registration Requirements
Under the terms of the Warrant Registration Rights Agreement, the holders
of the Warrants will be entitled to piggy-back registration rights for the
Common Stock (or other securities) issuable upon exercise of the Warrants in
connection with (i) an initial public offering of the Common Stock (or other
securities) issuable upon exercise of the Warrants, if any stockholder of the
issuer participates in such public offering, or (ii) certain public offerings of
shares of Common Stock (or other securities) issuable upon exercise of the
Warrants conducted subsequent to the initial public offering of such stock. If
only the Company sells shares in the initial public offering or all of the
Warrant Shares (or other securities issuable upon exercise of the Warrants) are
not sold in the initial public offering or any subsequent offering, the Company
will be required to use its best efforts to cause to be declared effective, no
later than 180 days after the closing date of the initial public offering (but
in no event prior to the first anniversary of the date of original issuance of
the Warrants), the Warrant Registration Statement with respect to the issuance
of the Common Stock (or other securities) issuable upon exercise of the
Warrants. The Company is required to use reasonable efforts to maintain the
effectiveness of the Warrant Registration Statement until the Expiration Date,
or if earlier, such time as all Warrants have been exercised. During any
consecutive 365-day period while the Warrants are exercisable, the Company will
have the ability to suspend the availability of such registration statement for
(a) up to two 30-consecutive-day periods (except during the 30 days immediately
prior to the expiration of the Warrants) if the Company's Board of Directors
determines in good faith that there is a valid purpose for the suspension and
provides notice of such determination to the holders at their addresses
appearing in the register of Warrants maintained by the Warrant Agent and (b)
five additional, non-consecutive three-day periods, except during the 30-day
period immediately prior to the Expiration Date, if the Company's Board of
Directors determines in good faith that the Company cannot provide adequate
disclosure during such period due to circumstances beyond its control. Holders
of Warrants will not be named as selling securityholders in the Warrant
Registration Statement. The Warrant Agreement requires the Company to pay the
expenses associated with such registration.
Reservation of Shares
The Company has authorized and will reserve for issuance such number of
shares of Common Stock as will be issuable upon the exercise of all outstanding
Warrants. Such shares of Common Stock, when issued and paid for in accordance
with the Warrant Agreement, will be duly and validly issued, fully paid and
nonassessable, free of preemptive rights and free from all taxes, liens, charges
and security interests.
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DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of: (i) 101,524 shares
of Common Stock, of which one share has been issued and is outstanding and owned
by Allegiance LLC, 95,000 shares are reserved for issuance upon conversion of
the Preferred Stock, and 1,523 shares are reserved for issuance upon exercise of
the Warrants; and (ii) 95,000 shares of Preferred Stock, of which 95,000 shares
are issued and outstanding and owned by Allegiance LLC.
COMMON STOCK
Holders of Common Stock of the Company are entitled to one vote for each
share held on all matters submitted to a vote of stockholders. Except as
otherwise required by law, actions at the Company's stockholders meetings
require the affirmative vote of a majority of the shares represented at the
meeting and that a quorum be present. Holders of Common Stock are entitled,
subject to the preferences of the Preferred Stock, to receive such dividends, if
any, as may be declared by the Board of Directors out of funds legally available
therefor. The Indenture restricts the ability of the Company to pay dividends on
the Common Stock. See "Description of the Notes -- Covenants." In addition,
without the prior consent of Allegiance LLC, the Company may not declare or pay
any dividends on its Common Stock. See "Certain Transactions -- Stock Purchase
Agreement." The holders of Common Stock have no preemptive, redemption,
conversion or sinking fund rights. In the event of a liquidation, dissolution or
winding up of the Company, holders of Common Stock are entitled to share ratably
in the assets of the Company which are legally available for distribution, if
any, remaining after the payment of all debts and liabilities of the Company and
the liquidation preference of any outstanding Preferred Stock.
At present, there is no established trading market for the Common Stock.
PREFERRED STOCK
The Preferred Stock accrues dividends at a per-annum rate of 12% of the sum
of the Liquidation Value thereof and all accumulated and unpaid dividends
thereon. "Liquidation Value" for any share of Preferred Stock is equal to the
sum of (i) the initial price paid to the Company for such share on its date of
issuance and (ii) the aggregate contributions to the capital of the Company made
pursuant to the Stock Purchase Agreement with respect to such share after its
date of issuance. The Indenture restricts the ability of the Company to pay
dividends on the Preferred Stock. See "Description of the Notes -- Covenants."
Upon any liquidation, dissolution or winding up of the Company (whether
voluntary or involuntary), each holder of Preferred Stock shall be entitled to
be paid, before any distribution or payment is made with respect to any other
class of the Company's capital stock, an amount in cash equal to the aggregate
Liquidation Value of all shares held by such holder plus all accrued and unpaid
dividends thereon (the "Liquidation Payment"). In the event of certain changes
of control of the Company, and upon the election of the holders of a majority of
the Preferred Stock, the holders of Preferred Stock may elect (subject to
certain exceptions) to require the Company to treat such change of control as a
dissolution or liquidation of the Company and receive Liquidation Payments with
respect to their Preferred Stock.
The Preferred Stock is convertible at any time and from time to time
(without credit for accumulated dividends) into shares of Common Stock. The
95,000 shares of Preferred Stock outstanding are currently convertible into
95,000 shares of the Company's Common Stock, which conversion ratio is subject
to adjustment on a weighted-average basis upon any issuance or deemed issuance
of Common Stock, or securities convertible into or exercisable for Common Stock,
that would otherwise dilute the economic interests of the holders of Preferred
Stock. In addition, the Company can cause the Preferred Stock to be converted in
connection with an IPO, subject to the approval of the holders of a majority of
the Preferred Stock. Holders of Preferred Stock vote with holders of the
Company's Common Stock on an as-if-converted basis.
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REGISTRATION RIGHTS
The Fund Investors, the Management Investors, and the Company are parties
to a registration rights agreement dated as of August 13, 1997 (the
"Registration Agreement"). Under the terms of the Registration Agreement, the
Fund Investors may (subject to Mr. Holland's approval right described above)
require the Company to consummate an IPO. After the IPO, 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 an IPO
or other 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.
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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 an exchange of Old Notes for New Notes and
the ownership and disposition of the New Notes to initial purchasers thereof.
This discussion is based on currently existing provisions of the Internal
Revenue Code (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
or Warrant 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 (other than any partnership treated as foreign
under U.S. Treasury regulations which may be issued under recently enacted
amendments to the Code), (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.
EXCHANGE OF NOTES
The Company believes that the exchange of Old Notes for New Notes pursuant
to the Exchange Offer will not be treated as an "exchange" for federal income
tax purposes because the New Notes will not be considered to differ materially
in kind or extent from the Old Notes. Rather, the New Notes received by a holder
will be treated as a continuation of the Old Notes in the hands of such holder.
As a result, there will be no federal income tax consequences to holders
exchanging Old Notes for New Notes pursuant to the Exchange Offer.
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
Original Issue Discount. Because the Old Notes were sold at a substantial
discount from their principal amount at maturity and because there will not be
any payment of interest on the Notes in the first five years after issuance, the
Old Notes and New Notes (which for tax purposes are treated as a continuation of
the Old Notes) will have original issue discount ("OID") for federal tax
purposes, and U.S. Holders of Notes will be subject to special tax accounting
rules, as described in greater detail below. U.S. Holders of Notes should be
aware that they generally must include OID in gross income for U.S. federal
income tax purposes on an
103
<PAGE> 108
annual basis under a constant yield accrual method regardless of their regular
method of tax accounting. As a result, U.S. Holders will include OID in income
in advance of the receipt of cash attributable to such income. However, U.S.
Holders of the Notes generally will not be required to include separately in
income cash payments received on such notes, even if denominated as interest, to
the extent such payments constitute payments of previously accrued OID.
The Notes will be treated as issued with OID equal to the excess of the
"stated redemption price at maturity" of a Note over its "issue price." The
issue price of a Note is described under "-- Allocation of Purchase Price
Between Notes and Warrants." The stated redemption price at maturity of a Note
is the total of all payments on the Note that are not payments of "qualified
stated interest." A qualified stated interest payment is a payment of stated
interest unconditionally payable, in cash or property (other than debt
instruments of the issuer), at least annually at a single fixed rate during the
entire term of the Note that appropriately takes into account the length of
intervals between payments. Because there will not be any payment of interest on
the Notes in the first five years after issuance, none of the payments on the
Notes will constitute qualified stated interest. Accordingly, all payments on
the Notes will be treated as part of the Notes' stated redemption price at
maturity.
The amount of OID includible in income by an initial U.S. Holder of a Note
is the sum of the "daily portions" of OID with respect to the Note for each day
during the taxable year or portion thereof in which such U.S. Holder holds such
Note ("accrued OID"). The daily portion is determined by allocating to each day
in any "accrual period" a pro-rata portion of the OID that accrued in such
period. The "accrual period" for a Note will generally be the semi-annual period
between interest payment dates, but may be of any length and may vary in length
over the term of an OID note, provided that each accrual period is no longer
than one year and each scheduled payment of principal or interest occurs either
on the first or last day of an accrual period. The amount of OID that accrues
with respect to any accrual period is the excess of (a) the product of the
Note's adjusted issue price at the beginning of such accrual period and its
yield to maturity, determined on the basis of compounding at the close of each
accrual period and properly adjusted for the length of such period, over (b) the
amount of qualified stated interest allocable to such accrual period). The
"adjusted issue price" of a Note at the start of any accrual period is equal to
its issue price increased by the accrued OID for each prior accrual period and
reduced by any prior payments made on such Note (other than payments of
qualified stated interest).
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, yield to maturity and all related OID
computations would be made 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. In that event, if the Note were in fact not redeemed on such
date, appropriate adjustments would be made for purposes of future OID accruals.
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 (except to the extent such amount
is attributable to accrued but unpaid interest, which will be taxable as
ordinary income) and such U.S. Holder's adjusted tax basis in the Note. A U.S.
Holder's adjusted tax basis in the Note will be its cost to such U.S. Holder,
increased by the amount of any OID previously included in the U.S. Holder's
income and reduced by the amount of any cash payments on the Note other than
payments of qualified stated interest. As a general rule (with the exception of,
among other things, amounts attributable to accrued but unpaid interest), 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.
Applicable High-Yield Discount Obligations. The Notes will be treated as
"applicable high-yield discount obligations" ("AHYDOs") for U.S. federal income
tax purposes. An AHYDO is a debt instrument
104
<PAGE> 109
that has a yield-to-maturity, computed as of its issue date, that equals or
exceeds the sum of (i) the "applicable federal rate" (the "AFR") in effect for
the month in which the Notes are issued (for February 1998, the AFR is 5.84%,
assuming semi-annual compounding) and (ii) 5.0%, and that bears "significant"
OID (as determined under a formula prescribed in the Code). Because the Notes
are AHYDOS, the Company will not be allowed to deduct OID accrued on the Notes
until such time as the Company actually pays such OID.
Moreover, to the extent that the yield to maturity on the Notes exceeds the
sum of the AFR and 6.0% (such excess referred to herein as the "Disqualified
Yield"), the deduction for OID accrued on the Notes would be permanently
disallowed (regardless of whether the Company actually paid such OID) to the
extent such OID is attributable to such Disqualified Yield ("Dividend-Equivalent
Interest"). For purposes of the dividend-received deduction generally available
to corporations, such Dividend-Equivalent Interest will be treated as a dividend
to Holders to the extent it is deemed to have been paid out of the Company's
current or accumulated earnings and profits. U.S. Holders that are corporations
should consult with their own tax advisors as to the applicability of the
dividends received deduction.
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 10.0% 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) either (A) 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, or (B) 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
certifies to the Company or its agent under penalties of perjury that such
statement has been received from the beneficial owner by it or by the
financial institution between it and the beneficial owner and furnishes the
payor with a copy thereof;
(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 (other than any such gain in respect of
accrued interest) 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 generally
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
105
<PAGE> 110
before any payment date to claim such exemption), may 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 of a Note may
be subject to a branch profits tax equal to 30.0% 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, 1998
(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 which 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 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.
With respect to a Foreign Holder subject to U.S. federal income taxation
under the circumstances described above in paragraph (ii), exchange of an Old
Note for a New Note should not be subject to U.S. federal income tax.
Non-U.S. Holders should consult with their tax advisors regarding U.S. and
foreign tax consequences with respect to the Notes.
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 31.0% 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 50.0%
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
106
<PAGE> 111
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, 1998.
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 furnished to
the IRS.
PLAN OF DISTRIBUTION
Each Participating Broker-Dealer that receives New Notes for its own
account pursuant to the Exchange Offer must acknowledge that it will deliver a
Prospectus in connection with any resale of such New Notes. This Prospectus, as
it may be amended or supplemented from time to time, may be used by a
Participating Broker-Dealer in connection with resales of New Notes received in
exchange for Old Notes where such Old Notes were acquired as a result of
market-making activities or other trading activities. The Company has agreed
that for a period of 180 days after the Expiration Date, it will make this
Prospectus, as amended or supplemented, available to any Participating
Broker-Dealer for use in connection with any such resale. In addition, until
, 1998 (90 days after the commencement of the Exchange Offer), all
dealers effecting transactions in the New Notes, whether or not participating in
this distribution, may be required to deliver a Prospectus.
The Company will not receive any proceeds from any sales of the New Notes
by Participating Broker-Dealers. New Notes received by Participating
Broker-Dealers for their own accounts pursuant to the Exchange Offer may be sold
from time to time in one or more transactions in the over-the-counter market, in
negotiated transactions, through the writing of options on the New Notes or a
combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such Participating Broker-Dealer and/or the purchasers of
any such New Notes. Any Participating Broker-Dealer that resells the New Notes
that were received by it for its own account pursuant to the Exchange Offer and
any broker or dealer that participates in a distribution of such New Notes may
be deemed to be an "underwriter" within the meaning of the Securities Act and
any profit on any such resale of New Notes and any commissions or concessions
received by any such persons may be deemed to be underwriting compensation under
the Securities Act. The Letter of Transmittal states that by acknowledging that
it will deliver and by delivering a Prospectus, a Participating Broker-Dealer
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act.
For a period of 180 days after the Expiration Date, the Company will
promptly, upon request and in no event more than five business days after such
request, send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any Participating Broker-Dealer that requests
such documents in the Letter of Transmittal.
LEGAL MATTERS
The validity of the New Notes offered hereby will be passed upon for the
Company by Kirkland & Ellis (a partnership including professional corporations),
Chicago, Illinois.
EXPERTS
The consolidated balance sheet of the Company as of December 31, 1997, and
the related consolidated statements of operations, stockholder's deficit, and
cash flows for the period from inception (April 22, 1997) through December 31,
1997, included in this Prospectus have been audited by Arthur Andersen LLP,
independent public accountants, as set forth in their report on such financial
statements appearing elsewhere in this Prospectus.
107
<PAGE> 112
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheet as of December 31, 1997.......... F-3
Consolidated Statement of Operations for the Period from
Inception (April 22, 1997) through December 31, 1997...... F-4
Consolidated Statement of Stockholder's Deficit for the
Period from Inception (April 22, 1997) through December
31, 1997.................................................. F-5
Consolidated Statement of Cash Flows for the Period from
Inception (April 22, 1997) through December 31, 1997...... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 113
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholder of
Allegiance Telecom, Inc.:
We have audited the accompanying consolidated balance sheet of Allegiance
Telecom, Inc. (a Delaware corporation) and subsidiaries (the "Company") as of
December 31, 1997, and the related consolidated statements of operations,
stockholder's deficit, and cash flows 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 audit.
We conducted our audit 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 audit provides 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 December 31, 1997, and the results of its operations and its
cash flows for the period from inception to December 31, 1997, in conformity
with generally accepted accounting principles.
Dallas, Texas ARTHUR ANDERSEN LLP
March 13, 1998
F-2
<PAGE> 114
ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET -- DECEMBER 31, 1997
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 5,726,359
Accounts receivable....................................... 4,310
Prepaid expenses and other current assets................. 245,152
-----------
Total current assets.............................. 5,975,821
PROPERTY AND EQUIPMENT:
Property and equipment.................................... 23,912,659
Accumulated depreciation and amortization................. (12,639)
-----------
Property and equipment, net....................... 23,900,020
OTHER ASSETS................................................ 171,173
-----------
Total assets...................................... $30,047,014
===========
LIABILITIES AND STOCKHOLDER'S DEFICIT
CURRENT LIABILITIES:
Accounts payable.......................................... $ 2,261,690
Accrued liabilities....................................... 1,668,010
-----------
Total current liabilities......................... 3,929,700
REDEEMABLE CONVERTIBLE PREFERRED STOCK -- $.01 par value,
95,000 shares authorized, issued and outstanding.......... 30,455,214
COMMITMENTS AND CONTINGENCIES (see Note 6)
STOCKHOLDER'S DEFICIT:
Common stock -- $.01 par value, 100,001 shares authorized,
1 share issued and outstanding......................... 100
Accumulated deficit....................................... (4,338,000)
-----------
Total stockholder's deficit....................... (4,337,900)
-----------
Total liabilities and stockholder's deficit....... $30,047,014
===========
</TABLE>
The accompanying notes are an integral part of this consolidated financial
statement.
F-3
<PAGE> 115
ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(APRIL 22, 1997),
THROUGH
DECEMBER 31, 1997
-----------------
<S> <C>
REVENUES.................................................... $ 403
OPERATING EXPENSES:
Technical................................................. 151,269
Selling................................................... 22,844
General and administrative................................ 3,403,068
Depreciation and amortization............................. 12,639
-----------
Total operating expenses.......................... 3,589,820
-----------
Loss from operations...................................... (3,589,417)
INTEREST INCOME............................................. 111,417
-----------
NET LOSS.................................................... (3,478,000)
ACCRUED REDEEMABLE PREFERRED STOCK DIVIDENDS................ (860,000)
-----------
NET LOSS APPLICABLE TO COMMON STOCK......................... $(4,338,000)
===========
NET LOSS PER SHARE, basic and diluted....................... $(4,338,000)
===========
</TABLE>
The accompanying notes are an integral part of this consolidated financial
statement.
F-4
<PAGE> 116
ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDER'S DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK
----------------
NUMBER
OF ACCUMULATED
SHARES AMOUNT DEFICIT TOTAL
------ ------ ----------- -----------
<S> <C> <C> <C> <C>
BALANCE, April 22, 1997 (date of inception).... -- $ -- $ -- $ --
Issuance of common stock at $100 per share on
August 13, 1997........................... 1 100 -- 100
Accrued preferred stock dividends............ -- -- (860,000) (860,000)
Net loss..................................... -- -- (3,478,000) (3,478,000)
--- ---- ----------- -----------
BALANCE, December 31, 1997..................... 1 $100 $(4,338,000) $(4,337,900)
=== ==== =========== ===========
</TABLE>
The accompanying notes are an integral part of this consolidated financial
statement.
F-5
<PAGE> 117
ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(APRIL 22, 1997),
THROUGH
DECEMBER 31, 1997
-----------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $ (3,478,000)
Adjustments to reconcile net loss to net cash used in
operating activities --
Depreciation and amortization.......................... 12,639
Changes in assets and liabilities --
Accounts receivable.................................. (4,310)
Prepaid expenses and other current assets............ (245,152)
Other assets......................................... (171,173)
Accounts payable..................................... 275,089
Accrued liabilities.................................. 1,668,010
------------
Net cash used in operating activities................ (1,942,897)
------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........................ (23,912,659)
------------
Net cash used in investing activities................ (23,912,659)
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Construction accounts payable............................. 1,986,601
Proceeds from issuance of redeemable preferred stock...... 5,000,000
Proceeds from redeemable capital contributions (see Note
3)..................................................... 24,595,214
Proceeds from issuance of common stock.................... 100
------------
Net cash provided by financing activities............ 31,581,915
------------
INCREASE IN CASH AND CASH EQUIVALENTS....................... 5,726,359
CASH AND CASH EQUIVALENTS, beginning of period.............. --
------------
CASH AND CASH EQUIVALENTS, end of period.................... $ 5,726,359
============
</TABLE>
The accompanying notes are an integral part of this consolidated financial
statement.
F-6
<PAGE> 118
ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
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 consolidated financial statements of the Company include the
accounts of Allegiance Telecom, Inc., Allegiance Telecom of Texas, Inc.,
Allegiance Telecom of Georgia, Inc., and Allegiance Telecom of New York, Inc.
Each of these companies is a wholly owned subsidiary of Allegiance Telecom, Inc.
The Company plans two phases of development, the first to offer services in
12 of the largest metropolitan areas in the U.S. and the second to offer
services in 12 additional large metropolitan areas in the U.S. The Company is
currently developing its networks in six markets: New York City, Dallas,
Atlanta, Chicago, Los Angeles and San Francisco. During December 1997, the
Company began providing service in Dallas. Initial facilities-based service for
the New York City market is expected to begin in the first quarter of 1998.
Initial facilities-based services in the Dallas and Atlanta markets are
scheduled to begin in the second quarter of 1998, for the Chicago and Los
Angeles markets in the third quarter of 1998, and for the San Francisco market
in the fourth quarter of 1998. The Company is planning to begin services in an
additional six markets in the second half of 1998 and early 1999. The build-out
of the second phase will be dependent upon the Company obtaining additional
financing.
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 operating
losses and operating cash flow deficits.
The Company's success will be affected by the problems, expenses, and
delays encountered in connection with the formation of any new business, and the
competitive environment in which the Company intends to operate. The Company's
performance will further be affected by its ability to assess potential markets,
secure financing or raise additional capital, implement expanded interconnection
and collocation with incumbent local exchange carrier ("ILEC") facilities, lease
adequate trunking capacity from ILECs or other CLECs, purchase and install
switches in additional markets, implement efficient operations support systems
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.
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.
F-7
<PAGE> 119
ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, the Company includes as cash and cash
equivalents, cash and marketable securities with original maturities of three
months or less.
ACCOUNTS RECEIVABLE
Accounts Receivable consists of end user receivables and a receivable from
an employee.
PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of prepaid rent,
insurance, and refundable deposits. Prepayments are expensed on a straight-line
basis over the life of the agreement.
PROPERTY AND EQUIPMENT
Property and equipment includes office equipment, furniture and fixtures,
and construction-in-progress of switches and leasehold improvements. These
assets are stated at cost and depreciated once placed in service using the
straight-line method. The estimated useful lives of office equipment, and
furniture and fixtures, and leasehold improvements are two, five, and seven
years, respectively. Repair and maintenance costs are expensed as incurred.
Property and equipment at December 31, 1997, consisted of the following:
<TABLE>
<S> <C>
Construction-in-progress switches........................... $19,989,924
Construction-in-progress leasehold improvements............. 2,458,728
Construction-in-progress office equipment................... 1,186,457
Leasehold improvements...................................... 37,466
Office equipment............................................ 89,855
Furniture and fixtures...................................... 150,229
Less: Accumulated depreciation.............................. (12,639)
-----------
Property and equipment, net................................. $23,900,020
===========
</TABLE>
In October 1997, the Company acquired digital switches in New York City and
Atlanta and certain furniture and fixtures from US ONE Communications for an
aggregate purchase price of approximately $19.3 million.
USE OF ESTIMATES IN FINANCIAL STATEMENTS
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of expenses during the reporting period.
Actual results may differ from those estimates.
EARNINGS PER SHARE
The net loss per share amount reflected on the statement of operations is
based upon the weighted average number of common shares outstanding of one
share. The preferred shares were not included in the net loss per share
calculation as the effect from converting those shares would be antidilutive
(see Note 3). The net loss applicable to common stock includes preferred stock
dividends in arrears of $860,000.
F-8
<PAGE> 120
ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. CAPITALIZATION:
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 L.L.C.") (see Note 5). Allegiance
L.L.C. purchased 95,000 shares of 12% cumulative convertible Preferred Stock par
value $.01 per share ("Initial Closing") and 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
must submit a proposal to Allegiance L.L.C. detailing the funds necessary to
build out the Company's business in a new market. Allegiance L.L.C. is not
required to make any contributions until the proposal has been approved by
Allegiance L.L.C. The maximum commitment of Allegiance L.L.C. is $100 million.
As of December 31, 1997, the L.L.C. has contributed a total of $29.6 million. 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, each security holder
in Allegiance L.L.C. shall have the right to require Allegiance L.L.C. to
repurchase all of the outstanding securities held by such security holder at the
greater of the original cost for such security and the fair market value as
defined in the security holders agreement. The original cost shall be equal to
the contributions made to Allegiance L.L.C. together with interest thereon at
12% per annum. In the event the repurchase provisions are exercised, the Company
has agreed, at the request and direction of Allegiance L.L.C., to take any and
all actions necessary, including declaring and paying dividends and repurchasing
preferred or common stock to enable Allegiance L.L.C. to satisfy its repurchase
obligations. Accordingly, the Company is accruing the cumulative but undeclared
dividends under the Preferred Stock to reflect the minimum value payable in the
event the repurchase provisions are exercised.
REDEEMABLE CONVERTIBLE PREFERRED STOCK
As of December 31, 1997, the Company had authorized 95,000 shares of 12%
Cumulative Convertible Preferred Stock ("Preferred Stock"), par value $.01 per
share. Each share is convertible into shares of Common Stock (par value $.01 per
share). Each share of Preferred Stock is currently convertible into Common Stock
on a 1:1 basis, subject to certain antidilution provisions. No dividends were
declared in 1997. As of December 31, 1997, the Company had accrued Preferred
Stock dividends of approximately $9.05 per share, $860,000 in the aggregate, to
reflect the minimum repurchase value of the Preferred Stock.
On August 13, 1997, as a result of the Initial Closing, 95,000 shares of
Preferred Stock were issued at a per share price of $52.63, for an aggregate
price of $5 million.
Capital contributed in the Subsequent Closing occurring in October 1997,
and other capital contributions totaled approximately $24.6 million.
COMMON STOCK
As of December 31, 1997, the Company had authorized 100,001 shares of $.01
par value Common Stock. One share is issued and outstanding. Of the authorized
but unissued Common Stock, 95,000 shares are reserved for issuance upon
conversion of Preferred Stock, and 5,000 shares are reserved for issuance upon
exercise of stock options issued under Stock Option Plan (see Note 8).
4. 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
F-9
<PAGE> 121
ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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 but concluded that the
claim for abuse of process stated a claim against WorldCom.
5. RELATED PARTIES:
The Company is a wholly owned subsidiary of Allegiance L.L.C. As of
December 31, 1997, Allegiance L.L.C. has made capital contributions to the
Company of approximately $29.6 million. Allegiance L.L.C. may continue to make
additional capital contributions to the Company as discussed in Note 3 to these
financial statements. Certain investors in Allegiance L.L.C. are also employees
of the Company. Upon an initial public offering by the Company, a sale of the
Company or liquidation or dissolution of the Company, Allegiance L.L.C. will
dissolve and its assets (which are expected to consist almost entirely of
capital stock of the Company) will be distributed to the institutional investors
and employee investors of Allegiance L.L.C. in accordance with an allocation
formula calculated immediately prior to such dissolution. The Company will
account for any increase in the allocation of assets to the employee investors
in Allegiance L.L.C. in accordance with generally accepted accounting principles
and SEC regulations in effect at the time of such increase, and this may result
in a charge to the Company's earnings. During 1997, the Company paid all
organizational and legal fees of Allegiance L.L.C., the amount of which was
immaterial. As of December 31, 1997, the Company had accrued but undeclared
Redeemable Preferred Stock dividends of $860,000 payable to Allegiance L.L.C.
(see Note 3). No amounts are due from Allegiance L.L.C. at December 31, 1997.
6. COMMITMENTS AND CONTINGENCIES:
The Company has entered into various operating lease agreements, with
expirations through 2007, for office space and equipment. Future minimum lease
obligations related to the Company's operating leases are as follows:
<TABLE>
<S> <C>
1998............................................. $1,462,568
1999............................................. 1,498,343
2000............................................. 1,507,187
2001............................................. 1,137,973
2002............................................. 1,119,128
Thereafter....................................... 4,743,351
</TABLE>
Total rent expense for the period from inception (April 22, 1997), to
December 31, 1997, was $212,053. 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.
7. FEDERAL INCOME TAXES:
The Company has certain net deferred tax assets related primarily to net
losses incurred during the development stage. The Company has recorded a
valuation allowance equal to the net deferred tax assets at
F-10
<PAGE> 122
ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 income tax provisions.
The Company's deferred tax assets at December 31, 1997, were as follows:
<TABLE>
<S> <C>
Start-up costs capitalized for tax purposes................. $ 1,200,952
Net operating loss carryforward............................. 371,795
Valuation allowance......................................... (1,572,747)
-----------
$ --
===========
</TABLE>
Under existing tax law, all operating expenses incurred prior to a company
commencing its principal operations are capitalized and amortized over a 5 year
period for tax purposes.
8. STOCK OPTION PLAN:
The Company has a stock option plan (the "Plan") under which it grants
options to purchase common stock. The options granted have a term of six years
and vest over a three-year period. As of December 31, 1997, 5,000 shares of
common stock are reserved for issuance under the 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 Plan. Had compensation cost for the Plan
been determined based on the fair value of the options as of the grant dates for
awards under the Plan 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 estimated the fair value of each
option grant using the minimum value method permitted by SFAS No. 123 for
entities not publicly traded. The Company utilized the following assumptions in
the calculation: risk-free interest rate of 6.06%, expected life of 6 years, and
no dividends being paid over the life of the options.
<TABLE>
<S> <C>
Net loss -- As reported..................................... $3,478,000
Net loss -- Pro forma....................................... $3,488,052
</TABLE>
A summary of the status of the Plan as of December 31, 1997, is presented
in the table below:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
------- ----------------
<S> <C> <C>
Outstanding, beginning of year............................. -- $ --
Granted.................................................... 419 1,052.63
Exercised.................................................. -- --
Forfeited.................................................. -- --
------- ---------
Outstanding, end of year................................... 419 $1,052.63
======= =========
Options exercisable at year-end............................ -- $ --
======= =========
Weighted average fair value of options granted............. $320.85
=======
</TABLE>
As of December 31, 1997, the 419 options outstanding under the Plan have an
exercise price of $1,052.63, and a weighted-average remaining contractual life
of 5.8 years.
F-11
<PAGE> 123
ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. SUBSEQUENT EVENTS:
FINANCING
On January 29, 1998, the Company increased the number of shares of Common
Stock authorized to 101,524 and reserved 1,523 shares for issuance, sale and
delivery upon the exercise of warrants, as discussed below.
On February 3, 1998, the Company raised gross proceeds of approximately
$250 million 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 and
one warrant to purchase .0034224719 shares of Common Stock of the Company at an
exercise price of $.01 per share, subject to certain antidilution provisions.
The Company intends to use the proceeds from the Unit Offering to fund the
deployment and operation of the network, including costs to development
necessary OSS and other back office systems, purchase and install digital
switches, collocated equipment, customer premise equipment and other
transmission facilities as dictated by traffic volume growth, and may include
acquisitions.
In connection with the Unit Offering, the Company incurred approximately
$4.4 million in fees to an affiliate of an investor in Allegiance L.L.C.
EQUIPMENT LEASE FINANCING
In December 1997, the Company received a financing proposal from AT&T
Corporation ("AT&T Capital"), pursuant to which AT&T Capital and the Company are
in the process of negotiating up to $100 million of lease financing (the "Lease
Facility") for the acquisition of digital switches, software, electronics and
associated transmission equipment. The implementation of the Lease Facility and
the terms and conditions thereof remain subject to a number of conditions,
including negotiation of definitive documents, completion of due diligence, and
receipt of AT&T Capital internal approval.
F-12
<PAGE> 124
======================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFERS
CONTAINED HEREIN OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL
OR THE SOLICITATION OF AN OFFER TO BUY TO ANY PERSON IN ANY JURISDICTION IN
WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING
SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT
IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO THE DATE HEREOF.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................ i
Summary.............................. 1
Risk Factors......................... 10
Use of Proceeds...................... 24
Dividend Policy...................... 25
Capitalization....................... 26
Selected Financial Data.............. 27
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 28
Business............................. 33
Management........................... 52
Certain Transactions................. 59
Security Ownership of Certain
Beneficial Owners and Management... 62
Description of Certain
Indebtedness....................... 63
The Exchange Offer................... 64
Description of the Notes............. 72
Description of the Warrants.......... 97
Description of Capital Stock......... 101
Certain United States Federal Tax
Considerations..................... 103
Plan of Distribution................. 107
Legal Matters........................ 107
Experts.............................. 107
Index to Consolidated Financial
Statements......................... F-1
</TABLE>
======================================================
======================================================
$445,000,000
ALLEGIANCE TELECOM, INC.
OFFER TO EXCHANGE ITS 11 3/4% SERIES B SENIOR DISCOUNT NOTES DUE 2008 FOR ANY
AND ALL OF ITS OUTSTANDING 11 3/4% SENIOR DISCOUNT NOTES DUE 2008
-----------------
PROSPECTUS
-----------------
, 1998
======================================================
<PAGE> 125
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. 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 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.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
3.1 Certificate of Incorporation of Allegiance Telecom, Inc.*
3.2 By-Laws of Allegiance Telecom, Inc.*
4.1 Purchase 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.*
4.2 Indenture, dated as of February 3, 1998, by and among the
Company and The Bank of New York, as trustee.
</TABLE>
II-1
<PAGE> 126
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
4.3 Form of 11 3/4% Senior Discount Notes.
4.4 Registration Rights Agreement, dated as of 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.*
5.1 Opinion of Kirkland & Ellis.*
10.1 Stock Purchase Agreement, dated August 13, 1997, between
Allegiance LLC and the Company.
10.2 Securityholders Agreement, dated August 13, 1997, among
Allegiance LLC, the Fund Investors, the Management Investors
and the Company.
10.3 Registration Agreement, dated August 13, 1997, among the
Fund Investors, the Management Investors and the Company.
10.4 Allegiance Telecom, Inc. 1997 Nonqualified Stock Option
Plan.
10.5 Executive Purchase Agreement, dated August 13, 1997, between
Allegiance LLC, the Company and Royce J. Holland.*
10.6 Executive Purchase Agreement, dated August 13, 1997, between
Allegiance LLC, the Company and Thomas M. Lord.
10.7 Executive Purchase Agreement, dated January 28, 1998,
between Allegiance LLC, the Company and C. Daniel Yost.*
10.8 Form of Executive Purchase Agreement between Allegiance LLC,
the Company and each of the other Management Investors.*
10.9 Warrant Agreement, dated February 3, 1998, by and among the
Company and The Bank of New York, as Warrant Agent
(including the form of the Warrant Certificate).
12.1 Statement Regarding Computation of Ratios of Earnings (Loss)
to Fixed Charges.
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.*
27.1 Financial Data Schedule.*
99.1 Form of Letter of Transmittal.*
99.2 Form of Notice of Guaranteed Delivery.*
99.3 Form of Tender Instructions.*
</TABLE>
- ---------------
* To be filed by amendment.
(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.
II-2
<PAGE> 127
ITEM 22. UNDERTAKINGS.
The undersigned registrants hereby undertake:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at the time shall be deemed to
be the initial bonafide offering thereof;
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering; and
(4) The undersigned registrants hereby undertake as follows: that
prior to any public reoffering of the securities registered hereunder
through use of a prospectus which is a part of this registration statement,
by any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items
of the applicable form.
(5) The registrants undertake that every prospectus: (i) that is filed
pursuant to paragraph (1) immediately preceding, or (ii) that purports to
meet the requirements of Section 10(a)(3) of the Act and is used in
connection with an offering of securities subject to Rule 415, will be
filed as a part of an amendment to the registration statement and will not
be used until such amendment is effective, and that, for purposes of
determining any liability under the Securities Act of 1933, each such
post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the registrants pursuant to the provisions described
under Item 20 or otherwise, the registrants have 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 registrants of expenses incurred or
paid by a director, officer or controlling person of the registrants 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 registrants will, unless in the opinion of their 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.
(6) 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 registrants pursuant to Rule 424(b)(1) or
II-3
<PAGE> 128
(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.
(7) For the purpose 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.
(8) The undersigned registrants hereby undertake to respond to
requests for information that is incorporated by reference into the
prospectus pursuant to Item 4, 10(b), 11, or 13 of this form, within one
business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date
of the registration statement through the date of responding to the
request.
(9) The undersigned registrants hereby undertake to supply by means of
a post-effective amendment all information concerning a transaction, and
the company being acquired involved therein, that was not the subject of
and included in the registration statement when it became effective.
II-4
<PAGE> 129
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Allegiance
Telecom, Inc. has duly caused this Registration Statement on Form S-4 to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Dallas, State of Texas, on March 31, 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 DATES
--------- -------- -----
<C> <S> <C>
/s/ ROYCE J. HOLLAND Chairman of the Board and Chief March 31, 1998
- ----------------------------------------------------- Executive Officer (Principal
Royce J. Holland Executive Officer)
/s/ C. DANIEL YOST President, Chief Operating March 31, 1998
- ----------------------------------------------------- Officer and Director
C. Daniel Yost
/s/ THOMAS M. LORD Executive Vice President, Chief March 31, 1998
- ----------------------------------------------------- Financial Officer, and
Thomas M. Lord Director (Principal Financial
Officer)
/s/ DENNIS M. MAUNDER Vice President and Controller March 31, 1998
- ----------------------------------------------------- (Principal Accounting
Dennis M. Maunder Officer)
/s/ JOHN J. CALLAHAN Senior Vice President of Sales March 31, 1998
- ----------------------------------------------------- and Marketing and Director
John J. Callahan
</TABLE>
II-5
<PAGE> 130
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATES
--------- -------- -----
<C> <S> <C>
/s/ PAUL D. CARBERY Director March 31, 1998
- -----------------------------------------------------
Paul D. Carbery
/s/ JAMES E. CRAWFORD, III Director March 31, 1998
- -----------------------------------------------------
James E. Crawford, III
/s/ JOHN B. EHRENKRANZ Director March 31, 1998
- -----------------------------------------------------
John B. Ehrenkranz
/s/ PAUL J. FINNEGAN Director March 31, 1998
- -----------------------------------------------------
Paul J. Finnegan
/s/ RICHARD D. FRISBIE Director March 31, 1998
- -----------------------------------------------------
Richard D. Frisbie
Director March 31, 1998
- -----------------------------------------------------
Reed E. Hundt
/s/ ROBERT H. NIEHAUS Director March 31, 1998
- -----------------------------------------------------
Robert H. Niehaus
/s/ JAMES N. PERRY, JR. Director March 31, 1998
- -----------------------------------------------------
James N. Perry, Jr.
</TABLE>
II-6
<PAGE> 131
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
3.1 Certificate of Incorporation of Allegiance Telecom, Inc.*
3.2 By-Laws of Allegiance Telecom, Inc.*
4.1 Purchase 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.*
4.2 Indenture, dated as of February 3, 1998, by and among the
Company and The Bank of New York, as trustee.
4.3 Form of 11 3/4% Senior Discount Notes.
4.4 Registration Rights Agreement, dated as of 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.*
5.1 Opinion of Kirkland & Ellis.*
10.1 Stock Purchase Agreement, dated August 13, 1997, between
Allegiance LLC and the Company.
10.2 Securityholders Agreement, dated August 13, 1997, among
Allegiance LLC, the Fund Investors, the Management Investors
and the Company.
10.3 Registration Agreement, dated August 13, 1997, among the
Fund Investors, the Management Investors and the Company.
10.4 Allegiance Telecom, Inc. 1997 Nonqualified Stock Option
Plan.
10.5 Executive Purchase Agreement, dated August 13, 1997, between
Allegiance LLC, the Company and Royce J. Holland.*
10.6 Executive Purchase Agreement, dated August 13, 1997, between
Allegiance LLC, the Company and Thomas M. Lord.
10.7 Executive Purchase Agreement, dated January 28, 1998,
between Allegiance LLC, the Company and C. Daniel Yost.*
10.8 Form of Executive Purchase Agreement between Allegiance LLC,
the Company and each of the other Management Investors.*
10.9 Warrant Agreement, dated February 3, 1998, by and among the
Company and The Bank of New York, as Warrant Agent
(including the form of the Warrant Certificate).
12.1 Statement Regarding Computation of Ratios of Earnings (Loss)
to Fixed Charges.
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.*
27.1 Financial Data Schedule.*
99.1 Form of Letter of Transmittal.*
99.2 Form of Notice of Guaranteed Delivery.*
99.3 Form of Tender Instructions.*
</TABLE>
- ---------------
* To be filed by amendment.
<PAGE> 1
EXHIBIT 4.2
================================================================================
ALLEGIANCE TELECOM, INC.,
as Issuer
and
THE BANK OF NEW YORK
-------------------------
Indenture
Dated as of February 3, 1998
-------------------------
11 3/4% Senior Discount Notes due 2008
================================================================================
<PAGE> 2
CROSS-REFERENCE TABLE
<TABLE>
<CAPTION>
TIA Sections Indenture Sections
- ------------ ------------------
<S> <C> <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 . . . . . . . . . . . . . . . . . . . . . . . . 22
SECTION 1.03. Rules of Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
ARTICLE TWO
THE NOTES
SECTION 2.01. Form and Dating . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
SECTION 2.02. Restrictive Legends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
SECTION 2.03. Execution, Authentication and Denominations . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
SECTION 2.04. Registrar and Paying Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
SECTION 2.05. Paying Agent to Hold Money in Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
SECTION 2.06. Transfer and Exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
SECTION 2.07. Book-Entry Provisions for Global Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
SECTION 2.08. Special Transfer Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
SECTION 2.09. Replacement Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
SECTION 2.10. Outstanding Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
SECTION 2.11. Temporary Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
SECTION 2.12. Cancellation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
SECTION 2.13. CUSIP Numbers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
SECTION 2.14. Defaulted Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
SECTION 2.15. Issuance of Additional Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
ARTICLE THREE
REDEMPTION
SECTION 3.01. Right of Redemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
SECTION 3.02. Notices to Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
SECTION 3.03. Selection of Notes to Be Redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
SECTION 3.04. Notice of Redemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
SECTION 3.05. Effect of Notice of Redemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
SECTION 3.06. Deposit of Redemption Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
</TABLE>
- -------------------
Note: The Table of Contents shall not for any purposes be deemed to be a
part of the Indenture.
<PAGE> 4
ii
<TABLE>
<S> <C> <C>
SECTION 3.07. Payment of Notes Called for Redemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
SECTION 3.08. Notes Redeemed in Part . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
ARTICLE FOUR
COVENANTS
SECTION 4.01. Payment of Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
SECTION 4.02. Maintenance of Office or Agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
SECTION 4.03. Limitation on Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
SECTION 4.04. Limitation on Restricted Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
SECTION 4.05. Limitation on Dividend and Other Payment Restrictions Affecting Restricted . . . . . . . . . . . 48
SECTION 4.06. Limitation on the Issuance and Sale of Capital Stock of Restricted . . . . . . . . . . . . . . . 50
SECTION 4.07. Limitation on Issuances of Guarantees by Restricted Subsidiaries . . . . . . . . . . . . . . . . . 50
SECTION 4.08. Limitation on Transactions with Shareholders and Affiliates . . . . . . . . . . . . . . . . . . . 51
SECTION 4.09. Limitation on Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
SECTION 4.10. Limitation on Asset Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
SECTION 4.11. Repurchase of Notes upon a Change of Control . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
SECTION 4.12. Existence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
SECTION 4.13. Payment of Taxes and Other Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
SECTION 4.14. Maintenance of Properties and Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
SECTION 4.15. Notice of Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
SECTION 4.16. Compliance Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
SECTION 4.17. Commission Reports and Reports to Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
SECTION 4.18. Waiver of Stay, Extension or Usury Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
SECTION 4.19. Limitation on Sale-Leaseback Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
SECTION 4.20. Calculation of Original Issue Discount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
ARTICLE FIVE
SUCCESSOR CORPORATION
SECTION 5.01. When Company May Merge, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
SECTION 5.02. Successor Substituted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
ARTICLE SIX
DEFAULT AND REMEDIES
SECTION 6.01. Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
SECTION 6.02. Acceleration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
SECTION 6.03. Other Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
SECTION 6.04. Waiver of Past Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
</TABLE>
<PAGE> 5
iii
<TABLE>
<S> <C> <C>
SECTION 6.05. Control by Majority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
SECTION 6.06. Limitation on Suits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
SECTION 6.07. Rights of Holders to Receive Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
SECTION 6.08. Collection Suit by Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
SECTION 6.09. Trustee May File Proofs of Claim . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
SECTION 6.10. Priorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
SECTION 6.11. Undertaking for Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
SECTION 6.12. Restoration of Rights and Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
SECTION 6.13. Rights and Remedies Cumulative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
SECTION 6.14. Delay or Omission Not Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
ARTICLE SEVEN
TRUSTEE
SECTION 7.01. General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
SECTION 7.02. Certain Rights of Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
SECTION 7.03. Individual Rights of Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
SECTION 7.04. Trustee's Disclaimer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
SECTION 7.05. Notice of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
SECTION 7.06. Reports by Trustee to Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
SECTION 7.07. Compensation and Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
SECTION 7.08. Replacement of Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
SECTION 7.09. Successor Trustee by Merger, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
SECTION 7.10. Eligibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
SECTION 7.11. Money Held in Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
SECTION 7.12. Withholding Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
ARTICLE EIGHT
DISCHARGE OF INDENTURE
SECTION 8.01. Termination of Company's Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
SECTION 8.02. Defeasance and Discharge of Indenture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
SECTION 8.03. Defeasance of Certain Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
SECTION 8.04. Application of Trust Money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
SECTION 8.05. Repayment to Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
SECTION 8.06. Reinstatement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
ARTICLE NINE
AMENDMENTS, SUPPLEMENTS AND WAIVERS
SECTION 9.01. Without Consent of Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
</TABLE>
<PAGE> 6
iv
<TABLE>
<S> <C> <C>
SECTION 9.02. With Consent of Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
SECTION 9.03. Revocation and Effect of Consent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
SECTION 9.04. Notation on or Exchange of Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
SECTION 9.05. Trustee to Sign Amendments, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
SECTION 9.06. Conformity with Trust Indenture Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
ARTICLE TEN
MISCELLANEOUS
SECTION 10.01. Trust Indenture Act of 1939 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
SECTION 10.02. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
SECTION 10.03. Certificate and Opinion as to Conditions Precedent . . . . . . . . . . . . . . . . . . . . . . . 80
SECTION 10.04. Statements Required in Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
SECTION 10.05. Rules by Trustee, Paying Agent or Registrar . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
SECTION 10.06. Payment Date Other Than a Business Day . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
SECTION 10.07. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
SECTION 10.08. No Adverse Interpretation of Other Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . 81
SECTION 10.09. No Recourse Against Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
SECTION 10.10. Successors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
SECTION 10.11. Duplicate Originals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
SECTION 10.12. Separability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
SECTION 10.13. Table of Contents, Headings, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
</TABLE>
<PAGE> 7
INDENTURE, dated as of February 3, 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
$445,000,000 aggregate principal amount at maturity of the Company's 11 3/4%
Senior Discount Notes due 2008 (the "Notes") issuable as provided in this
Indenture. The Company has agreed to issue and sell a total of 445,000 Units
(the "Units"), each of which consists of one Note and one warrant (each a
"Warrant"), each Warrant entitling the holder thereof to purchase .0034224719
shares of Common Stock, par value $.01 per share, of the Company. The Notes
and Warrants included in each Unit will become separately transferable upon the
earliest to occur of (i) the date that is six months following the Closing
Date, (ii) the commencement of the Exchange Offer pursuant to the Notes
Registration Rights Agreement and (iii) the date the Shelf Registration
Statement (as defined herein) is declared effective (the "Separation Date").
All things necessary to make this Indenture a valid agreement of the Company,
in accordance with its terms, have been done, and the Company has done all
things necessary to make the Notes, when executed by the Company and
authenticated and delivered by the Trustee hereunder and duly issued by the
Company, the valid obligations of the Company as hereinafter provided.
This Indenture is subject to, and shall be governed by,
the provisions of the Trust Indenture Act of 1939, as amended, that are
required to be a part of and to govern indentures qualified under the Trust
Indenture Act of 1939, as amended.
AND THIS INDENTURE FURTHER WITNESSETH
For and in consideration of the premises and the
purchase of the Notes by the Holders thereof, it is mutually covenanted and
agreed, for the equal and proportionate benefit of all Holders, as follows.
ARTICLE ONE
DEFINITIONS AND INCORPORATION BY REFERENCE
SECTION 1.01. Definitions.
"Accreted Value" means, for any Specified Date, the amount provided
below for each $1,000 principal amount at maturity of Notes:
<PAGE> 8
2
(i) if the Specified Date occurs on one of the
following dates (each a "Semi- Annual Accrual Date"), the
Accreted Value will equal the amount set forth below for such
Semi- Annual Accrual Date:
<TABLE>
<CAPTION>
SEMI-ANNUAL ACCRETED
ACCRUAL DATE VALUE
---------------- --------
<S> <C>
August 15, 1998 $ 598.21
February 15, 1999 $ 633.36
August 15, 1999 $ 670.57
February 15, 2000 $ 709.96
August 15, 2000 $ 751.67
February 15, 2001 $ 795.84
August 15, 2001 $ 842.59
February 15, 2002 $ 892.09
August 15, 2002 $ 944.51
February 15, 2003 $1,000.00
</TABLE>
(ii) if the Specified Date occurs before the first
Semi-Annual Accrual Date, the Accreted Value will equal the sum of (a)
$562.87 and (b) an amount equal to the product of (1) the Accreted
Value for the first Semi-Annual Accrual Date less $562.87 multiplied
by (2) a fraction, the numerator of which is the number of days from
the Closing Date to the Specified Date, using a 360-day year of twelve
30-day months, and the denominator of which is the number of days from
the Closing Date to the first Semi-Annual Accrual Date, using a
360-day year of twelve 30-day months;
(iii) if the Specified Date occurs between two Semi-Annual
Accrual Dates, the Accreted Value will equal the sum of (a) the
Accreted Value for the Semi-Annual Accrual Date immediately preceding
such Specified Date and (b) an amount equal to the product of (1) the
Accreted Value for the immediately following Semi-Annual Accrual Date
less the Accreted Value for the immediately preceding Semi-Annual
Accrual Date multiplied by (2) a fraction, the numerator of which is
the number of days from the immediately preceding Semi-Annual Accrual
Date to the Specified Date, using a 360-day year of twelve 30-day
months, and the denominator of which is 180; or
<PAGE> 9
3
(iv) if the Specified Date occurs after the last
Semi-Annual Accrual Date, the Accreted Value will equal $1,000.
"Acquired Indebtedness" means Indebtedness of a Person existing at the
time such Person becomes a Restricted Subsidiary or 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 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 (including
Capital Stock of the Company held by Allegiance LLC).
"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
<PAGE> 10
4
(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 2.07(a).
"Allegiance LLC" means Allegiance Telecom L.L.C., a Delaware limited
liability company.
"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
<PAGE> 11
5
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.
"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.
<PAGE> 12
6
"Capitalized Lease Obligations" means the discounted present value of
the rental obligations under a Capitalized Lease.
"Change of Control" means such time as (i) (a) prior to the occurrence
of a Public Market, a "person" or "group" (within the meaning of 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 Voting Stock representing a
greater percentage of the total voting power of the Voting Stock of (x)
Allegiance LLC, on a fully diluted basis, than is beneficially owned by the
Fund Investors on such date or (y) the Company, on a fully diluted basis, than
is beneficially owned by the Existing Stockholders on such date and (b) after
the occurrence of a Public Market, 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 (x) 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 or (y) so long as the Fund Investors and their Affiliates beneficially
own a majority of the Voting Stock of Allegiance LLC, whose election was
approved by Allegiance LLC) cease for any reason to constitute a majority of
the members of the Board of Directors then in office.
"Closing Date" means the date on which the Notes are originally issued
under this Indenture.
"Commission" means the Securities and Exchange Commission, as from
time to time constituted, created under the Exchange Act or, if at any time
after the execution of this instrument such Commission is not existing and
performing the duties now assigned to it under the TIA, then the body
performing such duties at such time.
"Common Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) of such Person's 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.
<PAGE> 13
7
"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 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 Units, all as determined on a consolidated
basis (without taking into account Unrestricted Subsidiaries) in conformity
with GAAP.
<PAGE> 14
8
"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 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,
<PAGE> 15
9
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.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchange Notes" means any securities of the Company containing terms
identical to the Notes (except that such Exchange Notes shall be registered
under the Securities Act) that are issued and exchanged for the Notes pursuant
to the Notes Registration Rights Agreement and this Indenture.
<PAGE> 16
10
"Existing Stockholders" means (i) 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 (collectively, the "Fund Investors") and (ii) Allegiance LLC, so
long as the Fund Investors, in the aggregate, beneficially own a majority of
the Voting Stock of Allegiance LLC.
"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
Units 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> 17
11
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
<PAGE> 18
12
amount outstanding at any time of any Indebtedness issued with original issue
discount is the face amount of such Indebtedness less the remaining unamortized
portion of the original issue discount of such Indebtedness at 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.
"Institutional Accredited Investor" means an institution that is an
"accredited investor" as that term is defined in Rule 501(a)(1), (2), (3) or
(7) under the Securities Act.
"Interest Payment Date" means each semiannual interest payment date on
February 15 and August 15, of each year, commencing August 15, 2003.
"Interest Rate Agreement" means any interest rate protection
agreement, interest rate future agreement, interest rate option agreement,
interest rate swap agreement, interest rate cap agreement, interest rate collar
agreement, interest rate hedge agreement, option or future contract or other
similar agreement or arrangement.
"Investment" in any Person means any direct or indirect advance, loan
or other extension of credit (including, without limitation, by way of
Guarantee or similar arrangement; but excluding advances to customers in the
ordinary course of business that are, in conformity with GAAP, recorded as
accounts receivable on the balance sheet of the Company or its Restricted
Subsidiaries) 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
<PAGE> 19
13
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 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.
"Non-U.S. Person" means a person who is not a U.S. person, as defined
in Regulation S.
<PAGE> 20
14
"Notes" means any of the securities, as defined in the first paragraph
of the recitals hereof, that are authenticated and delivered under this
Indenture. For all purposes of this Indenture, the term "Notes" shall include
the Notes initially issued on the Closing Date, any Exchange Notes to be issued
and exchanged for any Notes pursuant to the Notes Registration Rights Agreement
and this Indenture and any other Notes issued after the Closing Date under this
Indenture. For purposes of this Indenture, all Notes shall vote together as
one series of Notes under this Indenture.
"Notes Registration Rights Agreement" means the Notes Registration
Rights Agreement, dated January 29, 1998, among the Company and Morgan Stanley
& Co. Incorporated, Salomon Brothers Inc, Bear, Stearns & Co. Inc. and
Donaldson, Lufkin & Jenrette Securities Corporation and certain permitted
assigns specified therein.
"Offer to Purchase" means an offer to purchase Notes by the Company
from the Holders commenced by mailing a notice to the Trustee and each Holder
stating: (i) the covenant pursuant to which the offer is being made and that
all Notes validly tendered will be accepted for payment on a pro rata basis;
(ii) the purchase price and the date of purchase (which shall be a Business Day
no earlier than 30 days nor later than 60 days from the date such notice is
mailed) (the "Payment Date"); (iii) that any Note not tendered will continue to
accrue interest (or original issue discount) pursuant to its terms; (iv) that,
unless the Company defaults in the payment of the purchase price, any Note
accepted for payment pursuant to the Offer to Purchase shall cease to accrue
interest (or original issue discount) on and after the Payment Date; (v) that
Holders electing to have a Note purchased pursuant to the Offer to Purchase
will be required to surrender the Note, together with the form entitled "Option
of the Holder to Elect Purchase" on the reverse side of the Note completed, to
the Paying Agent at the address specified in the notice prior to the close of
business on the Business Day immediately preceding the Payment Date; (vi) that
Holders will be entitled to withdraw their election if the Paying Agent
receives, not later than the close of business on the third Business Day
immediately preceding the Payment Date, a telegram, facsimile transmission or
letter setting forth the name of such Holder, the principal amount at maturity
of Notes delivered for purchase and a statement that such Holder is withdrawing
his election to have such Notes purchased; and (vii) that Holders whose Notes
are being purchased only in part will be issued new Notes equal in principal
amount to the unpurchased portion of the Notes surrendered; provided that each
Note purchased and each new Note issued shall be in a principal amount at
maturity of $1,000 or an integral multiple thereof. On the Payment Date, the
Company shall (i) accept for payment on a pro rata basis Notes or portions
thereof tendered pursuant to an Offer to Purchase; (ii) deposit with the Paying
Agent money sufficient to pay the purchase price of all Notes or portions
thereof so accepted; and (iii) deliver, or cause to be delivered, to the
Trustee all Notes or portions thereof so accepted together with an Officers'
Certificate specifying the Notes or portions thereof accepted for payment by
the Company. The Paying Agent shall promptly mail to the Holders of Notes so
accepted payment in an amount equal to the purchase price, and the Trustee
shall promptly authenticate and mail to
<PAGE> 21
15
such Holders a new Note equal in principal amount at maturity to any
unpurchased portion of the Note surrendered; provided that each Note purchased
and each new Note issued shall be in a principal amount at maturity of $1,000
or an integral multiple thereof. The Company will publicly announce the results
of an Offer to Purchase as soon as practicable after the Payment Date. The
Trustee shall act as the Paying Agent for an Offer to Purchase. The Company
will comply with Rule 14e-1 under the Exchange Act and any other securities
laws and regulations thereunder to the extent such laws and regulations are
applicable, in the event that the Company is required to repurchase Notes
pursuant to an Offer to Purchase.
"Officer" means, with respect to the Company, (i) the Chairman of the
Board, the President, any Vice President, the Chief Financial Officer, and (ii)
the Treasurer or any Assistant Treasurer, or the Secretary or any Assistant
Secretary.
"Officers' Certificate" means a certificate signed by one Officer
listed in clause (i) of the definition thereof and one Officer listed in clause
(ii) of the definition thereof. Each Officers' Certificate (other than
certificates provided pursuant to TIA Section 314(a)(4)) shall include the
statements provided for in TIA Section 314(e).
"Offshore Global Note" has the meaning provided in Section 2.01.
"Offshore Physical Notes" has the meaning provided in Section 2.01.
"Offshore Notes Exchange Date" has the meaning provided in Section
2.01.
"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 2.04, except that,
for the purposes of Article Eight, the Paying Agent shall not be the Company or
a Subsidiary of the Company or an Affiliate of any of them. The term "Paying
Agent" includes any additional Paying Agent.
"Payment Date" has the meaning specified in the definition of "Offer to
Purchase."
"Permanent Offshore Global Note" has the meaning provided in Section
2.01.
"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
<PAGE> 22
16
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 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
<PAGE> 23
17
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.
"Physical Notes" has the meaning provided in Section 2.01.
"Preferred Stock" means, with respect to any Person, any and all
shares, interests, participations or other equivalents (however designated,
whether voting or non-voting) of such Person's preferred or preference 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.
<PAGE> 24
18
"Private Placement Legend" means the legend initially set forth on the
Notes in the form set forth in Section 2.02.
"Public Equity Offering" means an underwritten primary public offering
of Common Stock of the Company pursuant to an effective registration statement
under the Securities Act.
A "Public Market" shall be deemed to exist if (i) a Public Equity
Offering has been consummated and (ii) at least 15% of the total issued and
outstanding Common Stock of the Company 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.
"QIB" means a "qualified institutional buyer" as defined in Rule 144A.
"Redemption Date", when used with respect to any Note to be redeemed,
means the date fixed for such redemption by or pursuant to this Indenture.
"Redemption Price", when used with respect to any Note to be redeemed,
means the price at which such Note is to be redeemed pursuant to this
Indenture.
"Registrar" has the meaning provided in Section 2.04.
"Registration" has the meaning provided in Section 4.17.
"Registration Statement" means the Registration Statement as defined
and described in the Notes Registration Rights Agreement.
"Regular Record Date" for the interest payable on any Interest Payment
Date means the February 1 or August 1 (whether or not a Business Day), as the
case may be, next preceding such Interest Payment Date.
"Regulation S" means Regulation S under the Securities Act.
"Repurchase Offer" has the meaning provided in the Warrant Agreement
dated as of the Closing Date between the Company and The Bank of New York
relating to the Warrants.
"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
<PAGE> 25
19
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.
"Rule 144A" means Rule 144A under the Securities Act.
"Security Register" has the meaning provided in Section 2.04.
"Securities Act" means the Securities Act of 1933, as amended.
"Semi-Annual Accrual Date" has the meaning specified in the definition
of "Accreted Value."
"Separation Date" has the meaning provided in the recitals to this
Indenture.
"Shelf Registration Statement" means the Shelf Registration Statement
as defined in the Notes Registration Rights Agreement.
"Significant Subsidiary" means, at any date of determination, any
Restricted Subsidiary that, together with its Subsidiaries, (i) for the most
recent fiscal year of the Company, accounted for more than 10% of the
consolidated revenues of the Company and its Restricted Subsidiaries or (ii) as
of the end of such fiscal year, was the owner of more than 10% of the
consolidated assets of the Company and its Restricted Subsidiaries, all as set
forth on the most recently available consolidated financial statements of the
Company for such fiscal year.
"S&P" means Standard & Poor's Ratings Services and its successors.
"Specified Date" means any Redemption Date, any Payment Date for an
Offer to Purchase or any date on which the Notes first become due and payable
after an Event of Default.
"Stated Maturity" means, (i) with respect to any debt security, the
date specified in such debt security as the fixed date on which the final
installment of principal of such debt security is due and payable and (ii) with
respect to any scheduled installment of principal of or interest on any debt
security, the date specified in such debt security as the fixed date on which
such installment is due and payable.
<PAGE> 26
20
"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.
"Temporary Offshore Global Note" has the meaning provided in Section
2.01.
<PAGE> 27
21
"TIA" or "Trust Indenture Act" means the Trust Indenture Act of 1939,
as amended (15 U.S. Code Sections 77aaa- 77bbb), as in effect on the date this
Indenture was executed, except as provided in Section 9.06.
"Trade Payables" means, with respect to any Person, any accounts
payable or any other indebtedness or monetary obligation to trade creditors
created, assumed or Guaranteed by such Person or any of its Subsidiaries
arising in the ordinary course of business in connection with the acquisition
of goods or services.
"Transaction Date" means, with respect to the Incurrence of any
Indebtedness by the Company or any of its Restricted Subsidiaries, the date
such Indebtedness is to be Incurred and, with respect to any Restricted
Payment, the date such Restricted Payment is to be made.
"Trustee" means the party named as such in the first paragraph of this
Indenture until a successor replaces it in accordance with the provisions of
Article Seven of this Indenture and thereafter means such successor.
"Unit" has the meaning provided in the recitals to this Indenture.
"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. Global Note" has the meaning provided in Section 2.01.
"U.S. Government Obligations" means securities that are (i) direct
obligations of the United States of America for the payment of which its full
faith and credit is pledged or (ii) obligations of a Person controlled or
supervised by and acting as an agency or instrumentality of the United States
of America the payment of which is unconditionally guaranteed as a full faith
and credit obligation by the United States of America, which, in either case,
are not callable or redeemable at the option of the issuer thereof at any time
prior to the Stated Maturity of the Notes, and shall also include a depository
receipt issued by a bank or trust company as custodian with respect to any such
U.S. Government Obligation or a specific payment of interest on or principal
of any such U.S. Government Obligation held by such custodian for the account
of the holder of a depository receipt; provided that (except as required by
law) such custodian is not authorized to make any deduction from the amount
payable to the holder of such depository receipt from any amount received by
the custodian in respect of the U.S. Government Obligation or the specific
payment of interest on or principal of the U.S. Government Obligation evidenced
by such depository receipt.
"U.S. Physical Notes" has the meaning provided in Section 2.01.
<PAGE> 28
22
"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
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.
"Warrant" has the meaning provided in the recitals to this Indenture.
"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;
<PAGE> 29
23
"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.
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.
<PAGE> 30
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ARTICLE TWO
THE NOTES
SECTION 2.01. Form and Dating. The Notes and the Trustee's
certificate of authentication shall be substantially in the form annexed hereto
as Exhibit A with such appropriate insertions, omissions, substitutions and
other variations as are required or permitted by this Indenture. The Notes may
have notations, legends or endorsements required by law, stock exchange
agreements to which the Company is subject or usage. The Company shall approve
the form of the Notes and any notation, legend or endorsement on the Notes.
Each Note shall be dated the date of its authentication.
The terms and provisions contained in the form of the Notes
annexed hereto as Exhibit A shall constitute, and are hereby expressly made, a
part of this Indenture. To the extent applicable, the Company and the Trustee,
by their execution and delivery of this Indenture, expressly agree to such
terms and provisions and to be bound thereby.
Notes offered and sold in reliance on Rule 144A shall be
issued initially in the form of one or more permanent global Notes in
registered form, substantially in the form set forth in Exhibit A
(collectively, the "U.S. Global Notes"), deposited with the Trustee, as
custodian for the Depositary, duly executed by the Company and authenticated by
the Trustee as hereinafter provided. The aggregate principal amount of the
U.S. Global Notes may from time to time be increased or decreased by
adjustments made on the records of the Trustee, as custodian for the Depositary
or its nominee, as hereinafter provided.
Notes offered and sold in offshore transactions in reliance on
Regulation S shall be issued initially in the form of one or more temporary
global Notes in registered form substantially in the form set forth in Exhibit
A (the "Temporary Offshore Global Notes") deposited with the Trustee, as
custodian for the Depositary, duly executed by the Company and authenticated by
the Trustee as hereinafter provided. On or after the later of (i) March 15,
1998 and (ii) the Separation Date (the "Offshore Notes Exchange Date"), upon
receipt by the Trustee and the Company of a certificate substantially in the
form of Exhibit B hereto, one or more permanent global Notes in registered form
substantially in the form set forth in Exhibit A (the "Permanent Offshore
Global Notes"; and together with the Temporary Offshore Global Notes, the
"Offshore Global Notes") duly executed by the Company and authenticated by the
Trustee as hereinafter provided shall be deposited with the Trustee, as
custodian for the Depositary, and the Registrar shall reflect on its books and
records the date and a decrease in the principal amount of the Temporary
Offshore Global Notes in an amount equal to the principal amount of the
beneficial interest in the Temporary Offshore Global Notes transferred.
Notes offered and sold in reliance on Regulation D under the
Securities Act shall be issued in the form of permanent certificated Notes in
registered form in substantially the form
<PAGE> 31
25
set forth in Exhibit A (the "U.S. Physical Notes"). Notes issued pursuant to
Section 2.07 in exchange for interests in the Offshore Global Note shall be in
the form of permanent certificated Notes in registered form substantially in
the form set forth in Exhibit A (the "Offshore Physical Notes").
The Offshore Physical Notes and U.S. Physical Notes are
sometimes collectively herein referred to as the "Physical Notes". The U.S.
Global Notes and the Offshore Global Notes are sometimes referred to herein as
the "Global Notes".
The definitive Notes shall be typed, printed, lithographed or
engraved or produced by any combination of these methods or may be produced in
any other manner permitted by the rules of any securities exchange on which the
Notes may be listed, all as determined by the Officers executing such Notes, as
evidenced by their execution of such Notes.
SECTION 2.02. Restrictive Legends. Unless and until a Note
is exchanged for an Exchange Note or sold in connection with an effective
Registration pursuant to the Notes Registration Rights Agreement, the U.S.
Global Notes, Temporary Offshore Global Notes and each U.S. Physical Note shall
bear the following legend on the face thereof:
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE
OFFERED OR SOLD WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR
BENEFIT OF, U.S. PERSONS EXCEPT AS SET FORTH IN THE FOLLOWING
SENTENCE. BY ITS ACQUISITION HEREOF, THE HOLDER (1) REPRESENTS THAT
(A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A
UNDER THE SECURITIES ACT), OR (B) IT IS AN INSTITUTIONAL "ACCREDITED
INVESTOR" AS DEFINED IN RULE 501(a)(1), (2), (3) OR (7) OF REGULATION
D UNDER THE SECURITIES ACT (AN "INSTITUTIONAL ACCREDITED INVESTOR") OR
(C) IT IS NOT A U.S. PERSON AND IS ACQUIRING THIS NOTE IN AN OFFSHORE
TRANSACTION IN COMPLIANCE WITH REGULATION S UNDER THE SECURITIES ACT,
(2) AGREES THAT IT WILL NOT, WITHIN TWO YEARS AFTER THE INITIAL SALE
OF THE NOTES, RESELL OR OTHERWISE TRANSFER THIS NOTE EXCEPT (A) TO
ALLEGIANCE TELECOM, INC. (THE "COMPANY") OR ANY SUBSIDIARY THEREOF,
(B) TO A QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE 144A
UNDER THE SECURITIES ACT, (C) INSIDE THE UNITED STATES TO AN
INSTITUTIONAL ACCREDITED INVESTOR THAT, PRIOR TO SUCH TRANSFER,
FURNISHES TO THE TRUSTEE A SIGNED LETTER CONTAINING CERTAIN
REPRESENTATIONS AND AGREEMENTS RELATING TO THE RESTRICTIONS ON
TRANSFER OF THIS NOTE (THE FORM OF WHICH LETTER CAN BE OBTAINED FROM
THE TRUSTEE) AND IF SUCH TRANSFER
<PAGE> 32
26
IS IN RESPECT OF AN AGGREGATE ACCRETED VALUE OF NOTES AT THE TIME OF
TRANSFER OF LESS THAN $100,000, AN OPINION OF COUNSEL ACCEPTABLE TO
THE COMPANY THAT SUCH TRANSFER IS IN COMPLIANCE WITH THE SECURITIES
ACT, (D) OUTSIDE THE UNITED STATES IN AN OFFSHORE TRANSACTION IN
COMPLIANCE WITH RULE 904 UNDER THE SECURITIES ACT, (E) PURSUANT TO THE
EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES
ACT (IF AVAILABLE) OR (F) PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT, AND (3) AGREES THAT IT WILL
DELIVER TO EACH PERSON TO WHOM THIS NOTE IS TRANSFERRED A NOTICE
SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. IN CONNECTION WITH ANY
TRANSFER OF THIS NOTE WITHIN THE TIME PERIOD REFERRED TO ABOVE, THE
HOLDER MUST CHECK THE APPROPRIATE BOX SET FORTH ON THE REVERSE HEREOF
RELATING TO THE MANNER OF SUCH TRANSFER AND SUBMIT THIS CERTIFICATE TO
THE TRUSTEE. IF THE PROPOSED TRANSFEREE IS AN INSTITUTIONAL
ACCREDITED INVESTOR, THE HOLDER MUST, PRIOR TO SUCH TRANSFER, FURNISH
TO THE TRUSTEE AND THE COMPANY SUCH CERTIFICATIONS, LEGAL OPINIONS OR
OTHER INFORMATION AS EITHER OF THEM MAY REASONABLY REQUIRE TO CONFIRM
THAT SUCH TRANSFER IS BEING MADE PURSUANT TO AN EXEMPTION FROM, OR IN
A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT. AS USED HEREIN, THE TERMS "OFFSHORE TRANSACTION",
"UNITED STATES" AND "U.S. PERSON" HAVE THE MEANINGS GIVEN TO THEM BY
REGULATION S UNDER THE SECURITIES ACT. THE INDENTURE CONTAINS A
PROVISION REQUIRING THE TRUSTEE TO REFUSE TO REGISTER ANY TRANSFER OF
THIS NOTE IN VIOLATION OF THE FOREGOING RESTRICTIONS.
Each Global Note, whether or not an Exchange Note, shall also
bear the following legend on the face thereof:
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE
OF THE DEPOSITORY TRUST COMPANY, TO THE COMPANY OR ITS AGENT FOR
REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE
ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR TO SUCH OTHER ENTITY
AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY
TRUST COMPANY OR SUCH OTHER REPRESENTATIVE OF THE DEPOSITORY TRUST
COMPANY OR SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY (AND ANY PAYMENT HEREON
IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS
<PAGE> 33
27
IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST
COMPANY), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY OR TO ANY PERSON IS WRONGFUL SINCE THE REGISTERED OWNER
HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
TRANSFERS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS IN WHOLE,
BUT NOT IN PART, TO NOMINEES OF CEDE & CO. OR TO A SUCCESSOR THEREOF
OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL
NOTE SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE
RESTRICTIONS SET FORTH IN SECTION 2.08 OF THE INDENTURE.
Prior to the Separation Date, each Note shall bear the
following legend on the face thereof:
THIS NOTE IS INITIALLY ISSUED AS PART OF AN ISSUANCE OF UNITS, EACH OF
WHICH CONSISTS OF ONE NOTE AND ONE WARRANT INITIALLY ENTITLING THE
HOLDER THEREOF TO PURCHASE .0034224719 SHARES OF COMMON STOCK, PAR
VALUE $.01 PER SHARE, OF ALLEGIANCE TELECOM, INC. (A "WARRANT").
PRIOR TO THE CLOSE OF BUSINESS UPON THE EARLIEST TO OCCUR OF (i)
AUGUST 3, 1998, (ii) THE COMMENCEMENT OF AN EXCHANGE OFFER WITH
RESPECT TO THE NOTES, AND (iii) THE EFFECTIVENESS OF A SHELF
REGISTRATION STATEMENT WITH RESPECT TO THE NOTES, THE NOTES EVIDENCED
BY THIS CERTIFICATE MAY NOT BE TRANSFERRED OR EXCHANGED SEPARATELY
FROM, BUT MAY BE TRANSFERRED OR EXCHANGED ONLY TOGETHER WITH, THE
WARRANTS.
SECTION 2.03. Execution, Authentication and Denominations.
Subject to Article Four, the aggregate principal amount at maturity of Notes
which may be authenticated and delivered under this Indenture is unlimited.
The Notes shall be executed by two Officers of the Company. 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.
<PAGE> 34
28
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 2.15, 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 at maturity and
any integral multiple of $1,000 in excess thereof.
SECTION 2.04. Registrar and Paying Agent. The Company shall
maintain an office or agency where Notes may be presented for registration of
transfer or for exchange (the "Registrar"), an office or agency where Notes may
be presented for payment (the "Paying Agent") and an office or agency where
notices and demands to or upon the Company in respect of the Notes and this
Indenture may be served, which shall be in the Borough of Manhattan, The City
of New York. The Company shall cause the Registrar to keep a register of the
Notes and of their transfer and exchange (the "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 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
<PAGE> 35
29
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 2.05. 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 2.06. Transfer and Exchange. The Notes are issuable
only in registered form. The Notes shall initially be issued as part of an
issue of Units, each of which consists of one Note and one Warrant. Prior to
the Separation Date, the Notes may not be transferred or exchanged separately
from, but may be transferred or exchanged only together with, the Warrants
issued in connection with the Notes. 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 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
<PAGE> 36
30
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 (including an exchange of Notes for Exchange Notes), the
Registrar shall register the transfer or make the exchange as requested if its
requirements for such transactions are met; provided that no exchanges of Notes
for Exchange Notes shall occur until a Registration Statement shall have been
declared effective by the Commission and that any Notes that are exchanged for
Exchange Notes shall be cancelled by the Trustee. To permit registrations of
transfers and exchanges, the Company shall execute and the Trustee shall
authenticate Notes at the Registrar's request. No service charge shall be made
for any registration of transfer or exchange or redemption of the Notes, but
the Company may require payment of a sum sufficient to cover any transfer tax
or similar governmental charge payable in connection therewith (other than any
such transfer taxes or other similar governmental charge payable upon exchanges
pursuant to Section 2.11, 3.08 or 9.04).
The Registrar shall not be required (i) to issue, register the
transfer of or exchange any Note during a period beginning at the opening of
business 15 days before the day of the mailing of a notice of redemption of
Notes selected for redemption under Section 3.03 and ending at the close of
business on the day of such mailing, or (ii) to register the transfer of or
exchange any Note so selected for redemption in whole or in part, except the
unredeemed portion of any Note being redeemed in part.
SECTION 2.07. Book-Entry Provisions for Global Notes. (a)
The U.S. Global Note and Offshore Global Note initially shall (i) be registered
in the name of the Depositary for such Global Notes or the nominee of such
Depositary, (ii) be delivered to the Trustee as custodian for such Depositary
and (iii) bear legends as set forth in Section 2.02.
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.
<PAGE> 37
31
(b) Transfers of a Global Note shall be limited to
transfers of such Global Note in whole, but not in part, to the Depositary, its
successors or their respective nominees. Interests of beneficial owners in a
Global Note may be transferred in accordance with the rules and procedures of
the Depositary and the provisions of Section 2.08. In addition, U.S. Physical
Notes and Offshore Physical Notes shall be transferred to all beneficial owners
in exchange for their beneficial interests in the U.S. Global Note or the
Offshore Global Note, respectively, (i) if the Depositary notifies the Company
that it is unwilling or unable to continue as Depositary for the U.S. Global
Note or the Offshore Global Note, as the case may be, 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 and the provisions of Section 2.08.
(c) Any beneficial interest in one of the Global Notes
that is transferred to a person who takes delivery in the form of an interest
in the other Global Note will, upon transfer, cease to be an interest in such
Global Note and become an interest in the other Global Note and, accordingly,
will thereafter be subject to all transfer restrictions, if any, and other
procedures applicable to beneficial interests in such other Global Note for as
long as it remains such an interest.
(d) In connection with any transfer of a portion of the
beneficial interests in the U.S. Global Note or Permanent Offshore Global Note
to beneficial owners pursuant to paragraph (b) of this Section, the Registrar
shall reflect on its books and records the date and a decrease in the principal
amount of the U.S. Global Note or Permanent Offshore Global Note in an amount
equal to the principal amount of the beneficial interest in the U.S. Global
Note or Permanent Offshore Global Note to be transferred, and the Company shall
execute, and the Trustee shall authenticate and deliver, one or more U.S.
Physical Notes or Offshore Physical Notes, as the case may be, of like tenor
and amount.
(e) In connection with the transfer of the entire U.S.
Global Note or Offshore Global Note to beneficial owners pursuant to paragraph
(b) of this Section, the U.S. Global Note or Offshore Global Note, as the case
may be, shall be deemed to be surrendered to the Trustee for cancellation, and
the Company shall execute, and the Trustee shall authenticate and make
available for delivery, to each beneficial owner identified by the Depositary
in exchange for its beneficial interest in the U.S. Global Note or Offshore
Global Note, as the case may be, an equal aggregate principal amount of U.S.
Physical Notes or Offshore Physical Notes, as the case may be, of authorized
denominations.
(f) Any U.S. Physical Note delivered in exchange for an
interest in the U.S. Global Note pursuant to paragraph (b), (d) or (e) of this
Section shall, except as otherwise
<PAGE> 38
32
provided by paragraph (f) of Section 2.08, bear the legend regarding transfer
restrictions applicable to the U.S. Physical Note set forth in Section 2.02.
(g) Any Offshore Physical Note delivered in exchange for
an interest in the Temporary Offshore Global Note pursuant to paragraph (b),
(d) or (e) of this Section shall, except as otherwise provided by paragraph (f)
of Section 2.08, bear the legend regarding transfer restrictions applicable to
the Offshore Physical Note set forth in Section 2.02.
(h) The registered holder of a Global Note may grant
proxies and otherwise authorize any person, including Agent Members and persons
that may hold interests through Agent Members, to take any action which a
Holder is entitled to take under this Indenture or the Notes.
SECTION 2.08. Special Transfer Provisions. Unless and until
a Note is exchanged for an Exchange Note or sold in connection with an
effective Registration Statement pursuant to the Notes Registration Rights
Agreement, the following provisions shall apply:
(a) Transfers to Non-QIB Institutional Accredited
Investors. The following provisions shall apply with respect to the
registration of any proposed transfer of a Note to any Institutional Accredited
Investor which is not a QIB (excluding Non-U.S. Persons):
(i) The Registrar shall register the transfer of any
Note, whether or not such Note bears the Private Placement Legend, if
(x) the requested transfer is after the time period referred to in
Rule 144(k) under the Securities Act or (y) the proposed transferee
has delivered to the Registrar (A) a certificate substantially in the
form of Exhibit C hereto and (B) if the aggregate Accreted Value of
the Notes at the time of transfer is less than $100,000, an opinion of
counsel acceptable to the Company that such transfer is in compliance
with the Securities Act.
(ii) If the proposed transferor is an Agent Member holding
a beneficial interest in the U.S. Global Note, upon receipt by the
Registrar of (x) the documents, if any, required by paragraph (i) and
(y) instructions given in accordance with the Depositary's and the
Registrar's procedures, the Registrar shall reflect on its books and
records the date and a decrease in the principal amount at maturity of
the U.S. Global Note in an amount equal to the principal amount at
maturity of the beneficial interest in the U.S. Global Note to be
transferred, and the Company shall execute, and the Trustee shall
authenticate and make available for delivery, one or more U.S.
Physical Certificates of like tenor and amount.
<PAGE> 39
33
(b) Transfers to QIBs. The following provisions shall
apply with respect to the registration of any proposed transfer of a U.S.
Physical Note or an interest in the U.S. Global Note to a QIB (excluding
Non-U.S. Persons):
(i) If the Note to be transferred consists of (x) U.S.
Physical Notes, the Registrar shall register the transfer if such
transfer is being made by a proposed transferor who has checked the
box provided for on the form of Note stating, or has otherwise advised
the Company and the Registrar in writing, that the sale has been made
in compliance with the provisions of Rule 144A to a transferee who has
signed the certification provided for on the form of Note stating, or
has otherwise advised the Company and the Registrar in writing, that
it is purchasing the Note for its own account or an account with
respect to which it exercises sole investment discretion and that it
and any such account is a QIB within the meaning of Rule 144A, and is
aware that the sale to it is being made in reliance on Rule 144A and
acknowledges that it has received such information regarding the
Company as it has requested pursuant to Rule 144A or has determined
not to request such information and that it is aware that the
transferor is relying upon its foregoing representations in order to
claim the exemption from registration provided by Rule 144A or (y) an
interest in the U.S. Global Note, the transfer of such interest may be
effected only through the book entry system maintained by the
Depositary.
(ii) If the proposed transferee is an Agent Member, and
the Note to be transferred consists of U.S. Physical Notes, upon
receipt by the Registrar of the documents referred to in clause (i)
and instructions given in accordance with the Depositary's and the
Registrar's procedures, the Registrar shall reflect on its books and
records the date and an increase in the principal amount at maturity
of the U.S. Global Note in an amount equal to the principal amount at
maturity of the U.S. Physical Notes, to be transferred, and the
Trustee shall cancel the U.S. Physical Note so transferred.
(c) Transfers of Interests in the Temporary Offshore
Global Note. The following provisions shall apply with respect to registration
of any proposed transfer of interests in the Temporary Offshore Global Note:
(i) The Registrar shall register the transfer of any Note
(x) if the proposed transferee is a Non- U.S. Person and the proposed
transferor has delivered to the Registrar a certificate substantially
in the form of Exhibit D hereto or (y) if the proposed transferee is a
QIB and the proposed transferor has checked the box provided for on
the form of Note stating, or has otherwise advised the Company and the
Registrar in writing, that the sale has been made in compliance with
the provisions of Rule 144A to a transferee who has signed the
certification provided for on the form of Note stating, or has
otherwise advised the Company and the Registrar in writing, that it is
purchasing the Note for its
<PAGE> 40
34
own account or an account with respect to which it exercises sole
investment discretion and that it and any such account is a QIB within
the meaning of Rule 144A, and is aware that the sale to it is being
made in reliance on Rule 144A and acknowledges that it has received
such information regarding the Company as it has requested pursuant to
Rule 144A or has determined not to request such information and that
it is aware that the transferor is relying upon its foregoing
representations in order to claim the exemption from registration
provided by Rule 144A.
(ii) If the proposed transferee is an Agent Member, upon
receipt by the Registrar of the documents referred to in clause (i)(y)
above and instructions given in accordance with the Depositary's and
the Registrar's procedures, the Registrar shall reflect on its books
and records the date and an increase in the principal amount at
maturity of the U.S. Global Note, in an amount equal to the principal
amount at maturity of the Temporary Offshore Global Note to be
transferred, and the Trustee shall decrease the amount of the
Temporary Offshore Global Note in such an amount.
(d) Transfers of Interests in the Permanent Offshore
Global Note or Unlegended Offshore Physical Notes. The following provisions
shall apply with respect to any transfer of interests in the Permanent Offshore
Global Note or unlegended Offshore Physical Notes. The Registrar shall
register the transfer of any such Note without requiring any additional
certification.
(e) Transfers to Non-U.S. Persons at Any Time. The
following provisions shall apply with respect to any transfer of a Note to a
Non-U.S. Person:
(i) Prior to March 15, 1998, the Registrar shall register
any proposed transfer of a Note to a Non- U.S. Person upon receipt of
a certificate substantially in the form of Exhibit D hereto from the
proposed transferor.
(ii) On and after March 15, 1998, the Registrar shall
register any proposed transfer to any Non-U.S. Person if the Note to
be transferred is a U.S. Physical Note or an interest in the U.S.
Global Note, upon receipt of a certificate substantially in the form
of Exhibit D from the proposed transferor.
(iii) (a) If the proposed transferor is an Agent Member
holding a beneficial interest in the U.S. Global Note, upon receipt
by the Registrar of (x) the documents, if any, required by paragraph
(ii) and (y) instructions in accordance with the Depositary's and the
Registrar's procedures, the Registrar shall reflect on its books and
records the date and a decrease in the principal amount at maturity of
the U.S. Global Note in an amount equal to the principal amount at
maturity of the beneficial interest in the U.S. Global Note to be
transferred, and (b) if the proposed transferee is an Agent Member,
upon receipt by
<PAGE> 41
35
the Registrar of instructions given in accordance with the
Depositary's and the Registrar's procedures, the Registrar shall
reflect on its books and records the date and an increase in the
principal amount at maturity of the Offshore Global Note in an amount
equal to the principal amount at maturity of the U.S. Physical Notes
or the U.S. Global Note, as the case may be, to be transferred, and
the Trustee shall cancel the Physical Note, if any, so transferred or
decrease the amount of the U.S. Global Note.
(f) Private Placement Legend. Upon the transfer,
exchange or replacement of Notes not bearing the Private Placement Legend, the
Registrar shall deliver Notes that do not bear the Private Placement Legend.
Upon the transfer, exchange or replacement of Notes bearing the Private
Placement Legend, the Registrar shall deliver only Notes that bear the Private
Placement Legend unless either (i) the circumstances contemplated by the second
sentence of the fourth paragraph of Section 2.01 or paragraphs (a)(i)(x) or
(e)(ii) of this Section 2.08 exist or (ii) there is delivered to the Registrar
an Opinion of Counsel reasonably satisfactory to the Company and the Trustee to
the effect that neither such legend nor the related restrictions on transfer
are required in order to maintain compliance with the provisions of the
Securities Act.
(g) General. By its acceptance of any Note bearing the
Private Placement Legend, each Holder of such a Note acknowledges the
restrictions on transfer of such Note set forth in this Indenture and in the
Private Placement Legend and agrees that it will transfer such Note only as
provided in this Indenture. The Registrar shall not register a transfer of any
Note unless such transfer complies with the restrictions on transfer of such
Note set forth in this Indenture. In connection with any transfer of Notes,
each Holder agrees by its acceptance of the Notes to furnish the Registrar or
the Company such certifications, legal opinions or other information as either
of them may reasonably require to confirm that such transfer is being made
pursuant to an exemption from, or a transaction not subject to, the
registration requirements of the Securities Act; provided that the Registrar
shall not be required to determine (but may rely on a determination made by the
Company with respect to) the sufficiency of any such certifications, legal
opinions or other information.
The Registrar shall retain copies of all letters, notices and
other written communications received pursuant to Section 2.07 or this Section
2.08. The Company shall have the right to inspect and make copies of all such
letters, notices or other written communications at any reasonable time upon
the giving of reasonable written notice to the Registrar.
SECTION 2.09. Replacement Notes. If a mutilated Note is
surrendered to the Trustee or if the Holder claims that the Note has been lost,
destroyed or wrongfully taken, 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 2.09 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
<PAGE> 42
36
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.
Every replacement Note is an additional obligation of the
Company and shall be entitled to the benefits of this Indenture.
SECTION 2.10. Outstanding Notes. Notes outstanding at any
time are all Notes that have been authenticated by the Trustee except for those
cancelled by it, those delivered to it for cancellation and those described in
this Section 2.10 as not outstanding.
If a Note is replaced pursuant to Section 2.09, 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 2.11. 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
<PAGE> 43
37
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.
SECTION 2.12. Cancellation. The Company at any time may
deliver to the Trustee for cancellation any Notes previously authenticated and
delivered hereunder which the Company may have acquired in any manner
whatsoever, and may deliver to the Trustee for cancellation any Notes
previously authenticated hereunder which the Company has not issued and sold.
The Registrar and the Paying Agent shall forward to the Trustee any Notes
surrendered to them for transfer, exchange or payment. The Trustee shall
cancel all Notes surrendered for transfer, exchange, payment or cancellation in
accordance with its normal procedure.
SECTION 2.13. 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 2.14. Defaulted Interest. If the Company defaults in
a payment of interest on the Notes, it shall pay, or shall deposit with the
Paying Agent money in immediately available funds sufficient to pay the
defaulted interest, plus (to the extent lawful) any interest payable on the
defaulted interest, to the Persons who are Holders on a subsequent special
record date. A special record date, as used in this Section 2.14 with respect
to the payment of any defaulted interest, shall mean the 15th day next
preceding the date fixed by the Company for the payment of defaulted interest,
whether or not such day is a Business Day. At least 15 days before the
subsequent special record date, the Company 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.
<PAGE> 44
38
SECTION 2.15. Issuance of Additional Notes. The Company may, subject
to Article Four of this Indenture, issue additional Notes under this Indenture.
The Notes issued on the Closing Date and any additional Notes subsequently
issued shall be treated as a single class for all purposes under this
Indenture.
ARTICLE THREE
REDEMPTION
SECTION 3.01. Right of Redemption. (a) The Notes may be
redeemed, at the Company's option, in whole or in part, at any time or from
time to time, on or after February 15, 2003 and prior to maturity, upon not
less than 30 nor more than 60 days' prior notice mailed by first class mail to
each Holder's last address as it appears in the Security Register, at the
Redemption Prices (expressed in percentages of principal amount at maturity)
set forth below, plus accrued and unpaid interest, if any, to the Redemption
Date (subject to the right of Holders of record on the relevant Regular Record
Date that is on or prior to the Redemption Date to receive interest due on an
Interest Payment Date), if redeemed during the 12-month period commencing
February 15 of the years set forth below:
<TABLE>
<CAPTION>
Redemption
Year Price
---- -------------
<S> <C>
2003 105.8750%
2004 103.9167%
2005 101.9583%
2006 and thereafter 100.0000%
</TABLE>
(b) In addition, at any time prior to February 15, 2001,
the Company may redeem up to 35% of the principal amount at maturity 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 Accreted
Value on the Redemption Date) of 111.75%; provided that at least $289,250,000
aggregate principal amount at maturity of Notes remains outstanding after each
such redemption.
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).
<PAGE> 45
39
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 at maturity 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 at maturity may only be redeemed in whole. The
Trustee may select for redemption portions (equal to $1,000 in principal amount
at maturity or any integral multiple thereof) of Notes that have denominations
larger than $1,000 in principal amount at maturity. Provisions of this
Indenture that apply to Notes called for redemption also apply to portions of
Notes called for redemption. The Trustee shall notify the Company and the
Registrar promptly in writing of the Notes or portions of Notes to be called
for redemption.
SECTION 3.04. Notice of Redemption. With respect to any
redemption of Notes pursuant to Section 3.01(a) or 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;
<PAGE> 46
40
(vi) that, if any Note is being redeemed in part, the
portion of the principal amount (equal to $1,000 in principal amount
at maturity or any integral multiple thereof) of such Note to be
redeemed and that, on and after the Redemption Date, upon surrender of
such Note, a new Note or Notes in principal amount at maturity equal
to the unredeemed portion thereof will be reissued; and
(vii) that, if any Note contains a CUSIP, CINS or ISIN
number as provided in Section 2.13, no representation is being made as
to the correctness of the CUSIP, CINS or ISIN number either as printed
on the Notes or as contained in the notice of redemption and that
reliance may be placed only on the other identification numbers
printed on the Notes.
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 2.05) 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
<PAGE> 47
41
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 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 2.05. As provided in Section 6.09, upon any bankruptcy or
reorganization procedure relative to the Company, the Trustee shall serve as
the Paying Agent and conversion agent, if any, for the Notes.
The Company shall pay interest on overdue principal, premium,
if any, and interest on overdue installments of interest, to the extent lawful,
at the rate per annum specified in the Notes.
SECTION 4.02. Maintenance of Office or Agency. The Company
will maintain in the Borough of Manhattan, The City of New York an office or
agency where Notes may be surrendered for registration of transfer or exchange
or for presentation for payment and where notices and demands to or upon the
Company in respect of the Notes and this Indenture may be served. The Company
will give prompt written notice to the Trustee of the location, and any change
in the location, of such office or agency. If at any time the Company shall
fail to
<PAGE> 48
42
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 10.02.
The Company may also from time to time designate one or more
other offices or agencies where the Notes may be presented or surrendered for
any or all such purposes and may from time to time rescind such designations;
provided that no such designation or rescission shall in any manner relieve the
Company of its obligation to maintain an office or agency in the Borough of
Manhattan, The City of New York for such purposes. The Company will give
prompt written notice to the Trustee of any such designation or rescission and
of any change in the location of any such other office or agency.
The Company hereby initially designates the Corporate Trust
Office of the Trustee, located in the Borough of Manhattan, The City of New
York, as such office of the Company in accordance with Section 2.04.
SECTION 4.03. Limitation on Indebtedness. (a) The Company
will not, and will not permit any of its Restricted Subsidiaries to, Incur any
Indebtedness (other than the Notes and Indebtedness existing on the Closing
Date); provided that the Company 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
<PAGE> 49
43
(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, 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;
<PAGE> 50
44
(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 the Closing Date as a capital contribution or from the
issuance and sale of its Capital Stock (other than Disqualified Stock)
to a Person that is not a Subsidiary of the Company, to the extent (I)
such capital contribution or Net Cash Proceeds have not been used
pursuant to clause (C)(2) of the first paragraph or clause (iii),
(iv), (vi) of (vii) of the second paragraph of Section 4.04 to make a
Restricted Payment and (II) if such capital contribution or Net Cash
Proceeds are used to consummate a transaction pursuant to which the
Company Incurs Acquired Indebtedness, the amount of such Net Cash
Proceeds exceeds one-half of the amount of Acquired Indebtedness so
Incurred and (B) 80% of the fair market value of property (other than
cash and cash equivalents) received by the Company after the Closing
Date 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.
<PAGE> 51
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(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.
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
<PAGE> 52
46
an Unrestricted Subsidiary) accrued on a cumulative basis during the period
(taken as one accounting period) beginning on the first day of the fiscal
quarter immediately following the Closing Date and ending on the last day of
the last fiscal quarter preceding the Transaction Date for which reports have
been filed with the Commission or provided to the Trustee pursuant to Section
4.17 plus (2) the aggregate Net Cash Proceeds received by the Company after the
Closing Date as a capital contribution or from the issuance and sale permitted
by this Indenture of its Capital Stock (other than Disqualified Stock) to a
Person who is not a Subsidiary of the Company, including an issuance or sale
permitted by this Indenture of Indebtedness of the Company for cash subsequent
to the Closing Date upon the conversion of such Indebtedness into Capital Stock
(other than Disqualified Stock) of the Company, or from the issuance to a
Person who is not a Subsidiary of the Company of any options, warrants or other
rights to acquire Capital Stock of the Company (in each case, exclusive of any
Disqualified Stock 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 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
<PAGE> 53
47
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 and (b) the amount of Net Cash Proceeds received by the
Company after the Closing Date as a capital contribution or from the
sale of its Capital Stock (other than Disqualified Stock) to a Person
who is not a Subsidiary of the Company, except to the extent such Net
Cash Proceeds are used to Incur Indebtedness pursuant to clause (viii)
of the second paragraph of Section 4.03(a) or to make Restricted
Payments pursuant to clause (C)(2) of the first paragraph, or clauses
(iii) or (iv) 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 the Common
Stock of the Company following a Public Equity Offering of such Common
Stock, of up to 6% per annum of the Net Cash Proceeds received by the
Company in such Public Equity Offering;
<PAGE> 54
48
(ix) prior to the occurrence of a Public Market, the
purchase, redemption, retirement or other acquisition for value of
shares of Capital Stock of the Company or options to purchase such
shares, held by directors, employees or officers, or former directors,
employees or officers, of the Company or a Restricted Subsidiary (or
their estates or beneficiaries under their estates), upon the death,
disability, retirement, termination of employment or pursuant to the
terms of any agreement under which such shares of Capital Stock or
options were issued; provided that the aggregate consideration paid
for such purchase, redemption, retirement or other acquisition for
value of such shares or options after the Closing Date does not exceed
$5 million in the aggregate (unless such repurchases are made with the
proceeds of insurance policies and the shares are purchased from the
executors, administrators, testamentary trustees, heirs, legatees or
beneficiaries);
(x) repurchases of Warrants pursuant to a Repurchase
Offer;
(xi) 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
(xii) 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
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
<PAGE> 55
49
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;
(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
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50
(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 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,
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51
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;
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(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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53
(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
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54
Accreted Value of Notes equal to the Excess Proceeds on such date, at a
purchase price equal to 100% of the Accreted Value of the Notes on the relevant
Payment Date, plus, in each case, accrued interest (if any) 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 Accreted Value thereof on the relevant
Payment Date, plus accrued interest (if any) 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
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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.
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
<PAGE> 62
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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.
(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. At
all times from and after the earlier of (i) the date of the commencement of a
registered exchange offer for the Notes by the Company or the effectiveness of
the Shelf Registration Statement pursuant to and in accordance with the terms
of the Notes Registration Rights Agreement (the "Registration") and (ii) the
date that is six months from the Closing Date, in either case, 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. 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). In addition, at all times prior to the
earlier of the date of the Registration and the date that is six months from
the Closing Date, the Company shall, at its cost, deliver to each Holder of the
Notes quarterly and annual reports substantially equivalent to those which
would be required by the Exchange Act. In addition, at all times prior to the
Registration, upon the request of any Holder or any prospective purchaser of
the Notes designated by a Holder, the Company shall supply to such Holder or
such prospective purchaser the information required under Rule 144A under the
Securities Act. 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
<PAGE> 63
57
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.
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.
SECTION 4.20. Calculation of Original Issue Discount. The
Company shall file with the Trustee promptly at the end of each calendar year
(i) a written notice specifying the amount of original issue discount
(including daily rates and accrual periods) accrued on outstanding Notes as of
the end of such year and (ii) such other specific information relating to such
original issue discount as may then be relevant under the Internal Revenue Code
of 1986, as amended from time to time and requested by the Trustee.
<PAGE> 64
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ARTICLE FIVE
SUCCESSOR CORPORATION
SECTION 5.01. When Company May Merge, Etc. The Company shall
not consolidate with, merge with or into, or sell, convey, transfer, lease or
otherwise dispose of all or substantially all of its property and assets (as an
entirety or substantially an entirety in one transaction or a series of related
transactions) to, any Person or permit any Person to merge with or into the
Company unless:
(i) the Company shall be the continuing Person, or the
Person (if other than the Company) formed by such consolidation or
into which the Company is merged or that acquired or leased such
property and assets of the Company shall be a corporation organized
and validly existing under the laws of the United States of America or
any jurisdiction thereof and shall expressly assume, by a supplemental
indenture, executed and delivered to the Trustee, all of the
obligations of the Company on all of the Notes and under this
Indenture;
(ii) immediately after giving effect to such transaction,
no Default or Event of Default shall have occurred and be continuing;
(iii) immediately after giving effect to such transaction
on a pro forma basis, the Company or any Person becoming the successor
obligor of the Notes shall have a Consolidated Net Worth equal to or
greater than the Consolidated Net Worth of the Company immediately
prior to such transaction;
(iv) immediately after giving effect to such transaction
on a pro forma basis the Company, or any Person becoming the successor
obligor of the Notes, as the case may be, could Incur at least $1.00
of Indebtedness under the first paragraph of Section 4.03; provided
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
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(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.
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;
(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;
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(d) the Company defaults in the performance of or
breaches any other covenant or agreement of the Company in this
Indenture or under the Notes (other than a default specified in clause
(a), (b) or (c) above) and such default or breach continues for a
period of 30 consecutive days after written notice by the Trustee or
the Holders of 25% or more in aggregate principal amount at maturity
of the Notes,
(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 substantially all of the
property and assets of the Company or any Significant Subsidiary or
(C) the winding up or liquidation of the affairs of the Company or any
Significant Subsidiary and, in each case, such decree or order shall
remain unstayed and in effect for a period of 30 consecutive days; or
(h) the Company or any Significant Subsidiary (A)
commences a voluntary case under any applicable bankruptcy, insolvency
or other similar law now or hereafter in effect, or consents to the
entry of an order for relief in an involuntary case under any such
law, (B) consents to the appointment of or taking possession by a
receiver, liquidator,
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assignee, custodian, trustee, sequestrator or similar official of the
Company or any Significant Subsidiary or for all or substantially all
of the property and assets of the Company or any Significant
Subsidiary or (C) effects any general assignment for the benefit of
creditors.
SECTION 6.02. Acceleration. If an Event of Default (other
than an Event of Default specified in clause (g) or (h) of Section 6.01 that
occurs with respect to the Company) occurs and is continuing under this
Indenture, the Trustee or the Holders of at least 25% in aggregate principal
amount of the Notes, then outstanding, by written notice to the Company (and to
the Trustee if such notice is given by the Holders), may, and the Trustee at
the request of such Holders shall, declare the Accreted Value of, premium, if
any, and accrued interest on the Notes to be immediately due and payable. Upon
a declaration of acceleration, such Accreted Value 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 Accreted Value 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.
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.
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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.
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.
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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 Accreted Value of, premium, if any, or
interest on, such Note or to bring suit for the enforcement of any such
payment, on or after the due date expressed in the Notes, 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.
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
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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.
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
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in Section 2.09, no right or remedy herein conferred upon or reserved to the
Trustee or to the Holders is intended to be exclusive of any other right or
remedy, and every right and remedy shall, to the extent permitted by law, be
cumulative and in addition to every other right and remedy given hereunder or
now or hereafter existing at law or in equity or otherwise. The assertion or
employment of any right or remedy hereunder, or otherwise, shall not prevent
the concurrent assertion or employment of any other appropriate right or
remedy.
SECTION 6.14. Delay or Omission Not Waiver. No delay or
omission of the Trustee or of any Holder to exercise any right or remedy
accruing upon any Event of Default shall impair any such right or remedy or
constitute a waiver of any such Event of Default or an acquiescence therein.
Every right and remedy given by this Article Six or by law to the Trustee or to
the Holders may be exercised from time to time, and as often as may be deemed
expedient, by the Trustee or by the Holders, as the case may be.
ARTICLE SEVEN
TRUSTEE
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 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 10.03 or
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Section 10.04, 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 at maturity of the outstanding Notes relating to the
time, method and place of conducting any proceeding for any remedy
available to the Trustee, or exercising any trust or power conferred
upon the Trustee, under this Indenture; provided that the Trustee's
conduct does not constitute 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) 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
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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, 1998, the Trustee shall mail to each
Holder as provided in TIA Section 313(c) a brief report dated as of such May
15, if required by TIA Section 313(a).
SECTION 7.07. Compensation and Indemnity. The Company shall
pay to the Trustee such compensation as shall be agreed upon in writing for its
services. The compensation of the Trustee shall not be limited by any law on
compensation of a trustee of an express trust. The Company shall reimburse the
Trustee upon request for all reasonable out-of-pocket expenses 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.
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To secure the Company's payment obligations in this Section
7.07, the Trustee shall have a lien prior to the Notes on all money or property
held or collected by the Trustee, in its capacity as Trustee, except money or
property held in trust to pay 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 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.
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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 under Article Eight of this Indenture.
SECTION 7.12. Withholding Taxes. The Trustee, as agent for
the Company, shall exclude and withhold from each payment of principal and
interest and other amounts due hereunder or under the Notes any and all
withholding taxes applicable thereto as required by law. The Trustee agrees to
act as such withholding agent and, in connection therewith, whenever any
present or future taxes or similar charges are required to be withheld with
respect to any amounts payable in respect of the Notes, to withhold such
amounts and timely pay the same to the appropriate authority in the name of and
on behalf of the holders of the Notes, that it will file any necessary
withholding tax returns or statements when due. The Company or the Trustee
shall, as promptly as possible after the payment of the taxes described above,
deliver to each holder of a Note appropriate documentation showing the payment
thereof, together with such additional documentary evidence as such holders may
reasonably request from time to time.
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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 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, 2.08, 2.09, 2.14, 4.01, 4.02, 7.07, 7.08, 8.04, 8.05 and 8.06 shall
survive until the Notes are no longer outstanding. Thereafter, only the
Company's obligations in Sections 7.07, 8.05 and 8.06 shall survive. 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
<PAGE> 77
71
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 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;
<PAGE> 78
72
(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;
(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)
<PAGE> 79
73
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, 2.08, 2.09, 2.14, 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 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
<PAGE> 80
74
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 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
<PAGE> 81
75
(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. 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.
<PAGE> 82
76
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 and the Notes with the written consent of
the Holders of a majority in aggregate principal amount at maturity of the
Notes then outstanding, and the Holders of a majority in aggregate principal
amount at maturity of the Notes then outstanding by written notice to the
Trustee may waive future compliance by the Company with any provision of this
Indenture or the Notes.
Notwithstanding the provisions of this Section 9.02, without
the consent of each Holder affected, an amendment or waiver, including a waiver
pursuant to Section 6.04, may not:
(i) change the Stated Maturity of the principal of, or
any installment of interest on, any Note,
(ii) reduce the Accreted Value of, or premium, if any, or
interest on, any Note,
<PAGE> 83
77
(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 or
(viii) reduce the percentage or aggregate principal amount
at maturity of outstanding Notes the consent of whose Holders is
necessary for waiver of compliance with certain provisions of this
Indenture or for waiver of certain defaults.
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.
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
<PAGE> 84
78
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.
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.
<PAGE> 85
79
ARTICLE TEN
MISCELLANEOUS
SECTION 10.01. Trust Indenture Act of 1939. Prior to the
effectiveness of the Registration Statement, this Indenture shall incorporate
and be governed by the provisions of the TIA that are required to be part of
and to govern indentures qualified under the TIA. After the effectiveness of
the Registration Statement, this Indenture shall be 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 10.02. 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
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 10.02, it is
duly given, whether or not the addressee receives it.
<PAGE> 86
80
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 10.03. Certificate and Opinion as to Conditions
Precedent. Upon any request or application by the Company to the Trustee to
take any action under this Indenture, the Company shall furnish to the Trustee:
(i) an Officers' Certificate stating that, in the opinion
of the signers, all conditions precedent, if any, provided for in this
Indenture relating to the proposed action have been complied with; and
(ii) an Opinion of Counsel 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 10.04. 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.
<PAGE> 87
81
SECTION 10.05. 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 10.06. 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 10.07. 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 10.08. No Adverse Interpretation of Other Agreements.
This Indenture may not be used to interpret another indenture, loan or debt
agreement of the Company or any Subsidiary of the Company. Any such indenture,
loan or debt agreement may not be used to interpret this Indenture.
SECTION 10.09. 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 10.10. 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.
<PAGE> 88
SECTION 10.11. 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 10.12. 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 10.13. 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.
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: Chief Executive Officer
THE BANK OF NEW YORK
By: /s/ VAN BROWN
----------------------------------
Name: Van Brown
Title: Assistant Vice President
<PAGE> 89
EXHIBIT A
[FACE OF NOTE]
ALLEGIANCE TELECOM, INC.
11 3/4% Senior Discount Note Due 2008
[CUSIP] [CINS] __________
No. $_________
The following information is supplied for purposes of Sections
1273 and 1275 of the Internal Revenue Code:
Issue Date: February 3, 1998 Original issue discount under
Section 1273 of the Internal
Revenue Code (for each $1,000
Yield to maturity for period from principal amount): $1,043.02
Issue Date to February 15, 2008:
12.19%, compounded semi-annually on
February 15 and August 15, commencing Issue Price (for each $1,000
August 15, 1998 (computed without principal amount): $544.48
giving effect to the additional payments
of interest in the event the issuer
fails to commence the exchange offer or
cause the registration statement to be declared
effective, each as described on the reverse
hereof)
ALLEGIANCE TELECOM, INC., a Delaware corporation (the
"Company", which term includes any successor under the Indenture hereinafter
referred to), for value received, promises to pay to ________________, or its
registered assigns, the principal sum of ___________________ ($______) on
February 15, 2008.
Interest Payment Dates: February 15 and August 15, commencing
August 15, 2003.
Regular Record Dates: February 1 and August 1.
<PAGE> 90
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.
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 11 3/4% Senior Discount Notes due 2008
described in the within-mentioned Indenture.
Date: THE BANK OF NEW YORK,
as Trustee
By:
--------------------------------
Authorized Signatory
<PAGE> 91
A-3
[REVERSE SIDE OF NOTE]
ALLEGIANCE TELECOM, INC.
11 3/4% Senior Discount Note due 2008
1. Principal and Interest.
The Company will pay the principal of this Note on February
15, 2008.
The Company promises to pay interest on the principal amount
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 February 1 or August 1
immediately preceding the Interest Payment Date) on each Interest Payment Date,
commencing August 15, 2003; provided that no interest shall accrue on the
principal amount of this Note prior to February 15, 2003 and no interest shall
be paid on this Note prior to August 15, 2003, except as provided in the next
paragraph.
If an exchange offer registered under the Securities Act is
not consummated and a shelf registration statement under the Securities Act
with respect to resales of the Notes is not declared effective by the
Commission, on or before August 3, 1998 in accordance with the terms of the
Notes Registration Rights Agreement dated January 29, 1998 among the Company
and Morgan Stanley & Co. Incorporated, Salomon Brothers Inc, Bear, Stearns &
Co. Inc. and Donaldson, Lufkin & Jenrette Securities Corporation, interest (in
addition to the accrual of original issue discount during the period ending
February 15, 2003 and in addition to the interest otherwise due on the Notes
after such date) will accrue, at an annual rate of 0.5% of Accreted Value on
the preceding Semiannual Accrual Date on the Notes from August 3, 1998, payable
in cash semiannually, in arrears, on each February 15 and August 15, commencing
February 15, 1999, until the exchange offer is consummated or the shelf
registration statement is declared effective. The Holder of this Note is
entitled to the benefits of such Notes Registration Rights Agreement.
From and after February 15, 2003, interest on the Notes will
accrue from the most recent date to which interest has been paid or, if no
interest has been paid, from February 15, 2003; provided that, if there is no
existing default in the payment of interest and this Note is authenticated
between a Regular Record Date referred to on the face hereof and the next
succeeding Interest Payment Date, interest shall accrue from such Interest
Payment Date. Interest will be computed on the basis of a 360-day year of
twelve 30-day months.
<PAGE> 92
A-4
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 February 15 and
August 15 to the persons who are Holders (as reflected in the Security Register
at the close of business on such February 1 and August 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
February 15, 2008.
The Company will pay principal, premium, if any, and as
provided above, interest in money of the United States that at the time of
payment is legal tender for payment of public and private debts. However, the
Company 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
February 3, 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.
<PAGE> 93
A-5
5. Redemption.
The Notes will be redeemable, at the Company's option, in
whole or in part, at any time or from time to time, on or after February 15,
2003 and prior to maturity, upon not less than 30 nor 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 at maturity) set forth below, plus accrued and unpaid
interest, if any, to the Redemption Date (subject to the right of Holders of
record on the relevant Regular Record Date that is on or prior to the
Redemption Date to receive interest due on an Interest Payment Date), if
redeemed during the 12-month period commencing February 15 of the years set
forth below:
<TABLE>
<CAPTION>
Redemption
Year Price
---- -------------
<S> <C>
2003 105.8750%
2004 103.9167%
2005 101.9583%
2006 and thereafter 100.0000%
</TABLE>
In addition, at any time prior to February 15, 2001, the
Company may redeem up to 35% of the principal amount at maturity 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 Accreted Value on the
Redemption Date) of 111.75%; provided that at least $289,250,000 aggregate
principal amount at maturity of Notes remains outstanding after each such
redemption.
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 and the
original issue discount ceases to accrete on Notes or portions of Notes called
for redemption, unless the Company defaults in the payment of the Redemption
Price.
6. Repurchase upon Change 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 Accreted Value 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
<PAGE> 94
A-6
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 and
the original issue discount ceases to accrete on Notes or portions of Notes
surrendered for purchase by the Company, unless the Company defaults in the
payment of the Change of Control Payment.
7. Denominations; Transfer; Exchange.
The Notes are in registered form without coupons in
denominations of $1,000 of principal amount at maturity and multiples of $1,000
in excess thereof. A Holder may register the transfer or exchange of Notes in
accordance with the Indenture. The Registrar may require a Holder, among other
things, to furnish appropriate endorsements and transfer documents and to pay
any taxes and fees required by law or permitted by the Indenture. The
Registrar need not register the transfer or exchange of any Notes selected for
redemption. Also, it need not register the transfer or exchange of any Notes
for a period of 15 days before 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.
<PAGE> 95
A-7
10. Discharge Prior to Redemption or Maturity.
If the Company deposits with the Trustee money or U.S.
Government Obligations sufficient to pay the then outstanding principal of,
premium, if any, and accrued interest on the Notes (a) to redemption or
maturity, the Company will be discharged from the Indenture and the Notes,
except in certain circumstances for certain sections thereof, and (b) to the
Stated Maturity, the Company will be discharged from certain covenants set
forth in the Indenture.
11. Amendment; Supplement; Waiver.
Subject to certain exceptions, the Indenture or the Notes may
be amended or supplemented with the consent of the Holders of at least a
majority in principal amount 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.
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 at maturity, upon acceleration,
redemption or otherwise; (b) default in the payment of interest on any Note
when the same becomes due and payable, and such default continues for a period
of 30 days; (c) default in the performance, or breach of the provisions of
<PAGE> 96
A-8
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 at maturity of the Notes, (e) there occurs with respect to any
issue or issues of Indebtedness of the Company or any Significant Subsidiary
having an outstanding principal amount of $5 million or more in the aggregate
for all such issues of all such Persons, whether such Indebtedness now exists
or shall hereafter be created, (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 substantially all of the property and assets of the
Company or any Significant Subsidiary or (C) the winding up or liquidation of
the affairs of the Company or any Significant Subsidiary and, in each case,
such decree or order shall remain unstayed and in effect for a period of 30
consecutive days; or (h) the Company or any Significant Subsidiary (A)
commences a voluntary case under any applicable bankruptcy, insolvency or other
similar law now or hereafter in effect, or consents to the entry of an order
for relief in an involuntary case under any such law, (B) consents to the
appointment of or taking possession by a receiver, liquidator, assignee,
custodian, trustee, sequestrator or similar official of the Company or any
Significant Subsidiary or for all or substantially all of the property and
assets of the Company or any Significant Subsidiary or (C) effects any general
assignment for the benefit of creditors.
If an Event of Default (other than an Event of Default
specified in 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
<PAGE> 97
A-9
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. 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.
16. No Recourse Against Others.
No incorporator or any past, present or future partner,
shareholder, other equity holder, officer, director, employee or controlling
person as such, of the Company or of any successor Person shall have any
liability for any obligations of the Company under the Notes or the 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.
17. Authentication.
This Note shall not be valid until the Trustee or
authenticating agent signs the certificate of authentication on the other side
of this Note.
18. Abbreviations.
Customary abbreviations may be used in the name of a Holder or
an assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by the
entireties), JT TEN (= joint tenants with right of survivorship and not as
tenants in common), CUST (= Custodian) and U/G/M/A (= Uniform Gifts to Minors
Act).
The Company will furnish to any Holder upon written request
and without charge a copy of the Indenture. Requests may be made to Allegiance
Telecom, Inc., 1950 Stemmons Frwy., Suite 3026, Dallas, Texas 75207, Attention:
Chief Financial Officer.
<PAGE> 98
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.
[THE FOLLOWING PROVISION TO BE INCLUDED
ON ALL NOTES OTHER THAN EXCHANGE NOTES,
PERMANENT OFFSHORE GLOBAL NOTES AND
OFFSHORE PHYSICAL NOTES]
In connection with any transfer of this Note occurring prior
to the date which is the earlier of (i) the date the shelf registration
statement with respect to resales of the Notes is declared effective or (ii)
the end of the period referred to in Rule 144(k) under the Securities Act, the
undersigned confirms that without utilizing any general solicitation or general
advertising that:
[Check One]
[ ] (a) this Note is being transferred in compliance with the
exemption from registration under the Securities Act of 1933,
as amended, provided by Rule 144A thereunder.
or
[ ] (b) this Note is being transferred other than in accordance with
(a) above and documents are being furnished which comply with
the conditions of transfer set forth in this Note and the
Indenture.
<PAGE> 99
A-11
If none of the foregoing boxes is checked, the Trustee or other Registrar shall
not be obligated to register this Note in the name of any Person other than the
Holder hereof unless and until the conditions to any such transfer of
registration set forth herein and in Section 2.08 of the Indenture shall have
been satisfied.
Date:
------------------ ---------------------------------
NOTICE: The signature to this
assignment must correspond
with the name as written upon the
face of the within-mentioned
instrument in every particular,
without alteration or any change
whatsoever.
TO BE COMPLETED BY PURCHASER IF (a) ABOVE IS CHECKED.
The undersigned represents and warrants that it is purchasing
this Note for its own account or an account with respect to which it exercises
sole investment discretion and that it and any such account is a "qualified
institutional buyer" within the meaning of Rule 144A under the Securities Act
of 1933, as amended, and is aware that the sale to it is being made in reliance
on Rule 144A and acknowledges that it has received such information regarding
the Company as the undersigned has requested pursuant to Rule 144A or has
determined not to request such information and that it is aware that the
transferor is relying upon the undersigned's foregoing representations in order
to claim the exemption from registration provided by Rule 144A.
Date:
------------------ ---------------------------------
NOTICE: To be executed by an
executive officer
<PAGE> 100
A-12
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 at maturity): $___________________.
Date: _________________
Your Signature:
------------------------------------------------------------
(Sign exactly as your name appears on the other side of this
Note)
Signature Guarantee:
---------------------
<PAGE> 101
EXHIBIT B
Form of Certificate
The Bank of New York ________________, ____
101 Barclay Street
Floor 21 West
New York, New York 10286
Attention: Corporate Trust Administration
Allegiance Telecom, Inc.
1950 Stemmons Frwy., Suite 3026
Dallas, Texas 75207
Attention: Chief Financial Officer
Re: Allegiance Telecom, Inc. (the "Company")
11 3/4% Senior Discount Notes
due 2008 (the "Notes")
Dear Sirs:
This letter relates to U.S. $_______________ principal amount at
maturity of Notes represented by a Note (the "Legended Note") which bears a
legend outlining restrictions upon transfer of such Legended Note. Pursuant to
Section 2.01 of the Indenture (the "Indenture") dated as of February 3, 1998
relating to the Notes, we hereby certify that we are (or we will hold such
securities on behalf of) a person outside the United States to whom the Notes
could be transferred in accordance with Rule 904 of Regulation S promulgated
under the U.S. Securities Act of 1933, as amended. Accordingly, you are hereby
requested to exchange the legended certificate for an unlegended certificate
representing an identical principal amount at maturity of Notes, all in the
manner provided for in the Indenture.
You and the Company are entitled to rely upon this letter and
are irrevocably authorized to produce this letter or a copy hereof to any
interested party in any administrative or legal proceedings or official inquiry
with respect to the matters covered hereby. Terms used in this certificate
have the meanings set forth in Regulation S.
Very truly yours,
[Name of Holder]
By:
----------------------------------
Authorized Signature
<PAGE> 102
EXHIBIT C
Form of Certificate to Be
Delivered in Connection with
Transfers to Non-QIB Accredited Investors
____________, ____
The Bank of New York
101 Barclay Street
Floor 21 West
New York, NY 10286
Attention: Corporate Trust Administration
Allegiance Telecom, Inc.
1950 Stemmons Frwy., Suite 3026
Dallas, Texas 75207
Attention: Chief Financial Officer
Re: Allegiance Telecom, Inc. (the "Company")
11 3/4% Senior Discount Notes due 2008 (the "Notes")
Dear Sirs:
In connection with our proposed purchase of
$__________________ aggregate principal amount at maturity of the Notes, we
confirm that:
1. We understand that any subsequent transfer of the Notes is
subject to certain restrictions and conditions set forth in the Indenture dated
as of February 3, 1998, relating to the Notes (the "Indenture") and the
undersigned agrees to be bound by, and not to resell, pledge or otherwise
transfer the Notes except in compliance with, such restrictions and conditions
and the Securities Act of 1933, as amended (the "Securities Act").
2. We understand that the offer and sale of the Notes have
not been registered under the Securities Act, and that the Notes may not be
offered or sold except as permitted in the following sentence. We agree, on
our own behalf and on behalf of any accounts for which we are acting as
hereinafter stated, that if we should sell any Notes, we will do so only (A) to
the Company or any subsidiary thereof, (B) in accordance with Rule 144A under
the Securities Act to a "qualified institutional buyer" (as defined therein),
(C) to an institutional "accredited
<PAGE> 103
C-2
investor" (as defined below) that, prior to such transfer, furnishes (or has
furnished on its behalf by a U.S. broker-dealer) to you and to the Company a
signed letter substantially in the form of this letter, (D) outside the United
States in accordance with Rule 904 of Regulation S under the Securities Act,
(E) pursuant to the exemption from registration provided by Rule 144 under the
Securities Act, or (F) pursuant to an effective registration statement under
the Securities Act, and we further agree to provide to any person purchasing
any of the Notes from us a notice advising such purchaser that resales of the
Notes are restricted as stated herein.
3. We understand that, on any proposed resale of any Notes,
we will be required to furnish to you and the Company such certifications,
legal opinions and other information as you and the Company may reasonably
require to confirm that the proposed sale complies with the foregoing
restrictions. We further understand that the Notes purchased by us will bear a
legend to the foregoing effect.
4. We are an institutional "accredited investor" (as defined
in Rule 501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act)
and have such knowledge and experience in financial and business matters as to
be capable of evaluating the merits and risks of our investment in the Notes,
and we and any accounts for which we are acting are each able to bear the
economic risk of our or its investment.
5. We are acquiring the Notes purchased by us for our own
account or for one or more accounts (each of which is an institutional
"accredited investor") as to each of which we exercise sole investment
discretion.
You and the Company are entitled to rely upon this letter and
are irrevocably authorized to produce this letter or a copy hereof to any
interested party in any administrative or legal proceedings or official inquiry
with respect to the matters covered hereby.
Very truly yours,
[Name of Transferee]
By:
------------------------
Authorized Signature
<PAGE> 104
EXHIBIT D
Form of Certificate to Be Delivered
in Connection with Transfers
Pursuant to Regulation S
____________, ____
The Bank of New York
101 Barclay Street
Floor 21 West
New York, New York 10286
Attention: Corporate Trust Administration
Allegiance Telecom, Inc.
1950 Stemmons Frwy., Suite 3026
Dallas, Texas 75207
Attention: Chief Financial Officer
Re: Allegiance Telecom, Inc. (the "Company")
11 3/4% Senior Discount Notes due 2008 (the "Notes")
Dear Sirs:
In connection with our proposed sale of U.S.$__________________
aggregate principal amount at maturity of the Notes, we confirm that such sale
has been effected pursuant to and in accordance with Regulation S under the
Securities Act of 1933, as amended, and, accordingly, we represent that:
(1) the offer of the Notes was not made to a person in the
United States;
(2) at the time the buy order was originated, the
transferee was outside the United States or we and any person acting on
our behalf reasonably believed that the transferee was outside the
United States;
<PAGE> 105
D-2
(3) no directed selling efforts have been made by us in the
United States in contravention of the requirements of Rule 903(b) or
Rule 904(b) of Regulation S, as applicable; and
(4) the transaction is not part of a plan or scheme to
evade the registration requirements of the U.S. Securities Act of 1933.
You and the Company are entitled to rely upon this letter and
are irrevocably authorized to produce this letter or a copy hereof to any
interested party in any administrative or legal proceedings or official inquiry
with respect to the matters covered hereby. Terms used in this certificate
have the meanings set forth in Regulation S.
Very truly yours,
[Name of Transferor]
By:
-------------------------------
Authorized Signature
<PAGE> 1
EXHIBIT 4.3
[FACE OF NOTE]
ALLEGIANCE TELECOM, INC.
11 3/4% Senior Discount Note Due 2008
[CUSIP] [CINS] __________
No. $_________
The following information is supplied for purposes of Sections
1273 and 1275 of the Internal Revenue Code:
Issue Date: February 3, 1998 Original issue discount under
Section 1273 of the Internal
Revenue Code (for each $1,000
Yield to maturity for period principal amount): $1,043.02
from Issue Date to February 15, 2008:
12.19%, compounded semi-annually on
February 15 and August 15, commencing Issue Price (for each $1,000
August 15, 1998 (computed without giving principal amount): $544.48
effect to the additional payments of
interest in the event the issuer fails to
commence the exchange offer or cause the
registration statement to be declared
effective, each as described on the reverse
hereof)
ALLEGIANCE TELECOM, INC., a Delaware corporation (the
"Company", which term includes any successor under the Indenture hereinafter
referred to), for value received, promises to pay to ________________, or its
registered assigns, the principal sum of ___________________ ($______) on
February 15, 2008.
Interest Payment Dates: February 15 and August 15, commencing
August 15, 2003.
Regular Record Dates: February 1 and August 1.
Reference is hereby made to the further provisions of this Note
set forth on the reverse hereof, which further provisions shall for all
purposes have the same effect as if set forth at this place.
<PAGE> 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 11 3/4% Senior Discount Notes due 2008
described in the within-mentioned Indenture.
Date: THE BANK OF NEW YORK,
as Trustee
By:
Authorized Signatory
<PAGE> 3
[REVERSE SIDE OF NOTE]
ALLEGIANCE TELECOM, INC.
11 3/4% Senior Discount Note due 2008
1. Principal and Interest.
The Company will pay the principal of this Note on February
15, 2008.
The Company promises to pay interest on the principal amount
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 February 1 or August 1
immediately preceding the Interest Payment Date) on each Interest Payment Date,
commencing August 15, 2003; provided that no interest shall accrue on the
principal amount of this Note prior to February 15, 2003 and no interest shall
be paid on this Note prior to August 15, 2003, except as provided in the next
paragraph.
If an exchange offer registered under the Securities Act is
not consummated and a shelf registration statement under the Securities Act
with respect to resales of the Notes is not declared effective by the
Commission, on or before August 3, 1998 in accordance with the terms of the
Notes Registration Rights Agreement dated January 29, 1998 among the Company
and Morgan Stanley & Co. Incorporated, Salomon Brothers Inc, Bear, Stearns &
Co. Inc. and Donaldson, Lufkin & Jenrette Securities Corporation, interest (in
addition to the accrual of original issue discount during the period ending
February 15, 2003 and in addition to the interest otherwise due on the Notes
after such date) will accrue, at an annual rate of 0.5% of Accreted Value on
the preceding Semiannual Accrual Date on the Notes from August 3, 1998, payable
in cash semiannually, in arrears, on each February 15 and August 15, commencing
February 15, 1999, until the exchange offer is consummated or the shelf
registration statement is declared effective. The Holder of this Note is
entitled to the benefits of such Notes Registration Rights Agreement.
From and after February 15, 2003, interest on the Notes will
accrue from the most recent date to which interest has been paid or, if no
interest has been paid, from February 15, 2003; provided that, if there is no
existing default in the payment of interest and this Note is authenticated
between a Regular Record Date referred to on the face hereof and the next
succeeding Interest Payment Date, interest shall accrue from such Interest
Payment Date. Interest will be computed on the basis of a 360-day year of
twelve 30-day months.
The Company shall pay interest on overdue principal and
premium, if any, and interest on overdue installments of interest, to the
extent lawful, at a rate per annum that is 2% in excess of the rate otherwise
payable.
<PAGE> 4
2. Method of Payment.
The Company will pay interest (except defaulted interest) on
the principal amount of the Notes as provided above on each February 15 and
August 15 to the persons who are Holders (as reflected in the Security Register
at the close of business on such February 1 and August 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
February 15, 2008.
The Company will pay principal, premium, if any, and as
provided above, interest in money of the United States that at the time of
payment is legal tender for payment of public and private debts. However, the
Company 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
February 3, 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.
5. Redemption.
The Notes will be redeemable, at the Company's option, in
whole or in part, at any time or from time to time, on or after February 15,
2003 and prior to maturity, upon not less than 30 nor 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 at maturity) set forth below, plus accrued and unpaid
interest, if any, to the Redemption
<PAGE> 5
Date (subject to the right of Holders of record on the relevant Regular Record
Date that is on or prior to the Redemption Date to receive interest due on an
Interest Payment Date), if redeemed during the 12-month period commencing
February 15 of the years set forth below:
<TABLE>
<CAPTION>
Redemption
Year Price
---- -------------
<S> <C>
2003 105.8750%
2004 103.9167%
2005 101.9583%
2006 and thereafter 100.0000%
</TABLE>
In addition, at any time prior to February 15, 2001, the
Company may redeem up to 35% of the principal amount at maturity 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 Accreted Value on the
Redemption Date) of 111.75%; provided that at least $289,250,000 aggregate
principal amount at maturity of Notes remains outstanding after each such
redemption.
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 and the
original issue discount ceases to accrete on Notes or portions of Notes called
for redemption, unless the Company defaults in the payment of the Redemption
Price.
6. Repurchase upon Change 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 Accreted Value 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 and the original issue discount
ceases to accrete on Notes or portions of Notes surrendered for purchase by the
Company, unless the Company defaults in the payment of the Change of Control
Payment.
7. Denominations; Transfer; Exchange.
The Notes are in registered form without coupons in
denominations of $1,000 of principal amount at maturity and multiples of $1,000
in excess thereof. A Holder may register the transfer or exchange of Notes in
accordance with the Indenture. The Registrar may require a Holder, among other
things, to furnish appropriate endorsements and transfer documents and to
<PAGE> 6
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 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.
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.
<PAGE> 7
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 at maturity, upon acceleration,
redemption or otherwise; (b) default in the payment of interest on any Note
when the same becomes due and payable, and such default continues for a period
of 30 days; (c) default in the performance, or breach of the provisions of
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 at maturity of the Notes, (e) there occurs with respect to any
issue or issues of Indebtedness of the Company or any Significant Subsidiary
having an outstanding principal amount of $5 million or more in the aggregate
for all such issues of all such Persons, whether such Indebtedness now exists
or shall hereafter be created, (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 substantially all of the property and assets of the
Company or any Significant Subsidiary or (C) the winding up or liquidation of
the affairs of the Company or any Significant Subsidiary and, in each case,
such decree or order shall remain unstayed and in effect for a period of 30
consecutive days; or (h) the Company or any Significant Subsidiary (A)
commences a voluntary case under any applicable bankruptcy, insolvency or other
similar law now or hereafter in effect, or consents to the entry of an order
for relief in an involuntary case under any such law, (B) consents to the
<PAGE> 8
appointment of or taking possession by a receiver, liquidator, assignee,
custodian, trustee, sequestrator or similar official of the Company or any
Significant Subsidiary or for all or substantially all of the property and
assets of the Company or any Significant Subsidiary or (C) effects any general
assignment for the benefit of creditors.
If an Event of Default (other than an Event of Default
specified in 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. 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.
16. No Recourse Against Others.
No incorporator or any past, present or future partner,
shareholder, other equity holder, officer, director, employee or controlling
person as such, of the Company or of any successor Person shall have any
liability for any obligations of the Company under the Notes or the 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.
17. Authentication.
This Note shall not be valid until the Trustee or
authenticating agent signs the certificate of authentication on the other side
of this Note.
18. Abbreviations.
Customary abbreviations may be used in the name of a Holder or
an assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by the
entireties), JT TEN (= joint tenants with right of survivorship and not as
tenants in common), CUST (= Custodian) and U/G/M/A (= Uniform Gifts to Minors
Act).
The Company will furnish to any Holder upon written request
and without charge a copy of the Indenture. Requests may be made to Allegiance
Telecom, Inc., 1950 Stemmons Frwy., Suite 3026, Dallas, Texas 75207, Attention:
Chief Financial Officer.
<PAGE> 9
[FORM OF TRANSFER NOTICE]
FOR VALUE RECEIVED the undersigned registered holder hereby
sell(s), assign(s) and transfer(s) unto
Insert Taxpayer Identification No.
- ------------------------------------------------------------
Please print or typewrite name and address including zip code of assignee
- ------------------------------------------------------------
the within Note and all rights thereunder, hereby irrevocably constituting and
appointing __________________________________________ attorney to transfer
said Note on the books of the Company with full power of substitution in the
premises.
[THE FOLLOWING PROVISION TO BE INCLUDED
ON ALL NOTES OTHER THAN EXCHANGE NOTES,
PERMANENT OFFSHORE GLOBAL NOTES AND
OFFSHORE PHYSICAL NOTES]
In connection with any transfer of this Note occurring prior
to the date which is the earlier of (i) the date the shelf registration
statement with respect to resales of the Notes is declared effective or (ii)
the end of the period referred to in Rule 144(k) under the Securities Act, the
undersigned confirms that without utilizing any general solicitation or general
advertising that:
[Check One]
[ ] (a) this Note is being transferred in compliance with the
exemption from registration under the Securities Act of 1933,
as amended, provided by Rule 144A thereunder.
or
[ ] (b) this Note is being transferred other than in accordance with
(a) above and documents are being furnished which comply with
the conditions of transfer set forth in this Note and the
Indenture.
<PAGE> 10
If none of the foregoing boxes is checked, the Trustee or other Registrar shall
not be obligated to register this Note in the name of any Person other than the
Holder hereof unless and until the conditions to any such transfer of
registration set forth herein and in Section 2.08 of the Indenture shall have
been satisfied.
Date:
NOTICE: The signature to this
assignment must correspond with the
name as written upon the face of the
within-mentioned instrument in every
particular, without alteration or
any change whatsoever.
TO BE COMPLETED BY PURCHASER IF (a) ABOVE IS CHECKED.
The undersigned represents and warrants that it is purchasing
this Note for its own account or an account with respect to which it exercises
sole investment discretion and that it and any such account is a "qualified
institutional buyer" within the meaning of Rule 144A under the Securities Act
of 1933, as amended, and is aware that the sale to it is being made in reliance
on Rule 144A and acknowledges that it has received such information regarding
the Company as the undersigned has requested pursuant to Rule 144A or has
determined not to request such information and that it is aware that the
transferor is relying upon the undersigned's foregoing representations in order
to claim the exemption from registration provided by Rule 144A.
Dated:
NOTICE: To be executed by an executive officer
<PAGE> 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 at maturity): $___________________.
Date: _________________
Your Signature:
(Sign exactly as your name appears on the other side of this Note)
Signature Guarantee: ______________________________
<PAGE> 1
EXHIBIT 10.1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
STOCK PURCHASE AGREEMENT
BY AND BETWEEN
TRANSCEND TELECOM, INC.
AND
TRANSCEND TELECOM, L.L.C.
AUGUST 13, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
1. Authorization and Closings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1A. Authorization of the Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1B. Purchase and Sale of Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1C. The Initial Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1D. The Subsequent Closings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. Conditions to the Initial Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2A. Representations and Warranties; Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2B. Adoption of Certificate of Incorporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2C. Adoption of the Company's Bylaws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2D. LLC Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2E. Investor Unit Purchase Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2F. Executive Unit Purchase Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2G. Securityholders Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2H. Registration Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2I. Securities Law Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2J. Compliance with Applicable Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2K. Initial Closing Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2L. Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2M. Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
3. Conditions to Each Subsequent Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
3A. Authorized by Approved Business Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
3B. Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
3C. No Breach or Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
3D. No Material Adverse Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
3E. Compliance with Applicable Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
3F. Subsequent Closing Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
3G. Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
3H. Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
4. Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
4A. Financial Statements and Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
4B. Inspection of Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
4C. Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
4D. Affirmative Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
4E. Compliance with Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
4F. Current Public Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
4G. Intellectual Property Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
4H. Public Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
</TABLE>
- i -
<PAGE> 3
<TABLE>
<S> <C> <C>
4I. Additional Restrictive Covenant Concerning Stock Issuances and Incurring Debt . . . . . . . . . . . 15
4J. Preemptive Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
4K. Affiliated Entity Business Combinations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
5. Transfer of Restricted Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
5A. General Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
5B. Opinion Delivery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
5C. Rule 144A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
5D. Legend Removal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
6. Representations and Warranties of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
6A. Organization, Corporate Power and Licenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
6B. Capital Stock and Related Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
6C. Authorization; No Breach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
6D. Conduct of Business; Absence of Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
6E. No Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
6F. Brokerage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
6G. Governmental Consent, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
6H. Compliance with Laws. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
6I. Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
7. Board of Directors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
7A. Board Composition and Vacancies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
7B. Director Expenses; Indemnity Insurance; Exculpation. . . . . . . . . . . . . . . . . . . . . . . . . 23
7C. Termination. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
8. Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
8A. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
8B. Knowledge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
9. Miscellaneous Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
9A. Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
9B. Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
9C. LLC's Investment Representations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
9D. Consent to Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
9E. Put Cooperation Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
9F. Survival of Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
9G. Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
9H. Capital and Surplus; Special Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
9I. Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
9J. Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
9K. Descriptive Headings; Interpretation; No Strict Construction . . . . . . . . . . . . . . . . . . . . 34
9L. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
9M. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
9N. Delivery by Facsimile. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
</TABLE>
- ii -
<PAGE> 4
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (this "Agreement") is made as of
August 13, 1997, by and between Transcend Telecom, Inc., a Delaware corporation
(the "Company"), and Transcend Telecom, L.L.C., a Delaware limited liability
company (the "LLC"). Capitalized terms used but not otherwise defined herein
have the meanings ascribed to such terms in Section 8 below.
NOW, THEREFORE, in consideration of the mutual promises made
herein and other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties hereto, intending to be legally
bound, agree as follows:
SECTION 1. AUTHORIZATION AND CLOSINGS.
1A. Authorization of the Preferred Stock. The Company
shall authorize the issuance and sale to the LLC of 95,000 shares of the
Company's 12% Cumulative Convertible Preferred Stock, par value $.01 per share
(the "Preferred Stock"), having the rights and preferences set forth in the
Certificate of Incorporation attached hereto as Exhibit 1. The Preferred Stock
is convertible into shares of the Company's Common Stock, par value $.01 per
share (the "Common Stock"), as set forth in the Certificate of Incorporation.
1B. Purchase and Sale of Preferred Stock. At the Initial
Closing (as defined below), subject to the terms and conditions set forth
herein, the Company shall sell to the LLC and the LLC shall purchase from the
Company 95,000 shares of Preferred Stock at a price per share of $52.63, for an
aggregate purchase price equal to $5,000,000 (the "Initial Contribution").
1C. The Initial Closing. The closing of the purchase and
sale of Preferred Stock (the "Initial Closing") shall take place at the offices
of Kirkland & Ellis in Chicago, Illinois, at 10:00 a.m. local time on the date
hereof (the "Initial Closing Date"). At the Initial Closing, the Company shall
deliver to the LLC stock certificates evidencing the Preferred Stock to be
purchased at the Initial Closing, registered in the name of the LLC, upon the
LLC's payment of the purchase price thereof by delivery to the Company of a
check, or wire transfer of immediately available funds to an account designated
by the Company, in an aggregate amount equal to the Initial Contribution.
1D. The Subsequent Closings. Each of the subsequent
closings hereunder (the "Subsequent Closings") shall, subject to the terms and
conditions set forth below, occur at a time and place determined by the
Company's chief executive officer and set forth in a written notice from such
chief executive officer on behalf of the Company (the "Subsequent Closing
Notice") sent to the LLC and to each Person holding an interest in the profits,
losses, and distributions of the LLC (collectively, the "Unitholders") at least
30 days prior to the applicable Subsequent Closing. Such notice shall set
forth the aggregate amount to be contributed to the capital of the Company by
the LLC at such Subsequent Closing (the "Subsequent Contribution"); provided
that the applicable Subsequent Contribution for any Subsequent Closing shall
not, together with the Initial Contribution and the aggregate Subsequent
Contributions at all prior Subsequent Closings, exceed the Maximum Commitment;
and provided further that there shall exist no further obligations to make any
<PAGE> 5
Subsequent Contributions under this paragraph after the dissolution of the LLC,
other than any obligations relating to Subsequent Closings which have occurred
prior to such dissolution. At each Subsequent Closing, subject to the terms
and conditions hereof, the LLC shall deliver to the Company a check, or wire
transfer of immediately available funds to an account designated by the
Company, in an aggregate amount equal to the applicable Subsequent
Contribution; provided that in the event the Exercising Holders (as defined in
the LLC Agreement) have elected the remedy set forth in paragraph 5.1(b)(i)(C)
of the LLC Agreement, the LLC shall have no obligation to pay to the Company
the portion of any Subsequent Contribution constituting Related Contributions
(as defined in the LLC Agreement). If at any time after the date hereof the
LLC makes any contributions to the capital of the Company without the issuance
of additional shares of the Company's stock and the amount of such capital
contributions exceed the LLC's then-outstanding unpaid obligations (if any) to
make the Initial Contribution and all Subsequent Contributions required to be
made with respect to Subsequent Closings occurring prior to such time (the
amount of any such excess, an "Excess Contribution"), then such Excess
Contribution shall be credited dollar for dollar against the LLC's obligation
to make Subsequent Contributions at Subsequent Closings occurring after the
date of such Excess Contribution.
SECTION 2. CONDITIONS TO THE INITIAL CLOSING. The
obligation of the LLC to purchase and pay for the Preferred Stock at the
Initial Closing is subject to the satisfaction as of the Initial Closing of the
following conditions:
2A. Representations and Warranties; Covenants. The
representations and warranties contained in Section 6 hereof shall be true and
correct in all material respects at and as of the Initial Closing as though
then made, except to the extent of changes caused by the transactions expressly
contemplated herein, and the Company shall have performed in all material
respects all of the covenants required to be performed by it hereunder prior to
the Initial Closing.
2B. Adoption of Certificate of Incorporation. The
Company's certificate of incorporation shall have been amended and restated in
form and substance as set forth in Exhibit 1 hereto (as so amended and
restated, the "Certificate of Incorporation"), shall be in full force and
effect under the laws of Delaware as of the Initial Closing, and shall not have
been further amended or modified.
2C. Adoption of the Company's Bylaws. The Company's
bylaws shall have been duly authorized and adopted in form and substance as set
forth in Exhibit 2 attached hereto (as so adopted, the "Bylaws"), shall be in
full force and effect under the laws of Delaware as of the Initial Closing, and
shall not have been further amended or modified.
2D. LLC Agreement. The Unitholders shall have entered
into a limited liability company agreement governing the affairs of the LLC, in
form and substance as set forth in Exhibit 3 attached hereto (the "LLC
Agreement"), and the LLC Agreement shall be in full force and effect as of the
Initial Closing.
2E. Investor Unit Purchase Agreement. The LLC and the
Investor Members shall have entered into an investor unit purchase agreement in
form and substance as set forth in Exhibit
- 2 -
<PAGE> 6
4 attached hereto (the "Investor Purchase Agreement"), and the Investor
Purchase Agreement shall be in full force and effect as of the Initial Closing.
2F. Executive Unit Purchase Agreements. The LLC and the
Company shall have entered into an executive unit purchase agreement, in form
and substance substantially similar to that set forth in Exhibit 5 attached
hereto (each an "Executive Purchase Agreement"), with each of Royce J. Holland
("Holland") and Thomas M. Lord ("Lord"), and such Executive Purchase Agreements
shall be in full force and effect as of the Initial Closing.
2G. Securityholders Agreement. The LLC, the Company, and
each of the Unitholders shall have entered into a securityholders agreement in
form and substance as set forth in Exhibit 7 attached hereto (the
"Securityholders Agreement"), and the Securityholders Agreement shall be in
full force and effect as of the Initial Closing.
2H. Registration Agreement. The Company and each of the
Unitholders shall have entered into a registration agreement in form and
substance as set forth in Exhibit 8 attached hereto (the "Registration
Agreement"), and the Registration Agreement shall be in full force and effect
as of the Initial Closing.
2I. Securities Law Compliance. The Company shall have
made all filings under all applicable federal and state securities laws
necessary to consummate the issuance, in compliance with such laws, of the
Preferred Stock to be issued at the Initial Closing pursuant to this Agreement.
2J. Compliance with Applicable Laws. The purchase of
Preferred Stock by the LLC hereunder at the Initial Closing shall not be
prohibited by any applicable law or governmental rule or regulation and shall
not subject the LLC to any penalty, liability or, in the LLC's reasonable
judgment, other onerous condition under or pursuant to any applicable law or
governmental rule or regulation, and the purchase of the Preferred Stock by the
LLC hereunder shall be permitted by the laws, rules and regulations of the
jurisdictions and governmental authorities and agencies to which the LLC is
subject.
2K. Initial Closing Documents. The Company shall have
delivered to the LLC all of the following documents:
(i) an Officer's Certificate, dated the Initial
Closing Date, stating that the conditions specified in paragraphs
1A-1C, 2A-2C, and 2H-2I, inclusive, have been fully satisfied;
(ii) certified copies of (a) the resolutions duly
adopted by the Board authorizing the execution, delivery and
performance of this Agreement, the Securityholders Agreement, the
Registration Agreement and each of the other agreements contemplated
hereby, the amendment and restatement of the Company's Certificate of
Incorporation referred to in paragraph 2B, the adoption of the
Company's Bylaws referred to in paragraph 2C, the issuance and sale of
the Preferred Stock at the Initial Closing, the reservation for
issuance upon conversion of the Preferred Stock the number of shares
of Common Stock
- 3 -
<PAGE> 7
issuable upon conversion of all shares of Preferred Stock, and the
consummation of all other transactions to occur as of the Initial
Closing as contemplated by this Agreement, and (b) the resolutions
duly adopted by the Company's sole stockholder authorizing the
amendment and restatement of the Certificate of Incorporation referred
to in paragraph 2B;
(iii) certified copies of the Certificate of
Incorporation and the Bylaws, each as in effect at the Initial
Closing;
(iv) copies of all third party and governmental
consents, approvals and filings required in connection with the
consummation of the transactions to occur as of the Initial Closing
hereunder (including, without limitation, all blue sky law filings and
waivers of all preemptive rights and rights of first refusal); and
(v) such other documents relating to the
transactions contemplated by this Agreement as the LLC or its special
counsel may reasonably request.
2L. Proceedings. All corporate and other proceedings
taken or required to be taken by the Company in connection with the
transactions to occur at the Initial Closing shall be consummated at or prior
to the Initial Closing and all documents incident thereto shall be satisfactory
in form and substance to the LLC and its special counsel.
2M. Waiver. Any condition specified in this Section 2
may be waived if such waiver is consented to by the LLC; provided that no such
waiver shall be effective against the LLC unless it is set forth in a writing
executed by the LLC.
SECTION 3. CONDITIONS TO EACH SUBSEQUENT CLOSING. The
obligation of the LLC to make the specified Subsequent Contribution to the
capital of the Company at each Subsequent Closing is subject to the
satisfaction as of such Subsequent Closing of the following conditions:
3A. Authorized by Approved Business Plans. The
applicable Subsequent Contribution for such Subsequent Closing shall be
expressly contemplated and authorized under the terms of the Company's Approved
Business Plans, and such Subsequent Contribution shall not exceed the aggregate
capital requirements of the Company during the 6- month period (or such longer
or shorter time period as agreed to by the LLC and the Company's chief
executive officer) commencing on the date of such Subsequent Closing as set
forth in the Company's Approved Business Plans (taking into account any prior
Subsequent Contribution to the extent the time period for such prior Subsequent
Contribution overlaps with the time period for the present Subsequent
Contribution). For purposes of this Agreement, an "Approved Business Plan"
means any business proposal submitted by the chief executive officer of the
Company to the Board and to the LLC, setting forth proposed business activities
of the Company in a specified metropolitan statistical area ("MSA") during the
5-year period commencing on the date of such business proposal (or, if longer,
the period running from the date of such business proposal until the date
estimated in such proposal as the "break even" point for the Company's
operations in such MSA) (including the identification of key managers to be
hired and the proposed compensation and terms for each such hire); projections
of revenues, expenses, and income from such business activities; projections of
the
- 4 -
<PAGE> 8
amounts, timing, and proposed terms for lease financing and other financing to
be obtained by the Company to support such business activities during such
period; the amounts and timing of periodic capital drawdowns that the chief
executive officer deems necessary to support such business activities during
such period; and a budget of proposed expenditures of such capital; provided,
however, that no such business proposal shall constitute an Approved Business
Plan unless and until it has been approved by the LLC. Notwithstanding the
foregoing sentence, the parties acknowledge that:
(i) such a business proposal detailing the funds
necessary to build out all or part of the Company's business in the first MSA
other than the Dallas MSA (such other MSA, the "Second Market") shall not, even
after receiving the required LLC approval, be considered an "Approved Business
Plan" unless and until an individual has orally agreed (on terms of employment
reasonably satisfactory to the Board's Executive Committee) to serve as the
Company's president and chief operating officer (a "COO"), having primary
responsibility for the operations of the Company and for performing such other
executive duties as are ordinarily commensurate with such position (and subject
to no noncompete or other contractual restrictions on performing such duties),
which individual has been approved in advance for such position by the Board's
Executive Committee;
(ii) such a business proposal detailing the funds
necessary to build out all or part of the Company's business in any MSA other
than the Dallas MSA or the Second Market (such MSA, an "Other MSA") shall not,
even after receiving the required LLC approval, be considered an "Approved
Business Plan" unless and until (x) the Company has actually hired a COO
pursuant to the requirements and conditions set forth in clause (i) above and
such COO has commenced service with the Company as a full-time employee and has
executed an Executive Purchase Agreement and a counterpart to this Agreement,
the LLC Agreement and the Securityholders Agreement, and (y) the Board's
Executive Committee has approved the significant terms and conditions
(including, without limitation, the amount of financing, rate of interest,
duration of financing, conditions of financing, and covenants applicable to the
Company) of an agreement pursuant to which the Company would obtain equipment
financing for building out and conducting its business in such Other MSA; and
(iii) any Approved Business Plan for any particular MSA
shall cease to be such and shall not be considered or deemed to be an Approved
Business Plan for any purpose whatsoever (whether under this Agreement, the LLC
Agreement, or otherwise) during such time as the revenues, expenses, available
financing, capital expenditures, capital requirements, or other business
operations of the Company in the MSA to which such plan relates reflect, in the
good faith judgment of the LLC, a substantial deviation from such plan's
estimates, plans, and projections of any of the foregoing (or from an Approved
Budget's particularization of estimates, plans, and projections of any of the
foregoing, to the extent based on such plan) (it being understood that the
determination of the existence or nonexistence of a "substantial deviation"
shall consider such plan's estimates, plans, and projections in the aggregate
and shall not consider any one factor or measure in isolation to the extent a
deviation in such factor or measure does not impact the plan as a whole).
3B. Representations and Warranties. The representations
and warranties contained in paragraphs 6A (Organization), 6B(ii) (Capital
Stock), 6C (Authorization), 6F (Brokerage), 6G
- 5 -
<PAGE> 9
(Governmental Consent), 6H (Compliance with Laws), and 6I (Disclosure) hereof
shall be true and correct in all material respects at and as of such Subsequent
Closing as though then made, except to the extent of changes caused by the
transactions expressly contemplated herein.
3C. No Breach or Default. Neither the Company nor any of
its Subsidiaries shall have breached or be in default of any of its material
obligations to the LLC or the Unitholders pursuant to this Agreement or the
Registration Agreement, and neither the Company nor any of its Subsidiaries
shall be in material breach or default under any material agreement to which it
is a party.
3D. No Material Adverse Change. In the good faith
judgment of the LLC, there shall not have occurred a material adverse change
(other than a change specifically and expressly contemplated in one or more
Approved Business Plans approved prior to the date of such Subsequent Closing)
in the business, financial condition, operations, assets, or business prospects
of the Company and its Subsidiaries taken as a whole.
3E. Compliance with Applicable Laws. The making of the
applicable Subsequent Contribution by the LLC hereunder at such Subsequent
Closing shall not be prohibited by any applicable law or governmental rule or
regulation and shall not subject the LLC to any penalty, liability or, in the
LLC's reasonable judgment, other onerous condition under or pursuant to any
applicable law or governmental rule or regulation, and the making of such
Subsequent Contribution by the LLC hereunder shall be permitted by the laws,
rules and regulations of the jurisdictions and governmental authorities and
agencies to which the LLC is subject.
3F. Subsequent Closing Documents. The Company shall have
delivered to the LLC all of the following documents:
(i) an Officer's Certificate, dated the date of
the Subsequent Closing, stating that the conditions specified in
paragraphs 3A through 3D, inclusive, have been fully satisfied; and
(ii) such other documents relating to the
transactions to occur at such Subsequent Closing as the LLC or its
special counsel may reasonably request.
3G. Proceedings. All corporate and other proceedings
taken or required to be taken by the Company in connection with the
transactions to occur at such Subsequent Closing shall be consummated at or
prior to such Subsequent Closing and all documents incident thereto shall be
satisfactory in form and substance to the LLC and its special counsel.
3H. Waiver. Any condition specified in this Section 3
may be waived if consented to by the LLC; provided that no such waiver shall be
effective against the LLC unless it is set forth in a writing executed by the
LLC.
- 6 -
<PAGE> 10
SECTION 4. COVENANTS.
4A. Financial Statements and Other Information. The
Company shall deliver (a) to each Management Member (so long as such Management
Member holds any Management Equity and such Management Member does not
"participate" (as such term is defined in the form executive purchase agreement
attached hereto as Exhibit 5) in any business that is competitive with the
Company or any Subsidiary), the information set forth in subparagraph 4A(iii)
below, and (b) to the LLC (so long as it holds any Underlying Common Stock), to
each Investor Member or its Affiliates (so long as such Investor Member or
Affiliate holds any Investor Equity), and to any subsequent holder of at least
5% of the Investor Equity (the LLC, each Investor Member or Affiliate, and each
other such holder, a "Qualified Holder") all the information described in this
paragraph 4A:
(i) as soon as available but in any event within
30 days after the end of each monthly accounting period in each fiscal
year: (a) unaudited consolidating and consolidated statements of
income and cash flows of the Company and its Subsidiaries for such
monthly period and for the period from the beginning of the fiscal
year to the end of such month, and unaudited consolidating and
consolidated balance sheets of the Company and its Subsidiaries as of
the end of such monthly period, setting forth in each case comparisons
to the Company's annual budget and to the corresponding period in the
preceding fiscal year, and all such statements shall be prepared in
accordance with generally accepted accounting principles, consistently
applied (subject to the absence of footnote disclosures and to changes
resulting from normal year-end adjustments for recurring accruals),
and shall be certified by the Company's chief financial officer, and
(b) a status report prepared by the Company's chief financial officer,
indicating whether the Company has met its budgeted financial goals
(including, without limitation, those specified in any Approved
Business Plan and those delivered pursuant to subparagraph (v) below),
discussing the reasons for any variation from such goals, and
describing what actions the Company and its Subsidiaries have taken
and propose to take in order to meet budgeted financial targets in the
future;
(ii) within 45 days after the end of each
quarterly accounting period in each fiscal year, an Officer's
Certificate stating that the Company is not in default under this
Agreement or the Registration Agreement, and that neither the Company
nor any of its Subsidiaries is in default under any of its other
material agreements or, if any such default exists, specifying the
nature and period of existence thereof and what actions the Company
and its Subsidiaries have taken and propose to take with respect
thereto;
(iii) within 90 days after the end of each fiscal
year, consolidating and consolidated statements of income and cash
flows of the Company and its Subsidiaries for such fiscal year, and
consolidating and consolidated balance sheets of the Company and its
Subsidiaries as of the end of such fiscal year, setting forth in each
case comparisons to the Company's annual budget and to the preceding
fiscal year, all prepared in accordance with generally accepted
accounting principles, consistently applied, and accompanied by (a)
with respect to the consolidated portions of such statements, an
opinion containing no exceptions or qualifications (except for
qualifications regarding specified contingent liabilities) of an
- 7 -
<PAGE> 11
independent accounting firm of recognized national standing acceptable
to the holders of a majority of the Underlying Common Stock, (b) a
certificate from such accounting firm, addressed to the Board, stating
that in the course of its examination nothing came to its attention
that caused it to believe that there was any default specified in
paragraph 4A(ii) in existence or that there was any other default by
the Company or any Subsidiary in the fulfillment of or compliance with
any of the terms, covenants, provisions or conditions of any material
agreement to which the Company or any Subsidiary is a party or, if
such accountants have reason to believe any such default by the
Company or any Subsidiary exists, a certificate specifying the nature
and period of existence thereof, and (c) a copy of such firm's annual
management letter to the Board;
(iv) promptly upon receipt thereof, any additional
reports, management letters or other detailed information concerning
significant aspects of the Company's operations or financial affairs
given to the Company by its independent accountants (and not otherwise
contained in other materials provided hereunder);
(v) at least 30 days but not more than 90 days
prior to the beginning of each fiscal year, an annual budget prepared
on a monthly basis for the Company and its Subsidiaries for such
fiscal year (displaying anticipated statements of income and cash
flows and balance sheets and budgeted capital expenditures), which
annual budget shall have been approved by the LLC (it being understood
that if the statements, amounts, figures, estimates, plans, and
projections set forth in such budget are substantially in accordance
with that contemplated by the Company's Approved Business Plans then
in effect, the LLC's consent shall not be unreasonably withheld) (as
approved, an "Approved Budget"), and promptly upon preparation thereof
any other significant budgets prepared by the Company and any
revisions of such annual or other budgets (it being understood that
any revisions of any Approved Budget must be approved by the LLC);
(vi) promptly (but in any event within five
business days) after the discovery or receipt of notice of any default
under any material agreement to which the Company or any of its
Subsidiaries is a party, any condition or event which is reasonably
likely to result in any material liability under any federal, state or
local statute or regulation relating to public health and safety,
worker health and safety or pollution or protection of the environment
or any other material adverse change, event or circumstance affecting
the Company or any Subsidiary (including, without limitation, the
filing of any material litigation against the Company or any
Subsidiary or the existence of any dispute with any Person which
involves a reasonable likelihood of such litigation being commenced),
an Officer's Certificate specifying the nature and period of existence
thereof and what actions the Company and its Subsidiaries have taken
and propose to take with respect thereto;
(vii) within ten days after transmission thereof,
copies of all financial statements, proxy statements, reports and any
other general written communications which the Company sends to its
stockholders and copies of all registration statements and all
regular, special or periodic reports which it files, or (to its
knowledge) any of its officers or directors file with respect to the
Company, with the Securities and Exchange Commission
- 8 -
<PAGE> 12
or with any securities exchange on which any of its securities are
then listed, and copies of all press releases and other statements
made available generally by the Company to the public concerning
material developments in the Company's and its Subsidiaries'
businesses; and
(viii) with reasonable promptness, such other
information and financial data concerning the Company and its
Subsidiaries as any Qualified Holder may reasonably request.
Each of the financial statements referred to in subparagraphs 4A(i) and (iii)
shall be true and correct in all material respects as of the dates and for the
periods stated therein, subject in the case of the unaudited financial
statements to changes resulting from normal year-end adjustments for recurring
accruals (none of which would, alone or in the aggregate, be materially adverse
to the financial condition, operating results, assets, operations or business
prospects of the Company and its Subsidiaries taken as a whole).
Notwithstanding the foregoing, the provisions of this paragraph 4A shall cease
to be effective so long as the Company (a) is subject to the periodic reporting
requirements of the Securities Exchange Act and continues to comply with such
requirements and (b) promptly provides to each Qualified Holder all reports and
other materials filed by the Company with the Securities and Exchange
Commission pursuant to the periodic reporting requirements of the Securities
Exchange Act; provided that so long as any Preferred Stock remains outstanding,
the Company shall continue to deliver to each Qualified Holder the information
specified in subparagraphs 4A(ii), 4A(iii)(b), 4A(v), 4A(vi), and 4A(viii).
Except as otherwise required by law or judicial order or decree or requested by
any governmental agency or authority, or as specified in the immediately
following proviso, each Person entitled to receive information regarding the
Company and its Subsidiaries under paragraph 4A or 4B shall not disclose any
such information to any third party (other than such Person's advisors or
representatives); provided that such a Person may disclose such information (i)
in connection with the sale or transfer of any Class A Units, Preferred Stock,
or Underlying Common Stock if such Person's transferee agrees in writing to be
bound by the provisions hereof, (ii) if such Person is a partnership, limited
liability company or corporation, to such Person's partners, members and
shareholders, as the case may be, in the ordinary course of its business, or
(iii) if such information is available to the public other than by reason of
such Person's breach of this provision.
For purposes of this Agreement and the Registration Agreement, all holdings of
Class A Units, Preferred Stock and Underlying Common Stock by Persons who are
Affiliates shall be aggregated for purposes of meeting any threshold tests
under this Agreement or the Registration Agreement.
4B. Inspection of Property. To the extent not otherwise
prohibited by law or regulation, the Company shall permit any representatives
designated by any Qualified Holder, upon reasonable notice and during normal
business hours and at such other times as any such Qualified Holder may
reasonably request to (i) visit and inspect any of the properties of the
Company and its Subsidiaries, (ii) examine the corporate and financial records
of the Company and its Subsidiaries and make copies thereof or extracts
therefrom and (iii) discuss the affairs, finances and accounts of any such
corporations with the directors, officers, key employees and independent
accountants of
- 9 -
<PAGE> 13
the Company and its Subsidiaries. The presentation of an executed copy of this
Agreement (or photocopy thereof) by any Qualified Holder or representative
thereof to the Company's independent accountants shall constitute the Company's
permission to its independent accountants to participate in discussions with
such Persons notwithstanding the fact that such Qualified Holder is not a party
hereto.
4C. Restrictions. Prior to the consummation of a Public
Offering, the Company shall not, without the prior written consent of the LLC
(which consent may be authorized by the LLC's Executive Committee (as defined
in the LLC Agreement)):
(i) directly or indirectly declare or pay any
dividends or make any distributions upon any of its capital stock or
other equity securities other than the Preferred Stock pursuant to the
terms of the Certificate of Incorporation;
(ii) directly or indirectly redeem, purchase or
otherwise acquire, or permit any Subsidiary to redeem, purchase or
otherwise acquire, any of the Company's or any Subsidiary's capital
stock or other equity securities (including, without limitation, any
warrants, options and other rights to acquire such capital stock or
other equity securities), except for (A) repurchases of options to
acquire the Company's capital stock or of capital stock issued upon
the exercise of such options, pursuant to the terms of any Permitted
Stock Option Plan (as defined below), (B) repurchases of the Company's
securities pursuant to the terms of the Executive Purchase Agreements,
or (C) repurchases of the Company's securities pursuant to the terms
of paragraph 9E hereof;
(iii) except for (x) issuances of Preferred Stock
at the Initial Closing as contemplated under this Agreement or of
Common Stock upon conversion of such Preferred Stock, or (y) issuances
of options to acquire Common Stock pursuant to the terms of the
Permitted Stock Option Plan (as defined below) or of Common Stock upon
the exercise of such options, authorize, issue or enter into any
agreement providing for the issuance (contingent or otherwise) of (a)
any notes or debt securities containing equity features (including,
without limitation, any notes or debt securities convertible into or
exercisable or exchangeable for capital stock or other equity
securities, issued in connection with the issuance of capital stock or
other equity securities or containing profit participation features),
other than as may be expressly specified in any Approved Business Plan
or Approved Budget, or (b) any capital stock or other equity
securities (or any securities convertible into or exercisable or
exchangeable for any capital stock or other equity securities);
(iv) make, or permit any Subsidiary to make, any
loans or advances to, guarantees for the benefit of, or Investments
in, any Person (other than a Wholly-Owned Subsidiary established under
the laws of a jurisdiction of the United States or any of its
territorial possessions), except for (a) reasonable advances to
employees or customers in the ordinary course of business, (b)
acquisitions permitted under subparagraph (viii) below, and (c)
Investments having a stated maturity no greater than one year from the
date the Company makes such Investment in (1) obligations of the
United States government or any agency thereof or obligations
guaranteed by the United States government, (2) certificates of
deposit
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of commercial banks having combined capital and surplus of at least
$500 million or (3) commercial paper with a rating of at least
"Prime-1" by Moody's Investors Service, Inc.;
(v) merge or consolidate with any Person or,
except as permitted under subparagraph (viii) below, permit any
Subsidiary to merge or consolidate with any Person (other than a
merger between Wholly-Owned Subsidiaries);
(vi) sell, lease or otherwise dispose of, or
permit any Subsidiary to sell, lease or otherwise dispose of, more
than 10% of the consolidated assets of the Company and its
Subsidiaries (computed on the basis of book value, determined in
accordance with generally accepted accounting principles consistently
applied, or fair market value, determined by the Board in its
reasonable good faith judgment) in any transaction or series of
related transactions, or sell or permanently dispose of any of its or
any Subsidiary's material Intellectual Property Rights;
(vii) liquidate, dissolve or effect a
recapitalization or reorganization, or permit any Subsidiary to
liquidate, dissolve or effect a recapitalization or reorganization, in
any form of transaction (including, without limitation, any
reorganization into a limited liability company, a partnership or any
other non-corporate entity which is treated as a partnership for
federal income tax purposes);
(viii) acquire, or permit any Subsidiary to acquire,
any interest in any company or business (whether by a purchase of
assets, purchase of stock, merger or otherwise), or enter into any
joint venture (in each case, other than as may be expressly specified
in any Approved Business Plan or Approved Budget);
(ix) enter into, or permit any Subsidiary to enter
into, the ownership, active management or operation of any business
other than the provision of telecommunications services or such other
business activities as may be identified in any Approved Business
Plan;
(x) become subject to, or permit any of its
Subsidiaries to become subject to (including, without limitation, by
way of amendment to or modification of) any agreement or instrument
which by its terms would (under any circumstances) restrict (a) the
right of any Subsidiary to make loans or advances or pay dividends to,
transfer property to, or repay any Indebtedness owed to, the Company
or another Subsidiary or (b) the Company's performance of its
obligations under the provisions of this Agreement, the
Securityholders Agreement, the Registration Agreement, the Certificate
of Incorporation or the Bylaws (including, without limitation,
provisions relating to the declaration and payment of dividends on,
and the conversion of, any Preferred Stock);
(xi) except as expressly contemplated by this
Agreement, make any amendment to the Certificate of Incorporation or
the Bylaws, or file any resolution of the Board with the Delaware
Secretary of State;
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<PAGE> 15
(xii) enter into, amend, modify or supplement, or
permit any Subsidiary to enter into, amend, modify or supplement, any
agreement, transaction, benefit plan, commitment or arrangement with
any of its or any Subsidiary's executive officers, directors or
Affiliates or with any individual related by blood, marriage or
adoption to any such individual or with any entity in which any such
Person or individual owns a beneficial interest, except for customary
and reasonable employment arrangements and except as otherwise
expressly contemplated by this Agreement;
(xiii) establish or acquire any Subsidiaries other
than Wholly-Owned Subsidiaries organized within the United States and
its territorial possessions;
(xiv) create, incur, assume or suffer to exist, or
permit any Subsidiary to create, incur, assume or suffer to exist,
Indebtedness on a consolidated basis in an aggregate outstanding
principal amount in excess of $500,000 at any time (other than
Indebtedness expressly specified in any Approved Business Plan or
Approved Budget);
(xv) create, incur, assume or suffer to exist, or
permit any Subsidiary to create, incur, assume or suffer to exist, any
Liens other than Permitted Liens;
(xvi) make any capital expenditures or permit any
Subsidiary to make any capital expenditures (including, without
limitation, payments with respect to capitalized leases, as determined
in accordance with generally accepted accounting principles
consistently applied) exceeding $100,000 in the aggregate on a
consolidated basis during any 12-month period (other than capital
expenditures expressly specified in any Approved Business Plan or
Approved Budget);
(xvii) enter into, or permit any Subsidiary to enter
into, any leases or other rental agreements (excluding capitalized
leases, as determined in accordance with generally accepted accounting
principles consistently applied) under which the amount of the
aggregate lease payments for all such agreements exceeds $100,000 on a
consolidated basis for any 12-month period, provided that the Company
and its Subsidiaries shall be allowed to enter into any leasing
arrangements (including, but not limited to, leasing
telecommunications networks) that are expressly specified in any
Approved Business Plan or Approved Budget;
(xviii) change its fiscal year or permit any
Subsidiary to change its fiscal year;
(xix) change the authorized size or composition of
the Board, the board of directors of any Subsidiary, or the Board's
Executive Committee from that set forth in paragraph 7 hereof;
(xx) adopt any stock option plan or employee stock
ownership plan or issue any shares of Common Stock to its or its
Subsidiaries' employees other than (a) pursuant to an option plan, the
terms of which shall be approved by a majority of the Board and by the
LLC, under which employees of the Company and its Subsidiaries may be
granted options to acquire up to 5% of the Company's Common Stock,
determined immediately after giving
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<PAGE> 16
effect to the transactions contemplated hereby on a fully diluted and
as-if-converted basis (the "Permitted Stock Option Plan") or (b) the
issuance of options in certain circumstances upon a Public Offering
pursuant to the terms of any Executive Purchase Agreement;
(xxi) issue or sell any shares of the capital stock
or other equity securities (including, without limitation, any
warrants, options, and other rights to acquire such capital stock or
other equity securities) of any Subsidiary to any Person other than
the Company or a Wholly-Owned Subsidiary;
(xxii) terminate the employment of, hire, or enter
into, amend or modify any employment agreement or arrangement with,
any executive employee of the Company or any of its Subsidiaries who
would serve as, or would report directly to, the Company's chief
executive officer;
(xxiii) grant, or permit any of its Subsidiaries to
grant, any registration rights (including, without limitation, any
demand or piggyback registration rights) with respect to any of its
capital stock, other than pursuant to the Registration Agreement as in
effect on the Initial Closing Date;
(xxiv) amend, waive, or otherwise modify any
Approved Business Plan;
(xxv) use the proceeds from the sale of the
Preferred Stock hereunder other than for working capital and budgeted
general corporate purposes reflected in any Approved Business Plan or
Approved Budget, or for such other purposes as are contemplated by any
Approved Business Plan or Approved Budget;
(xxvi) select, retain, or amend, terminate, or
modify any retention arrangement with any underwriter, manager, or
financial advisor to advise the Company and its Subsidiaries with
respect to any proposed Sale of the Company or to underwrite, or
advise the Company with respect to, a Public Offering or any
acquisitions or financing transactions;
(xxvii) change any of the accounting principles or
practices utilized by the Company or its Subsidiaries, or select,
retain, or amend, terminate, or modify any retention arrangement with
any accounting firm engaged to audit the Company's or its
Subsidiaries' financial statements; or
(xxviii) agree or commit to any of the foregoing.
4D. Affirmative Covenants. So long as any Preferred
Stock remains outstanding, the Company shall, and shall cause each Subsidiary
(if any) to, unless it has received the prior written consent of the LLC:
(i) at all times cause to be done all things
necessary to maintain, preserve and renew its corporate existence;
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<PAGE> 17
(ii) at all times take all actions and cause to be
done all things necessary to obtain, maintain, preserve, and renew all
material licenses, authorizations, orders, permits, and other
governmental approvals necessary to the conduct of its businesses as
presently proposed to be conducted and as hereafter conducted;
(iii) maintain and keep its material properties in
good repair, working order and condition, and from time to time make
all necessary or desirable repairs, renewals and replacements, so that
its businesses may be properly and advantageously conducted in all
material respects at all times;
(iv) pay and discharge when payable all taxes,
assessments and governmental charges imposed upon its properties or
upon the income or profits therefrom (in each case before the same
becomes delinquent and before penalties accrue thereon) and all
material claims for labor, materials or supplies which if unpaid would
by law become a Lien upon any of its property unless and to the extent
that the same are being contested in good faith and by appropriate
proceedings and adequate reserves (as determined in accordance with
generally accepted accounting principles, consistently applied) have
been established on its books with respect thereto;
(v) comply with all other material obligations
which it incurs pursuant to any contract or agreement, whether oral or
written, express or implied, as such obligations become due, unless
and to the extent that the same are being contested in good faith and
by appropriate proceedings and adequate reserves (as determined in
accordance with generally accepted accounting principles, consistently
applied) have been established on its books with respect thereto;
(vi) comply in all material respects with all
applicable laws, rules and regulations of the FCC and all other
governmental authorities to which any of the Company and its
Subsidiaries are subject;
(vii) apply for and continue in force with good and
responsible insurance companies adequate insurance covering risks of
such types and in such amounts as are customary for well-insured
corporations of similar size engaged in similar lines of business; and
(viii) maintain proper books of record and account
which present fairly in all material respects its financial condition
and results of operations and make provisions on its financial
statements for all such proper reserves as in each case are required
in accordance with generally accepted accounting principles,
consistently applied.
4E. Compliance with Agreements. The Company shall
perform and observe all of its obligations to each holder of Preferred Stock
and to each holder of Underlying Common Stock set forth in the Certificate of
Incorporation, the Bylaws, and the Registration Agreement.
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<PAGE> 18
4F. Current Public Information. At all times after the
Company has filed a registration statement with the Securities and Exchange
Commission pursuant to the requirements of either the Securities Act or the
Securities Exchange Act, the Company shall file all reports required to be
filed by it under the Securities Act and the Securities Exchange Act and the
rules and regulations adopted by the Securities and Exchange Commission
thereunder and shall take such further action as any holder or holders of
Restricted Securities may reasonably request, all to the extent required to
enable such holders to sell Restricted Securities pursuant to (i) Rule 144
adopted by the Securities and Exchange Commission under the Securities Act (as
such rule may be amended from time to time) or any similar rule or regulation
hereafter adopted by the Securities and Exchange Commission or (ii) a
registration statement on Form S-2 or S-3 or any similar registration form
hereafter adopted by the Securities and Exchange Commission. Upon request, the
Company shall deliver to any holder of Restricted Securities a written
statement as to whether it has complied with such requirements.
4G. Intellectual Property Rights. The Company shall, and
shall cause each Subsidiary to, possess and maintain all material Intellectual
Property Rights necessary to the conduct of their respective businesses and own
all right, title and interest in and to, or have a valid license for, all such
Intellectual Property Rights. Neither the Company nor any Subsidiary shall
take any action, or fail to take any action, which would result in the
invalidity, abandonment, misuse or unenforceability of such Intellectual
Property Rights or which would infringe upon or misappropriate any rights of
other Persons.
4H. Public Disclosures. The Company shall not, nor shall
it permit any Subsidiary to, disclose the LLC's or any holder of Investor
Equity's name or identity as an investor in the Company or the LLC in any press
release or other public announcement or in any document or material filed with
any governmental entity, without the prior written consent of such Person,
unless such disclosure is required by applicable law or governmental
regulations or by order of a court of competent jurisdiction, in which case
prior to making such disclosure the Company shall give written notice to such
Person describing in reasonable detail the proposed content of such disclosure
and shall permit such Person to review and comment upon the form and substance
of such disclosure.
4I. Additional Restrictive Covenant Concerning Stock
Issuances and Incurring Debt. At any time prior to the dissolution or
liquidation of the LLC, the Company shall not, without the prior consent of
Holland (i) create, incur or assume Indebtedness for borrowed money, except for
equipment financing and for other Indebtedness expressly specified in any
Approved Business Plan or Approved Budget, or (ii) authorize, issue or enter
into any agreement providing for the issuance (contingent or otherwise) of any
capital stock or other equity securities (or any securities convertible into or
exercisable or exchangeable for any capital stock or other equity securities),
except for (w) issuances of Preferred Stock at the Initial Closing as
contemplated under this Agreement or of Common Stock upon conversion of such
Preferred Stock, (x) issuances of options to acquire Common Stock pursuant to
the terms of the Permitted Stock Option Plan (as defined above) or of Common
Stock upon the exercise of such options, (y) issuances of the Company's
securities in connection with the acquisition of another company or business as
contemplated under Section 4C(viii) above, or (z) issuances pursuant to a
Public Offering; provided that such consent shall not be required in either of
the following circumstances:
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<PAGE> 19
(i) if the aggregate amount of the Initial
Contribution and all Subsequent Contributions made on or prior to the
date of such proposed Issuance is not less than the Maximum
Commitment; or
(ii) if, in the good faith judgment of the LLC,
there has occurred a material adverse change (other than a change
specifically and expressly contemplated in one or more Approved
Business Plans) in the business, financial condition, operations,
assets, or business prospects of the Company and its Subsidiaries
taken as a whole.
The rights of Holland under this paragraph 4I shall terminate and thereafter
cease to apply if at any time Holland (together with members of his Family
Group (as defined in his Executive Purchase Agreement)) ceases to hold at least
90% of the Management Equity initially issued to Holland (and the members of
his Family Group (as defined in his Executive Purchase Agreement)) under his
Executive Purchase Agreement.
4J. Preemptive Rights.
(i) Except for issuances (w) of Preferred Stock at the
Initial Closing as contemplated under this Agreement or of Common Stock upon
conversion of such Preferred Stock, (x) of options to acquire Common Stock
pursuant to the terms of the Permitted Stock Option Plan (as defined above) or
of Common Stock upon the exercise of such options, (y) in connection with the
acquisition of another company or business as contemplated under Section
4C(viii) above, or (z) pursuant to a Public Offering, if the Company authorizes
the issuance or sale of any shares of Common Stock or any securities containing
options or rights to acquire any shares of Common Stock (other than as a
dividend on the outstanding Common Stock), the Company shall first offer to
sell to each Unitholder (or after the dissolution of the LLC, each holder of
Underlying Common Stock) a portion of such stock or securities equal to the
quotient obtained by dividing (1) the number of Class A Units and Class B Units
(or after the dissolution of the LLC, the number of shares of Underlying Common
Stock) held by such holder, by (2) the total number of Class A Units and Class
B Units (or after the dissolution of the LLC, the total number of shares of
Underlying Common Stock). Each such holder shall be entitled to purchase such
stock or securities at the most favorable price and on the most favorable terms
as such stock or securities are to be offered to any other Persons; provided
that if all Persons entitled to purchase or receive such stock or securities
are required to also purchase other securities of the Company, the holders
exercising their rights pursuant to this paragraph shall also be required to
purchase the same strip of securities (on the same terms and conditions) that
such other Persons are required to purchase. The purchase price for all stock
and securities offered to such holders hereunder shall be payable in cash.
(ii) In order to exercise its purchase rights hereunder, a
Unitholder (or holder of Underlying Common Stock, as applicable) must within 30
days after receipt of written notice from the Company describing in reasonable
detail the stock or securities being offered, the purchase price thereof, the
payment terms and such holder's percentage allotment, deliver a written notice
to the Company describing such holder's election hereunder. If all of the
securities offered to the Unitholders (or holders of Underlying Common Stock,
as applicable) are not fully subscribed, the remaining stock and securities
shall be reoffered by the Company to the holders purchasing their full
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<PAGE> 20
allotment upon the terms set forth in this paragraph, except that such holders
must exercise their rights within 5 business days after receipt of such
reoffer.
(iii) Upon the expiration of the offering periods described
above, the Company shall be entitled to sell such stock or securities which the
Unitholders (or holders of Underlying Common Stock, as applicable) have not
elected to purchase during the 180 days following such expiration at a price
not less and on other terms and conditions no more favorable to the purchasers
thereof than that offered to such holders. Any stock or securities offered or
sold by the Company after such 180-day period must be reoffered to the
Unitholders (or holders of Underlying Common Stock, as applicable) pursuant to
the terms of this paragraph.
(iv) The rights of the Unitholders (or holders of
Underlying Common Stock, as applicable) under this paragraph 4J shall terminate
upon the consummation of the first to occur of (x) a Public Offering and (y) a
Sale of the Company.
4K. Affiliated Entity Business Combinations. Any
transaction in which the Company or any Subsidiary would acquire any interest
in, or have any interest in it acquired by, or enter into any joint venture
with, any entity that is an Affiliate of any Investor Member (including by way
of merger, business combination, sale of stock, sale of assets, or otherwise)
shall require, in addition to normal approval of the Board, the approval of a
majority of the Investor Directors (excluding, for purposes of such vote, all
Investor Directors designated by the Investor Member(s) (or Affiliates thereof)
of which such entity is an Affiliate).
SECTION 5. TRANSFER OF RESTRICTED SECURITIES.
5A. General Provisions. Restricted Securities are
transferable only pursuant to (i) public offerings registered under the
Securities Act, (ii) Rule 144 or Rule 144A of the Securities and Exchange
Commission (or any similar rule or rules then in force) if such rule is
available, and (iii) subject to the various conditions and prohibitions set
forth in this Agreement (including, without limitation, paragraph 5B below) and
in the other agreements contemplated hereby (including, without limitation, the
Securityholders Agreement and the Executive Purchase Agreements), any other
legally available means of transfer.
5B. Opinion Delivery. In connection with the
transfer of any Restricted Securities (other than a transfer described in
paragraph 5A(i) or (ii) above), the holder thereof shall deliver written notice
to the Company describing in reasonable detail the transfer or proposed
transfer, together with an opinion of Kirkland & Ellis or other counsel which
(to the Company's reasonable satisfaction) is knowledgeable in securities law
matters to the effect that such transfer of Restricted Securities may be
effected without registration of such Restricted Securities under the
Securities Act. In addition, if the holder of the Restricted Securities
delivers to the Company an opinion of Kirkland & Ellis or such other counsel
that no subsequent transfer of such Restricted Securities shall require
registration under the Securities Act, the Company shall promptly upon such
contemplated transfer deliver new certificates for such Restricted Securities
which do not bear the Securities Act legend set forth in paragraph 9C below.
If the Company is not required to deliver new certificates for such Restricted
Securities not bearing such legend, the holder thereof shall not
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<PAGE> 21
transfer the same until the prospective transferee has confirmed to the Company
in writing its agreement to be bound by the conditions contained in this
Section 5 and paragraph 9C.
5C. Rule 144A. Upon the request of the LLC or any holder
of Investor Equity, the Company shall promptly supply to such Person or its
prospective transferees all information regarding the Company required to be
delivered in connection with a transfer pursuant to Rule 144A of the Securities
and Exchange Commission.
5D. Legend Removal. If any Restricted Securities become
eligible for sale pursuant to Rule 144(k), the Company shall, upon the request
of the holder of such Restricted Securities, remove the legend set forth in
paragraph 9C from the certificates for such Restricted Securities.
SECTION 6. REPRESENTATIONS AND WARRANTIES OF THE
COMPANY. As a material inducement to the LLC to enter into this Agreement and
purchase the Preferred Stock hereunder, the Company hereby represents and
warrants that:
6A. Organization, Corporate Power and Licenses. The
Company is a corporation duly organized, validly existing and in good standing
under the laws of Delaware and is qualified to do business in every
jurisdiction in which its ownership of property or conduct of business requires
it to qualify. The Company possesses all requisite corporate power and
authority and, except as set forth in the "Licenses Schedule" attached hereto,
all material licenses, permits and authorizations necessary to own and operate
its properties, to carry on its businesses as presently proposed to be
conducted and to carry out the transactions contemplated by this Agreement.
The copies of the Company's charter documents and Bylaws which have been
furnished to the LLC's special counsel reflect all amendments made thereto at
any time prior to the date of this Agreement and are correct and complete.
6B. Capital Stock and Related Matters.
(i) As of the Initial Closing and immediately thereafter,
the authorized capital stock of the Company shall consist of (a) 95,000 shares
of Preferred Stock, all of which shares shall be issued and outstanding, and
(b) 100,001 shares of Common Stock, of which 1 share shall be issued and
outstanding, 95,000 shares shall be reserved for issuance upon conversion of
the Preferred Stock and 5,000 shares shall be reserved for issuance upon
exercise of options issued pursuant to the Permitted Stock Option Plan. Except
as set forth on the attached "Capitalization Schedule," as of the Initial
Closing, the Company shall not have outstanding any stock or securities, nor
any options, warrants or other rights to acquire capital stock or securities of
the Company. As of the Initial Closing, all of the outstanding shares of the
Company's capital stock listed on the Capitalization Schedule shall be validly
issued, fully paid and nonassessable.
(ii) There are no statutory or, to the best of the
Company's knowledge, contractual stockholders preemptive rights or rights of
first refusal with respect to the issuance of the Preferred Stock hereunder or
the issuance of the Common Stock upon conversion of any of the Preferred Stock.
The Company has not violated any applicable federal or state securities laws in
connection
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<PAGE> 22
with the offer, sale or issuance of any of its capital stock, and the offer,
sale and issuance of the Preferred Stock hereunder do not require registration
under the Securities Act or any applicable state securities laws. To the best
of the Company's knowledge, there are no agreements between the Company's
stockholders with respect to the voting or transfer of the Company's capital
stock or with respect to any other aspect of the Company's affairs, except for
this Agreement and the Securityholders Agreement.
6C. Authorization; No Breach. The execution, delivery
and performance of this Agreement, the Registration Agreement, the
Securityholders Agreement, the Executive Purchase Agreements, and all other
agreements contemplated hereby to which the Company is a party, the filing of
the Company's amended and restated Certificate of Incorporation referred to in
paragraph 2B above, and the adoption of the Company's Bylaws referred to in
paragraph 2C above have been duly authorized by the Company. This Agreement,
the Registration Agreement, the Securityholders Agreement, the Executive
Purchase Agreements, the Certificate of Incorporation, and all other agreements
contemplated hereby to which the Company is a party each constitutes a valid
and binding obligation of the Company, enforceable in accordance with its
terms. The execution and delivery by the Company of this Agreement, the
Registration Agreement, the Securityholders Agreement, the Executive Purchase
Agreements and all other agreements contemplated hereby to which the Company is
a party and the consummation of the transactions contemplated hereby and
thereby, the offering, sale and issuance of the Preferred Stock hereunder, the
issuance of the options under the Permitted Stock Option Plan, the issuance of
the Common Stock upon conversion of the Preferred Stock and upon exercise of
the options issued pursuant to the Permitted Stock Option Plan, the filing of
the amended and restated Certificate of Incorporation and the adoption of the
Bylaws referred to above and the fulfillment of and compliance with the
respective terms hereof and thereof by the Company, do not and shall not (i)
conflict with or result in a breach of the terms, conditions or provisions of,
(ii) constitute a default under, (iii) result in the creation of any lien,
security interest, charge or encumbrance upon the Company's or any Subsidiary's
capital stock or assets pursuant to, (iv) give any third party the right to
modify, terminate or accelerate any obligation under, (v) result in a violation
of, or (vi) require any authorization, consent, approval, exemption or other
action by or notice or declaration to, or filing with, any court or
administrative or governmental body or agency pursuant to the charter or Bylaws
of the Company, or any law, statute, rule or regulation to which the Company or
any Subsidiary is subject, or any agreement, instrument, order, judgment or
decree to which the Company or any Subsidiary is subject.
6D. Conduct of Business; Absence of Liabilities. Prior
to the Initial Closing, except as set forth on the attached "Liabilities
Schedule," and except for the Company's obligations to pay expenses under
Section 9A hereof, the Company has not conducted any business, activities or
operations nor incurred any expenses, obligations or liabilities (whether
accrued, absolute, contingent, unliquidated or otherwise, whether or not known
to the Company and whether due or to become due and regardless of when
asserted).
6E. No Subsidiaries. The Company does not own or hold,
and has never owned or held, any shares of stock or any other securities or
interests in or any rights to acquire any shares of stock or any other security
or interest in any other Person.
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<PAGE> 23
6F. Brokerage. There are no claims for brokerage
commissions, finders' fees or similar compensation in connection with the
transactions contemplated by this Agreement based on any arrangement or
agreement binding upon the Company. The Company shall pay, and hold the LLC and
its Unitholders harmless against, any liability, loss or expense (including,
without limitation, reasonable attorneys' fees and out-of-pocket expenses)
arising in connection with any such claim.
6G. Governmental Consent, etc. Except as set forth on
the attached "Consents Schedule," no permit, consent, approval or authorization
of, or declaration to or filing with, any governmental authority is required in
connection with the execution, delivery and performance by the Company of this
Agreement or the other agreements contemplated hereby, or the consummation by
the Company of any other transactions contemplated hereby or thereby.
6H. Compliance with Laws. Neither the Company nor any
Subsidiary has violated any law or any governmental regulation or requirement
in any material respect.
6I. Disclosure. Neither this Agreement nor any of the
exhibits, schedules, attachments, written statements, documents, certificates
or other written items supplied to the LLC or any holder of Investor Equity by
or on behalf of the Company with respect to the transactions contemplated
hereby contain any untrue statement of a material fact or omit a material fact
necessary to make each statement contained herein or therein not misleading.
There is no fact which the Company has not disclosed to the LLC and the holders
of Investor Equity in writing and of which any of its officers, directors or
executive employees is aware and which would reasonably be expected to have a
material adverse effect upon the expected business, financial condition,
operations, assets, or business prospects of the Company and its Subsidiaries
taken as a whole.
SECTION 7. BOARD OF DIRECTORS.
7A. Board Composition and Vacancies. From and after the
Initial Closing and until the provisions of this paragraph 7 cease to be
effective, each holder of Underlying Common Stock shall vote all shares of
Underlying Common Stock owned by such holder or over which such holder has
voting control and shall take all other necessary or desirable actions within
such holder's control (whether in such holder's capacity as a stockholder,
director, member of a Board committee or officer of the Company or otherwise,
and including, without limitation, attendance at meetings in person or by proxy
for purposes of obtaining a quorum and execution of written consents in lieu of
meetings), and the Company shall take all necessary or desirable actions within
its control (including, without limitation, calling special Board and
stockholder meetings), so that:
(i) The authorized number of directors on the Board shall
be established and remain at thirteen directors.
(ii) The following individuals shall be elected to the
Board:
(a) two representatives designated by the holders
of a majority of the MDCP Equity held by MDCP and its
Affiliates so long as MDCP and its Affiliates
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<PAGE> 24
hold at least 30% of the MDCP Equity, and thereafter one
representative designated by the holders of a majority of the
MDCP Equity held by MDCP and its Affiliates so long as MDCP
and its Affiliates hold at least 15% of the MDCP Equity (such
representatives, the "MDCP Directors");
(b) two representatives designated by the holders
of a majority of the MSCP Equity held by MSCP and its
Affiliates so long as MSCP and its Affiliates hold at least
30% of the MSCP Equity, and thereafter one representative
designated by the holders of a majority of the MSCP Equity
held by MSCP and its Affiliates so long as MSCP and its
Affiliates hold at least 15% of the MSCP Equity (such
representatives, the "MSCP Directors");
(c) two representatives designated by the holders
of a majority of the Frontenac Equity held by Frontenac and
its Affiliates so long as Frontenac and its Affiliates hold at
least 66 2/3% of the Frontenac Equity, and thereafter one
representative designated by the holders of a majority of the
Frontenac Equity held by Frontenac and its Affiliates so long
as Frontenac and its Affiliates hold at least 33 1/3% of the
Frontenac Equity (such representatives, the "Frontenac
Directors");
(d) one representative designated by the holders
of a majority of the BV Equity held by BV and its Affiliates
so long as BV and its Affiliates hold at least 50% of the BV
Equity (such representative, the "BV Director");
(e) the chief executive officer of the Company
(the "CEO Director");
(f) three members of the Company's management in
addition to the chief executive officer (the "Management
Directors") designated by the holders of a majority of the
Management Equity; and
(g) two representatives (the "Outside Directors")
designated by the holders of a majority of the Investor Equity
held by the Investor Members and their respective Affiliates,
and reasonably acceptable to the holders of a majority of the
Management Equity; provided that neither representative shall
be a member of the Company's management or an employee or
officer of the Company or any of its Subsidiaries.
The MDCP Directors, the MSCP Directors, the Frontenac Directors and
the BV Director are referred to herein collectively as the "Investor
Directors."
(iii) The composition of the board of directors of each of
the Company's Subsidiaries (a "Sub Board") shall be the same as that
of the Board.
(iv) The Board shall create and maintain an executive
committee (the "Executive Committee") consisting of the following four
members: (a) the CEO Director, (b) one MDCP Director designated by the
holders of a majority of the MDCP Equity held by MDCP and its
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<PAGE> 25
Affiliates so long as such holders are entitled to designate at least
one MDCP Director under subparagraph (ii) above, (c) one MSCP Director
designated by the holders of a majority of the MSCP Equity held by
MSCP and its Affiliates so long as such holders are entitled to
designate at least one MSCP Director under subparagraph (ii) above,
and (d) one Frontenac Director designated by the holders of a majority
of the Frontenac Equity held by Frontenac and its Affiliates so long
as such holders are entitled to designate at least one Frontenac
Director under subparagraph (ii) above. The Executive Committee shall
exercise such powers as are specifically granted to it under the terms
of this Agreement and such powers of the Board as shall be delegated
to it from time to time by the Board. The Executive Committee may
take any action or exercise any power granted to it only with the
affirmative vote of any two of the MDCP Director, the MSCP Director,
and the Frontenac Director then serving thereon.
(v) Committees of the Board or a Sub Board (other than
the Executive Committee) shall be created only upon the approval of a
majority of the members of the Board or the applicable Sub Board that
includes a majority of the Investor Directors serving on such Board or
Sub Board, and the composition of each such committee (if any) shall
be proportionately equivalent to that of the Board to the extent
practicable.
(vi) Any director will be removed from the Board or a Sub
Board, with or without cause, at the written request of the holder or
holders entitled to designate such person to be a director and under
no other circumstances; provided that if the CEO Director ceases to
serve as the Company's chief executive officer, he shall be removed as
a member of the Board and each Sub Board promptly after his employment
ceases (it being understood that, at the election of the holders of a
majority of the Investor Equity held by the Investor Members and their
respective Affiliates, an Outside Director shall be removed from the
Board and such person formerly serving as the Company's chief
executive officer shall be designated to serve in such vacant Outside
Director position); and provided further that if any Management
Director ceases to be an employee of the Company and its Subsidiaries,
he shall be removed as a member of the Board and each Sub Board
promptly after his employment ceases.
(vii) In the event that any CEO Director ceases to serve as
the Company's chief executive officer during his term of office
(regardless of whether such individual ceases to serve as a member of
the Board or whether such individual is designated to serve as an
Outside Director), the resulting vacancy on the Board or the Sub Board
shall be filled by the person hired to replace such departing director
as the chief executive officer of the Company. In the event any
director (other than the CEO Director) ceases to serve as a member of
the Board or a Sub Board during his or her term of office, the
resulting vacancy on the Board or the Sub Board shall be filled by a
representative (or in the case of a vacant Management Directorship, a
member of the Company's management) designated by the holder or
holders entitled to designate the departing director.
(viii) If any party eligible to designate a representative
to fill a directorship pursuant to the terms of this paragraph 7 fails
to so designate, the individual previously holding such
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<PAGE> 26
directorship shall be elected to such position, or if such individual
has been removed as a director or fails or declines to serve, the
vacancy shall be filled with an individual designated by holders of a
majority of the Investor Equity held by the Investor Members and their
respective Affiliates; provided that all holders of Underlying Common
Stock shall vote to remove such individual if the party which failed
to designate such directorship so directs.
(ix) If any of MDCP, MSCP, Frontenac, or BV become
ineligible, by virtue of the terms of subparagraphs 7A(ii)(a), (b),
(c), and (d), respectively (including by operation of subparagraph
7A(x)), to designate a representative to fill a directorship pursuant
to such subparagraph (including the concomitant right to designate
such director to serve on the Executive Committee under subparagraph
7(a)(iv)), all rights and entitlements hereunder to designate persons
to fill such directorship shall thereafter be exercised by the holders
of a majority of the Investor Equity held by the Investor Members and
their respective Affiliates.
(x) In accordance with paragraph 9B(ii) hereof, if upon
any Capital Call Notice (as defined in the LLC Agreement), any holder
or Class A Units or Class B Units refuses or otherwise fails to make
the capital contributions required by such Capital Call Notice under
the LLC Agreement with respect to the Class A Units and Class B Units
held by such Unitholder, and in accordance with Section 5.1(b) of the
LLC Agreement, if a Unitholder becomes a Dissenting Holder (as defined
in the LLC Agreement), then in each case all securities held by such
Unitholder shall, for purposes of this paragraph 7A, cease to
constitute any of BV Equity, MDCP Equity, MSCP Equity, Frontenac
Equity, Investor Equity, or Management Equity.
7B. Director Expenses; Indemnity Insurance; Exculpation.
The Company shall pay the reasonable out-of-pocket expenses incurred by each
director in connection with attending the meetings of the Board, any Sub Board
and any committee thereof. So long as any director designated under this
Agreement serves on the Board and for five years thereafter, the Company shall
maintain directors and officers indemnity insurance coverage satisfactory to
the Board at the time such insurance is first obtained and not thereafter
reduced in amount or coverage, and the Company's certificate of incorporation
and bylaws shall provide for indemnification and exculpation of directors to
the fullest extent permitted under applicable law.
7C. Termination. The rights and requirements under
paragraph 7A shall terminate at the closing of a Sale of the Company.
SECTION 8. DEFINITIONS.
8A. Definitions. For the purposes of this Agreement, the
following terms have the meanings set forth below:
"Affiliate" of any particular Person means (i) any other
Person controlling, controlled by or under common control with such particular
Person, where "control" means the possession, directly or indirectly, of the
power to direct the management and policies of a Person whether through the
ownership of voting securities, by contract or otherwise, and (ii) if such
Person is a
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<PAGE> 27
partnership, any partner thereof (provided that for purposes of paragraph 7A
hereof, the term "Affiliate" shall not include any limited partner of such
particular Person that is a partnership).
"Base Rate" means, on any date, a variable rate per annum
equal to the rate of interest most recently published by The Wall Street
Journal as the "prime rate" at large U.S. money center banks.
"Board" means the board of directors of the Company.
"BV" means, collectively, Battery Ventures IV, L.P., a
Delaware limited partnership, and Battery Investment Partners IV, LLC.
"BV Equity" means (i) the Class A Units initially issued to BV
pursuant to the Investor Purchase Agreement (but not including any Class D
Units issued by the LLC in exchange for such Class A Units), (ii) upon and
after the dissolution or liquidation of the LLC, the Underlying Common Stock
distributed in respect of the Class A Units referred to in clause (i) above
pursuant to such dissolution or liquidation, and (iii) any securities issued
directly or indirectly with respect to the foregoing securities by way of a
stock split, stock dividend, or other division of securities, or in connection
with a combination of securities, recapitalization, merger, consolidation, or
other reorganization (but not including any Class D Units issued by the LLC in
exchange for any of the foregoing securities). As to any particular securities
constituting BV Equity, such securities shall cease to be BV Equity when they
have been (a) effectively registered under the Securities Act and disposed of
in accordance with the registration statement covering them, (b) distributed to
the public through a broker, dealer or market maker pursuant to Rule 144 under
the Securities Act (or any similar provision then in force) or (c) repurchased
by the LLC (including in exchange for Class D Units of the LLC), the Company or
any Subsidiary.
"Class A Units" has the meaning ascribed to such term in the
LLC Agreement.
"Class B Units" has the meaning ascribed to such term in the
LLC Agreement.
"Class C Units" has the meaning ascribed to such term in the
LLC Agreement.
"Class D Units" has the meaning ascribed to such term in the
LLC Agreement.
"Executive Purchase Agreement" shall include (i) any executive
unit purchase agreement substantially similar to that set forth in Exhibit 5
attached hereto entered into on or after the date hereof by and among the LLC,
the Company and any of Holland, Lord or the Company's COO (or members of their
respective Family Groups (as defined in the Executive Purchase Agreements)),
and (ii) any executive unit purchase agreement substantially similar to that
set forth in Exhibit 6 attached hereto entered into on or after the date hereof
by and among the LLC, the Company and a member of the Company's management
(other than Holland, Lord, or the Company's COO), or members of such managers'
respective Family Groups (as defined in the Executive Purchase Agreements).
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<PAGE> 28
"Frontenac" means Frontenac VII, L.P., a Delaware limited
partnership.
"Frontenac Equity" means (i) the Class A Units initially
issued to Frontenac pursuant to the Investor Purchase Agreement (but not
including any Class D Units issued by the LLC in exchange for such Class A
Units), (ii) upon and after the dissolution or liquidation of the LLC, the
Underlying Common Stock distributed in respect of the Class A Units referred to
in clause (i) above pursuant to such dissolution or liquidation, and (iii) any
securities issued directly or indirectly with respect to the foregoing
securities by way of a stock split, stock dividend, or other division of
securities, or in connection with a combination of securities,
recapitalization, merger, consolidation, or other reorganization (but not
including any Class D Units issued by the LLC in exchange for any of the
foregoing securities). As to any particular securities constituting Frontenac
Equity, such securities shall cease to be Frontenac Equity when they have been
(a) effectively registered under the Securities Act and disposed of in
accordance with the registration statement covering them, (b) distributed to
the public through a broker, dealer or market maker pursuant to Rule 144 under
the Securities Act (or any similar provision then in force) or (c) repurchased
by the LLC (including in exchange for Class D Units of the LLC), the Company or
any Subsidiary.
"Indebtedness" means at a particular time, without
duplication, (i) any indebtedness for borrowed money or issued in substitution
for or exchange of indebtedness for borrowed money, (ii) any indebtedness
evidenced by any note, bond, debenture or other debt security, (iii) any
indebtedness for the deferred purchase price of property or services with
respect to which a Person is liable, contingently or otherwise, as obligor or
otherwise (other than trade payables and other current liabilities incurred in
the ordinary course of business which are not more than six months past due),
(iv) any commitment by which a Person assures a creditor against loss
(including, without limitation, contingent reimbursement obligations with
respect to letters of credit), (v) any indebtedness guaranteed in any manner by
a Person (including, without limitation, guarantees in the form of an agreement
to repurchase or reimburse), (vi) any obligations under capitalized leases with
respect to which a Person is liable, contingently or otherwise, as obligor,
guarantor or otherwise, or with respect to which obligations a Person assures a
creditor against loss, (vii) any indebtedness secured by a Lien on a Person's
assets and (viii) any unsatisfied obligation for "withdrawal liability" to a
"multiemployer plan" as such terms are defined under the Employee Retirement
Income Security Act of 1974, as amended ("ERISA").
"Intellectual Property Rights" means all (i) patents, patent
applications, patent disclosures and inventions, (ii) trademarks, service
marks, trade dress, trade names, logos and corporate names and registrations
and applications for registration thereof together with all of the goodwill
associated therewith, (iii) copyrights (registered or unregistered) and
copyrightable works and registrations and applications for registration
thereof, (iv) mask works and registrations and applications for registration
thereof, (v) computer software, data, data bases and documentation thereof,
(vi) trade secrets and other confidential information (including, without
limitation, ideas, formulas, compositions, inventions (whether patentable or
unpatentable and whether or not reduced to practice), know-how, manufacturing
and production processes and techniques, research and development information,
drawings, specifications, designs, plans, proposals, technical data,
copyrightable works, financial and marketing plans and customer and supplier
lists and information),
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<PAGE> 29
(vii) other intellectual property rights and (viii) copies and tangible
embodiments thereof (in whatever form or medium).
"Investment" as applied to any Person means (i) any direct or
indirect purchase or other acquisition by such Person of any notes,
obligations, instruments, stock, securities or ownership interest (including
partnership interests and joint venture interests) of any other Person and (ii)
any capital contribution by such Person to any other Person.
"Investor Equity" means (i) the Class A Units issued pursuant
to the Investor Purchase Agreement (but not including any Class D Units issued
by the LLC in exchange for such Class A Units), (ii) upon and after the
dissolution or liquidation of the LLC, the Underlying Common Stock distributed
in respect of the Class A Units referred to in clause (i) above pursuant to
such dissolution or liquidation, and (iii) any securities issued directly or
indirectly with respect to the foregoing securities by way of a stock split,
stock dividend, or other division of securities, or in connection with a
combination of securities, recapitalization, merger, consolidation, or other
reorganization (but not including any Class D Units issued by the LLC in
exchange for any of the foregoing securities). As to any particular securities
constituting Investor Equity, such securities shall cease to be Investor Equity
when they have been (a) effectively registered under the Securities Act and
disposed of in accordance with the registration statement covering them, (b)
distributed to the public through a broker, dealer or market maker pursuant to
Rule 144 under the Securities Act (or any similar provision then in force) or
(c) repurchased by the LLC (including in exchange for Class D Units of the
LLC), the Company or any Subsidiary.
"Investor Members" means BV, Frontenac, MDCP, and MSCP.
"IRC" means the Internal Revenue Code of 1986, as amended, and
any reference to any particular IRC section shall be interpreted to include any
revision of or successor to that section regardless of how numbered or
classified.
"IRS" means the United States Internal Revenue Service.
"Lien" means any mortgage, pledge, security interest,
encumbrance, lien or charge of any kind (including, without limitation, any
conditional sale or other title retention agreement or lease in the nature
thereof), any sale of receivables with recourse against the Company, any of its
Subsidiaries or any Affiliate, any filing or agreement to file a financing
statement as debtor under the Uniform Commercial Code or any similar statute
other than to reflect ownership by a third party of property leased to the
Company or any of its Subsidiaries under a lease which is not in the nature of
a conditional sale or title retention agreement, or any subordination
arrangement in favor of another Person (other than any subordination arising in
the ordinary course of business).
"Liquidation Value" has the meaning ascribed to such term in
the Certificate of Incorporation.
"Management Equity" means (i) the Class B Units issued
pursuant to all Executive Purchase Agreements (but not including any Class C
Units or Class D Units issued by the LLC in
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<PAGE> 30
exchange for such Class B Units), (ii) upon and after the dissolution or
liquidation of the LLC, the Underlying Common Stock distributed in respect of
the Class B Units referred to in clause (i) above pursuant to such dissolution
or liquidation, and (iii) any securities issued directly or indirectly with
respect to the foregoing securities by way of a stock split, stock dividend, or
other division of securities, or in connection with a combination of
securities, recapitalization, merger, consolidation, or other reorganization
(but not including any Class C Units or Class D Units issued in exchange for
any of the foregoing securities). As to any particular securities constituting
Management Equity, such securities shall cease to be Management Equity when
they have been (a) effectively registered under the Securities Act and disposed
of in accordance with the registration statement covering them, (b) distributed
to the public through a broker, dealer or market maker pursuant to Rule 144
under the Securities Act (or any similar provision then in force) or (c)
repurchased by the LLC (including in exchange for Class C Units or Class D
Units of the LLC), the Company or any Subsidiary.
"Management Members" means Holland, Lord, and any other Person
that enters into an Executive Purchase Agreement on or after the date hereof.
"Maximum Commitment" shall initially mean the sum of (x)
$95,000,000 plus (y) the product of $5,000,000 times a fraction, the numerator
of which is equal to the aggregate Class B Units outstanding as of the date
hereof, and the denominator of which is the aggregate Class B Units authorized
under the LLC Agreement on the date hereof. In the event any Class B Units are
issued pursuant to the terms of the LLC Agreement and an Executive Purchase
Agreement (other than a reissuance of Class B Units previously repurchased by
the Company), the Maximum Commitment then in effect shall be increased by an
amount equal to the product of $5,000,000 times a fraction, the numerator of
which is the number of Class B Units so issued, and the denominator of which is
the aggregate number of Class B Units authorized under the LLC Agreement on the
date hereof (as such number is equitably adjusted to reflect any combinations
or divisions of Class B Units after the date hereof). In the event any Class A
Units or Class B Units are repurchased by the LLC (including in exchange for
Class C Units or Class D Units of the LLC) pursuant to the provisions of the
LLC Agreement, the Securityholders Agreement, any Executive Purchase Agreement
or otherwise, the Maximum Commitment then in effect shall be reduced by an
amount equal to the product of (x) the Remaining Commitment as of the date of
such repurchase, times (y) a fraction, the numerator of which is equal to the
number of Units so repurchased, and the denominator of which is equal to the
total number of Class A Units and Class B Units authorized under the LLC
Agreement on the date hereof (as such number is equitably adjusted for any
combinations or divisions of Units occurring after the date hereof). If any
such repurchased Class A Units or Class B Units are subsequently reissued to a
Unitholder of the LLC, the Maximum Commitment shall at the time of such
reissuance be increased by an amount equal to the product of (x) the Remaining
Commitment as of the date of such reissuance, times (y) a fraction, the
numerator of which is equal to the number of Units so reissued (which number
shall in no event be greater than the total number of Units so repurchased),
and the denominator of which is equal to the total number of Class A Units and
Class B Units authorized under the LLC Agreement on the date hereof (as such
number is equitably adjusted for any combinations or divisions of Units
occurring after the date hereof). In the event the Exercising Holders (as
defined in the LLC Agreement) elect the remedy set forth in paragraph
5.1(b)(i)(C) of the LLC Agreement, the Maximum Commitment then in effect shall
be reduced by an amount equal to that portion of the Remaining Commitment as of
the date of
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<PAGE> 31
such election that would constitute Related Contributions (as defined in the
LLC Agreement) if and when called by the Company as Subsequent Contributions.
"MDCP" means Madison Dearborn Capital Partners II, L.P., a
Delaware limited partnership.
"MDCP Equity" means (i) the Class A Units initially issued to
MDCP pursuant to the Investor Purchase Agreement (but not including any Class D
Units issued by the LLC in exchange for such Class A Units), (ii) upon and
after the dissolution or liquidation of the LLC, the Underlying Common Stock
distributed in respect of the Class A Units referred to in clause (i) above
pursuant to such dissolution or liquidation, and (iii) any securities issued
directly or indirectly with respect to the foregoing securities by way of a
stock split, stock dividend, or other division of securities, or in connection
with a combination of securities, recapitalization, merger, consolidation, or
other reorganization (but not including any Class D Units issued by the LLC in
exchange for any of the foregoing securities). As to any particular securities
constituting MDCP Equity, such securities shall cease to be MDCP Equity when
they have been (a) effectively registered under the Securities Act and disposed
of in accordance with the registration statement covering them, (b) distributed
to the public through a broker, dealer or market maker pursuant to Rule 144
under the Securities Act (or any similar provision then in force) or (c)
repurchased by the LLC (including in exchange for Class D Units of the LLC),
the Company or any Subsidiary.
"MSCP" means, collectively, Morgan Stanley Capital Partners
III, L.P., Morgan Stanley Capital Investors, L.P., and MSCP III 892 Investors,
L.P.
"MSCP Equity" means (i) the Class A Units initially issued to
MSCP pursuant to the Investor Purchase Agreement (but not including any Class D
Units issued by the LLC in exchange for such Class A Units), (ii) upon and
after the dissolution or liquidation of the LLC, the Underlying Common Stock
distributed in respect of the Class A Units referred to in clause (i) above
pursuant to such dissolution or liquidation, and (iii) any securities issued
directly or indirectly with respect to the foregoing securities by way of a
stock split, stock dividend, or other division of securities, or in connection
with a combination of securities, recapitalization, merger, consolidation, or
other reorganization (but not including any Class D Units issued by the LLC in
exchange for any of the foregoing securities). As to any particular securities
constituting MSCP Equity, such securities shall cease to be MSCP Equity when
they have been (a) effectively registered under the Securities Act and disposed
of in accordance with the registration statement covering them, (b) distributed
to the public through a broker, dealer or market maker pursuant to Rule 144
under the Securities Act (or any similar provision then in force) or (c)
repurchased by the LLC (including in exchange for Class D Units of the LLC),
the Company or any Subsidiary.
"Officer's Certificate" means a certificate signed by the
Company's president or its chief financial officer, stating that (i) the
officer signing such certificate has made or has caused to be made such
investigations as are reasonably necessary in order to permit him to verify the
accuracy of the information set forth in such certificate and (ii) such
certificate does not misstate any material fact and does not omit to state any
fact necessary to make the certificate not misleading.
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<PAGE> 32
"Permitted Lien" means:
(i) tax liens with respect to taxes not yet due
and payable or which are being contested in good faith by appropriate
proceedings and for which appropriate reserves have been established
in accordance with generally accepted accounting principles,
consistently applied;
(ii) deposits or pledges made in connection with,
or to secure payment of, utilities or similar services, workers'
compensation, unemployment insurance, old age pensions or other social
security obligations;
(iii) purchase money security interests in any
property acquired by the Company or any Subsidiary to the extent
permitted by this Agreement;
(iv) interests or title of a lessor under any
lease permitted by this Agreement;
(v) mechanics', materialmen's or contractors'
liens or encumbrances or any similar lien or restriction for amounts
not yet due and payable;
(vi) easements, rights-of-way, restrictions and
other similar charges and encumbrances not interfering with the
ordinary conduct of the business of the Company and its Subsidiaries
or detracting from the value of the assets of the Company and its
Subsidiaries; and
(vii) security interests in the assets of the
Company and its Subsidiaries granted to the Company's and its
Subsidiaries' lenders to secure Indebtedness permitted under
subparagraph 4C(xiv) above.
"Person" means an individual, a partnership, a corporation, a
limited liability company, an association, a joint stock company, a trust, a
joint venture, an unincorporated organization and a governmental entity or any
department, agency or political subdivision thereof.
"Public Offering" means any underwritten sale of the company's
common stock pursuant to an effective registration statement under the
Securities Act filed with the Securities and Exchange Commission on Form S-1
(or a successor form adopted by the Securities and Exchange Commission);
provided that the following shall not be considered a Public Offering: (i) any
issuance of common stock as consideration or financing for a merger or
acquisition, and (ii) any issuance of common stock or rights to acquire common
stock to employees of the Company or its Subsidiaries as part of an incentive
or compensation plan.
"Remaining Commitment" means, on any particular date, the
difference of the Maximum Commitment then in effect minus the sum of the
Initial Contribution and the aggregate Subsequent Contributions at all
Subsequent Closings occurring on or prior to such date.
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<PAGE> 33
"Restricted Securities" means (i) the Preferred Stock issued
hereunder, (ii) the Common Stock issued upon conversion of the Preferred Stock,
and (iii) any securities issued with respect to the securities referred to in
clauses (i) or (ii) above by way of a stock dividend or stock split or in
connection with a combination of shares, recapitalization, merger,
consolidation or other reorganization. As to any particular Restricted
Securities, such securities shall cease to be Restricted Securities when they
have (a) been effectively registered under the Securities Act and disposed of
in accordance with the registration statement covering them, (b) become
eligible for sale pursuant to Rule 144 (or any similar provision then in force)
under the Securities Act or (c) been otherwise transferred and new certificates
for them not bearing the Securities Act legend set forth in paragraph 9C have
been delivered by the Company in accordance with paragraph 5B. Whenever any
particular securities cease to be Restricted Securities, the holder thereof
shall be entitled to receive from the Company, without expense, new securities
of like tenor not bearing a Securities Act legend of the character set forth in
paragraph 9C.
"Sale of the Company" means either (i) the sale, lease,
transfer, conveyance or other disposition, in one or a series of related
transactions, of all or substantially all of the assets of the Company and its
Subsidiaries, taken as a whole, or (ii) a transaction or series of transactions
(including by way of merger, consolidation, or sale of stock) the result of
which is that the holders of the Company's outstanding voting stock immediately
prior to such transaction are after giving effect to such transaction no
longer, in the aggregate, the "beneficial owners" (as such term is defined in
Rule 13d-3 and Rule 13d-5 promulgated under the Securities Exchange Act),
directly or indirectly through one or more intermediaries, of more than 50% of
the voting power of the outstanding voting stock of the Company.
"Securities Act" means the Securities Act of 1933, as amended,
or any similar federal law then in force.
"Securities and Exchange Commission" includes any governmental
body or agency succeeding to the functions thereof.
"Securities Exchange Act" means the Securities Exchange Act of
1934, as amended, or any similar federal law then in force.
"Subsidiary" means, with respect to any Person, any
corporation, limited liability company, partnership, association or other
business entity of which (i) if a corporation, a majority of the total voting
power of shares of stock entitled (without regard to the occurrence of any
contingency) to vote in the election of directors, managers or trustees thereof
is at the time owned or controlled, directly or indirectly, by that Person or
one or more of the other Subsidiaries of that Person or a combination thereof,
or (ii) if a limited liability company, partnership, association or other
business entity, a majority of the partnership or other similar ownership
interest thereof is at the time owned or controlled, directly or indirectly, by
any Person or one or more Subsidiaries of that Person or a combination thereof.
For purposes hereof, a Person or Persons shall be deemed to have a majority
ownership interest in a limited liability company, partnership, association or
other business entity if such Person or Persons shall be allocated a majority
of limited liability company, partnership, association or other business entity
gains or losses or shall be or control any managing
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<PAGE> 34
director, manager or general partner of such limited liability company,
partnership, association or other business entity. For purposes of this
Agreement, if the context does not otherwise indicate to which Person the term
"Subsidiary" is used in respect of, the term "Subsidiary" shall refer to any
Subsidiary of the Company.
"Underlying Common Stock" means (i) the Common Stock issued or
issuable upon conversion of any Preferred Stock issued pursuant to this
Agreement and (ii) any Common Stock issued or issuable with respect to the
securities referred to in clause (i) above, including by way of a stock
dividend or stock split or in connection with a combination of shares,
recapitalization, merger, consolidation or other reorganization. For purposes
of this Agreement, any Person who holds any Preferred Stock issued pursuant to
this Agreement shall be deemed to be the holder of the Underlying Common Stock
obtainable upon conversion of such Preferred Stock, such Underlying Common
Stock shall be deemed to be in existence, and such Person shall be entitled to
exercise the rights of a holder of Underlying Common Stock hereunder. As to
any particular shares of Underlying Common Stock, such shares shall cease to be
Underlying Common Stock when they have been (a) effectively registered under
the Securities Act and disposed of in accordance with the registration
statement covering them, (b) distributed to the public through a broker, dealer
or market maker pursuant to Rule 144 under the Securities Act (or any similar
provision then in force) or (c) repurchased by the Company or any Subsidiary of
the Company.
"Units" has the meaning ascribed to such term in the LLC
Agreement.
"Wholly-Owned Subsidiary" means, with respect to any Person, a
Subsidiary of which all of the outstanding capital stock or other ownership
interests are owned by such Person or another Wholly-Owned Subsidiary of such
Person.
8B. Knowledge. As used in Section 6, the terms
"knowledge" or "aware" in respect of the Company shall mean and include (i) the
actual knowledge or awareness of Holland, Lord, or the Company's COO (and any
Person hired to serve as a replacement for any of the foregoing), and (ii) with
respect to the Persons identified in clause (i) above, the knowledge or
awareness which a prudent business person would have obtained in the conduct of
his business after making reasonable inquiry and reasonable diligence with
respect to the particular matter in question.
SECTION 9. MISCELLANEOUS PROVISIONS.
9A. Expenses. The Company shall pay, and hold the LLC
and each of its Unitholders harmless against liability for the payment of, the
out-of-pocket expenses of the LLC and its Unitholders (including the reasonable
fees and expenses of Kirkland & Ellis, Swidler & Berlin, and any other special
counsel (an "Other Counsel") retained by an Investor Member; provided that the
fees and expenses of such Other Counsels shall not exceed $10,000 for any one
Other Counsel nor $20,000 in the aggregate for all such Other Counsels) arising
in connection with the performance of due diligence investigations concerning
the Company and its operations and management, the negotiation and execution of
this Agreement, and the consummation of the transactions to occur at the
Initial Closing as contemplated hereby. In addition, The Company shall pay,
and hold the LLC and each of the holders of Investor Equity harmless against
liability for the payment of, the out-of-
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<PAGE> 35
pocket expenses of the LLC and the holders of Investor Equity (including the
reasonable fees and expenses of Kirkland & Ellis) arising in connection with
(i) any amendments or waivers (whether or not the same become effective) under
or in respect of this Agreement, any of the agreements contemplated hereby or
the Certificate of Incorporation, (ii) the enforcement of the rights granted
under this Agreement, any of the agreements contemplated hereby and the
Certificate of Incorporation, (iii) any filing with any governmental agency
with respect to the LLC's investment in the Company or any holder of Investor
Equity's investment in the LLC, or any other filing with any governmental
agency with respect to the Company or the LLC which mentions any holder of
Investor Equity, and (iv) stamp and other taxes which may be payable in respect
of the execution and delivery of this Agreement or the issuance, delivery or
acquisition of any shares of Preferred Stock or any shares of Common Stock
issuable upon conversion of any Preferred Stock.
9B. Remedies.
(i) Each holder of Preferred Stock and Underlying Common
Stock shall have all rights and remedies set forth in this Agreement and the
Certificate of Incorporation and all rights and remedies which such holders
have been granted at any time under any other agreement or contract and all of
the rights which such holders have under any law or at equity. Any Person
having any rights under any provision of this Agreement shall be entitled to
enforce (upon demonstration of irreparable harm) such rights specifically
(without posting a bond or other security), to recover damages by reason of any
breach of any provision of this Agreement and to exercise all other rights
granted by law.
(ii) If upon any Capital Call Notice (as defined in the
LLC Agreement), any holder of Class A Units or Class B Units refuses or
otherwise fails to make the capital contributions required by such Capital Call
Notice under the LLC Agreement with respect to the Class A Units and Class B
Units held by such Unitholder, such holder shall forfeit and thereafter cease
to possess all rights hereunder to designate any representatives to the Board
or to any Board committee (including, without limitation, the Executive
Committee) and all voting rights pursuant to Section 9G granted to the holders
entitled to designate certain directors.
(iii) If any holder of Class A Units becomes a Dissenting
Holder (as defined in the LLC Agreement) in accordance with Section 5.1(b) of
the LLC Agreement, such holder shall forfeit and thereafter cease to possess
all rights hereunder to designate any representatives to the Board or to any
Board committee (including, without limitation, the Executive Committee) and
all voting rights pursuant to Section 9G granted to the holders entitled to
designate certain directors.
9C. LLC's Investment Representations. The LLC hereby
represents that it is acquiring the Restricted Securities purchased hereunder
or acquired pursuant hereto for its own account with the present intention of
holding such securities for purposes of investment, and that it has no
intention of selling such securities in a public distribution in violation of
the federal securities laws or any applicable state securities laws; provided
that nothing contained herein shall prevent the LLC or any subsequent holders
of Restricted Securities from transferring such securities in compliance with
the provisions of Section 5 hereof. Each certificate or instrument
representing Restricted Securities shall be imprinted with a legend in
substantially the following form:
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<PAGE> 36
"The securities represented by this certificate were originally issued
on August 13, 1997, and have not been registered under the Securities
Act of 1933, as amended. The transfer of the securities represented
by this certificate is subject to the conditions specified in the
Stock Purchase Agreement dated as of August 15, 1997, as amended and
modified from time to time, between the issuer (the "Company") and the
initial holder of these securities. The Company reserves the right to
refuse the transfer of such securities until such conditions have been
fulfilled with respect to such transfer. A copy of such conditions
shall be furnished by the Company to the holder hereof upon written
request and without charge."
9D. Consent to Amendments. Except as otherwise expressly
provided herein, the provisions of this Agreement may be amended, modified, or
waived, and the Company may take any action herein prohibited, or omit to
perform any act herein required to be performed by it, only if the Company has
obtained the written consent of the LLC (along with evidence that such consent
has been authorized by the LLC's board of managers in accordance with the LLC
Agreement). Upon and after the dissolution of the LLC, the provisions of this
Agreement may be amended, modified, or waived, and the Company may take any
action herein prohibited, or omit to perform any act herein required to be
performed by it, only if the Company has obtained the written consent of the
holders (acting in their capacity as shareholders of the Company) entitled to
designate a majority of the Investor Directors hereunder and the holders
(acting in their capacity as shareholders of the Company) entitled to designate
two of the Management Directors (counting, for purposes of such determination,
the CEO Director as a Management Director); provided that if any such
amendment, modification or waiver would adversely affect any holder of Investor
Equity or Management Equity (including for purposes of this proviso holders
forfeiting their voting rights under Section 9B(ii) or (iii)) relative to the
holders of Investor Equity and Management Equity voting in favor of such
amendment, modification, or waiver, such amendment, modification or waiver
shall also require the written consent of the holders of a majority of the
Investor Equity or Management Equity (as the case may be) held by all holders
so adversely affected. No course of dealing between the Company and the LLC or
any other holder of Investor Equity or Management Equity or any delay by such
holder in exercising any rights hereunder or under the Certificate of
Incorporation shall operate as a waiver of any rights of such holder.
9E. Put Cooperation Agreement. The Company hereby
accepts, acknowledges, and agrees that in the event the LLC is obligated,
pursuant to the Unitholder put right provisions set forth in the
Securityholders Agreement, to repurchase Units from any Unitholder or
Unitholders, the Company will (at the request and direction of the LLC) take
any and all actions necessary and within its power under the law and the
Certificate of Incorporation (including, without limitation, assuming or
refinancing debt, obtaining waivers or consents from its lenders, declaring and
paying dividends to the LLC, repurchasing or redeeming Preferred Stock or
Underlying Common Stock held by such putting Unitholder or Unitholders or by
the LLC, or causing a Public Offering, recapitalization, or Sale of the Company
to occur) to enable the LLC to satisfy its repurchase obligations thereunder.
9F. Survival of Representations and Warranties. All
representations and warranties contained herein or made in writing by any party
in connection herewith shall survive the
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<PAGE> 37
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby, regardless of any investigation made by the
LLC or on its or any Investor Member's behalf.
9G. Successors and Assigns.
(i) Except as otherwise expressly provided herein
(including, without limitation, in paragraph 7A hereof), all covenants and
agreements contained in this Agreement by or on behalf of any of the parties
hereto shall bind and inure to the benefit of the respective successors and
assigns of the parties hereto whether so expressed or not.
(ii) Notwithstanding the foregoing clause (i), the
Company, the LLC, the Unitholders, and each subsequent holder of Preferred
Stock or Underlying Common Stock hereby accept, acknowledge, and agree that
upon and after the dissolution or liquidation of the LLC:
(a) all rights of the LLC to rely upon the
representations and warranties set forth in paragraph 6 hereof shall
thereafter inure to the benefit of and be enforceable by all holders
of Underlying Common Stock, and thus the provisions of paragraph 6
hereof shall thereafter operate and be construed as if the words
"holder of Underlying Common Stock" were substituted for the word
"LLC" in each such instance;
(b) all rights and powers expressly and
specifically granted to the LLC in paragraph 9D (Consent to
Amendments) hereof shall thereafter operate as provided therein;
(c) all rights and powers (other than those
referred to in subparagraphs (a) and (b) above) expressly and
specifically granted to the LLC hereunder (including, without
limitation, the rights and powers to take certain actions, give or
withhold certain consents or approvals, or make certain
determinations, opinions, judgments, or other decisions) shall
thereafter inure to the benefit of and be exercisable and enforceable
by the holders entitled to designate a majority of the Investor
Directors to the Board, and thus this Agreement shall thereafter
operate and be construed as if the words "holders entitled to
designate a majority of the Investor Directors to the Board" were
substituted for the word "LLC" in each such instance; and
(d) all contractual obligations and duties of the
LLC hereunder as a holder of the Company's securities shall bind and
be enforceable against each holder of Underlying Common Stock (and
their respective successors, assigns, and transferees), it being
understood that nothing in this paragraph (d) shall be construed to
cause any Unitholder to assume any liabilities of the LLC in
contravention of the limited liability provisions set forth in the LLC
Agreement.
9H. Capital and Surplus; Special Reserves. The Company
agrees that the capital of the Company (as such term is used in Section 154 of
the General Corporation Law of Delaware) in respect of the Preferred Stock
issued pursuant to this Agreement shall be equal to the aggregate par value of
such shares and that it shall not increase the capital of the Company with
respect to any shares of the Company's capital stock at any time on or after
the date of this Agreement. The
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<PAGE> 38
Company also agrees that it shall not create any special reserves under Section
171 of the General Corporation Law of Delaware without the prior written
consent of the LLC.
9I. Severability. Whenever possible, each provision of
this Agreement shall be interpreted in such manner as to be effective and valid
under applicable law, but if any provision of this Agreement is held to be
prohibited by or invalid under applicable law, such provision shall be
ineffective only to the extent of such prohibition or invalidity, without
invalidating the remainder of this Agreement.
9J. Counterparts. This Agreement may be executed
simultaneously in two or more counterparts, any one of which need not contain
the signatures of more than one party, but all such counterparts taken together
shall constitute one and the same Agreement.
9K. Descriptive Headings; Interpretation; No Strict
Construction. The descriptive headings of this Agreement are inserted for
convenience only and do not constitute a substantive part of this Agreement.
Whenever required by the context, any pronoun used in this Agreement shall
include the corresponding masculine, feminine or neuter forms, and the singular
forms of nouns, pronouns, and verbs shall include the plural and vice versa.
Reference to any agreement, document, or instrument means such agreement,
document, or instrument as amended or otherwise modified from time to time in
accordance with the terms thereof, and if applicable hereof. The use of the
words "include" or "including" in this Agreement shall be by way of example
rather than by limitation. The use of the words "or," "either" or "any" shall
not be exclusive. The parties hereto have participated jointly in the
negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this Agreement shall be construed
as if drafted jointly by the parties hereto, and no presumption or burden of
proof shall arise favoring or disfavoring any party by virtue of the authorship
of any of the provisions of this Agreement. The parties agree that prior
drafts of this Agreement shall be deemed not to provide any evidence as to the
meaning of any provision hereof or the intent of the parties hereto with
respect hereto.
9L. GOVERNING LAW. ALL ISSUES AND QUESTIONS CONCERNING
THE CONSTRUCTION, VALIDITY, ENFORCEMENT AND INTERPRETATION OF THIS AGREEMENT
AND THE EXHIBITS AND SCHEDULES HERETO SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF DELAWARE, WITHOUT GIVING EFFECT TO
ANY CHOICE OF LAW OR CONFLICT OF LAW RULES OR PROVISIONS (WHETHER OF THE STATE
OF DELAWARE OR ANY OTHER JURISDICTION) THAT WOULD CAUSE THE APPLICATION OF THE
LAWS OF ANY JURISDICTION OTHER THAN THE STATE OF DELAWARE. IN FURTHERANCE OF
THE FOREGOING, THE INTERNAL LAW OF THE STATE OF DELAWARE SHALL CONTROL THE
INTERPRETATION AND CONSTRUCTION OF THIS AGREEMENT (AND ALL SCHEDULES AND
EXHIBITS HERETO), EVEN THOUGH UNDER THAT JURISDICTION'S CHOICE OF LAW OR
CONFLICT OF LAW ANALYSIS, THE SUBSTANTIVE LAW OF SOME OTHER JURISDICTION WOULD
ORDINARILY APPLY.
9M. Notices. All notices, demands or other
communications to be given or delivered under or by reason of the provisions of
this Agreement shall be in writing and shall be deemed to have been given when
(a) delivered personally to the recipient, (b) telecopied to the recipient
(with hard copy sent to the recipient by reputable overnight courier service
(charges prepaid) that same day) if telecopied before 5:00 p.m. Chicago,
Illinois time on a business day, and
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<PAGE> 39
otherwise on the next business day, or (c) one business day after being sent to
the recipient by reputable overnight courier service (charges prepaid). Such
notices, demands and other communications shall be sent to the following
Persons at the following addresses:
To the LLC:
c/oMadison Dearborn Capital Partners
Three First National Plaza, Suite 3800
Chicago, Illinois 60670
Attention: James N. Perry, Jr.
Telephone: (312) 732-5416
Telecopy: (312) 732-4098
with copies (which shall not constitute notice) to each
Unitholder and to:
Kirkland & Ellis
200 East Randolph Drive
Chicago, Illinois 60601
Attention: Mark B. Tresnowski, Esq.
Telephone: (312) 861-2385
Telecopy: (312) 861-2200
and a copy (which shall not constitute notice) to:
Swidler & Berlin
3000 K Street, N.W., Suite 300
Washington, D.C. 20007
Attention: John Klusaritz, Esq.
Telephone: (202) 424-7586
Telecopy: (202) 424-7643
To any Unitholder: at the address set forth in the LLC's
records.
To any Other Holder of Preferred Stock or Underlying Common
Stock:
at the address set forth in the Company's records.
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<PAGE> 40
To the Company:
15190 Prestonwood Boulevard
Suite 421
Dallas, Texas 75248
Attention: Royce J. Holland
Telephone: (972) 385-3176
Telecopy: (972) 385-3176
or to such other address or to the attention of such other person as the
recipient party has specified by prior written notice to the sending party.
9N. Delivery by Facsimile. This Agreement, the
agreements referred to herein, and each other agreement or instrument entered
into in connection herewith or therewith or contemplated hereby or thereby, and
any amendments hereto or thereto, to the extent signed and delivered by means
of a facsimile machine, shall be treated in all manner and respects as an
original agreement or instrument and shall be considered to have the same
binding legal effect as if it were the original signed version thereof
delivered in person. At the request of any party hereto or to any such
agreement or instrument, each other party hereto or thereto shall reexecute
original forms thereof and deliver them to all other parties. No party hereto
or to any such agreement or instrument shall raise the use of a facsimile
machine to deliver a signature or the fact that any signature or agreement or
instrument was transmitted or communicated through the use of a facsimile
machine as a defense to the formation or enforceability of a contract and each
such party forever waives any such defense.
* * * * *
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<PAGE> 41
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first written above.
TRANSCEND TELECOM, INC.
By: /s/ ROYCE J. HOLLAND
-------------------------------------
Its: Chief Executive Officer
------------------------------------
TRANSCEND TELECOM, L.L.C.
BY: (EACH OF THE FOLLOWING SIGNING BOTH
INDIVIDUALLY AND IN THEIR CAPACITIES
AS UNITHOLDERS BINDING THE LLC)
/s/ DANA CROWNE
-----------------------------------
Dana Crowne
/s/ ROYCE J. HOLLAND
-----------------------------------
Royce J. Holland
ROYCE J. HOLLAND FAMILY LIMITED
PARTNERSHIP
By: /s/ ROYCE J. HOLLAND
--------------------------------
Royce J. Holland,
its general partner
/s/ THOMAS M. LORD
-----------------------------------
Thomas M. Lord (for himself and on
behalf of Brian T. Lord and Colin
J. Lord)
/S/ VICTORIA M. LORD
-----------------------------------
Victoria M. Lord
/s/ BRIAN T. LORD
-----------------------------------
Brian T. Lord
/s/ COLIN J. LORD
-----------------------------------
Colin J. Lord
/s/ ANTHONY J. PARELLA
-----------------------------------
Anthony J. Parella
<PAGE> 42
BATTERY VENTURES IV, L.P.
By Battery Partners IV, L.P.,
its general partner
By /s/ RICHARD D. FRISBIE
----------------------------------
Its Managing Partner
---------------------------------
BATTERY INVESTMENT PARTNERS IV, LLC
By /s/ RICHARD D. FRISBIE
----------------------------------
Its Manager
---------------------------------
FRONTENAC VII, L.P.
By Frontenac Company, its
general partner
By /s/ JAMES E. CRAWFORD, III
----------------------------------
Its General Partner
---------------------------------
MADISON DEARBORN CAPITAL
PARTNERS II, L.P.
By Madison Dearborn Partners II,
L.P., its general partner
By Madison Dearborn Partners, Inc.,
its general partner
By /s/ JAMES N. PERRY, JR.
----------------------------------
Its Vice President
---------------------------------
<PAGE> 43
MORGAN STANLEY CAPITAL PARTNERS III,
L.P.
By MSCP III, L.P., its general partner
By Morgan Stanley Capital Partners
III, Inc., its general partner
By /s/ FRANK V. SICA
----------------------------------
Its Vice Chairman
---------------------------------
By /s/ ROBERT H. NIEHAUS
----------------------------------
Its Vice Chairman
---------------------------------
MSCP III 892 INVESTORS, L.P.
By MSCP III, L.P., its general partner
By Morgan Stanley Capital Partners
III, Inc., its general partner
By /s/ FRANK V. SICA
----------------------------------
Its Vice Chairman
---------------------------------
By /s/ ROBERT H. NIEHAUS
----------------------------------
Its Vice Chairman
---------------------------------
MORGAN STANLEY CAPITAL INVESTORS, L.P.
By MSCP III, L.P., its general partner
By Morgan Stanley Capital Partners
III, Inc., its general partner
By /s/ FRANK V. SICA
----------------------------------
Its Vice Chairman
---------------------------------
By /s/ ROBERT H. NIEHAUS
----------------------------------
Its Vice Chairman
---------------------------------
<PAGE> 1
EXHIBIT 10.2
SECURITYHOLDERS AGREEMENT
THIS SECURITYHOLDERS AGREEMENT (this "Agreement") is made as
of August 13, 1997, by and among Transcend Telecom, L.L.C., a Delaware limited
liability company (the "LLC"), Transcend Telecom, Inc., a Delaware corporation
(the "Company"), the Investor Members, and the Management Members. The
Investor Members, the Management Members, and any holders of Securityholder
Securities that from time to time become party hereto after the date hereof in
accordance with the terms of this Agreement are referred to herein collectively
as the "Securityholders" and individually as a "Securityholder." Capitalized
terms used but not otherwise defined herein are defined in paragraph 8 hereof.
NOW, THEREFORE, in consideration of the mutual promises made
herein and other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties hereto, intending to be legally
bound, agree as follows:
1. Representations and Warranties. Each Securityholder
represents and warrants that (i) such Securityholder is the beneficial owner of
the number of Securityholder Securities set forth opposite its name on the
Schedule of Securityholders attached hereto and (ii) this Agreement has been
duly authorized, executed and delivered by such Securityholder and constitutes
the valid and binding obligation of such Securityholder, enforceable in
accordance with its terms.
2. Restrictions on Transfer of Management Securities.
Each Management Member and its transferees accepts, acknowledges, and agrees
that the Management Securities held by such Management Member and its
transferees are subject to significant restrictions on transfer, repurchase
options, and certain other agreements set forth in the Executive Purchase
Agreement to which such Management Member is a party.
3. Restrictions on Transfer of Investor Securities.
(a) Retention of Investor Securities.
(i) No holder of Investor Securities shall sell,
transfer, assign, pledge or otherwise dispose of (whether with or
without consideration and whether voluntarily or involuntarily or by
operation of law) any interest in any Investor Securities (a
"Transfer") at any time prior to the first anniversary of the date
hereof, except pursuant to (A) a Sale of the Company, (B) a Permitted
Transfer, or (C) the repurchase provisions set forth in the LLC
Agreement.
(ii) No holder of Investor Securities shall
Transfer any Investor Securities at any time on or after the first
anniversary of the date hereof, except pursuant to (A) a Sale of the
Company, (B) a Public Sale, (C) a Permitted Transfer, (D) the
repurchase provisions of the LLC Agreement, (E) the put provisions set
forth in this Agreement, or (F) the provisions of paragraphs 3(b) and
(c) hereof.
<PAGE> 2
(b) First Refusal Rights.
(i) At least 30 days prior to any Transfer of
Investor Securities (except pursuant to (A) a Sale of the Company, (B)
a Public Sale, (C) the repurchase provisions of the LLC Agreement, (D)
the put provisions set forth in this Agreement, or (E) a Permitted
Transfer), the Securityholder desiring to make such Transfer (the
"Transferring Securityholder") shall deliver a written notice (the
"Offer Notice") to each holder of Investor Securities, specifying in
reasonable detail the identity of the prospective transferee(s), the
number and type of Investor Securities to be transferred (the "Offered
Securities") and the price and other terms and conditions of the
proposed Transfer. The Transferring Securityholder shall not
consummate such proposed Transfer until at least 30 days after the
delivery of the Offer Notice, unless the parties to the Transfer have
been finally determined pursuant to this paragraph 3 prior to the
expiration of such 30-day period (the date of the first to occur of
such delivery or such final determination is referred to herein as the
"Authorization Date").
(ii) Each holder of Investor Securities may elect
to purchase all (but not less than all) of such holder's Pro Rata
Share of the Offered Securities at the price and on the other terms
set forth in the Offer Notice, by delivering written notice of such
election to the Transferring Securityholder within 20 days after
delivery of the Offer Notice. Any Offered Securities not elected to
be purchased by the end of such 20- day period shall be reoffered by
the Transferring Securityholder for the immediately following 10-day
period on a pro rata basis to the holders of Investor Securities who
have elected to purchase their Pro Rata Share. For purposes of this
paragraph, the "Pro Rata Share" of each holder of Investor Securities
shall be equal to the quotient of (x) the number of Investor
Securities then held by such holder, divided by (y) the aggregate
number of Investor Securities held by all holders of Investor
Securities (other than the Transferring Securityholder).
(iii) If the holders of Investor Securities have
elected to purchase all of the Offered Shares from the Transferring
Securityholder, such purchase shall be consummated as soon as
practicable after the delivery of the election notice(s) to the
Transferring Securityholder, but in any event within 30 days after the
Authorization Date. Notwithstanding any other provision hereof, in
the event that the sale price, or any portion thereof, for the Offered
Securities is not payable in the form of cash at closing or cash
payable on a defined basis (such as pursuant to simple promissory
notes issued by the prospective purchaser described in the Offer
Notice), each holder of Investor Securities electing to purchase
Offered Securities pursuant to this paragraph shall be required to pay
only such portion, if any, of the sale price described in the Offer
Notice as consists of such cash consideration, and delivery of such
consideration to the Transferring Securityholder shall be payment in
full for such Offered Securities.
(iv) If the holders of Investor Securities do not
elect, in the aggregate, to purchase all of the Offered Securities
from the Transferring Securityholder, all elections to
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<PAGE> 3
purchase such Offered Securities shall be null and void, and the
Transferring Securityholder shall have the right, within the 90 days
following the Authorization Date and subject to the provisions of
subparagraph 3(c) below, to transfer such Offered Securities to the
transferee(s) specified in the Offer Notice in the amounts specified
in the Offer Notice at a price not less than the price per security
specified in the Offer Notice and on other terms no more favorable to
the transferee(s) thereof than specified in the Offer Notice. Any
Investor Securities not so transferred within such 90-day period shall
be reoffered to the holders of Investor Securities pursuant to this
paragraph 3(b) prior to any subsequent Transfer.
(c) Participation Rights.
(i) Any holder of Investor Securities not
purchasing any Offered Securities pursuant to paragraph 3(b) above may
elect to participate in any sale of Offered Securities pursuant to
subparagraph 3(b)(iv) above (and only in sales pursuant to such
subparagraph) at the same price and on the same terms applicable to
the Transferring Securityholder by giving written notice of such
election to the Transferring Securityholder within 30 days after
delivery of the Offer Notice. In the event that the number of Offered
Securities to be transferred in the transaction described in the Offer
Notice (or, if such transaction is part of a group of related
transactions, the aggregate number of Investor Securities to be
transferred pursuant to subparagraph 3(b)(iv) hereof in all such
related transactions) is equal to at least 50% of the aggregate number
of Investor Securities then outstanding, (A) the Offer Notice shall
promptly be delivered to the holders of Vested Securities, and (B)
each holder of Vested Securities may elect to participate in such sale
of Offered Securities pursuant to subparagraph 3(b)(iv) at the same
price and on the same terms applicable to the Transferring
Securityholder by giving written notice of such election to the
Transferring Securityholder within 15 days after such delivery of the
Offer Notice.
(ii) Each holder of Investor Securities electing
to participate in such Transfer shall be entitled to sell in the
contemplated Transfer a number of Investor Securities equal to the
product of (x) the number of Offered Securities to be sold in the
contemplated Transfer, times (y) a fraction, the numerator of which is
the number of Investor Securities held by such holder, and the
denominator of which is the aggregate number of Investor Securities
(and, if any holder of Vested Securities has elected to participate in
such Transfer, Vested Securities) held by the Transferring
Securityholder and all other Securityholders electing to participate
in such Transfer. Each holder of Vested Securities electing to
participate in such Transfer shall be entitled to sell in the
contemplated Transfer a number of Vested Securities equal to the
product of (x) the number of Offered Securities to be sold in the
contemplated Transfer, times (y) a fraction, the numerator of which is
the number of Vested Securities held by such holder, and the
denominator of which is the aggregate number of Investor Securities
and Vested Securities held by the Transferring Securityholder and all
other Securityholders electing to participate in such Transfer.
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<PAGE> 4
(iii) Each Transferring Securityholder shall use
best efforts to obtain the agreement of the prospective transferee(s)
to the participation of the electing Securityholders in any
contemplated Transfer and to the inclusion (if requested by any such
holder) of any Investor Securities (and, if applicable, Vested
Securities) held by such holder in the contemplated Transfer, and no
Transferring Securityholder shall transfer any of its Investor
Securities to any prospective transferee(s) unless (A) such
prospective transferee(s) agree to allow the participation of all
electing Securityholders and to the inclusion of the Investor
Securities (and, if applicable Vested Securities) held by such
holders, or (B) the Transferring Securityholder purchases from each
electing Securityholder the same number of securities (at the same
price and on the same terms) that such participating Securityholder
would have been entitled to sell had the prospective transferee(s) so
agreed.
(iv) Each Securityholder transferring shares
pursuant to this paragraph 3(c) shall pay its pro rata share (based on
the number of Securityholder Shares to be transferred by such
Securityholder) of the expenses incurred by the Securityholders in
connection with such transfer and shall be obligated to participate
severally on a pro rata basis (based on the number of Securityholder
Shares to be sold) in any indemnification or other obligations that
the Transferring Securityholder agrees to provide in connection with
such transfer (other than any such obligations that relate solely to a
particular Securityholder, such as indemnification with respect to
representations and warranties given by a Securityholder regarding
such Securityholder's title to and ownership of Securityholder Shares,
in respect of which only such Securityholder shall be liable);
provided that no holder shall be obligated in connection with such
Transfer to agree to indemnify or hold harmless the transferees with
respect to an amount in excess of the net cash proceeds paid to such
holder in connection with such Transfer.
(v) For purposes of this paragraph (c), each
holder of Vested Securities shall be deemed the holder of the number
of Vested Securities determined assuming the consummation of the sale
of Offered Securities pursuant to subparagraph 3(b)(iv) above;
provided that in the event such transaction is not consummated nothing
herein shall be construed to cause any such securities to become
"vested" other than in accordance with the provisions of the Executive
Purchase Agreement to which each such holder is a party.
(d) Permitted Transfers. For purposes of this Agreement,
a "Permitted Transfer" shall mean any Transfer of Investor Securities (i) to an
Affiliate of the transferor, (ii) to any Person acquiring all or substantially
all of the transferor's portfolio investments, or (iii) to any Person whose
association with the LLC and the Company would, in the good faith judgment of
the holders of a majority of the Investor Securities, be beneficial to the LLC
and the Company by virtue of such Person's experience, expertise, or knowledge
in the telecommunications services industry or related industries; provided
that in each case the restrictions, conditions, and obligations contained in
this Agreement, the Stock Purchase Agreement, and (if applicable) the LLC
Agreement shall continue to be applicable to such Investor Securities after any
such Permitted Transfer, and the transferee(s) of such Investor Securities
shall have agreed in writing to be bound by the provisions of such
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<PAGE> 5
agreements; and provided further that the Investor Securities transferred
pursuant to clause (iii) hereof shall not exceed, in the aggregate, 10% of the
total Investor Securities held by all Investor Members on the date hereof; and
provided further that each Investor Member shall have the right to participate
in any Transfer pursuant to clause (iii) hereof pro rata, based on the number
of Investor Securities held by each such Investor Member on the date of such
Transfer.
(e) Termination of Restrictions. The restrictions on the
Transfer of Investor Securities set forth in this paragraph 3 shall continue
with respect to each such Investor Security (and shall survive any transfer
thereof) until the earliest to occur of (A) the date on which such Investor
Security has been transferred in a Public Sale, (B) a Sale of the Company, or
(C) the consummation of a Public Offering.
4. Sale of the Company.
(a) Securityholders Obligation. Subject to the approval
rights granted to Holland under the LLC Agreement and to the LLC (and, upon the
LLC's dissolution, to certain holders of the Company's securities) under the
Stock Purchase Agreement, if at any time the LLC (or, after the dissolution or
liquidation of the LLC, the holders of Investor Securities (acting in their
capacity as shareholders of the Company) entitled to designate a majority of
the Investor Directors under the terms of the Stock Purchase Agreement)
approves a Sale of the Company (an "Approved Sale"), each Securityholder shall
vote for, consent to and raise no objections against such Approved Sale. If
the Approved Sale is structured (i) as a merger or consolidation, each
Securityholder shall waive any dissenters rights, appraisal rights or similar
rights in connection with such merger or consolidation or (ii) as a sale of
stock, each Securityholder shall agree to sell all of such Securityholder's
shares of the Company's capital stock on the terms and conditions approved by
the LLC (or, after the dissolution or liquidation of the LLC, the holders
entitled to designate a majority of the Investor Directors under the Stock
Purchase Agreement). Each holder of Securityholder Securities shall take all
necessary or desirable actions in connection with the consummation of the
Approved Sale as requested by the Company.
(b) Conditions to Obligation. The obligations of the
Securityholders with respect to the Approved Sale of the Company are subject to
the satisfaction of the following conditions: (i) upon the consummation of the
Approved Sale, each holder of a class of the Company's capital stock shall
receive the same form of consideration and the same amount of consideration for
each share of such class of capital stock to be sold in such Approved Sale, and
(ii) if any holders of a class of the Company's capital stock are given an
option as to the form and amount of consideration to be received, each holder
of such class of capital stock shall be given the same option.
(c) Public Offering. Subject to the approval rights
granted to Holland under the LLC Agreement and to the LLC (and, upon the LLC's
dissolution, to certain holders of the Company's securities) under the Stock
Purchase Agreement, in the event that the LLC (or, after the dissolution or
liquidation of the LLC, the holders of Investor Securities entitled to
designate a majority of the Investor Directors under the Stock Purchase
Agreement) approves an initial Public
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<PAGE> 6
Offering, the Stockholders shall take all reasonable actions in connection with
the consummation of such Public Offering as requested by the LLC (or after the
dissolution or liquidation of the LLC, the holders of Investor Securities
entitled to designate a majority of the Investor Directors under the Stock
Purchase Agreement).
(d) Termination. The provisions of this paragraph 4
shall terminate upon the completion of a Sale of the Company.
5. Put Provisions.
(a) Put Right.
(i) At any time and from time to time on or after
the seventh anniversary of the date hereof, but not after the
consummation of a Public Offering or a Sale of the Company, each
Securityholder shall have the right to require the LLC to repurchase
all (but not less than all) of the outstanding Securityholder
Securities held by such holder at the Repurchase Price (as defined
below) by giving written notice to the LLC of such holder's exercise
of this right (the "Exercise Notice").
(ii) Within 10 days after receipt of an Exercise
Notice, the LLC shall give written notice (the "Repurchase Notice") to
each other Securityholder, setting forth the identity of the
Securityholder tendering such Exercise Notice, the number of shares of
Securityholder Securities to be repurchased from such Securityholder,
and a reasonable approximation of the fair market value of the LLC's
assets and of each Securityholder Security at the time of such
Repurchase Notice. Each other Securityholder shall be entitled to
join in such repurchase and require the LLC to purchase all (but not
less than all) of the Securityholder Securities held by such holder at
the same closing, at the same price, and on the same terms as the
Securityholder tendering the Exercise Notice by giving Exercise Notice
within 20 days after the date of the Repurchase Notice.
(iii) Promptly (but in any event within three
business days after the end of this 20-day period), the LLC shall send
each Securityholder written notice updating the information contained
in the Repurchase Notice (the "Revised Repurchase Notice"). Upon the
delivery of the Revised Repurchase Notice, the LLC, the holders of a
majority of the Investor Securities to be repurchased (if any) and the
holders of a majority of the Management Securities to be repurchased
(if any) shall in good faith determine the Repurchase Price as
provided hereunder, and (subject to the provisions hereof) within ten
days after the determination of the Repurchase Price, the LLC shall
purchase and such holders shall sell the number of Securityholder
Securities specified in the Revised Repurchase Notice at a mutually
agreeable time and place.
(b) Duties of the LLC. The LLC shall do everything
within its power (including, without limitation, (i) causing the Company to
assume or refinance debt, obtain waivers or consents
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<PAGE> 7
from its lenders, or declare and pay dividends to the LLC or repurchase Company
securities from the LLC, (ii) distributing Preferred Stock or Common Stock of
the Company to the putting Stockholders and causing the Company to repurchase
or redeem such Company stock, and (iii) causing a Public Offering,
recapitalization, or Sale of the Company to occur)) in order to satisfy its
repurchase obligations under this Section 5.
(c) Repurchase Price.
(i) The repurchase price for each Securityholder
Security repurchased by the LLC under this paragraph 5 (the
"Repurchase Price") shall be equal to the greater of the Original Cost
Value for such security and the Fair Market Value for such security.
(ii) The "Original Cost Value" for any
Securityholder Securities constituting Units shall be equal to the
aggregate Basic Contributions made to the LLC with respect to such
Units (together with interest thereon calculated at the same rate and
in the same manner as dividends are accrued on the Preferred Stock
under the Certificate of Incorporation). The "Original Cost Value"
for any Securityholder Securities constituting Preferred Stock shall
be equal to the Liquidation Value of such Preferred Stock (together
with all accrued and unpaid dividends thereon) as of the date of
valuation as calculated under the Certificate of Incorporation. The
"Original Cost Value" for any Securityholder Securities constituting
Common Stock shall be equal to what the Original Cost Value for the
Preferred Stock that was converted into such Common Stock would have
been as of the date of valuation if such Preferred Stock had never
been so converted.
(iii) The "Fair Market Value" for any
Securityholder Securities to be repurchased under this paragraph 5
shall be determined as follows:
(A) The LLC, the holders of a majority
of the Investor Securities to be repurchased (if any) and the
holders of a majority of the Management Securities to be
repurchased (if any) shall attempt in good faith to agree on
the Fair Market Value of the Securityholder Securities to be
repurchased. Any agreement reached by such Persons shall be
final and binding on all parties hereto.
(B) If such Persons are unable to reach
such agreement within 20 days of the commencement of such
negotiation, the Fair Market Value of any Securityholder
Securities that are publicly traded shall be the average, over
a period of 21 days consisting of the date of the valuation
and the 20 consecutive business days prior to that date, of
the average of the closing prices of the sales of such
securities on all securities exchanges on which such
securities may at that time be listed, or, if there have been
no sales on any such exchange on any day, the average of the
highest bid and lowest asked prices on all such exchanges at
the end of such day, or, if on any day such securities are not
so listed, the average of the representative bid and asked
prices quoted in the Nasdaq System as of 4:00 P.M.,
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<PAGE> 8
New York time, or, if on any day such securities are not
quoted in the Nasdaq System, the average of the highest bid
and lowest asked prices on such day in the domestic
over-the-counter market as reported by the National Quotation
Bureau Incorporated, or any similar successor organization.
(C) If such Persons are unable to reach
agreement pursuant to subparagraph (A) within 20 days, and to
the extent any Securityholder Securities are not publicly
traded:
1) The LLC, the holders of a
majority of the Investor Securities to be repurchased
(if any) and the holders of a majority of the
Management Securities to be repurchased (if any)
shall each, within 10 days thereafter, choose one
investment banker or other appraiser experienced in
analyzing and making determinations concerning
matters relating to the telecommunications industry
and in valuing interests in entities like the LLC
(including the distribution arrangements of the type
described in the LLC Agreement) (it being understood
that if only Management Securities or only Investor
Securities are to be repurchased, the two appraisers
appointed by the LLC and the holders of a majority of
the Securityholder Securities to be repurchased shall
together appoint a third appraiser).
2) The three investment
bankers/appraisers so selected shall each appraise
the fair market value of the Company (based on the
assumption of an orderly, arm's length sale to a
willing unaffiliated buyer). The three investment
bankers/appraisers shall then appraise the fair
market value of the Securityholder Securities (i)
constituting Common Stock based on such appraiser's
valuation of the Company above divided by the
aggregate number of shares of Common Stock
outstanding on the date of valuation (determined on a
fully diluted basis (A) with respect to the Preferred
Stock and all other outstanding securities
convertible into the Company's Common Stock, assuming
the conversion of such Preferred Stock and other
convertible securities (without regard to any
conditions or other restrictions on such conversion),
and (B) with respect to all outstanding options,
warrants and other rights or securities exercisable
or exchangeable for shares of the Company's Common
Stock, in accordance with the Treasury Stock Method
under generally accepted accounting principles for
determining earnings per share), (ii) constituting
Preferred Stock based on the fair market value of the
Common Stock (according to clause (i)) into which
such Preferred Stock is convertible as of the date of
valuation, (iii) constituting Units based on the fair
market value of the assets that would be distributed
under the LLC Agreement with respect to such Units if
the LLC were to dissolve and liquidate upon a sale of
the Company for a price equal to such appraiser's
valuation of the Company above, and (iv) constituting
other securities based
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<PAGE> 9
on the highest price obtainable for such securities
in an arm's length transaction to a willing
unaffiliated buyer (taking into account all relevant
factors determinative of value). Each of the three
investment bankers/appraisers shall, within thirty
days of its retention, provide the written results of
such appraisals to the LLC and to each holder of
Securityholder Securities to be repurchased
hereunder.
3) For purposes of this paragraph
5, the "Fair Market Value" of any Securityholder
Securities shall be the average of the two appraisals
thereof closest to each other, and such determination
shall be final and binding on all parties hereto.
4) The costs of the appraisal
shall be borne by the Company.
6. Legend. Each certificate evidencing Securityholder
Securities and each certificate issued in exchange for or upon the transfer of
any Securityholder Securities (if such securities remain Securityholder
Securities after such transfer) shall be stamped or otherwise imprinted with a
legend in substantially the following form:
"The securities represented by this certificate are subject to
a Securityholders Agreement dated as of August 12, 1997, among
the issuer of such securities (the "Issuer") and certain of
the Issuer's securityholders, as amended and modified from
time to time. A copy of such Securityholders Agreement shall
be furnished without charge by the Issuer to the holder hereof
upon written request."
The LLC shall imprint such legend on certificates evidencing Securityholder
Securities outstanding as of the date hereof. The legend set forth above shall
be removed from the certificates evidencing any shares which cease to be
Securityholder Securities in accordance with the definition of such term
herein.
7. Execution of this Agreement by Transferees. Prior to
transferring any Securityholder Securities to any Person (other than pursuant
to a Public Sale or a Sale of the Company), the transferring Securityholders
shall cause the prospective transferee(s) to be bound by this Agreement and to
execute and deliver to the LLC, the Company, and the other Securityholders a
counterpart of this Agreement.
8. Definitions.
"Affiliate" of any particular Person means (i) any other
Person controlling, controlled by or under common control with such particular
Person, where "control" means the possession, directly or indirectly, of the
power to direct the management and policies of a Person whether
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<PAGE> 10
through the ownership of voting securities, contract or otherwise, and any
partner of a Person that is a partnership, and (ii) if such Person is a
partnership, the partners thereof.
"Basic Contributions" has the meaning ascribed to such term in
the LLC Agreement.
"Certificate of Incorporation" means the Company's certificate
of incorporation, as in effect on the date hereof.
"Class A Units" has the meaning ascribed to such term in the
LLC Agreement.
"Class B Units" has the meaning ascribed to such term in the
LLC Agreement.
"Class C Units" has the meaning ascribed to such term in the
LLC Agreement.
"Class D Units" has the meaning ascribed to such term in the
LLC Agreement.
"Common Stock" means the Company's Common Stock, par value
$.01 per share.
"Executive Purchase Agreements" has the meaning ascribed to
such term in the Stock Purchase Agreement.
"Holland" means Royce J. Holland.
"Investor Directors" has the meaning ascribed to such term in
the Stock Purchase Agreement.
"Investor Members" has the meaning ascribed to such term in
the Stock Purchase Agreement.
"Investor Purchase Agreement" means that certain purchase
agreement of even date herewith by and among the LLC and the Investor Members.
"Investor Securities" means (i) the Class A Units issued to
the Investor Members pursuant to the Investor Purchase Agreement, (ii) upon
dissolution and liquidation of the LLC, any securities of the Company
distributed in respect of the securities referred to in clause (i) above
pursuant to such dissolution and liquidation, (iii) any securities issued
directly or indirectly with respect to the foregoing securities by way of a
stock split, stock dividend, or other division of securities, or in connection
with a combination of securities, recapitalization, merger, consolidation, or
other reorganization, or upon conversion or exercise of any of the foregoing
securities (but not including any Class D Units issued in exchange for Class A
Units). As to any particular securities constituting Investor Securities, such
securities shall cease to be Investor Securities when they have been (a)
effectively registered under the Securities Act and disposed of in accordance
with the registration statement covering them, (b) distributed to the public
through a broker, dealer or market
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<PAGE> 11
maker pursuant to Rule 144 under the Securities Act (or any similar provision
then in force) or (c) repurchased by the LLC (including in exchange for Class D
Units), the Company or any Subsidiary thereof.
"Liquidation Value" has the meaning ascribed to such term in
the Company's certificate of incorporation, as amended from time to time in
accordance with its terms.
"LLC Agreement" means that certain limited liability company
agreement of even date herewith entered into by and among the members of the
LLC, as amended from time to time according to its terms.
"Management Members" has the meaning ascribed to such term in
the Stock Purchase Agreement.
"Management Securities" means (i) the Class B Units issued to
the Management Members under the Executive Purchase Agreements, (ii) upon
dissolution and liquidation of the LLC, any securities of the Company
distributed in respect of the securities referred to in clause (i) above
pursuant to such dissolution and liquidation, and (iii) any securities issued
directly or indirectly with respect to the foregoing securities by way of a
stock split, stock dividend, or other division of securities, or in connection
with a combination of securities, recapitalization, merger, consolidation, or
other reorganization, or upon conversion or exercise of any of the foregoing
securities (but not including any Class C Units or Class D Units issued in
exchange for Class B Units). As to any particular securities constituting
Management Securities, such securities shall cease to be Management Securities
when they have been (a) effectively registered under the Securities Act and
disposed of in accordance with the registration statement covering them, (b)
distributed to the public through a broker, dealer or market maker pursuant to
Rule 144 under the Securities Act (or any similar provision then in force) or
(c) repurchased by any holder of Class A Units, or by the LLC (including in
exchange for Class C Units or Class D Units), the Company or any Subsidiary
thereof.
"Person" means an individual, a partnership, a corporation, a
limited liability company, an association, a joint stock company, a trust, a
joint venture, an unincorporated organization and a governmental entity or any
department, agency or political subdivision thereof.
"Preferred Stock" means the Company's 12% Cumulative
Convertible Preferred Stock, par value $.01 per share.
"Public Offering" means any underwritten sale of the Company's
common stock pursuant to an effective registration statement under the
Securities Act filed with the Securities and Exchange Commission on Form S-1
(or a successor form adopted by the Securities and Exchange Commission);
provided that the following shall not be considered a Public Offering: (i) any
issuance of common stock as consideration or financing for a merger or
acquisition, and (ii) any issuance of
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<PAGE> 12
common stock or rights to acquire common stock to employees of the Company or
its Subsidiaries as part of an incentive or compensation plan.
"Public Sale" means any sale of Securityholder Securities to
the public pursuant to an offering registered under the Securities Act or to
the public through a broker, dealer or market maker pursuant to the provisions
of Rule 144 adopted under the Securities Act.
"Sale of the Company" means either (i) the sale, lease,
transfer, conveyance or other disposition, in one or a series of related
transactions, of all or substantially all of the assets of the Company and its
Subsidiaries, taken as a whole, or (ii) a transaction or series of transactions
(including by way of merger, consolidation, or sale of stock) the result of
which is that the holders of the Company's outstanding voting stock immediately
prior to such transaction are after giving effect to such transaction no
longer, in the aggregate, the "beneficial owners" (as such term is defined in
Rule 13d-3 and Rule 13d-5 promulgated under the Securities Exchange Act),
directly or indirectly through one or more intermediaries, of more than 50% of
the voting power of the outstanding voting stock of the Company.
"Securities Act" means the Securities Act of 1933, as amended
from time to time.
"Securityholder Securities" means (i) any Class A Units or
Class B Units issued to or otherwise acquired by a Securityholder, (ii) upon
dissolution and liquidation of the LLC, any securities of the Company
distributed in respect of the securities referred to in clause (i) above
pursuant to such dissolution and liquidation, and (iii) any securities issued
directly or indirectly with respect to the foregoing securities by way of a
stock split, stock dividend, or other division of securities, or in connection
with a combination of securities, recapitalization, merger, consolidation, or
other reorganization, or upon conversion or exercise of any of the foregoing
securities (but not including any Class C Units or Class D Units issued in
exchange for Class A Units or Class B Units). As to any particular securities
constituting Securityholder Securities, such securities shall cease to be
Securityholder Securities when they have been (a) effectively registered under
the Securities Act and disposed of in accordance with the registration
statement covering them, (b) distributed to the public through a broker, dealer
or market maker pursuant to Rule 144 under the Securities Act (or any similar
provision then in force) or (c) repurchased by any holder of Class A Units
under the terms of an Executive Purchase Agreement, or by the LLC (including in
exchange for Class A Units or Class B Units), the Company or any Subsidiary
thereof.
"Stock Purchase Agreement" means that certain stock purchase
agreement of even date herewith by and between the Company and the LLC, as
amended from time to time in accordance with its terms.
"Subsidiary" means, with respect to any Person, any
corporation, limited liability company, partnership, association or other
business entity of which (i) if a corporation, a majority of the total voting
power of shares of stock entitled (without regard to the occurrence of any
contingency) to vote in the election of directors, managers or trustees thereof
is at the time owned
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<PAGE> 13
or controlled, directly or indirectly, by that Person or one or more of the
other Subsidiaries of that Person or a combination thereof, or (ii) if a
limited liability company, partnership, association or other business entity, a
majority of the limited liability company, partnership or other similar
ownership interest thereof is at the time owned or controlled, directly or
indirectly, by any Person or one or more Subsidiaries of that Person or a
combination thereof. For purposes hereof, a Person or Persons shall be deemed
to have a majority ownership interest in a limited liability company,
partnership, association or other business entity if such Person or Persons
shall be allocated a majority of limited liability company, partnership,
association or other business entity gains or losses or shall be or control the
managing director or general partner of such limited liability company,
partnership, association or other business entity.
"Unit" has the meaning ascribed to such term in the LLC
Agreement.
"Vested Securities" means any Management Securities which have
"vested" within the meaning of the Executive Purchase Agreement to which such
securities are subject.
9. Voting Agreement Relating to Stock Purchase
Agreement. Each Securityholder shall vote all Securityholder Securities that
are voting securities and shall take all other necessary or desirable actions
within such Securityholder's control (whether in such holder's capacity as a
Unitholder, representative on the board of managers of the LLC, member of a
committee thereof or otherwise, and including, without limitation, attendance
at meetings in person or by proxy for purposes of obtaining a quorum and
execution of written consents in lieu of meetings), and the LLC shall take all
necessary or desirable actions within its control (including, without
limitation, calling special board and member meetings), so that the LLC shall
satisfy its obligations under Section 7 of the Purchase Agreement to vote its
Company securities and to take all other necessary or desirable actions in
accordance with the provisions of Section 7 of the Stock Purchase Agreement.
10. Transfers in Violation of Agreement. Any Transfer or
attempted Transfer of any Securityholder Securities in violation of any
provision of this Agreement shall be void, and none of the LLC, the Company, or
any Subsidiary shall record such purported Transfer on its books or treat any
purported transferee of such Securityholder Securities as the owner of such
securities for any purpose.
11. Severability. Whenever possible, each provision of
this Agreement shall be interpreted in such manner as to be effective and valid
under applicable law, but if any provision of this Agreement is held to be
invalid, illegal or unenforceable in any respect under any applicable law or
rule in any jurisdiction, such invalidity, illegality or unenforceability shall
not affect the validity, legality or enforceability of any other provision of
this Agreement in such jurisdiction or affect the validity, legality or
enforceability of any provision in any other jurisdiction, but this Agreement
shall be reformed, construed and enforced in such jurisdiction as if such
invalid, illegal or unenforceable provision had never been contained herein.
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<PAGE> 14
12. Entire Agreement. Except as otherwise expressly set
forth herein, this Agreement, those documents expressly referred to herein and
other documents of even date herewith embody the complete agreement and
understanding among the parties hereto with respect to the subject matter
hereof and supersedes and preempts any prior understandings, agreements or
representations by or among the parties, written or oral, which may have
related to the subject matter hereof in any way.
13. Counterparts. This Agreement may be executed in
multiple counterparts, none of which need contain the signature of more than
one party hereto but each of which shall be deemed an original and all of which
taken together shall constitute one and the same agreement. Any Management
Member may at any time after the date hereof, with the prior written approval
of the LLC and the Company, become a party to this Agreement by executing a
counterpart to this Agreement agreeing to be bound by the provisions hereof as
if such Management Member were an original signatory hereto (which joinder
shall not constitute an amendment, modification or waiver hereof).
14. Successors and Assigns.
(a) Except as otherwise provided herein, this Agreement
shall bind and inure to the benefit of and be enforceable by the LLC and the
Company and their respective successors and assigns and the Securityholders and
any subsequent holders of Securityholder Securities and the respective
successors and assigns of each of them, so long as they hold Securityholder
Securities, whether so expressed or not.
(b) Each of the Company, the LLC, the Securityholders and
each holder of Securityholder Securities hereby acknowledges that upon and
after the dissolution and liquidation of the LLC, (A) all obligations and
duties of the LLC hereunder shall thereafter bind and be enforceable against
the Company, (B) all rights and powers specifically granted to the LLC
hereunder shall inure to the benefit of and be enforceable by the Company, (C)
all references to the LLC herein shall thereafter be deemed to be references to
the Company, and (D) this Agreement shall thereafter operate and be construed
as if the word "Company" were substituted for the word "LLC" in each such
instance.
15. Remedies. The LLC, the Company and the
Securityholders shall be entitled to enforce their rights under this Agreement
specifically, to recover damages by reason of any breach of any provision of
this Agreement and to exercise all other rights existing in their favor. The
parties hereto agree and acknowledge that money damages would not be an
adequate remedy for any breach of the provisions of this Agreement and that the
LLC, the Company and any Securityholder may in its sole discretion apply to any
court of law or equity of competent jurisdiction for specific performance
and/or injunctive relief (without posting a bond or other security) in order to
enforce or prevent any violation of the provisions of this Agreement.
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<PAGE> 15
16. Amendment and Waiver. The provisions of this
Agreement may be amended, modified, or waived only with the prior written
consent of the holders (acting in their capacity as shareholders of the
Company) then entitled to designate a majority of the Investor Directors (as
defined in the Stock Purchase Agreement) and, except for amendments,
modifications or waivers of Section 3(b) hereof, the holders (acting in their
capacity as shareholders of the Company) then entitled to designate two of the
Management Directors (as defined in the Stock Purchase Agreement) (counting for
purposes of such determination, the CEO Director as a Management Director);
provided that if any such modification, amendment or waiver would adversely
affect any Securityholder or Securityholders relative to the Securityholders
voting in favor thereof, such modification, amendment or waiver shall also
require the prior written approval of the holders of a majority of the
Securityholder Securities held by the Securityholder(s) so adversely affected.
No course of dealing or the failure of any party to enforce any of the
provisions of this Agreement shall in no way be construed as a waiver of such
provisions and shall not affect the right of such party thereafter to enforce
each and every provision of this Agreement in accordance with its terms.
17. Notices. All notices, demands or other
communications to be given or delivered under or by reason of the provisions of
this Agreement shall be in writing and shall be deemed to have been given when
(a) delivered personally to the recipient, (b) telecopied to the recipient
(with hard copy sent to the recipient by reputable overnight courier service
(charges prepaid) that same day) if telecopied before 5:00 p.m. Chicago,
Illinois time on a business day, and otherwise on the next business day, or (c)
one business day after being sent to the recipient by reputable overnight
courier service (charges prepaid). Such notices, demands and other
communications shall be sent to the LLC or the Company at the addresses set
forth below and to any Securityholder or other holder of Securityholder Shares
subject to this Agreement at such address as indicated by the Company's
records, or at such address or to the attention of such other person as the
recipient party has specified by prior written notice to the sending party.
To the LLC:
c/o Madison Dearborn Capital Partners
Three First National Plaza, Suite 3800
Chicago, Illinois 60670
Attention: James N. Perry, Jr.
Telephone: (312) 732-5416
Telecopy: (312) 732-4098
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<PAGE> 16
To the Company:
15190 Prestonwood Boulevard
Suite 421
Dallas, Texas 75248
Attention: Royce J. Holland
Telephone: (972) 385-3176
Telecopy: (972) 385-3176
18. GOVERNING LAW. ALL ISSUES AND QUESTIONS CONCERNING
THE CONSTRUCTION, VALIDITY, INTERPRETATION AND ENFORCEABILITY OF THIS AGREEMENT
AND THE EXHIBITS AND SCHEDULES HERETO SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF DELAWARE, WITHOUT GIVING EFFECT TO
ANY CHOICE OF LAW OR CONFLICT OF LAW RULES OR PROVISIONS (WHETHER OF THE STATE
OF DELAWARE OR ANY OTHER JURISDICTION) THAT WOULD CAUSE THE APPLICATION OF THE
LAWS OF ANY JURISDICTION OTHER THAN THE STATE OF DELAWARE. IN FURTHERANCE OF
THE FOREGOING, THE INTERNAL LAW OF THE STATE OF DELAWARE SHALL CONTROL THE
INTERPRETATION AND CONSTRUCTION OF THIS AGREEMENT (AND ALL SCHEDULES AND
EXHIBITS HERETO), EVEN THOUGH UNDER THAT JURISDICTION'S CHOICE OF LAW OR
CONFLICT OF LAW ANALYSIS, THE SUBSTANTIVE LAW OF SOME OTHER JURISDICTION WOULD
ORDINARILY APPLY.
19. Business Days. If any time period for giving notice
or taking action hereunder expires on a day which is a Saturday, Sunday or
legal holiday in the state in which the Company's chief-executive office is
located, the time period shall automatically be extended to the business day
immediately following such Saturday, Sunday or legal holiday.
20. Descriptive Headings; Interpretation; No Strict
Construction. The descriptive headings of this Agreement are inserted for
convenience only and do not constitute a substantive part of this Agreement.
Whenever required by the context, any pronoun used in this Agreement shall
include the corresponding masculine, feminine or neuter forms, and the singular
forms of nouns, pronouns, and verbs shall include the plural and vice versa.
Except as otherwise expressly provided herein, reference to any agreement,
document, or instrument means such agreement, document, or instrument as
amended or otherwise modified from time to time in accordance with the terms
thereof, and if applicable hereof. The use of the words "include" or
"including" in this Agreement shall be by way of example rather than by
limitation. The use of the words "or," "either" or "any" shall not be
exclusive. The parties hereto have participated jointly in the negotiation and
drafting of this Agreement. In the event an ambiguity or question of intent or
interpretation arises, this Agreement shall be construed as if drafted jointly
by the parties hereto, and no presumption or burden of proof shall arise
favoring or disfavoring any party by virtue of the authorship of any of the
provisions of this Agreement.
21. Delivery by Facsimile. This Agreement, the
agreements referred to herein, and each other agreement or instrument entered
into in connection herewith or therewith or contemplated hereby or thereby, and
any amendments hereto or thereto, to the extent signed and
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<PAGE> 17
delivered by means of a facsimile machine, shall be treated in all manner and
respects as an original agreement or instrument and shall be considered to have
the same binding legal effect as if it were the original signed version thereof
delivered in person. At the request of any party hereto or to any such
agreement or instrument, each other party hereto or thereto shall reexecute
original forms thereof and deliver them to all other parties. No party hereto
or to any such agreement or instrument shall raise the use of a facsimile
machine to deliver a signature or the fact that any signature or agreement or
instrument was transmitted or communicated through the use of a facsimile
machine as a defense to the formation or enforceability of a contract and each
such party forever waives any such defense.
* * * *
- 17 -
<PAGE> 18
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement on the day and year first above written.
TRANSCEND TELECOM, L.L.C.
By: /s/ ROYCE J. HOLLAND
----------------------------------
Its: Member
---------------------------------
TRANSCEND TELECOM, INC.
By: /s/ ROYCE J. HOLLAND
----------------------------------
Its: Chief Executive Officer
---------------------------------
/s/ DANA CROWNE
-------------------------------------
Dana Crowne
/s/ ROYCE J. HOLLAND
-------------------------------------
Royce J. Holland
ROYCE J. HOLLAND FAMILY LIMITED
PARTNERSHIP
By: /s/ ROYCE J. HOLLAND
-------------------------------------
Royce J. Holland, its general partner
/s/ THOMAS M. LORD
-------------------------------------
Thomas M. Lord (individually, and on
behalf of Brian T. Lord and Colin J. Lord)
/s/ VICTORIA M. LORD
-------------------------------------
Victoria M. Lord
/s/ BRIAN T. LORD
-------------------------------------
Brian T. Lord
/s/ COLIN J. LORD
-------------------------------------
Colin J. Lord
/s/ ANTHONY J. PARELLA
-------------------------------------
Anthony J. Parella
<PAGE> 19
BATTERY VENTURES IV, L.P.
By Battery Partners IV, L.P.,
its general partner
By: /s/ RICHARD D. FRISBIE
----------------------------------
Its: Managing Partner
---------------------------------
BATTERY INVESTMENT PARTNERS IV, LLC
By: /s/ RICHARD D. FRISBIE
----------------------------------
Its: Manager
---------------------------------
FRONTENAC VII, L.P.
By Frontenac Company, its general partner
By: /s/ JAMES E. CRAWFORD, III
----------------------------------
Its: General Partner
---------------------------------
MADISON DEARBORN CAPITAL PARTNERS II, L.P.
By Madison Dearborn Partners II, L.P.,
its general partner By Madison Dearborn
Partners, Inc., its general partner
By: /s/ JAMES N. PERRY, JR.
----------------------------------
Its: Vice President
---------------------------------
<PAGE> 20
MORGAN STANLEY CAPITAL PARTNERS III, L.P.
By MSCP III, L.P., its general partner
By Morgan Stanley Capital Partners III,
Inc.,its general partner
By: /s/ FRANK V. SICA
----------------------------------
Its: Vice Chairman
---------------------------------
By: /s/ ROBERT H. NIEHAUS
----------------------------------
Its: Vice Chairman
---------------------------------
MSCP III 892 INVESTORS, L.P.
By MSCP III, L.P., its general partner
By Morgan Stanley Capital Partners III,
Inc.,its general partner
By: /s/ FRANK V. SICA
----------------------------------
Its: Vice Chairman
---------------------------------
By: /s/ ROBERT H. NIEHAUS
----------------------------------
Its: Vice Chairman
---------------------------------
MORGAN STANLEY CAPITAL INVESTORS, L.P.
By MSCP III, L.P., its general partner
By Morgan Stanley Capital Partners III,
Inc.,its general partner
By: /s/ FRANK V. SICA
----------------------------------
Its: Vice Chairman
---------------------------------
By: /s/ ROBERT H. NIEHAUS
----------------------------------
Its: Vice Chairman
---------------------------------
<PAGE> 1
EXHIBIT 10.3
REGISTRATION AGREEMENT
THIS REGISTRATION AGREEMENT (this "Agreement") is made as of
August 13, 1997, by and among Transcend Telecom, Inc. (the "Company"), the
Investor Members, and the Management Members. Capitalized terms used but not
otherwise defined herein have the meanings set forth in paragraph 8 hereof.
NOW, THEREFORE, in consideration of the mutual promises made
herein and other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties hereto, intending to be legally
bound, agree as follows:
1. DEMAND REGISTRATIONS.
(a) Requests for Registration. At any time after the
date hereof and prior to the Company's Initial Public Offering, and subject to
the approval rights granted to Holland under the LLC Agreement and to the LLC
(and, upon the LLC's dissolution, to certain holders of the Company's
securities) under the Stock Purchase Agreement, the holders of a majority of
the Investor Registrable Securities then outstanding may request registration
under the Securities Act of all or any portion of their Registrable Securities
on Form S-1 or any similar long-form registration (a "Long-Form Registration").
After the Company's Initial Public Offering, (i) the holders of a majority of
the Frontenac Registrable Securities then outstanding, the holders of a
majority of the MDCP Registrable Securities then outstanding, and the holders
of a majority of the MSCP Registrable Securities then outstanding may each
request up to two Long-Form Registrations, (ii) the holders of a majority of
the BV Registrable Securities then outstanding and the holders of a majority of
the Management Registrable Securities then outstanding may each request one
Long-Form Registration, and (iii) the holders of at least 5% of the Registrable
Securities then outstanding may request registration under the Securities Act
of all or any portion of their Registrable Securities on Form S-3 or any
similar short-form registration ("Short-Form Registrations") if available;
provided that the aggregate offering value of the Registrable Securities
requested to be registered in any registration under this paragraph 1(a) (any
"Demand Registration") must equal at least $40 million if the registration is
the Company's Initial Public Offering, at least $20 million in any other
Long-Form Registration, and at least $5 million in any Short-Form Registration.
All requests for Demand Registrations shall be made by giving
written notice to the Company (the "Demand Notice"). Each Demand Notice shall
specify the approximate number of Registrable Securities requested to be
registered and the anticipated per share price range for such offering. Within
ten days after receipt of any Demand Notice, the Company shall give written
notice of such requested registration to all other holders of Registrable
Securities and, subject to the provisions of paragraph 1(d) below, shall
include in such registration all Registrable Securities with respect to which
the Company has received written requests for inclusion therein within 15 days
after the receipt of the Company's notice.
<PAGE> 2
(b) Expenses; Withdrawal. The Company shall pay all
Registration Expenses of all holders of Registrable Securities in all Demand
Registrations. A registration shall not count as one of the permitted
Long-Form Registrations until it has become effective or if the holders of
Registrable Securities initially requesting such registration are not able to
register and sell at least 90% of the Registrable Securities requested to be
included in such registration; provided that the Company shall in any event pay
all Registration Expenses in connection with any registration initiated as a
Demand Registration whether or not it has become effective and whether or not
such registration has counted as one of the permitted Long-Form Registrations.
All Long-Form Registrations shall be underwritten registrations unless
otherwise requested by the holders of a majority of the Registrable Securities
included in the applicable Long-Form Registration.
(c) Short-Form Registrations. Demand Registrations shall
be Short-Form Registrations whenever the Company is permitted to use any
applicable short form. After the Company has become subject to the reporting
requirements of the Securities Exchange Act, the Company shall use its best
efforts to make Short-Form Registrations on Form S-3 (or any successor form)
available for the sale of Registrable Securities.
(d) Priority on Demand Registrations. The Company shall
not include in any Demand Registration any securities which are not Registrable
Securities without the prior written consent of the holders of a majority of
the Registrable Securities included in such registration. If a Demand
Registration is an underwritten offering and the managing underwriters advise
the Company in writing that in their opinion the number of Registrable
Securities and, if permitted hereunder, other securities requested to be
included in such offering exceeds the number of Registrable Securities and
other securities, if any, which can be sold in an orderly manner in such
offering within a price range acceptable to the holders of a majority of the
Registrable Securities initially requesting registration, the Company shall
include in such registration the number which can be so sold in the following
order of priorities: (i) first, the Registrable Securities requested to be
included in such registration, pro rata among the holders of such Registrable
Securities on the basis of the number of shares owned by each such holder, and
(ii) second, other securities requested to be included in such registration.
(e) Restrictions on Long-Form Registrations. The Company
shall not be obligated to effect any Demand Registration which is a Long-Form
Registration within 180 days after the effective date of a previous Demand
Registration which was a Long-Form Registration or a previous registration in
which the holders of Registrable Securities were given piggyback rights
pursuant to paragraph 2 and in which there was no reduction in the number of
Registrable Securities requested to be included. The Company may postpone for
up to 180 days the filing or the effectiveness of a registration statement for
a Demand Registration if the Company's board of directors determines in its
reasonable good faith judgment that such Demand Registration would reasonably
be expected to have a material adverse effect on any proposal or plan by the
Company or any of its Subsidiaries to engage in any acquisition of assets
(other than in the ordinary course of business) or any merger, consolidation,
tender offer, reorganization or similar transaction; provided that in such
event, the holders of Registrable Securities initially requesting such Demand
Registration shall be entitled to withdraw such request and, if such request is
withdrawn, such
- 2 -
<PAGE> 3
Demand Registration shall not count as one of the permitted Demand
Registrations hereunder and the Company shall pay all Registration Expenses in
connection with such withdrawn registration. The Company may delay a Demand
Registration hereunder only once in any twelve-month period.
(f) Selection of Underwriters. Subject to the approval
rights granted to the LLC (and, upon the LLC's dissolution, to certain holders
of the Company's securities) under the Stock Purchase Agreement, the Board
shall select the investment banker(s) and manager(s) to administer the
offering.
(g) Other Registration Rights. Except as provided in
this Agreement, the Company shall not grant to any Persons the right to request
the Company to register any equity securities of the Company, or any securities
convertible or exchangeable into or exercisable for such securities, without
the prior written consent of the holders of a majority of the Investor
Registrable Securities (or, if none, Registrable Securities) then outstanding;
provided that the Company may grant rights to other Persons to participate in
Piggyback Registrations so long as such rights are subordinate to the rights of
the holders of Registrable Securities with respect to such Piggyback
Registrations.
2. PIGGYBACK REGISTRATIONS.
(a) Right to Piggyback. Whenever the Company proposes to
register any of its securities under the Securities Act (other than pursuant to
a Demand Registration) and the registration form to be used may be used for the
registration of Registrable Securities (a "Piggyback Registration"), the
Company shall give prompt written notice (in any event within three business
days after its receipt of notice of any exercise of demand registration rights
other than under this Agreement) to all holders of Registrable Securities of
its intention to effect such a registration and shall include in such
registration all Registrable Securities with respect to which the Company has
received written requests for inclusion therein within 20 days after the
receipt of the Company's notice.
(b) Piggyback Expenses. The Registration Expenses of the
holders of Registrable Securities shall be paid by the Company in all Piggyback
Registrations.
(c) Priority on Primary Registrations. If a Piggyback
Registration is an underwritten primary registration on behalf of the Company,
and the managing underwriters advise the Company in writing that in their
opinion the number of securities requested to be included in such registration
exceeds the number which can be sold in an orderly manner in such offering
within a price range acceptable to the Company, the Company shall include in
such registration (i) first, the securities the Company proposes to sell, (ii)
second, the Registrable Securities requested to be included in such
registration, pro rata among the holders of such Registrable Securities on the
basis of the number of shares owned by each such holder, and (iii) third, other
securities requested to be included in such registration.
- 3 -
<PAGE> 4
(d) Priority on Secondary Registrations. If a Piggyback
Registration is an underwritten secondary registration on behalf of holders of
the Company's securities, and the managing underwriters advise the Company in
writing that in their opinion the number of securities requested to be included
in such registration exceeds the number which can be sold in an orderly manner
in such offering within a price range acceptable to the holders initially
requesting such registration, the Company shall include in such registration
(i) first, the securities requested to be included therein by the holders
requesting such registration and the Registrable Securities requested to be
included in such registration, pro rata among the holders of any such
securities on the basis of the number of securities so requested to be included
therein owned by each such holder, and (ii) second, other securities requested
to be included in such registration.
(e) Selection of Underwriters. If any Piggyback
Registration is an underwritten offering, the selection of the investment
banker(s) and manager(s) to administer such offering shall be approved by the
Board.
(f) Other Registrations. If the Company has previously
filed a registration statement with respect to Registrable Securities pursuant
to paragraph 1 or pursuant to this paragraph 2, and if such previous
registration has not been withdrawn or abandoned, the Company shall not file or
cause to be effected any other registration of any of its equity securities or
securities convertible or exchangeable into or exercisable for its equity
securities under the Securities Act (except on Form S-8 or any successor form),
whether on its own behalf or at the request of any holder or holders of such
securities, until a period of at least 180 days has elapsed from the effective
date of such previous registration.
3. HOLDBACK AGREEMENTS.
(a) Holders of Registrable Securities. Each holder of
Registrable Securities shall not effect any public sale or distribution
(including sales pursuant to Rule 144) of equity securities of the Company, or
any securities convertible into or exchangeable or exercisable for such
securities, during the seven days prior to and (i) the 180-day period beginning
on the effective date of the Initial Public Offering in the case of the Initial
Public Offering and (ii) the 90-day period beginning on the effective date of
any other underwritten Demand Registration or any underwritten Piggyback
Registration in which Registrable Securities are included (in each case, except
as part of such underwritten registration), unless in each case the
underwriters managing the registered public offering otherwise agree.
(b) The Company. The Company (i) shall not effect any
public sale or distribution of its equity securities, or any securities
convertible into or exchangeable or exercisable for such securities, during the
seven days prior to and during the 180-day period beginning on the effective
date of any underwritten Demand Registration or any underwritten Piggyback
Registration (except as part of such underwritten registration or pursuant to
registrations on Form S-8 or any successor form), unless the underwriters
managing the registered public offering otherwise agree, and (ii) shall cause
each holder of its Common Stock, or any securities convertible into or
exchangeable or exercisable for Common Stock, purchased from the Company at any
time after the date of
- 4 -
<PAGE> 5
this Agreement (other than in a registered public offering or pursuant to Rule
144) to agree not to effect any public sale or distribution (including sales
pursuant to Rule 144) of any such securities during such period (except as part
of such underwritten registration, if otherwise permitted), unless the
underwriters managing the registered public offering otherwise agree.
4. REGISTRATION PROCEDURES. Whenever the holders of
Registrable Securities have requested that any Registrable Securities be
registered pursuant to this Agreement, the Company shall use its best efforts
to effect the registration and the sale of such Registrable Securities in
accordance with the intended method of disposition thereof, and pursuant
thereto the Company shall as expeditiously as possible:
(a) prepare and file with the Securities and Exchange
Commission a registration statement with respect to such Registrable Securities
and use its best efforts to cause such registration statement to become
effective (provided that before filing a registration statement or prospectus
or any amendments or supplements thereto, the Company shall furnish to the
counsel selected by the holders of a majority of the Registrable Securities
covered by such registration statement copies of all such documents proposed to
be filed, which documents shall be subject to the review and comment of such
counsel);
(b) notify each holder of Registrable Securities of the
effectiveness of each registration statement filed hereunder and prepare and
file with the Securities and Exchange Commission such amendments and
supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration statement
effective for a period of not less than 180 days and comply with the provisions
of the Securities Act with respect to the disposition of all securities covered
by such registration statement during such period in accordance with the
intended methods of disposition by the sellers thereof set forth in such
registration statement;
(c) furnish to each seller of Registrable Securities such
number of copies of such registration statement, each amendment and supplement
thereto, the prospectus included in such registration statement (including each
preliminary prospectus) and such other documents as such seller may reasonably
request in order to facilitate the disposition of the Registrable Securities
owned by such seller;
(d) use its best efforts to register or qualify such
Registrable Securities under such other securities or blue sky laws of such
jurisdictions as any seller reasonably requests and do any and all other acts
and things which may be reasonably necessary or advisable to enable such seller
to consummate the disposition in such jurisdictions of the Registrable
Securities owned by such seller (provided that the Company shall not be
required to (i) qualify generally to do business in any jurisdiction where it
would not otherwise be required to qualify but for this subparagraph, (ii)
subject itself to taxation in any such jurisdiction or (iii) consent to general
service of process in any such jurisdiction);
- 5 -
<PAGE> 6
(e) notify each seller of such Registrable Securities, at
any time when a prospectus relating thereto is required to be delivered under
the Securities Act, of the happening of any event as a result of which the
prospectus included in such registration statement contains an untrue statement
of a material fact or omits any fact necessary to make the statements therein
not misleading, and, at the request of any such seller, the Company shall
prepare a supplement or amendment to such prospectus so that, as thereafter
delivered to the purchasers of such Registrable Securities, such prospectus
shall not contain an untrue statement of a material fact or omit to state any
fact necessary to make the statements therein not misleading;
(f) cause all such Registrable Securities to be listed on
each securities exchange on which similar securities issued by the Company are
then listed and, if not so listed, to be listed on the Nasdaq and, if listed on
the Nasdaq, use its best efforts to secure designation of all such Registrable
Securities covered by such registration statement as a Nasdaq "national market
system security" within the meaning of Rule 11Aa2-1 of the Securities and
Exchange Commission or, failing that, to secure Nasdaq authorization for such
Registrable Securities and, without limiting the generality of the foregoing,
to arrange for at least two market makers to register as such with respect to
such Registrable Securities with the NASD;
(g) provide a transfer agent and registrar for all such
Registrable Securities not later than the effective date of such registration
statement;
(h) enter into such customary agreements (including
underwriting agreements in customary form) and take all such other actions as
the holders of a majority of the Registrable Securities being sold or the
underwriters, if any, reasonably request in order to expedite or facilitate the
disposition of such Registrable Securities (including effecting a stock split
or a combination of shares);
(i) make available for inspection by any seller of
Registrable Securities, any underwriter participating in any disposition
pursuant to such registration statement and any attorney, accountant or other
agent retained by any such seller or underwriter, all financial and other
records, pertinent corporate documents and properties of the Company, and cause
the Company's officers, directors, employees and independent accountants to
supply all information reasonably requested by any such seller, underwriter,
attorney, accountant or agent in connection with such registration statement;
(j) otherwise use its best efforts to comply with all
applicable rules and regulations of the Securities and Exchange Commission, and
make available to its security holders, as soon as reasonably practicable, an
earnings statement covering the period of at least twelve months beginning with
the first day of the Company's first full calendar quarter after the effective
date of the registration statement, which earnings statement shall satisfy the
provisions of Section 11(a) of the Securities Act and Rule 158 thereunder;
(k) permit any holder of Registrable Securities which
holder, in its sole and exclusive judgment, might be deemed to be an
underwriter or a controlling person of the Company,
- 6 -
<PAGE> 7
to participate in the preparation of such registration or comparable statement
and to require the insertion therein of material, furnished to the Company in
writing, which in the reasonable judgment of such holder and its counsel should
be included;
(l) in the event of the issuance of any stop order
suspending the effectiveness of a registration statement, or of any order
suspending or preventing the use of any related prospectus or suspending the
qualification of any common stock included in such registration statement for
sale in any jurisdiction, the Company shall use its best efforts promptly to
obtain the withdrawal of such order;
(m) obtain a cold comfort letter from the Company's
independent public accountants in customary form and covering such matters of
the type customarily covered by cold comfort letters as the holders of a
majority of the Registrable Securities being sold reasonably request; and
(n) use its best efforts to cause such Registrable
Securities covered by such registration statement to be registered with or
approved by such other governmental agencies or authorities as may be necessary
to enable the sellers thereof to consummate the disposition of the Registrable
Securities.
5. REGISTRATION EXPENSES.
(a) Expenses. All expenses incident to the Company's
performance of or compliance with this Agreement, including without limitation
all registration and filing fees, fees and expenses of compliance with
securities or blue sky laws, printing expenses, messenger and delivery
expenses, fees and disbursements of custodians, and fees and disbursements of
counsel for the Company and all independent certified public accountants,
underwriters (excluding discounts and commissions) and other Persons retained
by the Company (all such expenses being herein called "Registration Expenses"),
shall be borne as provided in this Agreement, except that the Company shall, in
any event, pay its internal expenses (including, without limitation, all
salaries and expenses of its officers and employees performing legal or
accounting duties), the expense of any annual audit or quarterly review, the
expense of any liability insurance and the expenses and fees for listing the
securities to be registered on each securities exchange on which similar
securities issued by the Company are then listed or on the Nasdaq.
(b) Reimbursement of Counsel. In connection with each
Demand Registration and each Piggyback Registration, the Company shall
reimburse the holders of Registrable Securities included in such registration
for the reasonable fees and disbursements of one counsel chosen by the holders
of a majority of the Investor Registrable Securities (or, if none, Registrable
Securities) included in such registration and for the reasonable fees and
disbursements of each additional counsel retained by any holder of Registrable
Securities solely for the purpose of rendering a legal opinion to underwriters
on behalf of such holder in connection with any underwritten Demand
Registration or Piggyback Registration.
- 7 -
<PAGE> 8
(c) Payment of Certain Expenses by Holders of Registrable
Securities. Underwriting discounts and commissions and transfer taxes relating
to the Registrable Securities included in any registration hereunder, and all
fees and expenses of counsel for any holder of Registrable Securities (other
than fees and expenses to be reimbursed by the Company as set forth in
paragraph (b) above) shall be borne and paid by the holders of such Registrable
Securities.
6. INDEMNIFICATION.
(a) The Company agrees to indemnify, to the extent
permitted by law, each holder of Registrable Securities, its officers and
directors and each Person that controls such holder (within the meaning of the
Securities Act) against all losses, claims, damages, liabilities and expenses
caused by any untrue or alleged untrue statement of material fact contained in
any registration statement, prospectus or preliminary prospectus or any
amendment thereof or supplement thereto or any omission or alleged omission of
a material fact required to be stated therein or necessary to make the
statements therein not misleading, except insofar as the same are caused by or
contained in any information furnished in writing to the Company by such holder
expressly for use therein or by such holder's failure to deliver a copy of the
registration statement or prospectus or any amendments or supplements thereto
after the Company has furnished such holder with a sufficient number of copies
of the same. In connection with an underwritten offering, the Company shall
indemnify such underwriters, their officers and directors and each Person who
controls such underwriters (within the meaning of the Securities Act) to the
same extent as provided above with respect to the indemnification of the
holders of Registrable Securities.
(b) In connection with any registration statement in
which a holder of Registrable Securities is participating, each such holder
shall furnish to the Company in writing such information and affidavits as the
Company reasonably requests for use in connection with any such registration
statement or prospectus and, to the extent permitted by law, shall indemnify
the Company, its directors and officers and each Person who controls the
Company (within the meaning of the Securities Act) against any losses, claims,
damages, liabilities and expenses resulting from any untrue or alleged untrue
statement of material fact contained in the registration statement, prospectus
or preliminary prospectus or any amendment thereof or supplement thereto or any
omission or alleged omission of a material fact required to be stated therein
or necessary to make the statements therein not misleading, but only to the
extent that such untrue statement or omission is contained in any information
or affidavit so furnished in writing by such holder; provided that the
obligation to indemnify shall be individual, not joint and several, for each
holder and shall be limited to the net amount of proceeds received by such
holder from the sale of Registrable Securities pursuant to such registration
statement.
(c) Any Person entitled to indemnification hereunder
shall (i) give prompt written notice to the indemnifying party of any claim
with respect to which it seeks indemnification (provided that the failure to
give prompt notice shall not impair any Person's right to indemnification
hereunder to the extent such failure has not prejudiced the indemnifying party)
and (ii) unless in such indemnified party's reasonable judgment a conflict of
interest between such indemnified and indemnifying parties may exist with
respect to such claim, permit such indemnifying party to assume
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<PAGE> 9
the defense of such claim with counsel reasonably satisfactory to the
indemnified party. If such defense is assumed, the indemnifying party shall
not be subject to any liability for any settlement made by the indemnified
party without its consent (but such consent shall not be unreasonably
withheld). An indemnifying party who is not entitled to, or elects not to,
assume the defense of a claim shall not be obligated to pay the fees and
expenses of more than one counsel for all parties indemnified by such
indemnifying party with respect to such claim, unless in the reasonable
judgment of any indemnified party a conflict of interest may exist between such
indemnified party and any other of such indemnified parties with respect to
such claim.
(d) The indemnification provided for under this Agreement
shall remain in full force and effect regardless of any investigation made by
or on behalf of the indemnified party or any officer, director or controlling
Person of such indemnified party and shall survive the transfer of securities.
The Company also agrees to make such provisions, as are reasonably requested by
any indemnified party, for contribution to such party in the event the
Company's indemnification is unavailable for any reason such that such
provisions provide the same obligations and benefits to the indemnified party
as those which would have been applicable had the indemnification provisions in
paragraphs 6(a) and (b) been available taking into account all of the
limitations set forth in paragraphs 6(a) and (b).
7. PARTICIPATION IN UNDERWRITTEN REGISTRATIONS. No
Person may participate in any registration hereunder which is underwritten
unless such Person (i) agrees to sell such Person's securities on the basis
provided in any underwriting arrangements approved by the Person or Persons
entitled hereunder to approve such arrangements and (ii) completes and executes
all questionnaires, powers of attorney, indemnities, underwriting agreements
and other documents required under the terms of such underwriting arrangements;
provided that no holder of Registrable Securities included in any underwritten
registration shall be required to make any representations or warranties to the
Company or the underwriters (other than representations and warranties
regarding such holder and such holder's intended method of distribution) or to
undertake any indemnification obligations to the Company with respect thereto,
except as otherwise provided in paragraph 6(b) hereof, or to the underwriters
with respect thereto, except to the extent of the indemnification being given
to the Company and its controlling persons in paragraph 6(a) hereof.
8. DEFINITIONS.
"BV Registrable Securities" means Registrable Securities
derived from or relating to the Class A Units initially issued to BV under the
Investor Purchase Agreement.
"BV" has the meaning ascribed to such term in the Stock
Purchase Agreement.
"Class A Units" has the meaning ascribed to such term in the
LLC Agreement.
"Class B Units" has the meaning ascribed to such term in the
LLC Agreement.
"Common Stock" means the Company's Common Stock, par value
$.01 per share.
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<PAGE> 10
"Executive Purchase Agreements" has the meaning ascribed to
such term in the Stock Purchase Agreement.
"Frontenac" has the meaning ascribed to such term in the Stock
Purchase Agreement.
"Frontenac Registrable Securities" means Registrable
Securities derived from or relating to the Class A Units initially issued to
Frontenac under the Investor Purchase Agreement.
"Holland" means Royce J. Holland.
"Initial Public Offering" means a sale of Common Stock to the
public registered under the Securities Act on Form S-1 or any similar form.
"Investor Members" has the meaning ascribed to such term in
the Stock Purchase Agreement.
"Investor Purchase Agreement" means that certain purchase
agreement of even date herewith by and among the LLC and the Investor Members.
"Investor Registrable Securities" means collectively, the BV
Registrable Securities, the Frontenac Registrable Securities, the MDCP
Registrable Securities, and the MSCP Registrable Securities.
"LLC" means Transcend Telecom, L.L.C., a Delaware limited
liability company.
"LLC Agreement" means that certain limited liability company
agreement of even date herewith entered into by and among the members of the
LLC, as amended from time to time according to its terms.
"Management Members" has the meaning ascribed to such term in
the Stock Purchase Agreement.
"Management Registrable Securities" means Registrable
Securities derived from or relating to (i) any Class B Units issued to any
Management Member pursuant to an Executive Purchase Agreement (or any other
Units issued by the LLC to a holder of such Class B Units in exchange
therefor), or (ii) any Tier I Options or Tier II Options issued to any
Management Member pursuant to an Executive Purchase Agreement.
"MDCP" has the meaning ascribed to such term in the Stock
Purchase Agreement.
"MDCP Registrable Securities" means Registrable Securities
derived from or relating to the Class A Units initially issued to MDCP under
the Investor Purchase Agreement.
"MSCP" has the meaning ascribed to such term in the Stock
Purchase Agreement.
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<PAGE> 11
"MSCP Registrable Securities" means Registrable Securities
derived from or relating to the Class A Units initially issued to MSCP under
the Investor Purchase Agreement.
"Person" means an individual, a partnership, a corporation, a
limited liability company, an association, a joint stock company, a trust, a
joint venture, an unincorporated organization and a governmental entity or any
department, agency or political subdivision thereof.
"Preferred Stock" means the Company's 12% Cumulative
Convertible Preferred Stock, par value $.01 per share.
"Registrable Securities" means (i) any Common Stock issued
upon conversion of any Preferred Stock issued with respect to any Class A Units
or Class B Units upon the dissolution and liquidation of the LLC, (ii) any
Common Stock issued upon exercise of any Tier I Options or Tier II Options,
(iii) any Common Stock issued or issuable with respect to the securities
referred to in clauses (i) and (ii) by way of a stock dividend or stock split
or in connection with a combination of shares, recapitalization, merger,
consolidation or other reorganization, and (iv) any other Common Stock of the
Company held by any holder of Registrable Securities; provided that with
respect to any Registrable Securities, such securities shall cease to be
Registrable Securities when they have been distributed to the public pursuant
to an offering registered under the Securities Act or sold to the public
through a broker, dealer or market maker in compliance with Rule 144 under the
Securities Act (or any similar rule promulgated by the Securities Exchange
Commission then in force). For purposes of this Agreement, a Person shall be
deemed to be the holder of Registrable Securities, and the Registrable
Securities shall be deemed to be outstanding and in existence, whenever such
Person has the right to acquire such Registrable Securities upon conversion of
Preferred Stock held by such Person or upon conversion of Preferred Stock
issuable to such Person upon dissolution and liquidation of the LLC with
respect to Units held by such Person, whether or not such acquisition has
actually been effected, and such Person shall be entitled to exercise the
rights of a holder of such Registrable Securities hereunder.
"Securities Act" means the Securities Act of 1933, as amended
from time to time.
"Stock Purchase Agreement" means that certain stock purchase
agreement of even date herewith by and between the Company and the LLC, as
amended from time to time in accordance with its terms.
"Tier I Options and Tier II Options" have the meanings
ascribed to such terms under the Executive Purchase Agreements.
"Unit" has the meaning ascribed to such term in the LLC
Agreement.
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<PAGE> 12
9. MISCELLANEOUS.
(a) No Inconsistent Agreements. The Company shall not
hereafter enter into any agreement with respect to its securities which is
inconsistent with or violates the rights granted to the holders of Registrable
Securities in this Agreement.
(b) Adjustments Affecting Registrable Securities. The
Company shall not take any action, or permit any change to occur, with respect
to its securities which would materially and adversely affect the ability of
the holders of Registrable Securities to include such Registrable Securities in
a registration undertaken pursuant to this Agreement or which would materially
and adversely affect the marketability of such Registrable Securities in any
such registration (including, without limitation, effecting a stock split or a
combination of shares).
(c) Remedies. Any Person having rights under any
provision of this Agreement shall be entitled to enforce such rights
specifically, to recover damages caused by reason of any breach of any
provision of this Agreement and to exercise all other rights granted by law.
The parties hereto agree and acknowledge that money damages may not be an
adequate remedy for any breach of the provisions of this Agreement and that any
party may in its sole discretion apply to any court of law or equity of
competent jurisdiction (without posting any bond or other security) for
specific performance and for other injunctive relief in order to enforce or
prevent violation of the provisions of this Agreement.
(d) Amendments and Waivers. Except as otherwise provided
herein, the provisions of this Agreement may be amended or waived only upon the
prior written consent of the Company and the holders of a majority of the
Investor Registrable Securities and the holders of a majority of the Management
Registrable Securities; provided that if any such amendment or waiver would
adversely affect any holder of Registrable Securities relative to the holders
of Investor Registrable Securities or Management Registrable Securities voting
in favor of such amendment or waiver, such amendment or waiver shall also
require the approval of the holders of a majority of the Registrable Securities
held by all holders so adversely affected.
(e) Successors and Assigns. All covenants and agreements
in this Agreement by or on behalf of any of the parties hereto shall bind and
inure to the benefit of the respective successors and assigns of the parties
hereto whether so expressed or not. In addition, whether or not any express
assignment has been made, the provisions of this Agreement which are for the
benefit of purchasers or holders of Registrable Securities are also for the
benefit of, and enforceable by, any subsequent holder of Registrable
Securities.
(f) Severability. Whenever possible, each provision of
this Agreement shall be interpreted in such manner as to be effective and valid
under applicable law, but if any provision of this Agreement is held to be
prohibited by or invalid under applicable law, such provision shall be
ineffective only to the extent of such prohibition or invalidity, without
invalidating the remainder of this Agreement.
- 12 -
<PAGE> 13
(g) Counterparts. This Agreement may be executed
simultaneously in two or more counterparts, any one of which need not contain
the signatures of more than one party, but all such counterparts taken together
shall constitute one and the same Agreement. Any Management Member may at any
time after the date hereof, with the prior written approval of the LLC and the
Company, become a party to this Agreement by executing a counterpart to this
Agreement agreeing to be bound by the provisions hereof as if such Management
Member were an original signatory hereto (which joinder shall not constitute a
modification, amendment, or waiver hereof).
(h) Descriptive Headings; Interpretation; No Strict
Construction. The descriptive headings of this Agreement are inserted for
convenience only and do not constitute a substantive part of this Agreement.
Whenever required by the context, any pronoun used in this Agreement shall
include the corresponding masculine, feminine or neuter forms, and the singular
forms of nouns, pronouns, and verbs shall include the plural and vice versa.
Reference to any agreement, document, or instrument means such agreement,
document, or instrument as amended or otherwise modified from time to time in
accordance with the terms thereof, and if applicable hereof. The use of the
words "include" or "including" in this Agreement shall be by way of example
rather than by limitation. The use of the words "or," "either" or "any" shall
not be exclusive. The parties hereto have participated jointly in the
negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this Agreement shall be construed
as if drafted jointly by the parties hereto, and no presumption or burden of
proof shall arise favoring or disfavoring any party by virtue of the authorship
of any of the provisions of this Agreement.
(i) GOVERNING LAW. THE CORPORATE LAW OF THE STATE OF
DELAWARE SHALL GOVERN ALL ISSUES AND QUESTIONS CONCERNING THE RELATIVE RIGHTS
OF THE COMPANY AND ITS STOCKHOLDERS. ALL OTHER ISSUES AND QUESTIONS CONCERNING
THE CONSTRUCTION, VALIDITY, INTERPRETATION AND ENFORCEMENT OF THIS AGREEMENT
AND THE EXHIBITS AND SCHEDULES HERETO SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF DELAWARE, WITHOUT GIVING EFFECT TO
ANY CHOICE OF LAW OR CONFLICT OF LAW RULES OR PROVISIONS (WHETHER OF THE STATE
OF DELAWARE OR ANY OTHER JURISDICTION) THAT WOULD CAUSE THE APPLICATION OF THE
LAWS OF ANY JURISDICTION OTHER THAN THE STATE OF DELAWARE.
(j) Notices. All notices, demands or other
communications to be given or delivered under or by reason of the provisions of
this Agreement shall be in writing and shall be deemed to have been given when
(a) delivered personally to the recipient, (b) telecopied to the recipient
(with hard copy sent to the recipient by reputable overnight courier service
(charges prepaid) that same day) if telecopied before 5:00 p.m. Chicago,
Illinois time on a business day, and otherwise on the next business day, or (c)
one business day after being sent to the recipient by reputable overnight
courier service (charges prepaid). Such notices, demands and other
communications shall be sent to the Company at the address set forth below and
to any holder of Registrable Securities at such address as indicated by the
Company's records, or at such address or to the attention of such other person
as the recipient party has specified by prior written notice to the sending
party. The Company's address is:
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<PAGE> 14
15190 Prestonwood Boulevard
Suite 421
Dallas, Texas 75248
Attention: Royce J. Holland
Telephone: (972) 385-3176
Telecopy: (972) 385-3176
(k) Business Days. If any time period for giving notice
or taking action hereunder expires on a day which is a Saturday, Sunday or
legal holiday in the state in which the Company's chief-executive office is
located, the time period shall automatically be extended to the business day
immediately following such Saturday, Sunday or legal holiday.
(l) Delivery by Facsimile. This Agreement, the
agreements referred to herein, and each other agreement or instrument entered
into in connection herewith or therewith or contemplated hereby or thereby, and
any amendments hereto or thereto, to the extent signed and delivered by means
of a facsimile machine, shall be treated in all manner and respects as an
original agreement or instrument and shall be considered to have the same
binding legal effect as if it were the original signed version thereof
delivered in person. At the request of any party hereto or to any such
agreement or instrument, each other party hereto or thereto shall reexecute
original forms thereof and deliver them to all other parties. No party hereto
or to any such agreement or instrument shall raise the use of a facsimile
machine to deliver a signature or the fact that any signature or agreement or
instrument was transmitted or communicated through the use of a facsimile
machine as a defense to the formation or enforceability of a contract and each
such party forever waives any such defense.
* * * * *
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<PAGE> 15
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first written above.
TRANSCEND TELECOM, INC.
By: /s/ ROYCE J. HOLLAND
--------------------------------
Its: Chief Executive Officer
-------------------------------
/s/ DANA CROWNE
-----------------------------------
Dana Crowne
/s/ ROYCE J. HOLLAND
-----------------------------------
Royce J. Holland
ROYCE J. HOLLAND FAMILY LIMITED
PARTNERSHIP
By: /s/ ROYCE J. HOLLAND
--------------------------------
Royce J. Holland, its general partner
/s/ THOMAS M. LORD
-----------------------------------
Thomas M. Lord (individually, and on
behalf of Brian T. Lord and Colin J. Lord)
/s/ VICTORIA M. LORD
-----------------------------------
Victoria M. Lord
/s/ BRIAN T. LORD
-----------------------------------
Brian T. Lord
/s/ COLIN J. LORD
-----------------------------------
Colin J. Lord
/s/ ANTHONY J. PARELLA
-----------------------------------
Anthony J. Parella
<PAGE> 16
BATTERY VENTURES IV, L.P.
By Battery Partners IV, L.P.,
its general partner
By: /s/ RICHARD D. FRISBIE
--------------------------------
Its: Managing Partner
-------------------------------
BATTERY INVESTMENT PARTNERS IV, LLC
By: /s/ RICHARD D. FRISBIE
--------------------------------
Its: Manager
-------------------------------
FRONTENAC VII, L.P.
By Frontenac Company, its general partner
By: /s/ JAMES E. CRAWFORD, III
--------------------------------
Its: General Partner
-------------------------------
MADISON DEARBORN CAPITAL PARTNERS II, L.P.
By Madison Dearborn Partners II, L.P.,
its general partner
By Madison Dearborn Partners, Inc.,
its general partner
By: /s/ JAMES N. PERRY, JR.
--------------------------------
Its: Vice President
-------------------------------
<PAGE> 17
MORGAN STANLEY CAPITAL PARTNERS III, L.P.
By MSCP III, L.P., its general partner
By Morgan Stanley Capital Partners III,
Inc.,its general partner
By: /s/ FRANK V. SICA
--------------------------------
Its: Vice Chairman
-------------------------------
By: /s/ ROBERT H. NIEHAUS
--------------------------------
Its: Vice Chairman
-------------------------------
MSCP III 892 INVESTORS, L.P.
By MSCP III, L.P., its general partner
By Morgan Stanley Capital Partners III,
Inc.,its general partner
By: /s/ FRANK V. SICA
--------------------------------
Its: Vice Chairman
-------------------------------
By: /s/ ROBERT H. NIEHAUS
--------------------------------
Its: Vice Chairman
-------------------------------
MORGAN STANLEY CAPITAL INVESTORS, L.P.
By MSCP III, L.P., its general partner
By Morgan Stanley Capital Partners III,
Inc.,its general partner
By: /s/ FRANK V. SICA
--------------------------------
Its: Vice Chairman
-------------------------------
By: /s/ ROBERT H. NIEHAUS
--------------------------------
Its: Vice Chairman
-------------------------------
<PAGE> 1
EXHIBIT 10.4
ALLEGIANCE TELECOM, INC.
1997 NONQUALIFIED STOCK OPTION PLAN
ARTICLE I
Purpose of Plan
The 1997 Stock Option Plan (the "Plan") of Allegiance Telecom,
Inc. (the "Company"), for directors, consultants, and executive and other key
employees (each a "Service Provider") of the Company and its subsidiaries, is
intended to advance the best interests of the Company and its stockholders by
providing those persons who have a substantial responsibility for its
management and growth with additional incentives by allowing them to acquire an
ownership interest in the Company and thereby encouraging them to contribute to
the success of the Company. The availability and offering of stock options
under the Plan also increases the Company's ability to attract and retain
individuals of exceptional managerial talent upon whom, in large measure, the
sustained progress, growth and profitability of the Company depends.
ARTICLE II
Definitions
For purposes of the Plan, except where the context clearly
indicates otherwise, the following terms shall have the meanings set forth
below:
"Board" shall mean the Board of Directors of the Company.
"Code" shall mean the Internal Revenue Code of 1986, as
amended, and any successor statute.
"Committee" shall mean the Executive Committee of the Board;
provided that the Board may in its discretion, at any time and from time to
time, resolve to administer the Plan or to delegate the administration of the
Plan to another committee of the Board as contemplated by Section 3.1, in which
case the term "Committee" shall mean the Board or such other committee, as the
case may be, for all purposes herein.
"Common Stock" shall mean the Company's Common Stock, par
value $.01 per share.
"Company" shall mean Allegiance Telecom, Inc., a Delaware
corporation, and (except to the extent the context requires otherwise) any
"subsidiary corporation" of Allegiance Telecom, Inc., as such term is defined
in Section 424(f) of the Code.
<PAGE> 2
"Fair Market Value" of the Common Stock shall be the average,
over a period of 21 days consisting of the day as of which Fair Market Value is
being determined and the 20 consecutive business days prior to such day, of the
average of the closing prices of the sales of such Common Stock on all
securities exchanges on which such Common Stock may at that time be listed, or,
if there have been no sales on any such exchange on any day, the average of the
highest bid and lowest asked prices on all such exchanges at the end of such
day, or, if on any day the Common Stock is not so listed, the average of the
representative bid and asked prices quoted in the Nasdaq System as of 4:00
P.M., New York time, or, if on any day the Common Stock is not quoted in the
Nasdaq System, the average of the highest bid and lowest asked prices on such
day in the domestic over-the-counter market as reported by the National
Quotation Bureau Incorporated or any similar successor organization. If at any
time the Common Stock is not listed on any securities exchange or quoted in the
Nasdaq System or the over-the-counter market, the Fair Market Value shall be
the fair value of the Common Stock determined in good faith by the Committee.
"Option" means a stock option granted pursuant to the Plan.
"Participant" shall mean any Service Provider who has been
selected to participate in the Plan by the Committee.
"Person" means an individual, a partnership, a corporation, a
limited liability company, an association, a joint stock company, a trust, a
joint venture, an unincorporated organization and a governmental entity or any
department, agency or political subdivision thereof.
ARTICLE III
Administration of the Plan
3.1 Administrator. The Plan shall be administered by the
Committee. The Committee may, to the extent permissible by law, delegate any
or all of its authority and responsibilities hereunder to a "compensation
committee" or other committee appointed by the Board, or to such other persons
as the Committee or the Board shall deem appropriate. The Committee or the
Board may revoke any such delegation at any time in its sole discretion.
3.2 Powers of the Committee. Subject to the limitations
of the Plan, the Committee shall have the sole and complete authority in its
discretion: (i) to select Participants, (ii) to grant Options to Participants
in such forms and amounts, and with such terms, as it shall determine, (iii) to
impose such limitations, restrictions and conditions upon such Options as it
shall deem appropriate, (iv) to interpret the Plan and adopt, amend and rescind
administrative guidelines and other rules and regulations relating to the Plan,
(v) to correct any defect or omission or reconcile any inconsistency in the
Plan or in any Option granted hereunder and (vi) make all other determinations
and take all other actions necessary or advisable for the implementation and
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<PAGE> 3
administration of the Plan. The Committee's determinations on matters within
its authority shall be conclusive and binding upon the Participants, the
Company and all other Persons.
3.3 Administrative Expenses; Indemnification. All
expenses associated with the Committee's administration of the Plan shall be
borne by the Company. The members of the Committee shall be indemnified to the
fullest extent of the law in accordance with the provisions set forth in the
Company's charter and by-laws for all costs and expenses incurred by them in
connection with any action, suit or proceeding to which they or any of them may
become party by reason of any action taken or failure to act under or in
connection with the Plan or any Option granted thereunder.
ARTICLE IV
Stock Subject to the Plan
4.1 Limitation on Aggregate Shares. Subject to paragraph
4.2, the number of shares of Common Stock with respect to which options may be
granted under the Plan (the "Options") and which may be issued upon the
exercise thereof shall not exceed, in the aggregate, 5,000 shares; provided
that the type and the aggregate number of shares which may be subject to
Options shall be subject to adjustment in accordance with the provisions of
paragraph 7.1 below.
4.2 Reversion of Unused Shares to the Plan. In the event
any Options expire unexercised or are canceled, terminated or forfeited in any
manner without the issuance of Common Stock thereunder, the shares of Common
Stock which were subject to such Options shall be returned to the Plan and
shall again be available for future distribution hereunder. Shares of Common
Stock actually issued under the Plan upon exercise of any Options shall not be
returned to the Plan and shall not become available for future distribution
hereunder; provided that if shares of Common Stock issued upon exercise of
Options are repurchased by the Company at the original exercise price paid for
such shares, such shares shall revert to the Plan and shall be available for
future issuance hereunder.
4.3 Source of Shares for Plan. The 5,000 shares of
Common Stock available under the Plan may be either authorized and unissued
shares, treasury shares or a combination thereof, as the Committee shall
determine.
ARTICLE V
Award of Options
5.1 Options. The Committee may grant Options to
Participants in accordance with this Article V.
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<PAGE> 4
5.2 Nature of Options. Options granted under this Plan
shall be nonqualified stock options and are not intended to be "incentive stock
options" within the meaning of Section 422 of the Code or any successor
provision.
5.3 Exercise Price. The per-share exercise price for
shares of Common Stock to be issued upon exercise of an Option shall be such
price as is determined by the Committee.
5.4 Written Agreement. Each Option granted hereunder to
a Participant shall be embodied in a written agreement (an "Option Agreement"),
which shall be signed by the Participant and by the chief executive officer of
the Company (or another officer of the Company authorized for such purpose by
the Committee or the Board) for and in the name and on behalf of the Company,
and any shares of Common Stock issued or issuable upon exercise of such Option
shall be subject to the terms and conditions set forth in the Plan and to such
terms and conditions as are prescribed in the Option Agreement (which in the
Committee's discretion may include, but are not limited to, (i) the right of
the Company and such other Persons as the Board shall designate ("Designees")
to repurchase from each Participant, and such Participant's transferees, all
shares of Common Stock issued or issuable to such Participant upon the exercise
of an Option in the event such Participant ceases to be a Service Provider,
(ii) restrictions on the Participant's ability to transfer such shares, (iii)
provisions that in the event of a sale of the Company such Participant, and its
transferees, shall vote in favor of such sale and shall (if such sale is
structured as a sale of stock) be required to sell its shares in connection
with such sale of the Company, (iv) holdback and other registration right
restrictions in the event of a public registration of any equity securities of
the Company, and (v) any other terms and conditions which the Committee shall
deem necessary and desirable).
5.5 Term of Options. The Committee shall determine the
term of each Option, and such term shall be stated in the Option Agreement;
provided that such term shall in no event exceed ten years from the date of
grant.
ARTICLE VI
Exercise of Options
6.1 Conditions and Limitations on Exercisability.
Options granted hereunder shall be exercisable according to the terms hereof at
such time or times at or subsequent to grant as shall be determined by the
Committee in its discretion and set forth in the Option Agreement. Options may
be made exercisable in one or more installments, upon the happening of certain
events, upon the passage of time, upon the fulfillment of certain requirements,
upon the achievement by the Company of certain performance goals, or subject to
such other limitations or conditions, in each case as shall be determined by
the Committee in its discretion at the time of grant and set forth in the
Option Agreement.
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<PAGE> 5
6.2 Expiration of Options.
(a) Normal Expiration. In no event shall any
portion of any Option be exercisable after the date of expiration of the term
thereof, as determined by the Committee pursuant to paragraph 5.5 above (the
"Expiration Date").
(b) Early Expiration upon Termination of Service
Provider Relationship. Except as otherwise provided by the Committee in the
Option Agreement, any portion of any of a Participant's Options that are not
vested and exercisable on the date such Participant ceases to be a Service
Provider (the "Termination Date") shall expire and be forfeited as of such
date, and any portion of any of a Participant's Options that are vested and
exercisable on the Termination Date shall expire and be forfeited 60 days after
the Termination Date, but in no event after the Expiration Date.
ARTICLE VII
General Provisions
7.1 Adjustments. In the event of any merger,
consolidation, reorganization, recapitalization, stock dividend, stock split,
combination of shares, exchange of shares, change in corporate structure, or
other change in the shares of Common Stock, the Committee may in its discretion
make such adjustments in the number and type of shares authorized by the Plan,
the number and type of shares covered by outstanding Options and the option
exercise prices specified therein as it determines to be appropriate and
equitable (and such adjustment shall in no event be considered an amendment or
modification of the Plan or any Options hereunder). The issuance by the
Company of shares of stock of any class, or options or securities exercisable
or convertible into shares of stock of any class, for cash or property, or for
labor or services either upon direct sale, or upon the exercise of rights or
warrants to subscribe therefor, or upon exercise or conversion of other
securities, shall not affect, and no adjustment by reason thereof shall be made
with respect to, the number or price of shares of Common Stock then subject to
any Options or authorized under the Plan.
7.2 Listing, Registration and Compliance with Laws and
Regulations. Options shall be subject to the requirement that if at any time
the Committee shall determine, in its discretion, that the listing,
registration or qualification of the shares subject to the Options upon any
securities exchange or under any state or federal securities or other law or
regulation, or the consent or approval of any governmental regulatory body, is
necessary or desirable as a condition to or in connection with the granting of
the Options or the issuance or purchase of shares thereunder, no Options may be
granted or exercised, in whole or in part, unless such listing, registration,
qualification, consent or approval shall have been effected or obtained free of
any conditions not acceptable to the Committee. The holders of such Options
shall supply the Company with such certificates, representations and
information as the Company shall request and shall otherwise cooperate with the
Company in obtaining such listing, registration, qualification, consent or
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<PAGE> 6
approval. In the case of officers and other Persons subject to Section 16(b)
of the Securities Exchange Act of 1934, as amended, the Committee may at any
time impose any limitations upon the exercise of an Option that, in the Board's
discretion, are necessary or desirable in order to comply with such Section
16(b) and the rules and regulations thereunder. If the Company, as part of an
offering of securities or otherwise, finds it desirable because of federal or
state regulatory requirements to reduce the period during which any Options may
be exercised, the Committee, may, in its discretion and without the
Participant's consent, so reduce such period on not less than 15 days written
notice to the holders thereof.
7.3 Nontransferability. Options may not be transferred
other than by will or the laws of descent and distribution and, during the
lifetime of the Participant, may be exercised only by such Participant (or his
legal guardian or legal representative). In the event of the death of a
Participant, exercise of Options granted hereunder shall be made only:
(i) by the executor or administrator of the
estate of the deceased Participant or the Person or Persons to whom
the deceased Participant's rights under the Option shall pass by will
or the laws of descent and distribution; and
(ii) to the extent that the deceased Participant
was entitled thereto at the date of his death, unless otherwise
provided by the Board in such Participant's Option Agreement.
7.4 Retention of Company's Rights. The Company's
adoption of this Plan and its issuance of Options to the Participants hereunder
shall not interfere with or limit in any way the right of the Company to
terminate any Participant's employment or other Service Provider relationship
at any time and for any reason, nor confer upon any Participant any right to
continue in the employ of, or other Service Provider relationship with, the
Company for any period of time or to continue his present (or any other) rate
of compensation. No Service Provider shall have a right to be selected as a
Participant or, having been so selected, to be selected again as a Participant.
7.5 Amendment, Suspension and Termination of Plan. The
Committee may suspend or terminate the Plan or any portion thereof at any time
and may amend it from time to time in such respects as the Committee may deem
advisable; provided that no such amendment shall be made without stockholder
approval to the extent such approval is required by law, agreement or the rules
of any exchange upon which the Common Stock is listed, and no such amendment,
suspension or termination shall impair the rights of any Participant under
outstanding Options without the consent of a majority (based on the number of
Option Shares (as defined in the Option Agreements) held) of the Participants
affected thereby.
7.6 Amendment, Modification and Cancellation of
Outstanding Options. The Board may amend or modify any Option in any manner to
the extent that the Board would have had the authority under the Plan initially
to grant such Option; provided that no such amendment or modification shall
impair the rights of any Participant under any Option without the consent of a
- 6 -
<PAGE> 7
majority (based on the number of Option Shares (as defined in the Option
Agreements) held) of the Participants whose Options are so amended. With the
Participant's consent, the Committee may cancel any Option and issue a new
Option to such Participant.
* * * *
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<PAGE> 1
EXHIBIT 10.6
EXECUTIVE PURCHASE AGREEMENT
THIS EXECUTIVE PURCHASE AGREEMENT (this "Agreement") is made
as of August 13, 1997, by and between Transcend Telecom, L.L.C., a Delaware
limited liability company (the "LLC"), Transcend Telecom, Inc., a Delaware
corporation (the "Company"), Thomas M. Lord ("Executive"), Victoria M. Lord
("Victoria"), Brian T. Lord ("Brian"), and Colin J. Lord ("Colin," and
collectively with Executive, Victoria, and Brian, the "Executive Purchasers").
Capitalized terms used but not otherwise defined herein have the meanings
ascribed to such terms in paragraph 7 hereof.
NOW, THEREFORE, in consideration of the mutual promises made
herein and other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties hereto, intending to be legally
bound, agree as follows:
1. PURCHASE AND SALE OF EXECUTIVE SECURITIES.
(a) Initial Capital Contribution and Issuance of
Executive Securities. Upon execution of this Agreement, (i) Executive shall
make a capital contribution to the LLC in the amount of $17,337 (Executive's
"Initial Capital Contribution") in exchange for, and the LLC shall issue to
Executive, 337,500 Class B Units having the rights, obligations, and
preferences set forth with respect thereto in the LLC Agreement, (ii) Victoria
shall make a capital contribution to the LLC in the amount of $8,668
(Victoria's "Initial Capital Contribution") in exchange for, and the LLC shall
issue to Executive, 168,750 Class B Units having the rights, obligations, and
preferences set forth with respect thereto in the LLC Agreement, (iii) Brian
shall make a capital contribution to the LLC in the amount of $4,334 (Brian's
"Initial Capital Contribution") in exchange for, and the LLC shall issue to
Executive, 84,375 Class B Units having the rights, obligations, and preferences
set forth with respect thereto in the LLC Agreement, and (ii) Colin shall make
a capital contribution to the LLC in the amount of $4,334 (Colin's "Initial
Capital Contribution") in exchange for, and the LLC shall issue to the
Partnership, 84,375 Class B Units having the rights, obligations, and
preferences set forth with respect thereto in the LLC Agreement. Each of the
Executive Purchasers shall make such Executive Purchaser's Initial Capital
Contribution to the LLC by delivery to the LLC of a cashier's or certified
check, or wire transfer of immediately available funds to an account designated
by the LLC, in the aggregate amount equal to such Executive Purchaser's Initial
Capital Contribution. The aggregate amount of the Initial Capital
Contributions made with respect to each Class B Unit issued hereunder shall be
considered Basic Contributions made with respect to such Class B Unit.
(b) Representations and Warranties of Executive. In
connection with the Executive Purchasers' Initial Capital Contributions and the
issuance of the Executive Securities hereunder, each of the Executive
Purchasers represents and warrants (and Executive represents and warrants on
behalf of himself and each other Executive Purchaser) to each of the LLC and
the Company that:
<PAGE> 2
(i) The Executive Securities to be acquired by
the Executive Purchasers pursuant to this Agreement shall be acquired
for the Executive Purchasers' own account and not with a view to, or
intention of, distribution thereof in violation of the Securities Act
or any applicable state securities laws, and the Executive Securities
shall not be disposed of in contravention of the Securities Act or any
applicable state securities laws.
(ii) Executive will serve on the Management
Committee of the LLC and is a management employee of the Company, and
each of the Executive Purchasers is sophisticated in financial matters
and is able to evaluate the risks and benefits of the investment in
the Executive Securities.
(iii) Each of the Executive Purchasers is able to
bear the economic risk of his investment in the Executive Securities
for an indefinite period of time and is aware that transfer of the
Executive Securities may not be possible because (A) such transfer is
subject to contractual restrictions on transfer set forth herein and
in the Securityholders Agreement, and (B) the Executive Securities
have not been registered under the Securities Act or any applicable
state securities laws and, therefore, cannot be sold unless
subsequently registered under the Securities Act and such applicable
state securities laws or an exemption from such registration is
available.
(iv) Each of the Executive Purchasers has had an
opportunity to ask questions and receive answers concerning the terms
and conditions of the offering of the Executive Securities issued
hereunder and has had full access to such other information concerning
the Company as he has requested.
(v) This Agreement, the LLC Agreement, the
Securityholders Agreement, and the other agreements contemplated
thereby of even date therewith constitute the legal, valid and binding
obligations of each Executive Purchaser, enforceable in accordance
with their terms, and the execution, delivery and performance of such
agreements by each Executive Purchaser and Executive's employment with
the Company do not and shall not conflict with, violate or cause a
breach of any agreement, contract or instrument to which any Executive
Purchaser is a party or by which any Executive Purchaser is bound or
any judgment, order or decree to which any Executive Purchaser is
subject.
(c) Acknowledgment of At-Will Employment. As an
inducement to the LLC and the Company to enter into this Agreement, and as a
condition thereto, each of the Executive Purchasers acknowledges and agrees
that no agreement or arrangement between the Executive Purchasers and the
Company or the LLC (including, without limitation, the issuance of the
Executive Securities to the Executive Purchasers and the execution and delivery
of this Agreement) shall entitle Executive to remain in the employment of the
Company and its Subsidiaries or affect the right of the Company or its
Subsidiaries to terminate Executive's employment at any time and for any
reason. Executive's initial annual salary, which will remain subject to
changes implemented by the Board of Directors of the Company, shall be
$175,000.
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<PAGE> 3
2. VESTING OF EXECUTIVE SECURITIES.
(a) Vesting Schedule. Except as otherwise provided
herein, an amount of Unvested Securities (as defined below) shall vest on the
date hereof and on each of the first four anniversaries of the date hereof,
such that the Executive Securities shall be vested on each such date in
accordance with the following schedule:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Cumulative Percentage of Executive
Date Securities Vested on Such Date
-------------- ----------------------------------------
- ------------------------------------------------------------------------------------------------
<S> <C>
The date hereof 20%
- ------------------------------------------------------------------------------------------------
The first anniversary of the date hereof 40%
- ------------------------------------------------------------------------------------------------
The second anniversary of the date hereof 60%
- ------------------------------------------------------------------------------------------------
The third anniversary of the date hereof 80%
- ------------------------------------------------------------------------------------------------
The fourth anniversary of the date hereof 100%
- ------------------------------------------------------------------------------------------------
</TABLE>
Notwithstanding the foregoing sentence, and except as otherwise provided
herein, the above vesting schedule shall cease and no Unvested Securities (as
defined below) shall vest after the date on which Executive's employment with
the Company and its Subsidiaries terminates for any reason; provided that if
Executive's employment is terminated by the Company without Cause, the
Executive Securities shall thereafter continue to vest in accordance with the
above schedule so long as Executive has not committed a Vesting Termination
Breach (upon which breach the vesting schedule shall cease, and no Unvested
Securities (as defined below) shall vest on or after the date of the first such
breach). In the event the LLC or the Company has alleged that Executive has
committed a Vesting Termination Breach, Executive disputes such allegation, and
the matter is subject to the dispute resolution provisions set forth in
paragraph 6, vesting shall be tolled upon the date of the allegation of such
breach; provided that (i) if it is ultimately resolved under paragraph 6 that
Executive has committed a Vesting Termination Breach, the tolling shall become
a permanent cessation such that vesting shall have forever ceased upon the date
of such allegation, and (ii) if it is ultimately resolved under paragraph 6
that Executive did not commit a Vesting Termination Breach, a number of
Unvested Securities shall vest giving retroactive effect to such vesting
schedule such that there shall exist a number of Vested Securities as if the
vesting schedule had not been tolled as a result of such allegations.
Executive Securities which have become vested pursuant to this Agreement are
referred to herein as "Vested Securities," and all other Executive Securities
are referred to herein as "Unvested Securities."
(b) Acceleration upon a Qualified Sale of the Company.
All Unvested Securities shall become Vested Securities upon the consummation of
a Qualified Sale of the Company (as defined below) so long as Executive is
employed by the Company or any of its Subsidiaries on the date of such sale
(or, if Executive's employment was terminated by the Company without Cause, so
long as Executive has not committed a Vesting Termination Breach). A
"Qualified Sale of the Company" means either (i) the sale, lease, transfer,
conveyance or other disposition, in one or a
- 3 -
<PAGE> 4
series of related transactions, of all or substantially all of the assets of
the Company and its Subsidiaries, taken as a whole, or (ii) a transaction or
series of transactions (including by way of merger, consolidation, or sale of
stock, but not including a Public Offering) the result of which is that the
holders of the Company's outstanding voting stock immediately prior to such
transaction are after giving effect to such transaction no longer, in the
aggregate, the "beneficial owners" (as such term is defined in Rule 13d-3 and
Rule 13d-5 promulgated under the Securities Exchange Act), directly or
indirectly through one or more intermediaries, of more than 50% of the voting
power of the outstanding voting stock of the Company, in each case where the
consideration for such assets or stock in such sale or transfer consists of
cash and/or publicly traded equity securities for at least 50% of the
outstanding stock of the Company (e.g., 100% of such consideration would have
to consist of cash and/or publicly traded equity securities if only 50.01% of
such stock were sold in such transaction).
(c) Acceleration upon a Public Offering. Upon the
consummation of the Company's initial Public Offering, and so long as Executive
is employed by the Company or any of its Subsidiaries on the closing date of
such offering (or, if Executive's employment was terminated by the Company
without Cause, so long as Executive has not committed a Vesting Termination
Breach), there will vest the amount of Unvested Securities which were scheduled
to vest within the 365 days following such closing date (and the remaining
Unvested Securities, if any, shall continue to vest 20% on each anniversary of
the date hereof in accordance with clause (a) above, such that the vesting
schedule set forth in paragraph (a) above shall have been effectively
accelerated by one year).
(d) Acceleration upon Death or Disability. All Unvested
Shares shall become Vested Shares if Executive's employment with the Company or
any of its Subsidiaries terminates by reason of Executive's death or
Disability.
(e) Other Acceleration. Subject to paragraph 3(h)
hereof, any Unvested Securities which the LLC (or its assignees) has not
elected to repurchase in the Repurchase Notice (as defined below) (including
Unvested Securities originally included in the Repurchase Notice, but for which
the election to repurchase was rescinded, pursuant to the terms of paragraph 3,
by all of the LLC and/or its assignees having made such election) shall
thereafter be deemed Vested Securities.
3. LLC'S REPURCHASE OPTION.
(a) The Repurchase Option. Upon (i) the termination of
Executive's employment with the Company and its Subsidiaries for any reason
other than a termination by the Company without Cause, or (ii) if Executive's
employment is terminated by the Company without Cause, upon Executive's
commission of a Vesting Termination Breach (the occurrence of either (i) or
(ii), a "Repurchase Event"), the Executive Securities then in existence
(whether held by an Executive Purchaser or one or more of the Executive
Purchasers' transferees) will be subject to repurchase by the LLC at the LLC's
election pursuant to the terms and conditions set forth in this paragraph 3
(the "Repurchase Option"). In the event that the LLC or the Company has
alleged that Executive has committed a Vesting Termination Breach, Executive
disputes such allegation, and the matter is subject to the dispute resolution
provisions set forth in paragraph 6, the closing of the repurchase under this
paragraph 3 shall not occur unless and until it is ultimately determined that
Executive
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<PAGE> 5
committed a Vesting Termination Breach; provided that during the pendency of
such proceeding, the Executive Securities specified in the Repurchase Notice
(as defined below) shall not be transferred by any holder thereof to any
Person.
(b) Repurchase Price. The repurchase price (the
"Repurchase Price") for any Vested Securities to be repurchased shall be the
Fair Market Value of such securities. The Repurchase Price of any Unvested
Securities to be repurchased shall be the lesser of (x) the Fair Market Value
of such Securities, and (y) the Original Cost of such Securities (with
securities having the lowest Original Cost subject to repurchase prior to
securities with a higher Original Cost).
(c) Exercise of Repurchase Option. The LLC (by action of
the Board) may elect to purchase all or any portion of the Executive Securities
by delivering written notice (the "Repurchase Notice") to the holder or holders
of the Executive Securities within 30 days after the Repurchase Event. The
Repurchase Notice shall set forth the amount, type, and class of Executive
Securities (including, if applicable, the amount of Unvested Securities and/or
Vested Securities) to be acquired from each such holder. The Executive
Securities to be repurchased by the LLC shall first be satisfied to the extent
possible from the Executive Securities held by Executive at the time of
delivery of the Repurchase Notice. If the amount of Executive Securities then
held by Executive is less than the total amount of Executive Securities that
the LLC has elected to purchase, the LLC shall purchase the remaining
securities elected to be purchased from the other holder(s) of Executive
Securities, pro rata according to the amount of Executive Securities held of
record by each such other holder at the time of delivery of the Repurchase
Notice. The amount of Unvested Securities and Vested Securities to be
repurchased hereunder shall be deemed to be allocated among Executive and the
other holders of repurchased Executive Securities (if any) pro rata according
to the amount of Executive Securities to be purchased from such persons.
(d) Assignment by the LLC. The LLC, by action of the
Board, will have the right to assign all or any portion of its repurchase
rights hereunder to any holder of Investor Equity and/or to any executive
employee of the Company or any of its Subsidiaries. Notwithstanding the
foregoing, the LLC may not assign to any Person its right to pay a portion of
the Repurchase Price for Executive Securities repurchased hereunder in the form
of Class C Units (or, after the dissolution and liquidation of the LLC, a
promissory note).
(e) Fair Market Value of Repurchased Shares.
(i) The "Fair Market Value" of Executive
Securities subject to repurchase hereunder shall be determined in
accordance with this paragraph (e).
(ii) A majority interest of the LLC and/or any
assignees of the LLC's repurchase rights (based on the amount of
Executive Securities to be purchased by each) and the holders of a
majority of the Executive Securities to be repurchased shall attempt
in good faith to agree on the Fair Market Value of the Executive
Securities. Any agreement reached by such Persons shall be final and
binding on all parties hereto.
- 5 -
<PAGE> 6
(iii) If such Persons are unable to reach such
agreement within 20 days after the giving of Repurchase Notice, the
Fair Market Value of any Executive Securities that are publicly traded
shall be the average, over a period of 21 days consisting of the date
of the Repurchase Event and the 20 consecutive business days prior to
that date, of the average of the closing prices of the sales of such
securities on all securities exchanges on which such securities may at
that time be listed, or, if there have been no sales on any such
exchange on any day, the average of the highest bid and lowest asked
prices on all such exchanges at the end of such day, or, if on any day
such securities are not so listed, the average of the representative
bid and asked prices quoted in the Nasdaq System as of 4:00 P.M., New
York time, or, if on any day such securities are not quoted in the
Nasdaq System, the average of the highest bid and lowest asked prices
on such day in the domestic over-the-counter market as reported by the
National Quotation Bureau Incorporated, or any similar successor
organization.
(iv) If such Persons are unable to reach agreement
pursuant to subparagraph (ii) within 20 days after the giving of
Repurchase Notice, and to the extent any Executive Securities are not
publicly traded:
(A) A majority interest of the LLC
and/or its assignees (based on the amount of Executive Securities to
be repurchased by each) and the holders of a majority of the Executive
Securities shall each, within 10 days thereafter, choose one
investment banker or other appraiser with experience in analyzing and
making determinations concerning matters in the telecommunications
industry and in valuing entities like the LLC (including the
distribution arrangements of the type described in the LLC Agreement),
and the two investment bankers/appraisers so selected shall together
select a third investment banker/appraiser similarly qualified.
(B) The three investment
bankers/appraisers shall first appraise the fair market value of the
Company (based on the assumption of an orderly, arm's length sale to a
willing unaffiliated buyer). The three investment bankers/appraisers
shall then appraise the fair market value of such non- publicly-traded
Executive Securities as follows:
1) the fair market value of each
share of Common Stock shall be equal to the fair market value
of the Company divided by the total number of shares of Common
Stock outstanding on the date of the Repurchase Event
(determined on a fully diluted basis (x) with respect to the
Preferred Stock and all other outstanding securities
convertible into the Company's Common Stock, assuming the
conversion of such Preferred Stock and other convertible
securities (without regard to any conditions or other
restrictions on such conversion), and (y) with respect to all
outstanding options, warrants and other rights or securities
exercisable or exchangeable for shares of the Company's Common
Stock, in accordance with the Treasury Stock Method under
generally accepted accounting principles for determination of
fully diluted earnings per share);
- 6 -
<PAGE> 7
2) the fair market value of each
share of Preferred Stock shall be equal to the greater of (x)
the Liquidation Value (as defined in the Company's certificate
of incorporation) of such share, together with all accrued but
unpaid dividends thereon (as determined under the Company's
certificate of incorporation), and (y) the fair market value
(determined in accordance with subparagraph 1) above) of the
share(s) of Common Stock (including fractional shares) into
which such share of Preferred Stock is convertible on the date
of the Repurchase Event;
3) the fair market value of each
Class B Unit shall be equal to the fair market value of the
assets (as determined in accordance with subparagraphs 1), 2),
and 4) of this subparagraph (B)) that would be distributed
according to the terms of the LLC Agreement with respect to
such Class B Unit if the LLC were dissolved and liquidated on
the date of the Repurchase Event; and
4) the fair market value of any
other non-publicly-traded Executive Securities (or, for
purposes of subparagraph 3) above, any other assets) shall be
the fair value of such securities (or other assets),
determined on the basis of an orderly, arm's length sale to a
willing, unaffiliated buyer, taking into account all relevant
factors determinative of value.
The three investment bankers/appraisers shall, within thirty days of
their retention, provide the written results of such appraisals to the
LLC and/or its assignees and to each of the holders of Executive
Securities.
(C) The "Fair Market Value" of the
non-publicly-traded Executive Securities to be repurchased shall be
the average of the two appraisals closest to each other, and such
amount shall be final and binding on all parties hereto; provided that
the LLC (and/or any assignee) may at any time within five days after
receiving written notice of such determination rescind its prior
exercise of the Repurchase Option by giving written notice of such
revocation to the holder or holders of the Executive Securities to be
repurchased, and upon such revocation the revoking party will be
treated as if it had never exercised such Repurchase Option (it being
understood that such revoking parties shall thereafter have no right
to re-exercise such Repurchase Option).
(D) The costs of such appraisal shall be
allocated between the parties based on the percentage which the
portion of the contested amount not awarded to each party bears to the
amount actually contested by such party; provided that if any parties
revoke their exercise of the Repurchase Option pursuant to paragraph
(C) above, such revoking parties shall bear (pro rata among such
revoking parties based on the number of Executive Securities with
respect to which each such revoking party had initially exercised its
Repurchase Option) any appraisal costs that would be allocated to the
holder(s) of Executive Securities under this paragraph (D).
- 7 -
<PAGE> 8
(f) Closing of the Repurchase. Within 10
business days after the Repurchase Price for the Executive Securities to be
repurchased has been determined, the LLC shall send a notice to each holder of
Executive Securities setting forth the consideration to be paid for such shares
and the time and place for the closing of the transaction, which date shall not
be more than 30 days nor less than five days after the delivery of such notice.
At such closing, the holders of Executive Securities shall deliver all
certificates (if any exist) evidencing the Executive Securities to be
repurchased to the LLC (and/or any assignees of the LLC's repurchase right), and
the LLC (and/or any assignees) shall pay for the Executive Securities to be
purchased pursuant to the Repurchase Option by delivery of a check or wire
transfer of immediately available funds in the aggregate amount of the
Repurchase Price for such securities; provided that in the event the Board
determines in its good faith discretion that the LLC is not in a position to pay
in cash any or all of the Repurchase Price for Executive Securities to be
repurchased by it:
(i) prior to the dissolution and liquidation of
the LLC, the LLC may pay a portion of the Repurchase Price for such
securities equal to (x) the aggregate Repurchase Price for the
Executive Securities to be repurchased by the LLC minus (y) the
Original Cost of such securities, by issuing in exchange for such
securities an equal number of the LLC's Class C Units (having the
rights and preferences set forth in the LLC Agreement), and for
purposes of the LLC Agreement each such Class C Unit shall as of its
issuance be deemed to have Basic Contributions made with respect to
such Class C Unit equal to (A) the aggregate portion of the Repurchase
Price paid by the issuance of Class C Units divided by (B) the number
of Class C Units so issued in such repurchase; or
(ii) after the dissolution and liquidation of the
LLC, the Company (as successor to the rights of the LLC under
paragraph 8(e)(ii) below) may pay, in the form of a promissory note, a
portion of the Repurchase Price for such securities equal to (x) the
aggregate Repurchase Price for the Executive Securities to be
repurchased by the LLC minus (y) the Original Cost of such securities.
Such a promissory note shall be subordinated to all of the Company's
senior debt obligations either then or thereafter incurred, shall earn
simple annual interest at the Base Rate, shall have all principal and
accrued interest due and payable upon maturity, and shall mature upon
the earliest to occur of the Company's initial Public Offering (if
such initial Public Offering has not occurred prior to the issuance of
such promissory note), a Qualified Sale of the Company, or the fifth
anniversary of the issuance of such promissory note.
The purchasers of Executive Securities hereunder shall be entitled to receive
customary representations and warranties from the sellers regarding good title
to such shares, free and clear of any liens or encumbrances.
(g) Restrictions. Notwithstanding anything to the
contrary contained in this Agreement, all repurchases of Executive Securities
by the LLC shall be subject to applicable restrictions contained in the
Delaware General Corporation Law, the Delaware Limited Liability Company Act
and in the LLC's and its Subsidiaries' debt and equity financing agreements.
If any such restrictions prohibit the repurchase of Executive Securities
hereunder which the LLC is otherwise entitled or required to make, the time
periods provided in this paragraph 3 shall be
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<PAGE> 9
suspended, and the LLC may make such repurchases as soon as it is permitted to
do so under such restrictions, unless by such time such Repurchase Option has
terminated pursuant to paragraph 3(h); provided that notwithstanding the
foregoing, in no event shall the time periods provided in this paragraph 3 be
suspended for more than 6 months.
(h) Termination of Repurchase Option. The rights under
this paragraph 3 of the LLC and/or its assignees to repurchase Vested
Securities (but not Unvested Securities) shall terminate upon the consummation
of a Public Offering. All rights under this paragraph 3 of the LLC and/or its
assignees to repurchase Executive Securities (including both Vested Securities
and Unvested Securities) shall terminate upon a Qualified Sale of the Company.
4. RESTRICTIONS ON TRANSFER.
(a) Opinion of Valid Transfer. In addition to any other
restrictions on transfer imposed by this Agreement, the Securityholders
Agreement, or the LLC Agreement, no holder of Executive Securities may sell,
transfer or dispose of any Executive Securities (except pursuant to an
effective registration statement under the Securities Act) without first
delivering to the LLC an opinion of counsel (reasonably acceptable in form and
substance to the LLC) that neither registration nor qualification under the
Securities Act and applicable state securities laws is required in connection
with such transfer.
(b) Restrictive Legend. The certificates representing
Executive Securities shall bear the following legend:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE WERE ORIGINALLY ISSUED
ON AUGUST 13, 1997, HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE,
AND SUCH SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF
AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR AN EXEMPTION FROM
REGISTRATION THEREUNDER. THE SECURITIES REPRESENTED BY THIS
CERTIFICATE ARE ALSO SUBJECT TO ADDITIONAL RESTRICTIONS ON TRANSFER
AND REPURCHASE OPTIONS SET FORTH IN AN EXECUTIVE PURCHASE AGREEMENT
BETWEEN THE ISSUER OF SUCH SECURITIES (THE "ISSUER") AND THE INITIAL
HOLDER OF SUCH SECURITIES (THE "INITIAL HOLDER"). A COPY OF SUCH
AGREEMENT MAY BE OBTAINED BY THE HOLDER HEREOF AT THE ISSUER'S
PRINCIPAL PLACE OF BUSINESS WITHOUT CHARGE."
The legend set forth above shall be removed from the certificates evidencing
any shares which cease to be Executive Securities.
(c) Retention of Executive Stock.
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<PAGE> 10
(i) No Executive Purchaser shall sell, transfer,
assign, pledge or otherwise dispose of (whether with or without
consideration and whether voluntarily or involuntarily or by operation
of law) any interest in any Executive Securities (a "Transfer"),
except pursuant to (A) the repurchase provisions of paragraph 3 hereof
or of the LLC Agreement, (B) the "Participation Rights" or "Put"
provisions set forth in the Securityholders Agreement, or (C) a Sale
of the Company (as defined in the Securityholders Agreement) (each of
(A), (B), and (C), an "Exempt Transfer").
(ii) The restrictions contained in this paragraph
(c) shall not apply with respect to transfers of Executive Securities
(A) pursuant to applicable laws of descent and distribution or (B)
among Executive's Family Group; provided that the restrictions
contained in this paragraph shall continue to be applicable to the
Executive Securities after any such Transfer, the transferees of such
Executive Securities shall have agreed in writing to be bound by the
provisions of this Agreement with respect to the Executive Securities
so transferred, and (prior to the death of Executive) each such
transferee of Executive Securities shall have entered into proxies and
other agreements satisfactory to the holders of a majority of the
Investor Equity pursuant to which Executive shall have the sole right
to vote such Executive Securities for all purposes. For purposes of
this Agreement, "Family Group" means Executive's spouse and
descendants (whether natural or adopted), any trust which at the time
of such Transfer and at all times thereafter is and remains solely for
the benefit of Executive and/or Executive's spouse and/or descendants
and any family partnership the partners of which consist solely of
Executive, such spouse, such descendants or such trusts.
(iii) The restrictions on the transfer of Executive
Securities set forth in this paragraph (c) shall continue with respect
to each Executive Security following any Transfer thereof (other than
an Exempt Transfer); provided that upon the consummation of a Public
Offering the restrictions set forth in this paragraph (c) shall
thereafter cease to apply to all Vested Securities (it being
understood that such restrictions shall continue to apply to all
Unvested Securities until such time as they become Vested Securities
in accordance with the terms hereof).
5. ISSUANCE OF TIER I AND TIER II OPTIONS.
(a) In the event of a dissolution and liquidation of the
LLC upon the consummation of a Public Offering (a "Public Offering
Liquidation"), if the Management Percentage for such Public Offering
Liquidation is less than 33.3% the Company shall contemporaneously with such
liquidation issue to each holder of Class B Units:
(i) options (the "Tier I Options") entitling the
holder to acquire, at an exercise price per share equal to the IPO
Price, a number of shares of the Company's Common Stock equal to the
lesser of (x) the number of shares of Common Stock that such holder
would have received under the LLC Agreement in connection with such
Public Offering Liquidation if the Management Percentage had been 10%,
and (y) the difference of (A) the number of shares of Common Stock
that such holder would have received in connection with such Public
Offering Liquidation if the Management Percentage had been
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33.3%, minus (B) the number of shares of Common Stock that such holder
actually received in such liquidation; and
(ii) if the Management Percentage for such Public
Offering Liquidation is less than 23.3%, in addition to any Tier I
Options, options (the "Tier II Options") entitling the holder to
acquire, at an exercise price per share equal to the Tier II Price, a
number of shares of the Company's Common Stock equal to the lesser of
(x) the number of shares of Common Stock that such holder would have
received in connection with such Public Offering Liquidation if the
Management Percentage had been 10%, and (y) the difference of (A) the
number of shares of Common Stock that such holder would have received
in connection with such Public Offering Liquidation if the Management
Percentage had been 33.3%, minus (B) the number of shares of Common
Stock that such holder actually received in such liquidation, minus
(C) the number of shares of Common Stock into which the Tier I Options
issued to such holder are initially exercisable.
(b) For purposes of performing the calculations in
subparagraphs (a)(i) and (ii) above, (i) a distribution of shares of the
Company's Preferred Stock in a Public Offering Liquidation shall be considered
to have been a distribution of the number of shares of Common Stock into which
such Preferred Stock is convertible on the date of such liquidation, and (ii) a
distribution of any other property in a Public Offering Liquidation shall be
considered to have been a distribution of a number of shares of Common Stock
equal to the quotient of (A) the aggregate fair market value of such
distributed property on the date of such liquidation, as determined in good
faith by the Board, divided by (B) the fair market value of one share of Common
Stock on the date of such liquidation, as determined in good faith by the
Board.
(c) For purposes of this paragraph, the following terms
shall have the meanings set forth below:
"IPO Price" means the gross price per share at which shares of
the Company's Common Stock are initially offered and sold to the public in
connection with a Public Offering.
"Liquidation FMV" has the meaning ascribed to such term in the
LLC Agreement.
"Management Percentage" has the meaning ascribed to such term
in the LLC Agreement.
"Return Multiple" has the meaning ascribed to such term in the
LLC Agreement.
"Tier II Price" means, with respect to a particular Public
Offering Liquidation, the quotient of (x) the amount that would result in a
Return Multiple of 3.5 if the Liquidation FMV for such liquidation were equal
to such amount, divided by (y) the number of shares of Common Stock (determined
on an as-if-converted basis) held by the LLC immediately prior to such
liquidation.
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6. CONFIDENTIALITY, NONCOMPETE, AND NONSOLICITATION.
(a) Nondisclosure and Nonuse of Confidential Information.
Executive shall not disclose or use at any time, either during his employment
with the Company or thereafter, any Confidential Information (as defined below)
of which Executive is or becomes aware, whether or not such information is
developed by him, except to the extent that such disclosure or use is directly
related to and required by Executive's performance of duties assigned to
Executive by the LLC or the Company, or to the extent such disclosure is
permissible under the confidentiality provisions set forth in the Stock
Purchase Agreement. Executive shall take all appropriate steps to safeguard
Confidential Information and to protect it against disclosure, misuse,
espionage, loss and theft. As used in this Agreement, the term "Confidential
Information" means information that is not generally known to the public and
that is used, developed or obtained by the LLC, the Company, or its
Subsidiaries in connection with their business, including but not limited to
(i) products or services, (ii) fees, costs and pricing structures, (iii)
designs, (iv) analysis, (v) drawings, photographs and reports, (vi) computer
software, including operating systems, applications and program listings, (vii)
flow charts, manuals and documentation, (viii) data bases, (ix) accounting and
business methods, (x) inventions, devices, new developments, methods and
processes, whether patentable or unpatentable and whether or not reduced to
practice, (xi) customers and clients and customer or client lists, (xii)
copyrightable works, (xiv) all technology and trade secrets, (xv) business
plans and financial models, and (xvi) all similar and related information in
whatever form. Confidential Information shall not include any information that
has been published in a form generally available to the public prior to the
date Executive proposes to disclose or use such information. Information shall
not be deemed to have been published merely because individual portions of the
information have been separately published, but only if all material features
constituting such information have been published in combination.
Notwithstanding the foregoing, "Confidential Information" shall not include any
information of which (a) Executive became aware prior to his affiliation with
the Company and the LLC, (b) Executive learns from sources other than the LLC,
the Company or its Subsidiaries, whether prior to or after such information is
actually disclosed by the LLC, the Company or its Subsidiaries or (c) is
disclosed in a prospectus or other documents for dissemination to the public.
(b) The Company's Ownership of Intellectual Property.
(i) Acknowledgment of Company Ownership. In the
event that Executive as part of his activities on behalf of the
Company generates, authors or contributes to any invention, design,
new development, device, product, method or process (whether or not
patentable or reduced to practice or constituting Confidential
Information), any copyrightable work (whether or not constituting
Confidential Information) or any other form of Confidential
Information relating directly or indirectly to the Company's business
as now or hereafter conducted (collectively, "Intellectual Property"),
Executive acknowledges that such Intellectual Property is the
exclusive property of the Company and hereby assigns all right, title
and interest in and to such Intellectual Property to the Company. Any
copyrightable work prepared in whole or in part by Executive will be
deemed "a work made for hire" under Section 201(b) of the 1976
Copyright Act, and the Company shall own all of the rights comprised
by the copyright therein. Executive shall promptly and fully disclose
all Intellectual Property to the Company and shall cooperate with the
Company to protect the Company's interests in and rights to such
Intellectual Property (including, without limitation,
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<PAGE> 13
providing reasonable assistance in securing patent protection and
copyright registrations and executing all documents as reasonably
requested by the Company, whether such requests occur prior to or
after termination of Executive's employment with the Company).
(ii) Executive Invention. Executive understands
that paragraph (b)(i) of this Agreement regarding the Company's
ownership of Intellectual Property does not apply to any invention for
which no equipment, supplies, facilities or trade secret information
of the Company were used and which was developed entirely on
Executive's own time, unless (i) the invention relates to the business
of the Company or to the Company's actual or demonstrably anticipated
research or development or (ii) the invention results from any work
performed by Executive for the Company.
(c) Delivery of Materials upon Termination of Employment.
As requested by the Company from time to time and upon the termination of
Executive's employment with the Company for any reason, Executive shall
promptly deliver to the Company all copies and embodiments, in whatever form,
of all Confidential Information and Intellectual Property in Executive's
possession or within his control (including, but not limited to, written
records, notes, photographs, manuals, notebooks, documentation, program
listings, flow charts, magnetic media, disks, diskettes, tapes and all other
materials containing any Confidential Information or Intellectual Property)
irrespective of the location or form of such material and, if requested by the
Company, shall provide the Company with written confirmation that all such
materials have been delivered to the Company.
(d) Noncompete. Executive acknowledges and agrees with
the Company and the LLC that in the course of his employment with the Company
he shall become familiar with the Company's trade secrets and with other
Confidential Information concerning the Company and the LLC, that Executive's
services to the Company and the LLC are unique in nature and of an
extraordinary value to the Company and the LLC, and that the Company and the
LLC would be irreparably damaged if Executive were to provide similar services
to any person or entity competing with the LLC or the Company or engaged in a
similar business. In connection with the issuance to Executive of the
Executive securities hereunder, in consideration of and as an inducement to the
LLC's and the Company's entering into this Agreement and the Company's agreeing
to issue the Tier I and Tier II Options and to assume the obligations of the
LLC upon dissolution and liquidation thereof, and in further consideration of
the Noncompete Compensation (as defined below), Executive accordingly covenants
and agrees with the Company and the LLC that during the Noncompete Period (as
defined below), Executive shall not, directly or indirectly, either for himself
or for or through any other individual, corporation, partnership, joint venture
or other entity, participate in any business or enterprise conducting business
in any Covered MSA which engages or proposes to engage in the provision of
telecommunications services. For purposes of this Agreement, (i) the term
"participate in" shall include, without limitation, having any direct or
indirect interest in any corporation, partnership, joint venture or other
entity, whether as a sole proprietor, owner, stockholder, partner, joint
venturer, creditor or otherwise, or rendering any direct or indirect service or
assistance to any individual, corporation, partnership, joint venture and other
business entity (whether as a director, officer, manager, supervisor, employee,
agent, consultant or otherwise), other than ownership of up to 2% of the
outstanding stock of any class which is publicly traded, (ii) the term "MSA"
means metropolitan statistical area and (iii) the term "Covered MSA" means (1)
any MSA
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<PAGE> 14
in which the Company is engaged in business or has at any time had an Approved
Business Plan (as defined in the Stock Purchase Agreement) to engage in
business, (2) the MSAs which include Dallas, New York, Atlanta, Chicago and Los
Angeles (the "Top Five MSAs"), (3) from and after the time at which there are
Approved Business Plans for each of the Top Five MSAs, each of the MSAs which
include Boston, Cleveland, Denver, Detroit, Houston, Miami, Northern New
Jersey, Phoenix, Philadelphia, St. Louis, San Diego, San Francisco, San Jose,
Seattle and Washington, D.C. and (4) any other MSA for which a business plan
has been submitted to the Company pursuant to the Stock Purchase Agreement on
or prior to the termination of Executive's Employment or for which Company
personnel have taken substantial steps towards completing, provided, that any
such MSA under this clause (4) shall cease to be a Covered MSA if such business
plan does not become an Approved Business Plan within the earlier of (x) 180
days after such submission and (y) 180 days after the termination of
Executive's Employment, and, in each case, the Company's management and the LLC
have attempted in good faith during such period to reach agreements that would
enable such plan to become an Approved Business Plan. Notwithstanding the
foregoing, the term Covered MSA shall not include any Top Five MSA which is not
subject to an Approved Business Plan if business plans for at least three of
such Top Five MSAs have not become Approved Business Plans prior to the later
of (x) the 180th day after the date on which the Company has employed a
president and chief operating officer approved by the Board's Executive
Committee or (y) the 180th day after business plans for each of the Top Five
MSAs have been submitted to the Company and the LLC for approval pursuant to
the Stock Purchase Agreement (which business plans are eligible to qualify as
Approved Business Plans because, among other things, they specify each of the
items required under Section 3A of the Stock Purchase Agreement to be specified
in an Approved Business Plan and do not require equity capital beyond the
Maximum Commitment (as defined in the Stock Purchase Agreement), and Executive
has worked in good faith to seek to have such plans become Approved Business
Plans by such time. Executive agrees that this covenant is reasonable with
respect to its duration, geographical area and scope.
(e) Nonsolicitation. During the Noncompete Period,
Executive shall not (i) induce or attempt to induce any employee of the Company
or any Subsidiary to leave the employ of the Company or any Subsidiary, or in
any way interfere with the relationship between the Company or any Subsidiary
and any employee thereof, (ii) hire directly or through another entity any
person who was an employee of the Company or any Subsidiary at any time during
the six months prior to the date such person is to be so hired, or (iii) induce
or attempt to induce any customer, supplier, licensee or other business
relation of the LLC, the Company or any Subsidiary to cease doing business with
the LLC, the Company or any Subsidiary, or in any way interfere with the
relationship between any such customer, supplier, licensee or business relation
and the LLC, the Company and its Subsidiaries (including, without limitation,
making any negative statements or communications concerning the LLC, the
Company or any Subsidiary).
(f) Noncompete Period. The "Noncompete Period" shall
commence on the date hereof and shall continue until (i) if Executive is
terminated prior to the third anniversary of the date hereof, the later of (A)
the fourth anniversary of the date hereof and (B) the second anniversary of the
date of termination, (ii) if Executive is terminated on or after the third
anniversary, but prior to the fourth anniversary, of the date hereof, the fifth
anniversary of the date hereof, and (iii) if Executive is terminated on or
after the fourth anniversary hereof, the first anniversary of the date of
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<PAGE> 15
termination; provided that the Noncompete Period shall terminate if at any time
after the date of termination the Company ceases to pay Executive his
Noncompete Compensation (unless Executive violates any covenant set forth in
this paragraph 6, in which case the Noncompete Period shall continue even
absent payment of the Noncompete Compensation). "Noncompete Compensation"
shall consist of 100% of the base salary that Executive received as
compensation from the Company and its Subsidiaries immediately prior to
termination (Executive's "Previous Salary") together with the continuation of
the medical benefits that the Company provided to Executive immediately prior
to termination (Executive's "Previous Benefits"); provided that if at any time
during the Noncompete Period Executive obtains other employment, Executive's
Noncompete Compensation shall during the period of such employment (i) be
reduced (but not below zero) by Executive's compensation for such employment
and (ii) shall not include the continued provision of medical benefits if such
employment provides medical benefits comparable to the Previous Benefits.
(g) Judicial Modification. If the final judgment of a
court of competent jurisdiction, or any final non-appealable decision of an
arbitrator in connection with a mandatory arbitration, declares that any term
or provision of this paragraph is invalid or unenforceable, the parties agree
that the court making the determination of invalidity or unenforceability shall
have the power to reduce the scope, duration, or geographic area of the term or
provision, to delete specific words or phrases, or to replace any invalid or
unenforceable term or provision with a term or provision that is valid and
enforceable and that comes closest to expressing the intention of the invalid
or unenforceable term or provision, and this Agreement shall be enforceable as
so modified after the expiration of the time within which the judgment or
decision may be appealed.
(h) Dispute Resolution.
(i) Arbitration. All claims, disputes,
controversies and other matters in question arising out of or relating
to this paragraph 6, or to the alleged breach hereof, shall be settled
by preliminary negotiation between the LLC or other Person bringing
such allegation and the Executive (the "parties") or, if such
preliminary negotiation is unsuccessful for any reason (but in any
event not later than 10 days after commencement of such negotiation),
by binding arbitration in accordance with the procedures set forth in
this paragraph (h). Without limiting the mandatory arbitration
provision set forth in this paragraph (h), each of the parties hereto
(A) waives the right to bring an action in any court of competent
jurisdiction with respect to any such claims, controversies and
disputes (other than any such action to enforce the award or other
remedy resulting from any arbitration pursuant to this paragraph (h)
or to prevent any arbitrator from exceeding the authority granted to
the arbitrators hereunder) and (B) waives the right to trial by jury
in any suit, action or other proceeding brought on, with respect to or
in connection with this Agreement.
(ii) Binding Arbitration. Upon filing of a notice
of demand for binding arbitration by any party hereto, arbitration
shall be commenced and conducted as follows:
(A) Arbitrators. All claims, disputes,
controversies and other matters (collectively "matters") in
question shall be referred to and decided and settled by a
panel of three arbitrators with experience in analyzing,
understanding,
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<PAGE> 16
and making determinations concerning matters in the
telecommunications industry, one selected by each of the
parties and the third by the two arbitrators so selected.
(B) Cost of Arbitration. The cost of
each arbitration proceeding, including without limitation the
arbitrators' compensation and expenses, hearing room charges,
court reporter transcript charges, etc., shall be allocated
among the parties based upon the percentage which the portion
of the contested amount not awarded to each party bears to the
amount actually contested by such party. The arbitrators
shall also award the party that prevails substantially in its
pre-hearing position its reasonable attorneys' fees and costs
incurred in connection with the arbitration. The arbitrators
are specifically instructed to award attorneys' fees for
instances of abuse of the discovery process.
(C) Situs of Proceedings. The situs of
the arbitration shall be in New York, New York, or such other
place as is mutually agreeable to the parties.
(iii) Pre-hearing Discovery. The parties shall
have the right to conduct and enforce pre- hearing discovery in
accordance with the then current Federal Rules of Civil Procedure,
subject to the following limitations: (A) each party may serve no more
than one set of interrogatories which set shall ask no more than
twenty questions; (B) each party may depose the other party's expert
witnesses who will be called to testify at the hearing, plus up to six
fact witnesses without regard to whether they will be called to
testify (each party will be entitled to a total of not more than 24
hours of depositions of the other party's witnesses, and not more than
6 hours with respect to any single witness); and (C) document
discovery and other discovery shall be under the control of and
enforceable by the arbitrators, and all disputes relating thereto
shall be decided by the arbitrators. Notwithstanding any contrary
foregoing provisions, the arbitrators shall have the power and
authority to, and to the fullest extent practicable shall, abbreviate
arbitration discovery in a manner which is fair to all parties in
order to expedite the conclusion of each alternative dispute
resolution proceeding.
(iv) Pre-hearing Conference. Within thirty (30)
days after filing of notice of demand for binding arbitration, the
arbitrators shall hold a pre-hearing conference to establish schedules
for completion of discovery, for exchange of exhibit and witness
lists, for arbitration briefs, for the hearing, and to decide
procedural matters and all other questions that may be presented.
(v) Hearing Procedures. The hearing shall be
conducted to preserve its privacy and to allow reasonable procedural
due process. Rules of evidence need not be strictly followed, and the
hearing shall be streamlined as follows: (A) documents shall be
self-authenticating, subject to valid objection by the opposing party;
(B) expert reports, witness biographies, depositions and affidavits
may be utilized, subject to the opponent's right of a live
cross-examination of the witness in person; (C) charts, graphs and
summaries shall be utilized to present voluminous data, provided (1)
that the underlying data was made available to the opposing party
thirty (30) days prior to the hearing, and (2) that the preparer of
each chart, graph or summary is available for explanation and live
cross-examination in person; (D) the hearing should be held on
consecutive business days without interruption to
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<PAGE> 17
the maximum extent practicable; and (E) the arbitrators shall
establish all other procedural rules for the conduct of the
arbitration in accordance with the rules of arbitration of the
American Arbitration Association.
(vi) Governing Law. This arbitration provision
shall be governed by, and all rights and obligations specifically
enforceable under and pursuant to, the Federal Arbitration Act (9
U.S.C. Section 1, etseq.).
(vii) Consolidation. No arbitration shall include,
by consolidation, joinder or in any other manner, any additional
person not a party to this Agreement (other than affiliates of any
such party, which affiliates may be included in the arbitration),
except by written consent of the parties hereto containing a specific
reference to this Agreement.
(viii) Award; Time Limit. The arbitrators are
empowered to render an award of general compensatory damages and
equitable relief (including, without limitation, injunctive relief),
but is not empowered to award punitive damages. The award rendered by
the arbitrators (A) shall be final; (B) shall not constitute a basis
for collateral estoppel as to any issue; and (C) shall not be subject
to vacation or modification. The arbitrators shall render any award
or otherwise conclude the arbitration no later than 120 days after the
date notice is given pursuant to this paragraph (h).
(ix) Confidentiality. The Parties hereto will
maintain the substance of any proceedings hereunder in confidence and
the arbitrators, prior to any proceedings hereunder, will sign an
agreement whereby the arbitrator agrees to keep the substance of any
proceedings hereunder in confidence.
7. DEFINITIONS.
"Approved Business Plan" has the meaning ascribed to such term
in the Stock Purchase Agreement.
"Basic Contributions" has the meaning ascribed to such term in
the LLC Agreement.
"Board" means the board of managers of the LLC (or, after the
dissolution and liquidation of the LLC, the board of directors of the Company).
"Cause" means (A) Executive's theft or embezzlement, or
attempted theft or embezzlement, of money or property of the Company or the
LLC, Executive's perpetration or attempted perpetration of fraud, or
Executive's participation in a fraud or attempted fraud, on the Company or the
LLC, or Executive's unauthorized appropriation of, or attempt to
misappropriate, any tangible or intangible assets or property of the Company or
the LLC, (B) any act or acts of disloyalty, misconduct or moral turpitude by
Executive injurious to the interest, property, operations, business or
reputation of the Company or the LLC, or Executive's conviction of a crime the
commission of which results in injury to the Company or the LLC or (C)
Executive's repeated
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refusal or failure (other than by reason of Disability) to carry out reasonable
instructions by his superiors or the Board or the Company's board of directors.
"Class A Units" has the meaning ascribed to such term in the
LLC Agreement.
"Class B Units" has the meaning ascribed to such term in the
LLC Agreement.
"Class C Units" has the meaning ascribed to such term in the
LLC Agreement.
"Class D Units" has the meaning ascribed to such term in the
LLC Agreement.
"Common Stock" means the Company's Common Stock, par value
$.01 per share.
"Disability" means (i) any permanent physical or mental
incapacity or disability rendering the Executive unable or unfit to perform
effectively the duties and obligations of his employment or to participate
effectively and actively in the management of the Company, or (ii) any
illness, accident, injury, physical or mental incapacity or other disability,
where such condition has rendered the Executive unable or unfit to perform
effectively the duties and obligations of his employment or to participate
effectively and actively in the management of the Company for a period of at
least 90 days (in either case, as determined in the good faith judgment of the
Company's board of directors).
"Executive Securities" means (i) the Class B Units issued to
the Executive Purchasers hereunder, (ii) upon dissolution and liquidation of
the LLC, any securities of the Company distributed in respect of the securities
referred to in clause (i) above pursuant to such dissolution and liquidation,
(iii) any Tier I Options or Tier II Options issued to any holder of Executive
Securities hereunder, (iv) any other securities of the LLC or the Company
hereafter acquired by Executive, and (v) any securities issued directly or
indirectly with respect to the foregoing securities by way of a stock split,
stock dividend, or other division of securities, or in connection with a
combination of securities, recapitalization, merger, consolidation, or other
reorganization, or upon conversion or exercise of any of the foregoing
securities. As to any particular securities constituting Executive Securities,
such securities shall cease to be Executive Securities when they have been (a)
effectively registered under the Securities Act and disposed of in accordance
with the registration statement covering them, (b) distributed to the public
through a broker, dealer or market maker pursuant to Rule 144 under the
Securities Act (or any similar provision then in force) or (c) repurchased by
any holder of Class A Units, or by the LLC (including in exchange for Class C
Units or Class D Units), the Company or any Subsidiary thereof
"Investor Equity" means (i) the Class A Units issued pursuant
to the Investor Purchase Agreement, (ii) upon and after the dissolution or
liquidation of the LLC, the securities distributed in respect of the securities
referred to in clause (i) above pursuant to such dissolution or liquidation,
and (iii) any securities issued directly or indirectly with respect to the
foregoing securities by way of a stock split, stock dividend, or other division
of securities, or in connection with a combination of securities,
recapitalization, merger, consolidation, or other reorganization, or upon
conversion or exercise of the foregoing (but not including any Class D Units
issued in exchange for Class A Units).
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<PAGE> 19
As to any particular securities constituting Investor Equity, such securities
shall cease to be Investor Equity when they have been (a) effectively
registered under the Securities Act and disposed of in accordance with the
registration statement covering them, (b) distributed to the public through a
broker, dealer or market maker pursuant to Rule 144 under the Securities Act
(or any similar provision then in force) or (c) repurchased by the LLC
(including in exchange for Class D Units) or the Company or any Subsidiary
thereof.
"LLC Agreement" means the limited liability company agreement
of even date herewith, entered into by and among the members of the LLC, as
amended from time to time in accordance with its terms.
"MSA" means a metropolitan statistical area.
"Original Cost" means, at any given time, (i) with respect to
any Class B Units, the total Basic Contributions made with respect to such
Class B Units pursuant to the LLC Agreement prior to such time, (ii) with
respect to any Preferred Stock, the aggregate Liquidation Value (as determined
under the Company's certificate of incorporation) of such Preferred Stock at
such time, (iii) with respect to any Common Stock issued upon conversion of
Preferred Stock, the Original Cost of such Preferred Stock, and (iv) with
respect to any other securities, the original price paid upon issuance of such
securities.
"Person" means an individual, a partnership, a corporation, a
limited liability company, an association, a joint stock company, a trust, a
joint venture, an unincorporated organization and a governmental entity or any
department, agency or political subdivision thereof.
"Preferred Stock" means the Company's 12% Cumulative
Convertible Preferred Stock, par value $.01 per share.
"Public Offering" means any underwritten sale of the Company's
common stock pursuant to an effective registration statement under the
Securities Act filed with the Securities and Exchange Commission on Form S-1
(or a successor form adopted by the Securities and Exchange Commission);
provided that the following shall not be considered a Public Offering: (i) any
issuance of common stock as consideration or financing for a merger or
acquisition, and (ii) any issuance of common stock or rights to acquire common
stock to employees of the Company or its Subsidiaries as part of an incentive
or compensation plan.
"Securities Act" means the Securities Act of 1933, as amended,
or any similar federal law then in force.
"Securityholders Agreement" means the securityholders
agreement entered into by and among the Company, the LLC, and the holders of
interests in the LLC, as amended from time to time in accordance with its
terms.
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<PAGE> 20
"Stock Purchase Agreement" means the stock purchase agreement
of even date herewith, entered into by and between the Company and the LLC, as
amended from time to time in accordance with the terms thereof.
"Subsidiary" means, with respect to any Person, any
corporation, limited liability company, partnership, association or other
business entity of which (i) if a corporation, a majority of the total voting
power of shares of stock entitled (without regard to the occurrence of any
contingency) to vote in the election of directors, managers or trustees thereof
is at the time owned or controlled, directly or indirectly, by that Person or
one or more of the other Subsidiaries of that Person or a combination thereof,
or (ii) if a limited liability company, partnership, association or other
business entity, a majority of the partnership or other similar ownership
interest thereof is at the time owned or controlled, directly or indirectly, by
any Person or one or more Subsidiaries of that Person or a combination thereof.
For purposes hereof, a Person or Persons shall be deemed to have a majority
ownership interest in a limited liability company, partnership, association or
other business entity if such Person or Persons shall be allocated a majority
of limited liability company, partnership, association or other business entity
gains or losses or shall be or control any managing director or general partner
of such limited liability company, partnership, association or other business
entity.
"Vesting Termination Breach" means (i) any breach of paragraph
6(d) or clause (ii) of paragraph 6(e) and (ii) any breach of any other
provision of paragraph 6 which is material or is intentionally and knowingly
committed by Executive.
8. MISCELLANEOUS PROVISIONS.
(a) Further Assurances; Voting Proxy. As a condition to
the LLC's and the Company's entering into this Agreement and the LLC's issuance
of Executive Securities to the Executive Purchasers, and as further
consideration therefor:
(i) Executive hereby unconditionally guarantees
the full and prompt performance of each Executive Purchaser's
obligations under this Agreement and under each of the agreements
contemplated hereby to which such Executive Purchaser is a party, and
Executive agrees that he will take all necessary or desirable actions
to ensure such performance as are reasonably requested by the LLC or
the Company. Executive further agrees that he will not provide any
directions to an Executive Purchaser that are contrary to any
obligation imposed on such Executive Purchaser under this Agreement or
under such other agreements, and that Executive will not fail to
provide any directions to an Executive Purchaser if such failure would
cause an Executive Purchaser not to satisfy its obligations hereunder
or thereunder. This guarantee shall be irrevocable with respect to
each Executive Security held by an Executive Purchaser (and shall
survive any transfer thereof, or the death, disability, incompetency,
or bankruptcy of such Executive Purchaser) until such time as such
Executive Security is transferred in accordance with the terms hereof
to a Person other than a member of Executive's Family Group, at which
time this guarantee shall be deemed revoked with respect to such
security (but not with respect to any other Executive Securities). No
invalidity, irregularity or unenforceability of this Agreement or such
other agreements
- 20 -
<PAGE> 21
by reason of an Executive Purchaser's incapacity, minor status,
incompetency, bankruptcy, insolvency, or otherwise shall impair,
affect or be a defense to the obligations of Executive under this
guarantee.
(ii) Each Executive Purchaser (other than
Executive) hereby appoints Executive as his true and lawful proxy and
attorney-in-fact, with full power of substitution, to vote all of such
Executive Purchaser's Executive Securities on all matters to be voted
on by the holders of such securities (whether as a member vote, a
shareholder vote, an approval right under this Agreement or the other
agreements contemplated hereby, or otherwise). These proxies and
powers granted by each Executive Purchaser pursuant to this paragraph
are coupled with an interest, and are given to secure such Executive
Purchasers' obligations under this Agreement and the other agreements
contemplated hereby to which the Executive Purchasers are parties.
Such proxies and powers shall be irrevocable with respect to each
Executive Security held by an Executive Purchaser (and shall survive
any transfer thereof, or the death, disability, incompetency, or
bankruptcy of such Executive Purchaser) until such time as such
Executive Security is transferred in accordance with the terms hereof
to a Person other than a member of Executive's Family Group, at which
time such proxy shall be deemed revoked with respect to such security
(but not with respect to any other Executive Securities).
(b) Transfers in Violation of Agreement. Any Transfer or
attempted Transfer of any Executive Securities in violation of any provision of
this Agreement shall be void, and none of the LLC, the Company, or any
Subsidiary thereof shall record such purported Transfer on its books or treat
any purported transferee of such Executive Securities as the owner of such
securities for any purpose.
(c) Severability. Whenever possible, each provision of
this Agreement shall be interpreted in such manner as to be effective and valid
under applicable law, but if any provision of this Agreement is held to be
invalid, illegal or unenforceable in any respect under any applicable law or
rule in any jurisdiction, such invalidity, illegality or unenforceability shall
not affect any other provision or any other jurisdiction, but this Agreement
shall be reformed, construed and enforced in such jurisdiction as if such
invalid, illegal or unenforceable provision had never been contained herein.
(d) Complete Agreement. This Agreement, those documents
expressly referred to herein and other documents of even date herewith embody
the complete agreement and understanding among the parties and supersede and
preempt any prior understandings, agreements or representations by or among the
parties, written or oral, which may have related to the subject matter hereof
in any way.
(e) Counterparts. This Agreement may be executed in
separate counterparts, none of which need contain the signature of more than
one party hereto but each of which shall be deemed to be an original and all of
which taken together shall constitute one and the same agreement.
(f) Successors and Assigns.
- 21 -
<PAGE> 22
(i) Except as otherwise provided herein, this
Agreement shall bind the parties hereto and their respective
successors and assigns and shall inure to the benefit of and be
enforceable by the parties hereto and their respective successors and
assigns whether so expressed or not.
(ii) Each of the Company, the LLC, each of the
Executive Purchasers, and each holder of Executive Securities hereby
acknowledges that upon and after the dissolution and liquidation of
the LLC, (A) all contractual obligations and duties of the LLC
hereunder shall thereafter bind and be enforceable against the
Company, (B) all rights and powers granted to the LLC hereunder
(including, without limitation, the repurchase rights set forth in
paragraph 3) shall inure to the benefit of and be enforceable by the
Company, (C) all references to the LLC shall thereafter be deemed to
be references to the Company, and (D) this Agreement shall thereafter
operate and be construed as if the word "Company" were substituted for
the word "LLC" in each such instance.
(g) CHOICE OF LAW. ALL QUESTIONS CONCERNING THE
CONSTRUCTION, VALIDITY, ENFORCEMENT AND INTERPRETATION OF THIS AGREEMENT AND
THE EXHIBITS HERETO SHALL BE GOVERNED BY THE INTERNAL LAW, AND NOT THE LAW OF
CONFLICTS, OF THE STATE OF DELAWARE.
(h) Remedies. Each of the parties to this Agreement
(including any holder of Investor Equity or employee of the Company to which
the LLC assigns any of its repurchase rights under paragraph 3 hereof) shall be
entitled to enforce its rights under this Agreement specifically, to recover
damages and costs (including reasonable attorney's fees) caused by any breach
of any provision of this Agreement and to exercise all other rights existing in
its favor. The parties hereto agree and acknowledge that money damages would
not be an adequate remedy for any breach of the provisions of this Agreement
and that any party may in its sole discretion apply to any court of law or
equity of competent jurisdiction (without posting any bond or deposit) for
specific performance and/or other injunctive relief in order to enforce or
prevent any violations of the provisions of this Agreement.
(i) Amendment, Modification, or Waiver. The provisions
of this Agreement may be amended, modified, or waived only with the prior
written consent of the LLC and the Executive.
(j) Third-Party Beneficiaries. The parties hereto
acknowledge and agree that certain provisions of this Agreement are intended
for the benefit of certain holders of Investor Equity or employees of the
Company to which the LLC assigns any of its repurchase rights under paragraph 3
hereof, that such Persons are third-party beneficiaries of this Agreement and
that provisions of this Agreement shall be enforceable by such Persons as
provided herein.
(k) Business Days. If any time period for giving notice
or taking action hereunder expires on a day which is a Saturday, Sunday or
legal holiday in the State of Illinois, the time period shall be automatically
extended to the business day immediately following such Saturday, Sunday or
holiday.
- 22 -
<PAGE> 23
(l) Descriptive Headings; Interpretation; No Strict
Construction. The descriptive headings of this Agreement are inserted for
convenience only and do not constitute a substantive part of this Agreement.
Whenever required by the context, any pronoun used in this Agreement shall
include the corresponding masculine, feminine or neuter forms, and the singular
forms of nouns, pronouns, and verbs shall include the plural and vice versa.
Reference to any agreement, document, or instrument means such agreement,
document, or instrument as amended or otherwise modified from time to time in
accordance with the terms thereof, and if applicable hereof. The use of the
words "include" or "including" in this Agreement shall be by way of example
rather than by limitation. The use of the words "or," "either" or "any" shall
not be exclusive. The parties hereto have participated jointly in the
negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this Agreement shall be construed
as if drafted jointly by the parties hereto, and no presumption or burden of
proof shall arise favoring or disfavoring any party by virtue of the authorship
of any of the provisions of this Agreement.
(m) Notices. All notices, demands or other
communications to be given or delivered under or by reason of the provisions of
this Agreement shall be in writing and shall be deemed to have been given when
(a) delivered personally to the recipient, (b) telecopied to the recipient
(with hard copy sent to the recipient by reputable overnight courier service
(charges prepaid) that same day) if telecopied before 5:00 p.m. Chicago,
Illinois time on a business day, and otherwise on the next business day, or (c)
one business day after being sent to the recipient by reputable overnight
courier service (charges prepaid). Such notices, demands and other
communications shall be sent to the following Persons at the following
addresses:
To the LLC:
c/o Madison Dearborn Capital Partners
Three First National Plaza, Suite 3800
Chicago, Illinois 60670
Attention: James N. Perry, Jr.
Telephone: (312) 732-5416
Telecopy: (312) 732-4098
with a copy (which shall not constitute notice) to:
Kirkland & Ellis
200 East Randolph Drive
Chicago, Illinois 60601
Attention: Mark B. Tresnowski, Esq.
Telephone: (312) 861-2385
Telecopy: (312) 861-2200
and a copy (which shall not constitute notice) to:
Swidler & Berlin
3000 K Street, N.W., Suite 300
- 23 -
<PAGE> 24
Washington, D.C. 20007
Attention: John Klusaritz, Esq.
Telephone: (202) 424-7586
Telecopy: (202) 424-7643
To the Company:
15190 Prestonwood Boulevard
Suite 421
Dallas, Texas 75248
Attention: Royce J. Holland
Telephone: (972) 385-3176
Telecopy: (972) 385-3176
with a copy (which shall not constitute notice) to:
Kirkland & Ellis
200 East Randolph Drive
Chicago, Illinois 60601
Attention: Mark B. Tresnowski, Esq.
Telephone: (312) 861-2385
Telecopy: (312) 861-2200
and a copy (which shall not constitute notice) to:
Swidler & Berlin
3000 K Street, N.W., Suite 300
Washington, D.C. 20007
Attention: John Klusaritz, Esq.
Telephone: (202) 424-7586
Telecopy: (202) 424-7643
To an Executive Purchaser: at the address set forth in
the LLC's or the Company's records.
or to such other address or to the attention of such other person as the
recipient party has specified by prior written notice to the sending party.
(n) Delivery by Facsimile. This Agreement, the
agreements referred to herein, and each other agreement or instrument entered
into in connection herewith or therewith or contemplated hereby or thereby, and
any amendments hereto or thereto, to the extent signed and delivered by means
of a facsimile machine, shall be treated in all manner and respects as an
original agreement or instrument and shall be considered to have the same
binding legal effect as if it were the original signed version thereof
delivered in person. At the request of any party hereto or to any such
agreement or instrument, each other party hereto or thereto shall reexecute
original forms
- 24 -
<PAGE> 25
thereof and deliver them to all other parties. No party hereto or to any such
agreement or instrument shall raise the use of a facsimile machine to deliver a
signature or the fact that any signature or agreement or instrument was
transmitted or communicated through the use of a facsimile machine as a defense
to the formation or enforceability of a contract and each such party forever
waives any such defense.
* * * *
- 25 -
<PAGE> 26
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement on the date first written above.
TRANSCEND TELECOM, L.L.C.
By: /s/ ROYCE J. HOLLAND
--------------------------------------------
Its: Member
-------------------------------------------
TRANSCEND TELECOM, INC.
By: /s/ ROYCE J. HOLLAND
--------------------------------------------
Its: Chief Executive Officer
-------------------------------------------
EXECUTIVE PURCHASERS
/s/ THOMAS M. LORD
-----------------------------------------------
Thomas M. Lord (individually, and on behalf of
Brian T. Lord and Colin J. Lord)
/s/ VICTORIA M. LORD
-----------------------------------------------
Victoria M. Lord
/s/ BRIAN T. LORD
-----------------------------------------------
Brian T. Lord
/s/ COLIN J. LORD
-----------------------------------------------
Colin J. Lord
<PAGE> 1
EXHIBIT 10.9
- --------------------------------------------------------------------------------
WARRANT AGREEMENT
between
ALLEGIANCE TELECOM, INC.
and
THE BANK OF NEW YORK
Dated as of February 3, 1998
- --------------------------------------------------------------------------------
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
ARTICLE I
CERTAIN DEFINITIONS
ARTICLE II
ORIGINAL ISSUE OF WARRANTS
Section 2.1. Form of Warrant Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 2.2. Restrictive Legends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 2.3. Execution and Delivery of Warrant Certificates . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 2.4. Certificated Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
ARTICLE III
EXERCISE PRICE, EXERCISE AND REPURCHASE OF WARRANTS
Section 3.1. Exercise Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 3.2. Exercise; Restrictions on Exercise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 3.3. Method of Exercise; Payment of Exercise Price . . . . . . . . . . . . . . . . . . . . . . . . . 12
Section 3.4. Repurchase Offers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
ARTICLE IV
ADJUSTMENTS
Section 4.1. Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Section 4.2. Notice of Adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Section 4.3. Statement on Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Section 4.4. Notice of Consolidation, Merger, Etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Section 4.5. Fractional Interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
ARTICLE V
DECREASE IN EXERCISE PRICE
</TABLE>
<PAGE> 3
ii
<TABLE>
<S> <C> <C>
ARTICLE VI
LOSS OR MUTILATION
ARTICLE VII
RESERVATION AND AUTHORIZATION
OF COMMON SHARES
ARTICLE VIII
WARRANT TRANSFER BOOKS; RESTRICTIONS ON TRANSFER
Section 8.1. Transfer and Exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Section 8.2. Book-Entry Provisions for the Global Warrants . . . . . . . . . . . . . . . . . . . . . . . . . 29
Section 8.3. Special Transfer Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Section 8.4. Surrender of Warrant Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
ARTICLE IX
WARRANT HOLDERS
Section 9.1. Warrant Holder Deemed Not a Stockholder . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Section 9.2. Right of Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
ARTICLE X
REMEDIES
Section 10.1. Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Section 10.2. Payment Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Section 10.3. Remedies; No Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
ARTICLE XI
THE WARRANT AGENT
Section 11.1. Duties and Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Section 11.2. Right to Consult Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Section 11.3. Compensation; Indemnification 38
</TABLE>
<PAGE> 4
iii
<TABLE>
<S> <C> <C>
Section 11.4. No Restrictions on Actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Section 11.5. Discharge or Removal; Replacement Warrant Agent . . . . . . . . . . . . . . . . . . . . . . . . 38
Section 11.6. Successor Warrant Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
ARTICLE XII
MISCELLANEOUS
Section 12.1. Monies Deposited with the Warrant Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Section 12.2. Payment of Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Section 12.3. No Merger, Consolidation or Sale of Assets of the Company . . . . . . . . . . . . . . . . . . . 41
Section 12.4. Reports to Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Section 12.5. Notices; Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Section 12.6. Binding Effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Section 12.7. Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Section 12.8. Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Section 12.9. Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Section 12.10. Common Shares Legend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Section 12.11. Third Party Beneficiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Section 12.12. Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Section 12.13. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
</TABLE>
<PAGE> 5
iv
EXHIBIT A FORM OF WARRANT CERTIFICATE
EXHIBIT B FORM OF CERTIFICATE TO BE DELIVERED IN CONNECTION WITH
TRANSFERS PURSUANT TO REGULATION S
EXHIBIT C-1 FORM OF CERTIFICATE TO BE DELIVERED BY TRANSFEROR IN CONNECTION
WITH TRANSFERS TO INSTITUTIONAL ACCREDITED INVESTORS
EXHIBIT C-2 FORM OF CERTIFICATE TO BE DELIVERED BY TRANSFEREES IN CONNECTION
WITH TRANSFERS TO INSTITUTIONAL ACCREDITED INVESTORS
EXHIBIT D FORM OF CERTIFICATE
APPENDIX A LIST OF FINANCIAL EXPERTS
<PAGE> 6
WARRANT AGREEMENT
WARRANT AGREEMENT, dated as of February 3, 1998 (this
"Agreement"), between ALLEGIANCE TELECOM, INC., a Delaware corporation (the
"Company"), and THE BANK OF NEW YORK, a New York banking corporation (the
"Warrant Agent").
W I T N E S S E T H:
WHEREAS, pursuant to the terms of a Purchase Agreement dated
January 29, 1998 (the "Purchase Agreement"), among the Company and Morgan
Stanley & Co. Incorporated, Salomon Brothers Inc, Bear, Stearns & Co. Inc. and
Donaldson, Lufkin & Jenrette Securities Corporation as initial purchasers (the
"Initial Purchasers"), the Company has agreed to issue and sell to the Initial
Purchasers an aggregate of 445,000 warrants (each, a "Warrant" and
collectively, the "Warrants"), each Warrant initially entitling the holder
thereof to purchase .0034224719 shares of Common Stock (as defined below) of
the Company at an exercise price of $.01 per Common Share (as defined below) as
part of 445,000 units (the "Units"), each Unit consisting of one 11 3/4% Senior
Discount Note due 2008 of the Company (each a "Note" and collectively, the
"Notes") to be issued pursuant to the provisions of an Indenture, dated as of
the date hereof, between the Company and The Bank of New York, as trustee (the
"Indenture"), and one Warrant;
WHEREAS, the Notes and the Warrants included in each Unit will
become separately transferable at the close of business upon the earliest to
occur of (i) the date that is six months after the Closing Date (as defined
below), (ii) the commencement of an exchange offer with respect to the Notes
undertaken pursuant to the Notes Registration Rights Agreement (as defined
below) and (iii) the effectiveness of a shelf registration statement with
respect to resales of the Notes (the "Separation Date"); and
WHEREAS, the Company desires to engage the Warrant Agent to
act on the Company's behalf, and the Warrant Agent desires to act on behalf of
the Company, in connection with the issuance of the Warrant Certificates (as
defined below) and the other matters as provided herein, including, without
limitation, for the purpose of defining the terms and provisions of the
Warrants and the respective rights and obligations thereunder of the Company
and the record holders thereof (together with the holders of shares of Common
Stock (or other securities) received upon exercise thereof, the "Holders").
NOW, THEREFORE, in consideration of the foregoing and of the
mutual agreements contained herein and in the Purchase Agreement, the Company
and the Warrant Agent hereby agree as follows:
<PAGE> 7
2
ARTICLE I
CERTAIN DEFINITIONS
"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 Members" has the meaning specified in Section 8.2
hereof.
"Auditors" means, at any time, the independent auditors of the
Company at such time.
"Beneficial Investors" means industry experts or other
individuals whose affiliation with the Company should, in the good faith
judgment of the Board, provide the Company with a strategic advantage.
"Board" means the board of directors of the Company from time
to time.
"Business Day" means a 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 Warrant Agent, are authorized by law to close.
"Cedel Bank" means Cedel Bank, societe anonyme.
"Certificated Warrants" has the meaning specified in Section
2.1 hereof.
"Certificate for Surrender" means the form on the reverse side
of the Warrant Certificate substantially in the form of Exhibit A hereto.
"Closing Date" means the date hereof.
"Commission" means the United States Securities and Exchange
Commission.
"Common Shares" means the shares of the Common Stock of the
Company.
<PAGE> 8
3
"Common Stock" means the Common Stock, par value $0.01 per
share, of the Company.
"Company" has the meaning specified in the preamble to this
Agreement.
"Current Market Value" has the meaning specified in Section
4.1(f) hereof.
"Default" has the meaning specified in Section 10.1 hereof.
"Depositary" means The Depository Trust Company, its nominees
and their respective successors.
"Euroclear" means Morgan Guaranty Trust Company of New York,
Brussels office, as operator of the Euroclear System.
"Exchange Act" means the United States Securities Exchange Act
of 1934, as amended.
"Exercise Price" has the meaning specified in Section 3.1
hereof.
"Expiration Date" means February 3, 2008.
"Final Surrender Time" has the meaning specified in Section
3.4 hereof.
"Financial Expert" means one of the Persons listed in Appendix
A hereto.
"Global Warrants" has the meaning specified in Section 2.1
hereof.
"Holders" has the meaning specified in the recitals to this
Agreement.
"IAI Certificated Warrants" has the meaning specified in
Section 2.1 hereof.
"Indenture" has the meaning specified in the recitals to this
Agreement.
"Independent Financial Expert" means a Financial Expert that
does not (and whose directors, executive officers and 5% stockholders do not)
have a direct or indirect financial interest in the Company or any of its
subsidiaries or affiliates, which has not been for at least five years and, at
the time that it is called upon to give independent financial advice to the
Company, is not (and none of its directors, executive officers or 5%
stockholders is) a promoter, director or officer of the Company or any of its
subsidiaries or Affiliates.
<PAGE> 9
4
"Institutional Accredited Investor" shall mean an institution
that is an "accredited investor" as that term is defined in Rule 501(a)(1),
(2), (3) or (7) of Regulation D under the Securities Act.
"Legended Regulation S Global Warrant" has the meaning
specified in Section 2.1 hereof.
"Non-U.S. Person" means a person who is not a U.S. person as
defined in Rule 902 of Regulation S.
"Notes" has the meaning specified in the recitals to this
Agreement.
"Notes Registration Rights Agreement" means the Notes
Registration Rights Agreement with respect to the Notes dated January 29, 1998
between the Company and the Initial Purchasers.
"Notice Date" has the meaning specified in Section 3.4(b)
hereof.
"Officer" means, with respect to the Company, (i) the Chairman
of the Board, any other Director, the Chief Executive Officer, the Chief
Financial Officer, the President, or any Vice President or (ii) the Treasurer
or any Assistant Treasurer, 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; provided, however, that any such
certificate may be signed by any two of the Officers listed in clause (i) of
the definition thereof in lieu of being signed by one Officer listed in clause
(i) of the definition thereof and one Officer listed in clause (ii) of the
definition thereof.
"Offshore Certificated Warrants" has the meaning specified in
Section 2.1 hereof.
"Opinion of Counsel" means a written opinion signed by legal
counsel who may be an employee of or counsel to the Company.
"Person" means an individual, general partnership, limited
partnership, corporation, trust or any other entity or organization, including
a government or political subdivision or an agency or instrumentality thereof.
"Private Placement Legend" means the legend set forth on the
Warrant Certificates in the form set forth in Section 2.2(a) hereof.
<PAGE> 10
5
"Purchase Agreement" has the meaning specified in the recitals
to this Agreement.
"QIB" means a "qualified institutional buyer" as defined in
Rule 144A.
"Regulation S" means Regulation S under the Securities Act.
"Regulation S Global Warrant" has the meaning specified in
Section 2.1 hereof.
"Relevant Value" has the meaning specified in Section 3.4(d)
hereof.
"Repurchase Event" means, and shall be deemed to occur on, any
date when the Company (i) consolidates with or merges into or with another
person (but only where the holders of Common Stock receive consideration in
exchange for all or part of such Common Stock), if the Common Stock (or other
securities) thereafter issuable upon exercise of the Warrants is not registered
under the Exchange Act or (ii) sells all or substantially all of its assets to
another person, if the Common Stock (or other securities) thereafter issuable
upon exercise of the Warrants is not registered under the Exchange Act;
provided that, in each case, a "Repurchase Event" shall not be deemed to have
occurred if the consideration for such transaction consists solely of cash.
"Repurchase Notice" has the meaning specified in Section
3.4(a) hereof.
"Repurchase Obligation" has the meaning specified in Section
10.2 hereof.
"Repurchase Offer" means the Company's offer to repurchase the
Warrants in accordance with Section 3.4 hereof.
"Repurchase Price" has the meaning specified in Section 3.4(d)
hereof.
"Restricted Certificated Warrants" has the meaning specified
in Section 2.1 hereof.
"Restricted Global Warrant" has the meaning specified in
Section 2.1 hereof.
"Right" has the meaning specified in Section 4.1(c) hereof.
"Rule 144A" means Rule 144A under the Securities Act.
"Securities Act" means the United States Securities Act of
1933, as amended.
<PAGE> 11
6
"Separation Date" has the meaning specified in the recitals to
this Agreement.
"Spread" means, with respect to any Warrant, the Current
Market Value of the Common Shares subject to such Warrant, less the Exercise
Price of such Warrant, in each case as adjusted as provided herein.
"Subscription Form" means the form on the reverse side of the
Warrant Certificate substantially in the form of Exhibit A hereto.
"Underlying Securities" shall mean the Common Shares (or other
securities) issuable upon exercise of the Warrants.
"Units" has the meaning specified in the recitals to this
Agreement.
"U.S. Certificated Warrants" has the meaning specified in
Section 2.1 hereof.
"Unlegended Regulation S Global Warrant" has the meaning
specified in Section 2.1 hereof.
"Valuation Date" means the date five Business Days prior to
the Notice Date.
"Value Certificate" has the meaning specified in Section 3.4
hereof.
"Value Report" has the meaning specified in Section 4.1(k)
hereof.
"Warrant" has the meaning specified in the recitals to this
Agreement.
"Warrant Agent" has the meaning specified in the preamble to
this Agreement until a successor Warrant Agent replaces it in accordance with
the provisions of Section 11.5 and thereafter means such successor.
"Warrant Certificates" has the meaning specified in Section
2.1 hereof.
"Warrant Registration Rights Agreement" means the Warrant
Registration Rights Agreement, dated January 29, 1998, between the Company and
the Initial Purchasers.
"Warrant Registration Statement" has the meaning specified in
Section 3 of the Warrant Registration Rights Agreement.
<PAGE> 12
7
ARTICLE II
ORIGINAL ISSUE OF WARRANTS
Section 2.1. Form of Warrant Certificates. Certificates
representing the Warrants (the "Warrant Certificates") shall be substantially
in the form attached hereto as Exhibit A, shall be dated the date on which such
Warrant Certificates are countersigned by the Warrant Agent and shall have such
insertions as are appropriate or required or permitted by this Agreement and
may have such letters, numbers or other marks of identification and such
legends and endorsements stamped, printed, lithographed or engraved thereon as
the Company may deem appropriate and as are not inconsistent with the
provisions of this Agreement, or as may be required to comply with any law or
with any rule or regulation pursuant thereto or with any rule or regulation of
any securities exchange on which the Warrants may be listed, or to conform to
usage.
Warrants offered and sold in reliance on Rule 144A shall be
issued initially in the form of one or more permanent global Warrant
Certificates in definitive, fully registered form, substantially in the form
set forth in Exhibit A (collectively, the "Restricted Global Warrant"),
deposited with the Warrant Agent, as custodian for, and registered in the name
of the nominee for, the Depositary, duly executed by the Company and
countersigned by the Warrant Agent as hereinafter provided. The aggregate
number of Warrants represented by the Restricted Global Warrant may from time
to time be increased or decreased by adjustments made on the records of the
Warrant Agent, as custodian for the Depositary, or its nominee, as provided in
Section 2.4 and Section 8.3 hereof.
Warrants offered and sold in offshore transactions in reliance
on Regulation S shall be issued initially in the form of one or more permanent
global Warrant Certificates in definitive, fully registered form, substantially
in the form set forth in Exhibit A (the "Legended Regulation S Global
Warrant"), deposited with the Warrant Agent, as custodian for, and registered
in the name of, the Depositary or its nominee for the accounts of Euroclear and
Cedel Bank, duly executed by the Company and countersigned by the Warrant Agent
as hereinafter provided. Prior to the date one year from the Closing Date,
beneficial interests in the Legended Regulation S Global Warrant may be only
held through Euroclear and Cedel Bank. At any time on or after the date one
year from the Closing Date, upon receipt by the Warrant Agent and the Company
of a certificate substantially in the form of Exhibit D hereto, one or more
global Warrant Certificates in registered form substantially in the form set
forth in Exhibit A (the "Unlegended Regulation S Global Warrant" and together
with the Legended Regulation S Global Warrant, the "Regulation S Global
Warrants") shall be deposited with the Warrant Agent, as custodian for, and
registered in the name of the nominee for, the Depositary, duly executed by the
Company and countersigned by the Warrant Agent as hereinafter provided, and the
Warrant Agent shall reflect on its books and records the date and a decrease in
the Legended Regulation S Global Warrant in an amount equal to the beneficial
interest in number of Warrants evidenced by the Legended Regulation S Global
Warrant
<PAGE> 13
8
transferred. The aggregate number of Warrants represented by the Regulation S
Global Warrant may from time to time be increased or decreased by adjustments
made on the records of the Warrant Agent, as custodian for the Depositary, or
its nominee, as provided in Section 2.4 and Section 8.3 hereof.
Warrants offered and sold to Institutional Accredited
Investors who are not QIBs shall be issued initially in registered form
substantially in the form set forth in Exhibit A ("IAI Certificated Warrants").
Warrants issued pursuant to Section 2.4 and Section 8.2(b) in
exchange for interests in the Restricted Global Warrant shall be issued in the
form of permanent Warrant Certificates in registered form, substantially in the
form set forth in Exhibit A (the "Restricted Certificated Warrants" and,
together with IAI Certificated Warrants, the "U.S. Certificated Warrants").
Warrants issued pursuant to Section 2.4 and Section 8.2(b) in exchange for
interests in the Regulation S Global Warrant shall be issued in the form of
permanent Warrant Certificates in registered form, substantially in the form
set forth in Exhibit A (the "Offshore Certificated Warrants"). The Offshore
Certificated Warrants and the U.S. Certificated Warrants are sometimes
collectively herein referred to as the "Certificated Warrants". The Restricted
Global Warrant and the Regulation S Global Warrant are sometimes herein
collectively referred to as the "Global Warrants."
The definitive Warrant Certificates 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 Warrants may be listed, all as determined by the officers
executing such Warrant Certificates, as evidenced by their execution of such
Warrant Certificates.
Section 2.2. Restrictive Legends. (a) The Warrant
Certificates, other than the Unlegended Regulation S Global Warrants, shall
bear substantially the following legend on the face thereof:
THE WARRANTS REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND ACCORDINGLY, MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE
TRANSFERRED WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR
BENEFIT OF, U.S. PERSONS EXCEPT AS SET FORTH IN THE FOLLOWING
SENTENCE. BY ITS ACQUISITION HEREOF, THE HOLDER (1) REPRESENTS THAT
(A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A
UNDER THE SECURITIES ACT) OR (B) IT IS AN INSTITUTIONAL "ACCREDITED
<PAGE> 14
9
INVESTOR" (AS DEFINED IN RULE 501(a)(1), (2), (3) OR (7) OF REGULATION
D UNDER THE SECURITIES ACT) (AN "INSTITUTIONAL ACCREDITED INVESTOR")
OR (C) IT IS NOT A U.S. PERSON AND IS ACQUIRING THE WARRANTS
REPRESENTED BY THIS CERTIFICATE IN AN OFFSHORE TRANSACTION IN
COMPLIANCE WITH REGULATION S UNDER THE SECURITIES ACT, (2) AGREES THAT
IT WILL NOT, WITHIN THE TIME PERIOD REFERRED TO UNDER RULE 144(k)
UNDER THE SECURITIES ACT AS IN EFFECT WITH RESPECT TO SUCH TRANSFER,
RESELL OR OTHERWISE TRANSFER THE WARRANTS REPRESENTED BY THIS
CERTIFICATE EXCEPT (A) TO ALLEGIANCE TELECOM, INC. (THE "COMPANY") OR
ANY SUBSIDIARY THEREOF, (B) INSIDE THE UNITED STATES TO A QUALIFIED
INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE 144A UNDER THE SECURITIES
ACT, (C) INSIDE THE UNITED STATES TO AN INSTITUTIONAL ACCREDITED
INVESTOR THAT, PRIOR TO SUCH TRANSFER, FURNISHES TO THE WARRANT AGENT
A SIGNED LETTER CONTAINING CERTAIN REPRESENTATIONS AND AGREEMENTS
RELATING TO THE RESTRICTIONS ON TRANSFER OF THE WARRANTS REPRESENTED
BY THIS CERTIFICATE (THE FORM OF WHICH LETTER CAN BE OBTAINED FROM THE
WARRANT AGENT) AND IF SUCH TRANSFER IS IN RESPECT OF ANY WARRANTS
SUBSEQUENT TO THE DATE ON WHICH THE WARRANTS REPRESENTED HEREBY BECOME
SEPARATELY TRANSFERABLE, AN OPINION OF COUNSEL ACCEPTABLE TO THE
COMPANY THAT SUCH TRANSFER IS IN COMPLIANCE WITH THE SECURITIES ACT,
(D) OUTSIDE THE UNITED STATES IN AN OFFSHORE TRANSACTION IN COMPLIANCE
WITH RULE 904 UNDER THE SECURITIES ACT, (E) PURSUANT TO THE EXEMPTION
FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT (IF
AVAILABLE) OR (F) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE SECURITIES ACT AND (3) AGREES THAT IT WILL DELIVER TO EACH
PERSON TO WHOM THE WARRANTS REPRESENTED BY THIS CERTIFICATE ARE
TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. IN
CONNECTION WITH ANY TRANSFER OF THE WARRANTS REPRESENTED BY THIS
CERTIFICATE WITHIN THE TIME PERIOD REFERRED TO ABOVE, THE HOLDER MUST
CHECK THE APPROPRIATE BOX SET FORTH ON THE REVERSE HEREOF RELATING TO
THE MANNER OF SUCH TRANSFER AND SUBMIT THIS CERTIFICATE TO THE WARRANT
AGENT. IF THE PROPOSED TRANSFEREE IS AN INSTITUTIONAL ACCREDITED
INVESTOR, THE
<PAGE> 15
10
HOLDER MUST, PRIOR TO SUCH TRANSFER, FURNISH TO EACH OF THE WARRANT
AGENT AND THE COMPANY SUCH CERTIFICATIONS, LEGAL OPINIONS OR OTHER
INFORMATION AS EITHER OF THEM MAY REASONABLY REQUIRE TO CONFIRM THAT
SUCH TRANSFER IS BEING MADE PURSUANT TO AN EXEMPTION FROM, OR IN A
TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT. AS USED HEREIN, THE TERMS "OFFSHORE TRANSACTION,"
"UNITED STATES" AND "U.S. PERSON" HAVE THE MEANINGS GIVEN TO THEM BY
REGULATION S UNDER THE SECURITIES ACT. THE WARRANT AGREEMENT CONTAINS
A PROVISION REQUIRING THE WARRANT AGENT TO REFUSE TO REGISTER ANY
TRANSFER OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IN VIOLATION
OF THE FOREGOING RESTRICTIONS.
(b) Each Global Warrant shall also bear the following
legend on the face thereof:
UNLESS THIS WARRANT CERTIFICATE IS PRESENTED BY AN AUTHORIZED
REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY TO ALLEGIANCE TELECOM,
INC. OR THE WARRANT AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR
PAYMENT AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE &
CO. OR SUCH OTHER ENTITY 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 SECURITY SHALL BE LIMITED TO TRANSFERS IN
WHOLE, BUT NOT IN PART, TO NOMINEES OF THE DEPOSITORY TRUST COMPANY OR
TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF
PORTIONS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS MADE IN
ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN ARTICLE VIII OF THE
WARRANT AGREEMENT.
<PAGE> 16
11
(c) Each Warrant Certificate issued prior to the
Separation Date shall bear the following legend on the face thereof:
THE WARRANTS EVIDENCED BY THIS CERTIFICATE WERE ISSUED AS PART OF AN
ISSUANCE OF UNITS, EACH OF WHICH CONSISTS OF ONE 11 3/4% SENIOR
DISCOUNT NOTE DUE 2008 OF ALLEGIANCE TELECOM, INC. (COLLECTIVELY, THE
"NOTES") AND ONE WARRANT INITIALLY ENTITLING THE HOLDER THEREOF TO
PURCHASE .0034224719 SHARES OF COMMON STOCK, PAR VALUE $0.01 PER
SHARE, OF ALLEGIANCE TELECOM, INC. PRIOR TO THE CLOSE OF BUSINESS
UPON THE EARLIEST TO OCCUR OF (i) AUGUST 3, 1998, (ii) THE
COMMENCEMENT OF AN EXCHANGE OFFER WITH RESPECT TO THE NOTES, AND (iii)
THE EFFECTIVENESS OF A SHELF REGISTRATION STATEMENT WITH RESPECT TO
RESALES OF THE NOTES, THE WARRANTS EVIDENCED BY THIS CERTIFICATE MAY
NOT BE TRANSFERRED OR EXCHANGED SEPARATELY FROM, BUT MAY BE
TRANSFERRED OR EXCHANGED ONLY TOGETHER WITH, THE NOTES.
Section 2.3. Execution and Delivery of Warrant Certificates.
Warrant Certificates evidencing 445,000 Warrants, each Warrant to purchase
initially .0034224719 Common Shares, may be executed, on or after the date of
this Agreement, by the Company and delivered to the Warrant Agent for
countersignature, and the Warrant Agent shall thereupon countersign and deliver
such Warrant Certificates upon the order and at the written direction of the
Company signed by its Chief Executive Officer or other duly authorized
executive officer to the purchasers thereof on the date of issuance. The
Warrant Agent is hereby authorized to countersign and deliver Warrant
Certificates as required by this Section 2.3 or by Section 3.3, Article VI or
Article VIII hereof.
The Warrant Certificates shall be executed on behalf of the
Company by its Chairman of the Board, Chief Executive Officer, any Vice
President or other duly authorized executive officer of the Company either
manually or by facsimile signature printed thereon. The Warrant Certificates
shall be countersigned by manual signature of the Warrant Agent and shall not
be valid for any purpose unless so countersigned. In case any officer or
director of the Company whose signature shall have been placed upon any of the
Warrant Certificates shall cease to be such officer or director of the Company
before countersignature by the Warrant Agent and the issuance and delivery
thereof, such Warrant Certificates may nevertheless be countersigned by the
Warrant Agent and issued and delivered with the same force and effect as though
such person had not ceased to be such officer or director of the Company.
<PAGE> 17
12
Section 2.4. Certificated Warrants. Beneficial owners of
interests in A Global Warrant may receive Certificated Warrants (which, except
as set forth in Section 8.3(d), shall bear the Private Placement Legend) in
accordance with the procedures of the Warrant Agent and the Depositary;
provided, however, that beneficial owners of interests in the Regulation S
Global Warrant may not receive Offshore Certificated Warrants in exchange for
such interests prior to the date one year from the Closing Date. In connection
with the execution and delivery of such Certificated Warrants, the Warrant
Agent shall reflect on its books and records the date and a decrease in the
number of Warrants represented by the relevant Global Warrant equal to the
number of such Certificated Warrants and the Company shall execute and the
Warrant Agent shall countersign and deliver to said beneficial owners one or
more Certificated Warrants in an equal aggregate number.
ARTICLE III
EXERCISE PRICE, EXERCISE AND REPURCHASE OF WARRANTS
Section 3.1. Exercise Price. Each Warrant Certificate shall,
when countersigned by the Warrant Agent, initially entitle the Holder thereof,
subject to the provisions of this Agreement, to purchase the number of Common
Shares indicated thereon at a purchase price (the "Exercise Price") of $.01 per
Common Share, subject to adjustment as provided in Section 4.1 and Article V
hereof.
Section 3.2. Exercise; Restrictions on Exercise. At any time
after one year after the Closing Date and on or before the Expiration Date, any
outstanding Warrants may be exercised on any Business Day; provided that the
Warrants will become exercisable in connection with the initial public offering
of equity securities (other than nonconvertible preferred shares or an offering
registered solely on Form S-4 or S-8 or any successor form thereto) of the
Company and provided further that the Warrant Registration Statement is, at the
time of exercise, effective and available for the exercise of the Warrants or
the exercise of such Warrants is exempt from the registration requirements of
the Securities Act. Any Warrants not exercised by 5:00 p.m., New York City
time, on the Expiration Date shall expire and all rights of the Holders of such
Warrants shall terminate. Additionally, pursuant to Section 4.1(j)(ii) hereof,
the Warrants shall expire and all rights of the Holders of such Warrants shall
terminate in the event the Company merges or consolidates with or sells all or
substantially all of its property and assets to a Person (other than an
Affiliate of the Company) if the consideration payable to holders of Common
Stock in exchange for their Common Stock in connection with such merger,
consolidation or sale consists solely of cash or in the event of the
dissolution, liquidation or winding up of the Company.
<PAGE> 18
13
Section 3.3. Method of Exercise; Payment of Exercise Price.
In order to exercise all or any of the Warrants represented by a Warrant
Certificate, the Holder thereof must surrender for exercise the Warrant
Certificate to the Warrant Agent at its corporate trust office address set
forth in Section 12.5 hereof, with the Subscription Form set forth on the
reverse of the Warrant Certificate duly executed, together with payment in full
of the Exercise Price then in effect for each Common Share (or other
securities) issuable upon exercise of the Warrants as to which a Warrant is
exercised; such payment may be made in cash or by certified or official bank or
bank cashier's check payable to the order of the Company and shall be made to
the Warrant Agent at its corporate trust office address set forth in Section
12.5 hereof prior to the close of business on the date the Warrant Certificate
is surrendered to the Warrant Agent for exercise. Notwithstanding the
foregoing, the Exercise Price may be paid by surrendering additional Warrants
to the Warrant Agent having an aggregate Spread equal to the aggregate Exercise
Price of the Warrants being exercised. All payments received upon exercise of
Warrants shall be delivered to the Company by the Warrant Agent as instructed
in writing by the Company. If less than all the Warrants represented by a
Warrant Certificate are exercised or surrendered (in connection with a cashless
exercise), such Warrant Certificate shall be surrendered and a new Warrant
Certificate of the same tenor and for the number of Warrants which were not
exercised or surrendered shall be executed by the Company and delivered to the
Warrant Agent and the Warrant Agent shall countersign the new Warrant
Certificate, registered in such name or names as may be directed in writing by
the Holder, and shall make available for delivery the new Warrant Certificate
to the Person or Persons entitled to receive the same. Global Warrants will be
exercised by accordance with the procedures of the Warrant Agent and the
Depositary. Upon the exercise of any Warrants following the surrender of a
Warrant Certificate in conformity with the foregoing provisions, the Warrant
Agent shall instruct the Company to transfer promptly to the Holder or, upon
the written order of the Holder of such Warrant Certificate, appropriate
evidence of ownership of any Common Shares or other security or property to
which it is entitled, registered or otherwise placed in such name or names as
may be directed in writing by the Holder, and to deliver such evidence of
ownership to the Person or Persons entitled to receive the same and fractional
shares, if any, or an amount in cash, in lieu of any fractional shares, as
provided in Section 4.5 hereof; provided that the Holder of such Warrant shall
be responsible for the payment of any transfer taxes required as the result of
any change in ownership of such Warrants or the issuance of such Common Shares
other than to the Holder of such Warrants and any such transfer shall comply
with applicable law. Upon the exercise of a Warrant or Warrants, the Warrant
Agent is hereby authorized and directed to requisition from any transfer agent
of the Common Shares (and all such transfer agents are hereby irrevocably
authorized to comply with all such requests) certificates (bearing the legend
set forth in Section 12.10 hereof, if applicable, unless a registration
statement with the Commission relating to such Common Shares shall then be in
effect or the Company and the Holder exercising such Warrant or Warrants
otherwise agree) for the number of Common Shares to which said Holder may be
entitled. The Company shall enter, or shall cause any transfer agent of the
Common
<PAGE> 19
14
Shares to enter, the name of the Person entitled to receive the Common Shares
upon exercise of the Warrants into the Company's register of stockholders
within 14 days of such exercise. A Warrant shall be deemed to have been
exercised immediately prior to the close of business on the date of the
surrender for exercise, as provided above, of the Warrant Certificate
representing such Warrant and, for all purposes under this Agreement, the
Person entitled to receive any Common Shares deliverable upon such exercise
shall, as between such Person and the Company, be deemed to be the Holder of
such Common Shares of record as of the close of business on such date and shall
be entitled to receive, and the Warrant Agent shall make available for delivery
to such Person, any Common Shares to which such Person would have been entitled
had such Person been the registered holder on such date.
Section 3.4. Repurchase Offers. (a) Notice of Repurchase
Event. Within five Business Days following the occurrence of a Repurchase
Event, the Company shall give notice (a "Repurchase Notice") to the Holders of
the Warrants and the Warrant Agent that such event has occurred.
(b) Repurchase Offers Generally. Following the
occurrence of a Repurchase Event, the Company shall offer to repurchase for
cash all outstanding Warrants pursuant to the provisions of this Section 3.4 (a
"Repurchase Offer"). The Company shall give notice of a Repurchase Offer in
accordance with Section 3.4(f) hereof. Each date on which the Company gives
any such notice is referred to as the "Notice Date." The Repurchase Offer
shall commence on the Notice Date for such Repurchase Offer and shall expire at
5:00 p.m., New York City time, on a date determined by the Company (the "Final
Surrender Time") that is at least 30 but not more than 60 days after the Notice
Date. Once a Repurchase Event has occurred, there is no limit on the number of
Repurchase Offers that the Company may make.
(c) Repurchase Offers. (i) In any Repurchase Offer, the
Company shall offer to purchase for cash at the Repurchase Price all Warrants
outstanding on the Notice Date for such Repurchase Offer that are properly
tendered to the Warrant Agent on or prior to the Final Surrender Time for such
Repurchase Offer.
(ii) Each Holder may, but shall not be obligated to,
accept such Repurchase Offer by tendering to the Warrant Agent, on or prior to
the Final Surrender Time for such Repurchase Offer, the Warrant Certificates
evidencing the Warrants such Holder desires to have repurchased in such offer,
together with a completed Certificate for Surrender in substantially the form
attached to the Warrant Certificate. A Holder may withdraw all or a portion of
the Warrants tendered to the Warrant Agent at any time prior to the Final
Surrender Time for such Repurchase Offer. If less than all the Warrants
represented by a Warrant Certificate shall be tendered, such Warrant
Certificate shall be surrendered and a new Warrant Certificate of the same
tenor and for the number of Warrants which were not tendered shall be
<PAGE> 20
15
executed by the Company and delivered to the Warrant Agent and the Warrant
Agent shall countersign the new Warrant Certificate, registered in such name or
names as may be directed in writing by the Holder, and shall make available for
delivery the new Warrant Certificate to the Person or Persons entitled to
receive the same; provided that the Holder of such Warrants shall be
responsible for the payment of any transfer taxes required as the result of any
change in ownership of such Warrants and any such transfer shall comply with
applicable law.
(d) Repurchase Price. (i) The purchase price (the
"Repurchase Price") for each Warrant properly tendered to the Warrant Agent
pursuant to a Repurchase Offer shall be equal to the value (the "Relevant
Value") on the Valuation Date of the Common Shares issuable, and other
securities or property of the Company which would have been delivered, upon
exercise of Warrants had the Warrants been exercised (regardless of whether the
Warrants are then exercisable), less the Exercise Price in effect on the Notice
Date for such Repurchase Offer.
(ii) The Relevant Value of the Common Shares and other
securities or property issuable upon exercise of all the Warrants, on any
Valuation Date shall be:
(1) (A) If the Common Shares (or other securities) are
registered under the Exchange Act, deemed to be the average of the
daily market prices (on the stock exchange that is the primary trading
market for the Common Shares (or other securities)) of the Common
Shares (or other securities) for the 20 consecutive trading days
immediately preceding such Valuation Date or, (B) if the Common Shares
(or other securities) have been registered under the Exchange Act for
less than 20 consecutive trading days before such date, then the
average of the daily market prices for all of the trading days before
such date for which daily market prices are available, in the case of
each of (A) and (B), as certified to the Warrant Agent by the
President, any Vice President or the Chief Financial Officer of the
Company (the "Value Certificate"). The market price for each such
trading day shall be: (A) in the case of a security listed or
admitted to trading on any national securities exchange, the closing
sales price on such day, or if no sale takes place on such day, the
average of the closing bid and asked prices on such day, (B) in the
case of a security not then listed or admitted to trading on any
national securities exchange, the last reported sale price on such
day, or if no sale takes place on such day, the average of the closing
bid and asked prices on such day, as reported by a reputable quotation
source designated by the Company, (C) in the case of a security not
then listed or admitted to trading on any national securities exchange
and as to which no such reported sale price or bid and asked prices
are available, the average of the reported high bid and low asked
prices on such day, as reported by a reputable quotation service, or a
newspaper of general circulation in the Borough of Manhattan, City and
State of New York customarily published on each Business Day,
designated by the Company, or, if there shall be no
<PAGE> 21
16
bid and asked prices on such day, the average of the high bid and low
asked prices, as so reported, on the most recent day (not more than 30
days prior to the date in question) for which prices have been so
reported and (D) if there are no bid and asked prices reported during
the 30 days prior to the date in question, the Relevant Value shall be
determined as if the Common Shares (or other securities) were not
registered under the Exchange Act; or
(2) If the Common Shares (or other securities) are not
registered under the Exchange Act or if the value cannot be computed
under clause (1) above, deemed to be equal to the value set forth in
the Value Report (as defined below) as determined by an Independent
Financial Expert, which shall be selected by the Board in accordance
with Section 3.4(e) hereof, and retained on customary terms and
conditions, using one or more valuation methods that the Independent
Financial Expert, in its best professional judgment, determines to be
most appropriate but without giving effect to any discount for lack of
liquidity, the fact that the Company has no class of equity securities
registered under the Exchange Act or the fact that the Common Shares
and other securities or property issuable upon exercise of the
Warrants represent a minority interest in the Company. The Company
shall cause the Independent Financial Expert to deliver to the
Company, with a copy to the Warrant Agent, within 45 days of the
appointment of the Independent Financial Expert in accordance with
Section 3.4(e) hereof, a value report (the "Value Report") stating the
Relevant Value of the Common Shares and other securities or property
of the Company, if any, being valued as of the Valuation Date and
containing a brief statement as to the nature and scope of the
methodologies upon which the determination of Relevant Value was made.
The Warrant Agent shall have no duty with respect to the Value Report
of any Independent Financial Expert, except to keep it on file and
available for inspection by the Holders. The determination as to
Relevant Value in accordance with the provisions of this Section
3.4(d) shall be conclusive on all Persons. The Independent Financial
Expert shall consult with management of the Company in order to allow
management to comment on the proposed Relevant Value prior to delivery
to the Company of any Value Report of the Independent Financial
Expert.
(e) Selection of Independent Financial Expert. If clause
(d)(ii)(2) of this Section 3.4 is applicable, the Board of Directors of the
Company shall select an Independent Financial Expert not more than five
Business Days following a Repurchase Event. Within seven Business Days
following a Repurchase Event, the Company shall deliver to the Warrant Agent a
notice setting forth the name of the Independent Financial Expert.
(f) Notice of Repurchase Offer. Each notice of a
Repurchase Offer (an "Offer Notice") given by the Company pursuant to Section
3.4(b) shall be given by the Company directly to all Holders of the Warrants,
with a copy to the Warrant Agent, shall be
<PAGE> 22
17
given simultaneously with the Repurchase Notice (or, in the event that the
Relevant Value of the Common Shares or other securities or property issuable
upon exercise of all the Warrants cannot be determined pursuant to Section
3.4(d)(ii)(1), then such Offer Notice shall be given within five Business Days
after the Company receives the Value Report with respect to such offer) and
shall specify (A) the Final Surrender Time for such Repurchase Offer, (B) the
manner in which Warrants may be surrendered to the Warrant Agent for repurchase
by the Company, (C) the Repurchase Price at which the Warrants will be
repurchased by the Company, (D) if applicable, the name of the Independent
Financial Expert whose valuation of the Common Shares and other securities or
property was utilized in connection with determining such Repurchase Price and
(E) that payment of the Repurchase Price will be made by the Warrant Agent.
Each such notice shall be accompanied by a Certificate for Surrender for
Repurchase Offer in substantially the form attached to the Warrant Certificate
and a copy of the Value Report, if any.
(g) Payment for Warrants. Upon surrender for repurchase
of any Warrants in conformity with the provisions of this Section 3.4, the
Warrant Agent shall thereupon promptly notify the Company of such surrender.
On or before the Final Surrender Time for any Repurchase Offer, the Company
shall deposit with the Warrant Agent funds sufficient to make payment for the
Warrants tendered to the Warrant Agent and not withdrawn. After receipt of
such deposit from the Company, the Warrant Agent shall make payment, by
delivering a check in such amount as is appropriate, to such Person or Persons
as it may be directed in writing by the Holder surrendering such Warrants, net
of any transfer taxes required to be paid in the event that the check is to be
delivered to a Person other than the Holder.
(h) Compliance with Laws. Notwithstanding anything
contained in this Section 3.4, if the Company is required to comply with laws,
rules, regulations and securities exchange or clearing procedures, in
connection with making any Repurchase Offer, such laws, rules, regulations and
procedures shall govern the making of such Repurchase Offer.
ARTICLE IV
ADJUSTMENTS
Section 4.1. Adjustments. The Exercise Price and the number
of Common Shares issuable upon exercise of each Warrant shall be subject to
adjustment from time to time as follows:
(a) Divisions; Consolidations; Reclassifications. In
case the Company shall, on or before the Expiration Date, (i) issue any Common
Shares in payment of a dividend or other distribution with respect to its
Common Stock, (ii) subdivide its issued and outstanding
<PAGE> 23
18
Common Shares, (iii) consolidate its issued and outstanding Common Shares into
a smaller number of shares, or (iv) reclassify or convert the Common Shares
(other than a reclassification in connection with a merger, consolidation or
other business combination which will be governed by Section 4.1(j)), then the
number of Common Shares purchasable upon exercise of each Warrant immediately
prior to the record date for such issue or distribution or the effective date
of such subdivision, consolidation, reclassification or conversion shall be
adjusted so that the Holder of each Warrant shall thereafter be entitled to
receive the kind and number of Common Shares which such Holder would have been
entitled to receive after the happening of any of the events described above
had such Warrant been exercised immediately prior to the happening of such
event or any record date with respect thereto. An adjustment made pursuant to
this Section 4.1(a) shall become effective immediately after the effective date
of such event retroactive to the record date, if any, for such event.
(b) Rights; Options; Warrants. In case the Company shall
issue rights, options, warrants or convertible or exchangeable securities
(other than an issuance of convertible or exchangeable securities subject to
Section 4.1(a)) to all holders of its Common Shares, entitling them to
subscribe for or purchase Common Shares at a price per share which is lower (at
the record date for such issuance) than the then Current Market Value per
Common Share, then the Company shall ensure that at the time of such issuance,
the same or a like offer or invitation is made to the Holders of the Warrants
as if their Warrants had been exercised on the day immediately preceding the
record date of such offer or invitation on the terms (subject to any adjustment
pursuant to Section 4.1(a) for a prior event) on which such Warrants could have
been exercised on such date; provided that if the Board so resolves, the
Company shall not be required to ensure that the same offer or invitation is
made to the Holders of the Warrants, but the number of Common Shares thereafter
purchasable upon the exercise of each Warrant shall instead be adjusted and
shall be determined by multiplying the number of Common Shares theretofore
purchasable upon exercise of each Warrant by a fraction, the numerator of which
shall be the sum of (i) the number of Common Shares outstanding immediately
prior to the issuance of such rights, options, warrants or convertible or
exchangeable securities plus (ii) the number of additional Common Shares which
may be purchased or subscribed for upon exercise, exchange or conversion of
such rights, options, warrants or convertible or exchangeable securities and
the denominator of which shall be the sum of (x) the number of Common Shares
outstanding immediately prior to the issuance of such rights, options, warrants
or convertible or exchangeable securities plus (y) the number of shares which
the total consideration received by the Company for such rights, options,
warrants or convertible or exchangeable securities so offered would purchase at
the then Current Market Value per Common Share. Except as otherwise provided
above, such adjustment shall be made whenever such rights, options, warrants or
convertible or exchangeable securities are issued, and shall become effective
retroactively immediately after
<PAGE> 24
19
the record date for the determination of stockholders entitled to receive such
rights, options, warrants or convertible or exchangeable securities.
(c) Issuance of Common Shares at Lower Values. In case
the Company shall sell and issue any Common Share or Right (as defined below)
(excluding (i) any Right issued in any of the transactions described in Section
4.1(a) or (b) above, (ii) Common Shares issued pursuant to (x) any Rights
outstanding on the date of this Agreement or any Right issued in any
transaction described in Section 4.1(a) or (b) above and (y) a Right, if on the
date such Right was issued, the exercise, conversion or exchange price per
Common Share with respect thereto was at least equal to the then Current Market
Value per Common Share and (iii) any Common Shares or Right issued as
consideration (A) when any corporation or business is acquired, merged into or
becomes part of the Company or a subsidiary of the Company or (B) in good faith
in connection with any other business collaboration, in each case in an
arm's-length transaction between the Company and a Person other than an
Affiliate of the Company) at a price per Common Share (determined in the case
of any such Right, by dividing (x) the total consideration receivable by the
Company in consideration of the sale and issuance of such Right, plus the total
consideration payable to the Company upon exercise, conversion or exchange
thereof, by (y) the total number of Common Shares covered by such Right) that
is lower than the Current Market Value per Common Share in effect immediately
prior to such sale or issuance, then the number of Common Shares thereafter
purchasable upon the exercise of each Warrant shall be determined by
multiplying the number of Common Shares theretofore purchasable upon exercise
of such Warrant by a fraction, the numerator of which shall be the number of
Common Shares outstanding immediately after such sale or issuance and the
denominator of which shall be the number of Common Shares outstanding
immediately prior to such sale or issuance plus the number of Common Shares
which the aggregate consideration received (determined as provided below) for
such sale or issuance would purchase at such Current Market Value per Common
Share. For purposes of this Section 4.1(c), the Common Shares which the holder
of any such Right shall be entitled to subscribe for or purchase shall be
deemed to be issued and outstanding as of the date of sale and issuance of such
Right and the consideration received by the Company therefor shall be deemed to
be the consideration received by the Company for such Right, plus the
consideration or premiums stated in such Right to be paid for the Common Shares
covered thereby. In case the Company shall sell and issue any Right together
with one or more other securities as part of a unit at a price per unit, then
in determining the "price per Common Share" and the "consideration received by
the Company" for purposes of the first sentence of this Section 4.1(c), the
Board shall determine, in good faith, the fair value of the Right then being
sold as part of such unit. For purposes of this paragraph, a "Right" shall
mean any right, option, warrant or convertible or exchangeable security
containing the Right to subscribe for or acquire one or more Common Shares,
excluding the Warrants. This Section 4.1(c) shall not apply to: (i) the
exercise of Warrants, or the conversion or exchange of other securities
<PAGE> 25
20
convertible or exchangeable for Common Shares; or (ii) Common Shares issued
upon the exercise of Rights or warrants issued to all holders of Common Shares.
(d) Distributions of Debt, Assets, Subscription Rights or
Convertible Securities. In case the Company shall make a distribution to all
holders of its Common Shares of evidences of its indebtedness, or assets, or
other distributions (excluding any issuance of Common Shares referred to in
Section 4.1(a) above and excluding distributions in connection with the
dissolution, liquidation or winding-up of the Company which shall be governed
by Section 4.1(j) and distributions of securities referred to in Section
4.1(a), Section 4.1(b) or Section 4.1(c)), then, in each case, the number of
Common Shares purchasable after such record date upon the exercise of each
Warrant shall be determined by multiplying the number of Common Shares
purchasable upon the exercise of such Warrant immediately prior to such record
date by a fraction, the numerator of which shall be the Current Market Value
per Common Share immediately prior to the record date for such distribution and
the denominator of which shall be the Current Market Value per Common Share
immediately prior to the record date for such distribution less the then fair
value (as determined in good faith by the Board) of the evidences of its
indebtedness, or assets or other distributions so distributed attributable to
one Common Share. Such adjustment shall be made whenever any such distribution
is made, and shall become effective on the date of distribution retroactive to
the record date for the determination of stockholders entitled to receive such
distribution.
(e) Expiration of Rights, Options and Conversion
Privileges. Upon the expiration of any rights, options, warrants or conversion
or exchange privileges (including, without limitation, any Rights) that have
previously resulted in an adjustment hereunder, if any thereof shall not have
been exercised, exchanged or converted, the Exercise Price and the number of
Common Shares issuable upon the exercise of each Warrant shall, upon such
expiration, be readjusted and shall thereafter, upon any future exercise, be
such as they would have been had they been originally adjusted (or had the
original adjustment not been required, as the case may be) as if (i) the only
Common Shares so issued were the Common Shares, if any, actually issued or sold
upon the exercise, exchange or conversion of such rights, options, warrants or
conversion or exchange rights (including, without limitation, any Rights) and
(ii) such Common Shares, if any, were issued or sold for the consideration
actually received by the Company upon such exercise, exchange or conversion
plus the consideration, if any, actually received by the Company for issuance,
sale or grant of all such rights, options, warrants or conversion or exchange
rights (including, without limitation, any Rights) whether or not exercised.
(f) Current Market Value. For the purposes of any
computation under this Article IV, the "Current Market Value" per Common Share
or of any other security (herein collectively referred to as a "security") at
any date herein specified shall be:
<PAGE> 26
21
(i) if the security is not registered under the Exchange
Act, the value of the security (1) most recently determined as of a
date within the six months preceding such date by an Independent
Financial Expert selected by the Company in accordance with the
criteria for such valuation set out in Section 4.1(k), or (2) if no
such determination shall have been made within such six-month period
or if the Company so chooses, determined as of such a date by an
Independent Financial Expert selected by the Company in accordance
with the criteria for such valuation set out in Section 4.1(k), or
(ii) if the security is registered under the Exchange Act,
the average of the daily market prices of the security for the 20
consecutive trading days immediately preceding such date or, if the
security has been registered under the Exchange Act for less than 20
consecutive trading days before such date, then the average of the
daily market prices for all of the trading days before such date for
which daily market prices are available. The market price for each
such trading day shall be: (A) in the case of a security listed or
admitted to trading on any national securities exchange, the closing
sales price, regular way, on such day, or if no sale takes place on
such day, the average of the closing bid and asked prices on such day
on the principal national securities exchange on which such security
is listed or admitted, as determined by the Board, in good faith, (B)
in the case of a security not then listed or admitted to trading on
any national securities exchange, the last reported sale price on such
day, or if no sale takes place on such day, the average of the closing
bid and asked prices on such day, as reported by a reputable quotation
source designated by the Company, (C) in the case of a security not
then listed or admitted to trading on any national securities exchange
and as to which no such reported sale price or bid and asked prices
are available, the average of the reported high bid and low asked
prices on such day, as reported by a reputable quotation service, or a
newspaper of general circulation in the Borough of Manhattan, City and
State of New York customarily published on each Business Day,
designated by the Company, or, if there shall be no bid and asked
prices on such day, the average of the high bid and low asked prices,
as so reported, on the most recent day (not more than 30 days prior to
the date in question) for which prices have been so reported and (D)
if there are no bid and asked prices reported during the 30 days prior
to the date in question, the Current Market Value of the security
shall be determined as if the security were not registered under the
Exchange Act.
(g) Consideration Received. For purposes of any
computation respecting consideration received pursuant to this Section 4.1, the
following shall apply:
(i) in the case of the issuance of Common Shares for
cash, the consideration shall be the amount of such cash, provided
that in no case shall any deduction be made for any commissions,
discounts or other expenses incurred by the Company for any
underwriting of the issue or otherwise in connection therewith;
<PAGE> 27
22
(ii) in the case of the issuance of Common Shares for a
consideration in whole or in part other than cash, the consideration
other than cash shall be deemed to be the fair market value thereof as
determined in good faith by the Board (irrespective of the accounting
treatment thereof), whose determination shall be conclusive and
described in reasonable detail in a board resolution which shall be
provided as soon as practicable thereafter to the Warrant Agent; and
(iii) in the case of the issuance of rights, options,
warrants or securities convertible into or exchangeable for Common
Shares (including, without limitation, any Rights), the aggregate
consideration received therefor shall be deemed to be the
consideration received by the Company for the issuance of such rights,
options, warrants or securities convertible into or exchangeable for
Common Shares, plus the additional minimum consideration, if any, to
be received by the Company upon the exercise, conversion or exchange
thereof (the consideration in each case to be determined in the same
manner as provided in clauses (i) and (ii) of this Section 4.1(g)).
(h) De Minimis Adjustments. No adjustment in the number
of Common Shares purchasable hereunder shall be required unless such adjustment
would require an increase or decrease of at least one percent (1%) in the
number of Common Shares purchasable upon the exercise of each Warrant;
provided, however, that any adjustments which by reason of this Section 4.1(h)
are not required to be made shall be carried forward and taken into account in
any subsequent adjustment. All calculations shall be made to the nearest
one-ten-billionth of a share.
(i) Adjustment of Exercise Price. Whenever the number of
Common Shares purchasable upon the exercise of each Warrant is adjusted, as
herein provided, the Exercise Price per Common Share payable upon exercise of
such Warrant shall be adjusted (calculated to the nearest $.01) so that it
shall equal the price determined by multiplying such Exercise Price immediately
prior to such adjustment by a fraction the numerator of which shall be the
number of Common Shares purchasable upon the exercise of each Warrant
immediately prior to such adjustment and the denominator of which shall be the
number of Common Shares so purchasable immediately thereafter. Following any
adjustment to the Exercise Price pursuant to this Article IV, the amount
payable, when adjusted, shall never be less than the par value per Common Share
at the time of such adjustment.
If after an adjustment, a Holder of a Warrant upon exercise of
it may receive shares of two or more classes in the capital of the Company, the
Company shall determine the allocation of the adjusted Exercise Price between
such classes of shares in a manner that the Board deems fair and equitable to
the Holders. After such allocation, the exercise privilege
<PAGE> 28
23
and the Exercise Price of each class of shares shall thereafter be subject to
adjustment on terms comparable to those applicable to Common Shares in this
Article IV.
Such adjustment shall be made successively whenever any event
listed above shall occur.
(j) Consolidation, Merger, Etc. (i) Subject to the
provisions of Subsection (ii) below of this Section 4.1(j), in case of
the consolidation of the Company with, or merger of the Company with
or into, or of the sale of all or substantially all of the properties
and assets of the Company to, any Person, and in connection therewith
consideration is payable to holders of Common Shares (or other
securities or property purchasable upon exercise of Warrants) in
exchange therefor, the Warrants shall remain subject to the terms and
conditions set forth in this Agreement and each Warrant shall, after
such consolidation, merger or sale, entitle the Holder to receive upon
exercise the number of shares in the capital or other securities or
property (including cash) of or from the Person resulting from such
consolidation or surviving such merger or to which such sale shall be
made or of the parent of such Person, as the case may be, that would
have been distributable or payable on account of the Common Shares if
such Holder's Warrants had been exercised immediately prior to such
merger, consolidation or sale (or, if applicable, the record date
therefor); and in any such case the provisions of this Agreement with
respect to the rights and interests thereafter of the Holders of
Warrants shall be appropriately adjusted by the Board in good faith so
as to be applicable, as nearly as may reasonably be, to any shares,
other securities or any property thereafter deliverable on the
exercise of the Warrants.
(ii) Notwithstanding the foregoing, (x) if the Company
merges or consolidates with, or sells all or substantially all of its
property and assets to, another Person (other than an Affiliate of the
Company) and consideration is payable to holders of Common Shares in
exchange for their Common Shares in connection with such merger,
consolidation or sale which consists solely of cash, or (y) in the
event of the dissolution, liquidation or winding up of the Company,
then the Holders of Warrants shall be entitled to receive
distributions on the date of such event on an equal basis with holders
of Common Shares (or other securities issuable upon exercise of the
Warrants) as if the Warrants had been exercised immediately prior to
such event, less the Exercise Price. Upon receipt of such payment, if
any, the rights of a Holder shall terminate and cease and such
Holder's Warrants shall expire. If the Company has made a Repurchase
Offer that has not expired at the time of such transaction, the
holders of the Warrants will be entitled to receive the higher of (i)
the amount payable to the holders of the Warrants described above and
(ii) the Repurchase Price payable to the holders of the Warrants
pursuant to such Repurchase Offer. In case of any such merger,
consolidation or sale of assets, the surviving or acquiring Person
and, in the event of
<PAGE> 29
24
any dissolution, liquidation or winding up of the Company, the Company
shall deposit promptly with the Warrant Agent the funds, if any,
necessary to pay the Holders of the Warrants. After receipt of such
deposit from such Person or the Company and after receipt of
surrendered Warrant Certificates, the Warrant Agent shall make payment
by delivering a check in such amount as is appropriate (or, in the
case of consideration other than cash, such other consideration as is
appropriate) to such Person or Persons as it may be directed in
writing by the Holder surrendering such Warrants.
(k) If required pursuant to Section 4.1(f)(i), the
Current Market Value shall be deemed to be equal to the value set forth in the
Value Report (as defined below) as determined by an Independent Financial
Expert, which shall be selected by the Board in its sole discretion, and
retained on customary terms and conditions, using one or more valuation methods
that the Independent Financial Expert, in its professional judgment, determines
to be most appropriate. The Company shall cause the Independent Financial
Expert to deliver to the Company, with a copy to the Warrant Agent, within 45
days of the appointment of the Independent Financial Expert, a value report
(the "Value Report") stating the value of the Common Shares and other
securities or property of the Company, if any, being valued as of the Valuation
Date and containing a brief statement as to the nature and scope of the
examination or investigation upon which the determination of value was made.
The Warrant Agent shall have no duty with respect to the Value Report of any
Independent Financial Expert, except to keep it on file and available for
inspection by the Holders. The determination as to Current Market Value in
accordance with the provisions of this Section 4.1(k) shall be conclusive on
all Persons. The Independent Financial Expert shall consult with management of
the Company in order to allow management to comment on the proposed value prior
to delivery to the Company of any Value Report.
(l) When No Adjustment Required. Without limiting any
other exception contained in this Section 4.1, and in addition thereto, no
adjustment need be made for:
(i) grants or exercises of Rights granted to employees or
directors of the Company or any Beneficial Investors
or Common Shares issued or granted to such employees,
directors or Beneficial Investors, whether or not
upon the exercise, exchange or conversion of any such
Rights (to the extent that all such securities do not
represent an aggregate equity value in excess of 15%
(and all such securities issued or granted to
Beneficial Investors do not represent an aggregate
equity value in excess of 2%) of the equity value of
the Company on a fully diluted basis, as determined
in good faith by the Board);
(ii) options, warrants or other agreements or rights to
purchase capital stock of the Company existing on the
Closing Date;
<PAGE> 30
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(iii) rights to purchase Common Shares pursuant to a
Company plan for reinvestment of dividends or
interest;
(iv) a change in the par value of the Common Shares
(including a change from par value to no par value or
vice versa);
(v) bona fide public offerings or private placements
pursuant to Section 4(2) of the Securities Act,
Regulation D thereunder or Regulation S, involving at
least one investment bank of national reputation, if
(i) in the case of any security trading on any
national securities exchange or in the over the
counter market, or of a security directly or
indirectly convertible or exchangeable for any such
security (the latter security being a "Reference
Security"), such security (or the Reference Security
as applicable) is sold to investors at a price at
least equal to the closing sale, bid or ask price
(whichever is customary) of such security (or the
Reference Security as applicable) on the date of the
public offering or private placement, or (ii) the
security or Reference Security is issued as part of a
public offering or a private placement of debt
securities.
To the extent the Warrants become convertible into cash, no
adjustment need be made thereafter as to the cash. Interest will not accrue on
the cash.
Section 4.2. Notice of Adjustment. Whenever the number of
Common Shares purchasable upon the exercise of each Warrant or the Exercise
Price is adjusted, as herein provided, the Company shall cause, so far as it is
able, the Warrant Agent promptly to mail, at the expense of the Company, to
each Holder notice of such adjustment or adjustments and shall deliver to the
Warrant Agent a certificate of the Auditors setting forth the number of Common
Shares purchasable upon the exercise of each Warrant and the Exercise Price
after such adjustment, setting forth a brief statement of the facts requiring
such adjustment and setting forth the computation by which such adjustment was
made. Such certificate shall be conclusive evidence of the correctness of such
adjustment except in the case of manifest error. The Warrant Agent shall be
entitled to rely on such certificate and shall be under no duty or
responsibility with respect to any such certificate, except to exhibit the
same, from time to time, to any Holder desiring an inspection thereof during
reasonable business hours upon reasonable notice. The Warrant Agent shall not
at any time be under any duty or responsibility to any Holders to determine
whether any facts exist which may require any adjustment of the Exercise Price
or the number of Common Shares purchasable on exercise of the Warrants or any
of the other adjustments set forth in Section 4.1, or with respect to the
nature or extent of any such adjustment when made, or with respect to the
method employed in making such adjustment, or the validity or value (or the
kind or amount) of any Common Shares which may be purchasable on exercise of
the Warrants. The Warrant Agent shall not
<PAGE> 31
26
be responsible for any failure of the Company to make any cash payment or to
issue, transfer or deliver any Common Shares or share certificates upon the
exercise of any Warrant.
Section 4.3. Statement on Warrants. Irrespective of any
adjustment in the Exercise Price or the number or kind of shares purchasable
upon the exercise of the Warrants, Warrants theretofore or thereafter issued
may continue to express the same price and number and kind of shares as are
stated in the Warrants initially issuable pursuant to this Agreement.
Section 4.4. Notice of Consolidation, Merger, Etc. In case
at any time after the date hereof and prior to 5:00 p.m., New York City time,
on the Expiration Date, there shall be any (i) consolidation or merger
involving the Company or sale, transfer or other disposition of all or
substantially all of the Company's property, assets or business (except (1) a
merger or other reorganization in which the Company shall be the surviving
corporation and holders of Common Shares receive no consideration in respect of
their shares and (2) a merger of the Company into a wholly owned Subsidiary of
the Company, the principal purpose of which, in the good faith determination of
the Board, is to change the state of incorporation of the Company) or (ii) any
other transaction contemplated by Section 4.1(j)(ii) above then, in any one or
more of such cases, the Company shall cause to be mailed to the Warrant Agent
and shall cause the Warrant Agent to mail, at Company's expense, to each Holder
of a Warrant, at the earliest practicable time (and, in any event, not less
than 20 days before any date set for definitive action), notice of the date on
which such reorganization, sale, consolidation, merger, dissolution,
liquidation or winding up shall take place, as the case may be. Such notice
shall also set forth such facts as shall indicate the effect of such action (to
the extent such effect may be known at the date of such notice) on the Exercise
Price and the kind and amount of the Common Shares and other securities, money
and other property deliverable upon exercise of the Warrants. Such notice
shall also specify the date as of which the holders of record of the Common
Shares or other securities or property issuable upon exercise of the Warrants
shall be entitled to exchange their shares for securities, money or other
property deliverable upon such reorganization, sale, consolidation, merger,
dissolution, liquidation or winding up, as the case may be.
Section 4.5. Fractional Interests. If more than one Warrant
shall be presented for exercise in full at the same time by the same Holder,
the number of full Common Shares which shall be issuable upon such exercise
thereof shall be computed on the basis of the aggregate number of Common Shares
purchasable on exercise of the Warrants so presented. The Company shall not be
required to issue fractional Common Shares upon the exercise of Warrants. If
any fraction of a Common Share would, except for the provisions of this Section
4.5, be issuable on the exercise of any Warrant (or specified portion thereof),
the Company may pay an amount in cash calculated by it to be equal to the then
Current Market Value per Common Share multiplied by such fraction computed to
the nearest whole cent.
<PAGE> 32
27
Section 4.6. When Issuance or Payment May Be Deferred. In
any case in which this Article IV shall require that an adjustment in the
Exercise Price be made effective as of a record date for a specified event, the
Company may elect to defer until the occurrence of such event (i) issuing to
the holder of any Warrant exercised after such record date the Common Shares
and other shares in the capital of the Company, if any, issuable upon such
exercise over and above the Common Shares and other shares in the capital of
<PAGE> 33
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the Company, if any, issuable upon such exercise and (ii) paying such holder
any amount in cash in lieu of a fractional share; provided, however, that the
Company shall deliver to such Holder a due bill or other appropriate instrument
evidencing such Holder's right to receive such additional Common Shares, other
shares and cash upon the occurrence of the event requiring such adjustment.
Section 4.7. Initial Public Offering. Notwithstanding
anything to the contrary herein contained, if the Company conducts an initial
public offering of equity securities (other than nonconvertible preferred
shares or an offering registered solely on S-4 or S-8 or any successor forms
thereto), the Company will give the Holders the opportunity to convert such
Warrants into warrants to purchase such equity securities (other than
nonconvertible preferred shares) and such Common Shares or such other
securities that have been received by the Holders upon the exercise of Warrants
into such equity securities (other than nonconvertible preferred shares). Such
conversion opportunity will be on terms and conditions determined to be fair
and reasonable by the Board.
ARTICLE V
DECREASE IN EXERCISE PRICE
The Board, in its sole discretion, shall have the right at any
time, or from time to time, to decrease the Exercise Price of the Warrants
and/or increase the number of shares issuable upon the exercise of the
Warrants.
ARTICLE VI
LOSS OR MUTILATION
Upon receipt by the Company and the Warrant Agent of evidence
satisfactory to them of the ownership and the loss, theft, destruction or
mutilation of any Warrant Certificate and of indemnity or bond satisfactory to
them and (in the case of mutilation) upon surrender and cancellation thereof,
then, in the absence of notice to the Company or the Warrant Agent that the
Warrants represented thereby have been acquired by a bona fide purchaser, the
Company shall execute and the Warrant Agent shall countersign and make
available for delivery to the registered Holder of the lost, stolen, destroyed
or mutilated Warrant Certificate, in exchange for or in lieu thereof, a new
Warrant Certificate of the same tenor and for a like aggregate number of
Warrants. Upon the issuance of any new Warrant Certificate under this Article
VI, the Company may require the payment of a sum sufficient to cover any tax or
other governmental charge that may be imposed in relation thereto and other
expenses
<PAGE> 34
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(including the fees and expenses of the Warrant Agent) in connection therewith.
Every new Warrant Certificate executed and delivered pursuant to this Article
VI in lieu of any lost, stolen or destroyed Warrant Certificate shall
constitute a contractual obligation of the Company whether or not the allegedly
lost, stolen or destroyed Warrant Certificates shall be at any time enforceable
by anyone and shall be entitled to the benefits of this Agreement equally and
proportionately with any and all other Warrant Certificates duly executed and
delivered hereunder. The provisions of this Article VI are exclusive and shall
preclude (to the extent lawful) all other rights or remedies with respect to
the replacement of mutilated, lost, stolen, or destroyed Warrant Certificates.
ARTICLE VII
RESERVATION AND AUTHORIZATION
OF COMMON SHARES
The Company shall at all times reserve and keep available such
number of its authorized but unissued Common Shares deliverable upon exercise
of the Warrants as will be sufficient to permit the exercise in full of all
outstanding Warrants and will cause appropriate evidence of ownership of such
Common Shares to be delivered to the Warrant Agent upon its request for
delivery thereof upon the exercise of the Warrants. The Company covenants that
all Common Shares of the Company that may be issued upon the exercise of the
Warrants will, upon issuance, be duly authorized, validly issued, fully paid
and not subject to any calls for funds and free from pre-emptive rights and all
taxes, liens, charges and security interests with respect to the issue thereof.
ARTICLE VIII
WARRANT TRANSFER BOOKS; RESTRICTIONS ON TRANSFER
Section 8.1. Transfer and Exchange. The Warrant Certificates
shall be issued in registered form only. The Warrant Agent shall keep at its
office a register for the registration of Warrant Certificates and transfers or
exchanges of Warrant Certificates as herein provided and other appropriate data
as determined by the Warrant Agent. The Company shall, upon reasonable notice
to the Warrant Agent, have access to such register during the Warrant Agent's
regular business hours. All Warrant Certificates issued upon any registration
of transfer or exchange of Warrant Certificates shall be the valid obligations
of the Company, evidencing the same obligations, and entitled to the same
benefits under this Agreement, as the Warrant Certificates surrendered for such
registration of transfer or exchange.
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The Warrants shall initially be issued as part of the issuance
of the Units. Prior to the Separation Date, the Warrants may not be
transferred or exchanged separately from, but may be transferred or exchanged
only together with, the Notes issued as part of such Units.
A Holder may transfer its Warrants only by written application
to the Warrant Agent stating the name of the proposed transferee and otherwise
complying with the terms of this Agreement. No such transfer shall be effected
until, and such transferee shall succeed to the rights of a Holder only upon,
final acceptance and registration of the transfer by the Warrant Agent in the
register. Prior to the registration of any transfer of Warrants by a Holder as
provided herein, the Company, the Warrant Agent, and any agent of the Company
may treat the person in whose name the Warrants are registered as the owner
thereof for all purposes and as the person entitled to exercise the rights
represented thereby, any notice to the contrary notwithstanding. Furthermore,
any holder of a Global Warrant shall, by acceptance of such Global Warrant,
agree that transfers of beneficial interests in such Global Warrant may be
effected only through a book-entry system maintained by the holder of such
Global Warrant (or its agent), and that ownership of a beneficial interest in
the Warrants represented thereby shall be required to be reflected in a
book-entry. When Warrant Certificates are presented to the Warrant Agent with
a request to register the transfer or to exchange them for an equal amount of
Warrants, the Warrant Agent shall register such transfer or make such exchange
as requested if its requirements for such transactions are met. To permit
registrations of transfers and exchanges, the Company shall execute Warrant
Certificates at the Warrant Agent's request. No service charge shall be made
for any registration of transfer or exchange of Warrants, but the Company may
require payment of a sum sufficient to cover any tax or other governmental
charge that may be imposed in connection with any registration of transfer of
Warrants.
Section 8.2. Book-Entry Provisions for the Global Warrants.
(a) The Global Warrants initially shall (i) be registered in the name of the
Depositary for such Global Warrant or the nominee of such Depositary, (ii) be
delivered to the Warrant Agent as custodian for such Depositary and (iii) bear
legends as set forth in Section 2.2 hereof.
Members of, or participants in, the Depositary ("Agent
Members") shall have no rights under this Agreement with respect to the Global
Warrants held on their behalf by the Depositary or the Warrant Agent as its
custodian, and the Depositary may be treated by the Company, the Warrant Agent
and any agent of the Company or the Warrant Agent as the absolute owner of each
such Global Warrant for all purposes whatsoever. Notwithstanding the
foregoing, nothing herein shall prevent the Company, the Warrant Agent or any
agent of the Company or the Warrant Agent, 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
Warrants.
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(b) Transfers of a Global Warrant shall be limited to
transfers of such Global Warrant in whole, but not in part, to the Depositary,
its successors or their respective nominees. Interests of beneficial owners in
the Global Warrants may be transferred in accordance with the rules and
procedures of the Depositary and the provisions of Section 8.3 hereof. U.S.
Certificated Warrants and Offshore Certificated Warrants shall be transferred
to beneficial owners in exchange for their beneficial interests in the
Restricted Global Warrant or the Regulation S Global Warrant, as the case may
be, (i) if the Depositary notifies the Company that it is unwilling or unable
to continue as Depositary for any such Global Warrant and a successor
depositary is not appointed by the Company within 90 days of such notice, (ii)
if there is a Default or (iii) upon the request of the beneficial owner in
accordance with the rules and procedures of the Depositary and the provisions
of Section 8.3 hereof; provided that Offshore Certificated Warrants shall not
be transferred in exchange for the Legended Regulation S Global Warrant prior
to one year after the Closing Date.
(c) Any beneficial interest in one of the Global Warrants
that is transferred to a person who takes delivery in the form of an interest
in any other Global Warrant will, upon transfer, cease to be an interest in the
first Global Warrant and become an interest in the other Global Warrant and,
accordingly, will thereafter be subject to all transfer restrictions, if any,
and other procedures applicable to beneficial interests in such other Global
Warrant for as long as it remains such an interest.
(d) In connection with the transfer of the entire
Restricted Global Warrant or Regulation S Global Warrant to beneficial owners
pursuant to paragraph (b) of this Section 8.2, the Restricted Global Warrant or
the Regulation S Global Warrant, as the case may be, shall be surrendered to
the Warrant Agent for cancellation, and the Company shall execute, and the
Warrant Agent shall countersign and deliver, to each beneficial owner
identified by the Depositary in exchange for its beneficial interest in the
Restricted Global Warrant or the Regulation S Global Warrant, as the case may
be, U.S. Certificated Warrants or Offshore Certificated Warrants, as the case
may be, representing, in the aggregate, the number of Warrants theretofore
represented by the Restricted Global Warrant or the Regulation S Global
Warrant, as the case may be.
(e) In connection with the transfer of a portion of the
beneficial interests in the Restricted Global Warrant or the Unlegended
Regulation S Global Warrant to beneficial owners pursuant to paragraph (b) of
this Section 8.2, the Warrant Agent shall reflect on its books and records the
date and a decrease in the amount of Warrants represented by the Restricted
Global Warrant or Unlegended Regulation S Global Warrant in an amount equal to
the amount of Warrants represented by the beneficial interest in the Restricted
Global Warrant or Unlegended Regulation S Global Warrant to be transferred, and
the Company shall execute, and the Warrant Agent shall countersign and deliver,
to each beneficial owner identified by the Depositary in exchange for its
beneficial interest in the Restricted Global Warrant or the
<PAGE> 37
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Unlegended Regulation S Global Warrant, as the case may be, U.S. Certificated
Warrants or Offshore Certificated Warrants, as the case may be, of like tenor
and amount.
(f) Any Certificated Warrant delivered in exchange for an
interest in a Global Warrant pursuant to paragraph (b) or (e) of this Section
shall, except as otherwise provided by paragraph (d) of Section 8.3 hereof,
bear the legend regarding transfer restrictions set forth in Section 2.2
hereof.
(g) The registered holder of a Global Warrant 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 Agreement or the Warrants.
Section 8.3. Special Transfer Provisions. The following
provisions shall apply:
(a) Transfers to QIBs. The following provisions shall
apply with respect to the registration of any proposed transfer of Warrants to
a QIB (excluding non-U.S. Persons):
(i) If the Warrants to be transferred are represented by
Certificated Warrants, the Warrant Agent shall register the transfer
if such transfer is being made by a proposed transferor who has
checked the box provided for on the form of Warrant Certificate
stating, or has otherwise advised the Company and the Warrant Agent in
writing, that the sale has been made in compliance with the provisions
of Rule 144A to a transferee who has signed the certification provided
for on the form of Warrant Certificate stating, or has otherwise
advised the Company and the Warrant Agent in writing, that it is
purchasing the Warrants for its own account or an account with respect
to which it exercises sole investment discretion and that it and any
such account is a QIB within the meaning of Rule 144A, and is aware
that the sale to it is being made in reliance on Rule 144A and
acknowledges that it has received such information regarding the
Company as it has requested pursuant to Rule 144A or has determined
not to request such information and that it is aware that the
transferor is relying upon its foregoing representations in order to
claim the exemption from registration provided by Rule 144A.
(ii) If the proposed transferee is an Agent Member, upon
receipt by the Warrant Agent of the documents referred to in clause
(i) above and instructions given in accordance with the Depositary's
and the Warrant Agent's procedures, the Warrant Agent shall reflect on
its books and records the date and an increase in the amount of
Warrants represented by the Restricted Global Warrant in an amount
equal to the
<PAGE> 38
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amount of Warrants represented by the Certificated Warrants to be
transferred, and the Warrant Agent shall cancel the Certificated
Warrants.
(b) Transfers to Non-U.S. Persons at Any Time. The
following provisions shall apply with respect to the registration of any
proposed transfer of Warrants to a Non-U.S. Person:
(i) Prior to February 3, 1999, the Warrant Agent shall
register any proposed transfer of Warrants to a Non-U.S. Person only
upon receipt of a certificate substantially in the form of Exhibit B
from the proposed transferor.
(ii) On and after February 3, 1999, the Warrant Agent
shall register any proposed transfer to any Non-U.S. Person of the
Warrants to be transferred are U.S. Certificated Warrants or an
interest in the Restricted Global Warrants, upon receipt of a
certificate substantially in the form of Exhibit B from the proposed
transferor.
(iii) If the proposed transferee is an Agent Member and the
Warrants to be transferred are represented by Certificated Warrants or
an interest in the Restricted Global Warrant, upon receipt by the
Warrant Agent of the documents referred to in clause (i) or (ii) above
and instructions given in accordance with the Depositary's and the
Warrant Agent's procedures, the Warrant Agent shall reflect on its
books and records the date and an increase in the number of Warrants
represented by the Regulation S Global Warrant in an amount equal to
the number of Warrants represented by the Certificated Warrants or the
Restricted Global Warrant, as the case may be, to be transferred, and
the Warrant Agent shall cancel the Certificated Warrant or decrease
the amount of Warrants represented by the Restricted Global Warrant so
transferred.
(c) Transfers to Any Other Person. The following
provisions shall apply with respect to the registration of any proposed
transfer of Warrants to any Person not specified in paragraphs (a) and (b)
above (including any Institutional Accredited Investor which is not a QIB).
(i) The Warrant Agent shall register any proposed
transfer of Warrants to any such Person if (x) the transferor has
delivered to the Warrant Agent and the Company a certificate
substantially in the form of Exhibit C-1 hereto and, if required by
paragraph (d) thereof, an Opinion of Counsel to the effect set forth
therein and (y) the proposed transferee has delivered to the Warrant
Agent and the Company a certificate substantially in the form of
Exhibit C-2 hereto if such transferee is an Institutional Accredited
Investor that is not a QIB.
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(ii) If the proposed transferor is an Agent Member holding
a beneficial interest in the Restricted Global Warrant or the
Regulation S Global Warrant, upon receipt by the Warrant Agent and the
Company of the documents referred to in clause (i) above and
instructions given in accordance with the Depositary's and the Warrant
Agent's procedures, the Company shall execute and the Warrant Agent
shall countersign Certificated Warrants in an amount equal to the
number of Warrants represented by the Restricted Global Warrant or the
Regulation S Global Warrant, if any, as the case may be, to be
transferred and the Warrant Agent shall decrease the number of
Warrants represented by the Restricted Global Warrant or the
Regulation S Global Warrant so transferred.
(d) Private Placement Legend. Upon the transfer,
exchange or replacement of Warrant Certificates not bearing the Private
Placement Legend, the Warrant Agent shall make available for delivery Warrant
Certificates that do not bear the Private Placement Legend. Upon the transfer,
exchange or replacement of Warrant Certificates bearing the Private Placement
Legend, the Warrant Agent shall make available for delivery only Warrant
Certificates that bear the Private Placement Legend unless either (i) the
circumstances contemplated by the third sentence of the third paragraph of
Section 2.1 exist or (ii) there is delivered to the Warrant Agent an opinion of
counsel reasonably satisfactory to the Company and its counsel and the Warrant
Agent to the effect that neither such legend nor the related restrictions on
transfer are required in order to maintain compliance with the provisions of
the Securities Act.
(e) Transfers of Interests in the Legended Regulation S
Global Warrant. The following provisions shall apply with respect to
registration of any proposed transfer of interests in the Legended Regulation S
Global Warrant:
(i) The Registrar shall register the transfer of any
Warrant (x) if the proposed transferee is a Non-U.S. Person and the
proposed transferor has delivered to the Registrar a certificate
substantially in the form of Exhibit B hereto or (y) if the proposed
transferee is a QIB and the proposed transferor has checked the box
provided for on the form of Warrant stating, or has otherwise advised
the Company and the Warrant Agent in writing, that the sale has been
made in compliance with the provisions of Rule 144A to a transferee
who has signed the certification provided for on the form of Warrant
stating, or has otherwise advised the Company and the Warrant Agent in
writing, that it is purchasing the Warrant for its own account or an
account with respect to which it exercises sole investment discretion
and that it and any such account is a QIB within the meaning of Rule
144A, and is aware that the sale to it is being made in reliance on
Rule 144A and acknowledges that it has received such information
regarding the Company as it has requested pursuant to Rule 144A or has
determined not to request such information and that it is aware that
the transferor is
<PAGE> 40
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relying upon its foregoing representations in order to claim the
exemption from registration provided by Rule 144A.
(ii) If the proposed transferee is an Agent Member, upon
receipt by the Warrant Agent of the documents referred to in clause
(i)(y) above and instructions given in accordance with the
Depositary's and the Warrant Agent's procedures, the Warrant Agent
shall reflect on its books and records the date and an increase in the
number of Warrants represented by the Restricted Global Warrant, in an
amount equal to the number of Warrants represented by the Legended
Regulation S Global Warrant to be transferred, and the Warrant Agent
shall decrease the number of Warrants represented by the Legended
Regulation S Global Warrant.
(f) Transfers of Interests in the Unlegended Regulation S
Global Warrant or Offshore Certificated Warrants. The following provisions
shall apply with respect to any transfer of interests in the Unlegended
Regulation S Global Warrant or Offshore Certificated Warrants: The Warrant
Agent shall register the transfer of any such Warrant without requiring any
additional certification.
(g) General. (i) By its acceptance of any Warrants
represented by a Warrant Certificate bearing the Private Placement Legend, each
Holder of such Warrants acknowledges the restrictions on transfer of such
Warrants set forth in this Agreement and in the Private Placement Legend and
agrees that it will transfer such Warrants only as provided in this Agreement.
The Warrant Agent shall not register a transfer of any Warrants unless such
transfer complies with the restrictions on transfer of such Warrants set forth
in this Agreement and is in compliance with applicable laws and applicable
rules, regulations and procedures of any securities exchange or clearing agency
in effect from time to time.. In connection with any transfer of Warrants,
each Holder agrees by its acceptance of Warrants to furnish the Warrant Agent
or the Company such certifications, legal opinions or other information as
either of them may reasonably require to confirm that such transfer is being
made pursuant to an exemption from, or a transaction not subject to, the
registration requirements of the Securities Act or any other applicable laws of
any foreign jurisdiction; provided that the Warrant Agent shall not be required
to determine (but may rely on a determination made by the Company with respect
to) the sufficiency of any such certifications, legal opinions or other
information.
(ii) The Warrant Agent shall retain copies of all letters,
notices and other written communications received pursuant to Section
8.2 hereof or this Section 8.3. The Company shall have the right to
inspect and make copies of all such letters, notices or other written
communications at any reasonable time upon the giving of reasonable
written notice to the Warrant Agent.
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Section 8.4. Surrender of Warrant Certificates. Any Warrant
Certificate surrendered for registration of transfer, exchange or exercise of
the Warrants represented thereby shall, if surrendered to the Company, be
delivered to the Warrant Agent, and all Warrant Certificates surrendered or so
delivered to the Warrant Agent shall be promptly cancelled by the Warrant Agent
and shall not be reissued by the Company and, except as provided in this
Article VIII in case of an exchange, Article III hereof in case of the exercise
of less than all the Warrants represented thereby or Article VI in case of a
mutilated Warrant Certificate, no Warrant Certificate shall be issued hereunder
in lieu thereof. The Warrant Agent shall deliver to the Company from time to
time or otherwise dispose of such cancelled Warrant Certificates as the Company
may direct in writing.
ARTICLE IX
WARRANT HOLDERS
Section 9.1. Warrant Holder Deemed Not a Stockholder. The
Company and the Warrant Agent may deem and treat the registered Holder(s) of
the Warrant Certificates as the absolute owner(s) thereof (notwithstanding any
notation of ownership or other writing thereon made by anyone), for the purpose
of any exercise thereof and for all other purposes, and neither the Company nor
the Warrant Agent shall be affected by any notice to the contrary.
Accordingly, the Company and/or the Warrant Agent shall not, except as ordered
by a court of competent jurisdiction as required by law, be bound to recognize
any equitable or other claim to or interest in the Warrants on the part of any
person other than such registered Holder, whether or not it shall have express
or other notice thereof. Prior to the valid exercise of the Warrants, no
Holder of a Warrant Certificate, as such, shall be entitled to any rights of a
stockholder of the Company, including, without limitation, the right to vote or
to consent to any action of the stockholders, to receive dividends or other
distributions, to exercise any preemptive right or to receive any notice of
meetings of stockholders and, except as otherwise provided in this Agreement,
shall not be entitled to receive any notice of any proceedings of the Company.
Section 9.2. Right of Action. All rights of action with
respect to this Agreement are vested in the Holders of the Warrants, and any
Holder of any Warrant, without the consent of the Warrant Agent or the Holders
of any other Warrant, may, on such Holder's own behalf and for such Holder's
own benefit, enforce, and may institute and maintain any suit, action or
proceeding against the Company suitable to enforce, or otherwise in respect of,
such Holder's right to exercise such Warrants in the manner provided in the
Warrant Certificate representing such Warrants and in this Agreement.
<PAGE> 42
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ARTICLE X
REMEDIES
Section 10.1. Defaults. It shall be deemed to be a "Default"
with respect to the Company's (or its successor's) obligations under this
Agreement if:
(a) a Repurchase Event occurs and the Company (or its
successor) shall fail to make a Repurchase Offer pursuant to Section
3.4 hereof; or
(b) the Company (or its successor) shall fail to purchase
the Warrants pursuant to the Repurchase Offer in accordance with the
provisions of Section 3.4 hereof.
Section 10.2. Payment Obligations. Upon the happening of a
Default under this Agreement, the Company shall be obligated to increase the
amount otherwise payable pursuant to Section 3.4(d) hereof in respect of the
Repurchase Offer to which such Default relates by an amount equal to interest
thereon at a rate per annum equal to 11 3/4% from the date of the Default to
the date of payment, which interest shall compound quarterly (all such payment
obligations in respect of such Repurchase Offer, together with all such
increased amounts, being the "Repurchase Obligation").
Section 10.3. Remedies; No Waiver. Notwithstanding any other
provision of this Warrant Agreement, if a Default occurs and is continuing, the
Holders of the Warrants may pursue any available remedy to collect the
Repurchase Obligation or to enforce the performance of any provision of this
Warrant Agreement. A delay or omission by any Holder of a Warrant in
exercising, or a failure to exercise, any right or remedy arising out of a
Default shall not impair the right or remedy or constitute a waiver of or
acquiescence in the Default. All remedies are cumulative to the extent
permitted by law.
ARTICLE XI
THE WARRANT AGENT
Section 11.1. Duties and Liabilities. The Warrant Agent
hereby accepts the agency established by this Agreement and agrees to perform
the same upon the terms and conditions herein set forth, by all of which the
Company and the Holders of Warrants, by their acceptance thereof, shall be
bound. The Warrant Agent shall not, by countersigning Warrant Certificates or
by any other act hereunder, be deemed to make any representations as to the
validity or authorization of the Warrants or the Warrant Certificates (except
as to its countersignature thereon) or of any Common Shares issued upon
exercise of any Warrant, or
<PAGE> 43
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as to the accuracy of the computation of the Exercise Price or the number or
kind or amount of Common Shares deliverable upon exercise of any Warrant or the
correctness of the representations of the Company made in the certificates that
the Warrant Agent receives. The Warrant Agent shall not be accountable for the
use or application by the Company of the proceeds of the exercise of any
Warrant. The Warrant Agent shall not have any duty to calculate or determine
any adjustments with respect to either the Exercise Price or the kind and
amount of Common Shares receivable by Holders upon the exercise of Warrants
required from time to time and the Warrant Agent shall have no duty or
responsibility in determining the accuracy or correctness of such calculation.
The Warrant Agent shall not be (a) liable for any recital or statement of fact
contained herein or in the Warrant Certificates or for any action taken,
suffered or omitted by it in good faith without gross negligence in the belief
that any Warrant Certificate or any other documents or any signatures are
genuine or properly authorized, (b) responsible for any failure on the part of
the Company to comply with any of its covenants and obligations contained in
this Agreement or in the Warrant Certificates or (c) liable for any act or
omission in connection with this Agreement except for its own gross negligence,
bad faith or willful misconduct. The Warrant Agent is hereby authorized to
accept instructions with respect to the performance of its duties hereunder
from the Chairman of the Board, Chief Executive Officer, any Vice President or
other executive officer of the Company and to apply to any such officer for
instructions (which instructions will be promptly given in writing when
requested) and the Warrant Agent shall not be liable for any action taken or
suffered to be taken by it in good faith without gross negligence in accordance
with the instructions of any such officer; provided, however, that, in its
discretion, the Warrant Agent may, in lieu thereof, accept other evidence of
such or may require such further or additional evidence as it may deem
reasonable. The Warrant Agent shall not be liable for any action taken with
respect to any matter in the event it requests instructions from the Company as
to that matter and does not receive such instructions within a reasonable
period of time after the request therefor.
The Warrant Agent may execute and exercise any of the rights
and powers hereby vested in it or perform any duty hereunder either itself or
by or through attorneys, agents or employees of its selection, and the Warrant
Agent shall not be answerable or accountable for any act, default, neglect or
misconduct of any such attorneys, agents or employees; provided that reasonable
care has been exercised with respect to the retention of any such attorney,
agent or employee. The Warrant Agent shall not be under any obligation or duty
to institute, appear in or defend any action, suit or legal proceeding in
respect hereof, unless first indemnified to its reasonable satisfaction. The
Warrant Agent shall promptly notify the Company in writing of any claim made or
action, suit or proceeding instituted against it arising out of or in
connection with this Agreement.
The Company will perform, execute, acknowledge and deliver or
cause to be delivered all such further acts, instruments and assurances as are
consistent with this
<PAGE> 44
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Agreement and as may reasonably be required by the Warrant Agent in order to
enable it to carry out or perform its duties under this Agreement.
The Warrant Agent shall act solely as agent of the Company
hereunder. The Warrant Agent shall not be liable except for the failure to
perform such duties as are specifically set forth herein, and no implied
covenants or obligations shall be read into this Agreement against the Warrant
Agent, whose duties and obligations shall be determined solely by the express
provisions hereof.
Section 11.2. Right to Consult Counsel. The Warrant Agent
may at any time consult with legal counsel of its selection (who may be legal
counsel for the Company), and the written opinion or advice of such counsel
shall be full and complete authorization and protection to the Warrant Agent
and the Warrant Agent shall incur no liability or responsibility to the Company
or to any Holder for any action taken, suffered or omitted by it in good faith
without gross negligence in accordance with the written opinion or advice of
such counsel.
Section 11.3. Compensation; Indemnification. The Company
agrees promptly to pay the Warrant Agent from time to time and in any case
within 30 days of receipt of an invoice, compensation for its services
hereunder as the Company and the Warrant Agent may agree from time to time, and
to reimburse it upon its request upon furnishing reasonable supporting
documentation for fees or expenses and reasonable counsel fees and expenses
incurred in connection with the execution and administration of this Agreement,
and further agrees to indemnify each of the Warrant Agent and any predecessor
Warrant Agent and save it harmless against any and all losses, claims, damages,
liabilities or reasonable expenses arising out of or in connection with the
acceptance and administration of this Agreement, including, without limitation,
the reasonable costs and expenses of investigating or defending any claim of
such liability, except that the Company shall have no liability hereunder to
the extent that any such loss, liability or expense results from the Warrant
Agent's own gross negligence, bad faith or willful misconduct. The obligations
of the Company under this Section 11.3 shall survive the exercise and the
expiration of the Warrants, the termination of this Agreement and the
resignation or removal of the Warrant Agent in respect of services or expenses
incurred in connection with the Warrants or this Agreement.
Section 11.4. No Restrictions on Actions. Nothing in this
Agreement shall be deemed to prevent the Warrant Agent and any stockholder,
director, officer or employee of the Warrant Agent from buying, selling or
dealing in any of the Warrants or other securities of the Company or becoming
pecuniarily interested in transactions in which the Company may be interested,
or contracting with or lending money to the Company or otherwise acting as
fully and freely as though it were not the Warrant Agent under this Agreement.
Nothing herein shall preclude the Warrant Agent from acting in any other
capacity for the Company or for any other legal entity.
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Section 11.5. Discharge or Removal; Replacement Warrant
Agent. The Warrant Agent may resign from its position as such and be
discharged from all further duties and liabilities hereunder (except liability
arising as a result of the Warrant Agent's own gross negligence, bad faith or
willful misconduct), after giving one month's prior written notice to the
Company. The Company may at any time remove the Warrant Agent upon one month's
written notice specifying the date when such discharge shall take effect, and
the Warrant Agent shall thereupon in like manner be discharged from all further
duties and liabilities hereunder, except as aforesaid. The Warrant Agent shall
mail to each Holder of a Warrant, at the Company's expense, a copy of said
notice of resignation or notice of removal, as the case may be. Upon such
resignation or removal the Company shall appoint in writing a new warrant
agent. If the Company shall fail to make such appointment within a period of
30 days after it has been notified in writing of such resignation by the
resigning Warrant Agent or after such removal, then the resigning or removed
Warrant Agent or the Holder of any Warrant may, at the expense of the Company,
apply to any court of competent jurisdiction for the appointment of a new
warrant agent. After 30 days from receipt of, or giving, notice, as the case
may be, and pending appointment of a successor to the original Warrant Agent,
either by the Company or by such a court, the duties of the Warrant Agent shall
be carried out by the Company. Any new warrant agent, whether appointed by the
Company or by such a court, shall be a bank or trust company doing business
under the laws of the United States or any state thereof, in good standing and
having a combined capital and surplus of not less than $25,000,000. The
combined capital and surplus of any such new warrant agent shall be deemed to
be the combined capital and surplus as set forth in the most recent annual
report of its condition published by such warrant agent prior to its
appointment, provided that such reports are published at least annually
pursuant to law or to the requirements of a federal or state supervising or
examining authority. After acceptance in writing of such appointment by the
new warrant agent, it shall be vested with the same powers, rights, duties and
responsibilities as if it had been originally named herein as the Warrant
Agent, without any further assurance, conveyance, act or deed; however, the
original Warrant Agent shall in all events deliver and transfer to the
successor Warrant Agent all property (including, without limitation, documents
and recorded information), if any, at the time held hereunder by the original
Warrant Agent and if for any reason it shall be necessary or expedient to
execute and deliver any further assurance, conveyance, act or deed, the same
shall be done at the expense of the Company and shall be legally and validly
executed and delivered by the resigning or removed Warrant Agent. Not later
than the effective date of any such appointment, the Company shall file notice
thereof with the resigning or removed Warrant Agent and shall forthwith cause a
copy of such notice to be mailed by the successor Warrant Agent to each Holder
of a Warrant. Failure to give any notice provided for in this Section 11.5,
however, or any defect therein, shall not affect the legality or validity of
the resignation of the Warrant Agent or the appointment of a new warrant agent,
as the case may be. No Warrant Agent hereunder shall be liable for any acts or
omissions of any successor Warrant Agent.
<PAGE> 46
41
Section 11.6. Successor Warrant Agent. Any corporation into
which the Warrant Agent or any new warrant agent may be merged or converted, or
any corporation resulting from any consolidation to which the Warrant Agent or
any new warrant agent shall be a party or any corporation succeeding to all or
substantially all the corporate agency business of the Warrant Agent, shall be
a successor Warrant Agent under this Agreement without any further act,
provided that such corporation would be eligible for appointment as successor
to the Warrant Agent under the provisions of Section 11.5 hereof. Any such
successor Warrant Agent shall promptly cause notice of its succession as
Warrant Agent to be mailed to each Holder of a Warrant.
ARTICLE XII
MISCELLANEOUS
Section 12.1. Monies Deposited with the Warrant Agent. The
Warrant Agent shall not be required to pay interest on any monies deposited
pursuant to the provisions of this Agreement except such as it shall agree in
writing with the Company to pay thereon. Any monies, securities or other
property which at any time shall be deposited by the Company or on its behalf
with the Warrant Agent pursuant to this Agreement shall be and are hereby
assigned, transferred and set over to the Warrant Agent in trust for the
purpose for which such monies, securities or other property shall have been
deposited; but such monies, securities or other property need not be segregated
from other funds, securities or other property except to the extent required by
law. Any monies, securities or other property deposited with the Warrant Agent
for payment or distribution to the Holders that remains unclaimed for one year
after the date the monies, securities or other property was deposited with the
Warrant Agent shall be delivered to the Company upon its request therefor.
Section 12.2. Payment of Taxes. Subject to Article VI
hereof, all Common Shares issuable upon the exercise of Warrants shall be
validly issued, fully paid and not subject to any calls for funds, and the
Company shall pay any taxes and other governmental charges that may be imposed
under the laws of the United States of America or any political subdivision or
taxing authority thereof or therein in respect of the issue or delivery thereof
upon exercise of Warrants (other than income taxes imposed on the Holders).
The Company shall not be required, however, to pay any tax or other charge
imposed in connection with any transfer involved in the issue of any
certificate for Common Shares (including other securities or property issuable
upon the exercise of the Warrants) or payment of cash to any Person other than
the Holder of a Warrant Certificate surrendered upon the exercise of a Warrant
and in case of such transfer or payment, the Warrant Agent and the Company
shall not be required to issue any share certificate or pay any cash until such
tax or charge has been paid or it has been
<PAGE> 47
42
established to the Warrant Agent's and the Company's satisfaction that no such
tax or charge is due.
Section 12.3. No Merger, Consolidation or Sale of Assets of
the Company. Except as otherwise provided herein, the Company will not merge
into or consolidate with any other Person, or sell or otherwise transfer its
property, assets and business substantially as an entirety to a successor of
the Company, unless the Person resulting from such merger or consolidation, or
such successor of the Company, shall expressly assume, by supplemental
agreement satisfactory in form to the Warrant Agent and executed and delivered
to the Warrant Agent, the due and punctual performance and observance of each
and every covenant and condition of this Agreement or contained in the Warrants
to be performed and observed by the Company.
Section 12.4. Reports to Holders. At all times from and
after August 3, 1998, 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 it would be required to file with the
Commission by Section 13(a) or 15(d) under the Exchange Act if it were subject
thereto. The Company shall supply the Warrant Agent and each Holder or shall
supply to the Warrant Agent for forwarding to each such Holder, without cost to
such Holder, copies of such reports and other information. The Warrant Agent's
receipt of such reports and other information 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
Warrant Agent is entitled to rely exclusively on Officers' Certificates). In
addition, at all times prior to August 3, 1998, upon the request of any Holder
or any prospective purchaser of the Warrants designated by a Holder, the
Company shall supply to such Holder or such prospective purchaser the
information required under Rule 144A.
Section 12.5. Notices; Payment. (a) Except as otherwise
provided in Section 12.5(b) hereof, any notice, demand or delivery authorized
by this Agreement shall be sufficiently given or made when mailed, if sent by
first class mail, postage prepaid, addressed to any Holder of a Warrant at such
Holder's last known address appearing on the register of the Company maintained
by the Warrant Agent and to the Company or the Warrant Agent as follows:
To the Company:
Allegiance Telecom, Inc.
1950 Stemmons Frwy., Suite 3026
Dallas, Texas 75207
Attention: Chief Financial Officer
<PAGE> 48
43
To the Warrant Agent:
The Bank of New York
101 Barclay Street
Floor 21 West
New York, New York 10286
Attention: Corporate Trust Administration
or such other address as shall have been furnished to the party giving or
making such notice, demand or delivery. Any notice that is mailed in the
manner herein provided shall be conclusively presumed to have been duly given
when mailed, whether or not the Holder receives the notice.
(b) Payment of the Exercise Price shall be made in
accordance with the provisions of this Agreement at the office of the Warrant
Agent set forth above, unless otherwise directed by the Warrant Agent and the
Company.
(c) Any notice required to be given by the Company to the
Holders shall be made by mailing, to the Holders at their last known addresses
appearing on the register maintained by the Warrant Agent. The Company hereby
irrevocably authorizes the Warrant Agent, in the name and at the expense of the
Company, to mail any such notice upon receipt thereof from the Company. Any
notice that is mailed in the manner herein provided shall be conclusively
presumed to have been duly given when mailed, whether or not the Holder
receives the notice.
Section 12.6. Binding Effect. This Agreement shall be
binding upon and inure to the benefit of the Company and the Warrant Agent and
their respective successors and assigns, and the Holders from time to time of
the Warrants. Nothing in this Agreement is intended or shall be construed to
confer upon any Person, other than the Company, the Warrant Agent and the
Holders of the Warrants, any right, remedy or claim under or by reason of this
Agreement or any part hereof.
Section 12.7. Counterparts. This Agreement may be executed
manually or by facsimile in any number of counterparts, each of which shall be
deemed an original, but all of which together constitute one and the same
instrument.
Section 12.8. Amendments. The Warrant Agent may, without the
consent or concurrence of the Holders of the Warrants, by supplemental
agreement or otherwise, join with the Company in making any changes or
corrections in this Agreement that (a) are required to cure any ambiguity or to
correct any defective or inconsistent provision or clerical omission or mistake
or manifest error herein contained or (b) add to the covenants and
<PAGE> 49
44
agreements of the Company in this Agreement further covenants and agreements of
the Company thereafter to be observed, or surrender any rights or power
reserved to or conferred upon the Company in this Agreement; provided that in
either case such changes or corrections do not and will not adversely affect,
alter or change the rights, privileges or immunities of the Holders of
Warrants. Upon the Warrant Agent's request, the Company shall promptly provide
an Officer's Certificate and Opinion of Counsel which provide all conditions
precedent to adoption of an amendment that have been satisfied.
Section 12.9. Headings. The descriptive headings of the
several Sections of this Agreement are inserted for convenience only and shall
not control or affect the meaning or construction of any of the provisions
hereof.
Section 12.10. Common Shares Legend. Unless and until the
Common Shares issuable upon the exercise of the Warrants are registered under
the Securities Act, or unless otherwise agreed by the Company and the Holder
thereof, such Common Shares will bear a legend substantially to the following
effect:
THE COMMON SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), AND ACCORDINGLY, MAY NOT BE OFFERED, SOLD, PLEDGED
OR OTHERWISE TRANSFERRED WITHIN THE UNITED STATES OR TO, OR FOR THE
ACCOUNT OR BENEFIT OF, U.S. PERSONS EXCEPT AS SET FORTH IN THE
FOLLOWING SENTENCE. BY ITS ACQUISITION HEREOF, THE HOLDER (1)
REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS
DEFINED IN RULE 144A UNDER THE SECURITIES ACT) OR (B) IT IS AN
INSTITUTIONAL "ACCREDITED INVESTOR" (AS DEFINED IN RULE 501(a)(1),
(2), (3) OR (7) OF REGULATION D UNDER THE SECURITIES ACT) (AN
"INSTITUTIONAL ACCREDITED INVESTOR") OR (C) IT IS NOT A U.S. PERSON
AND IS ACQUIRING THE COMMON SHARES REPRESENTED BY THIS CERTIFICATE IN
AN OFFSHORE TRANSACTION IN COMPLIANCE WITH REGULATION S UNDER THE
SECURITIES ACT, (2) AGREES THAT IT WILL NOT, WITHIN THE TIME PERIOD
REFERRED TO UNDER RULE 144(k), UNDER THE SECURITIES ACT AS IN EFFECT
WITH RESPECT TO SUCH TRANSFER, RESELL OR OTHERWISE TRANSFER THE COMMON
SHARES REPRESENTED BY THIS CERTIFICATE EXCEPT (A) TO ALLEGIANCE
TELECOM, INC. (THE "COMPANY") OR ANY SUBSIDIARY THEREOF, (B) INSIDE
THE UNITED STATES TO A QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE
WITH RULE 144A UNDER THE SECURITIES ACT, (C)
<PAGE> 50
45
INSIDE THE UNITED STATES TO AN INSTITUTIONAL ACCREDITED INVESTOR THAT,
PRIOR TO SUCH TRANSFER, FURNISHES TO THE TRANSFER AGENT AND REGISTRAR
A SIGNED LETTER CONTAINING CERTAIN REPRESENTATIONS AND AGREEMENTS
RELATING TO THE RESTRICTIONS ON TRANSFER OF THE COMMON SHARES
REPRESENTED BY THIS CERTIFICATE (THE FORM OF WHICH LETTER CAN BE
OBTAINED FROM THE TRANSFER AGENT AND REGISTRAR) AND AN OPINION OF
COUNSEL ACCEPTABLE TO THE COMPANY THAT SUCH TRANSFER IS IN COMPLIANCE
WITH THE SECURITIES ACT, (D) OUTSIDE THE UNITED STATES IN AN OFFSHORE
TRANSACTION IN COMPLIANCE WITH RULE 904 UNDER THE SECURITIES ACT, (E)
PURSUANT TO THE EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER
THE SECURITIES ACT (IF AVAILABLE) OR (F) PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND (3) AGREES THAT IT
WILL DELIVER TO EACH PERSON TO WHOM THE COMMON SHARES REPRESENTED BY
THIS CERTIFICATE ARE TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT
OF THIS LEGEND. IN CONNECTION WITH ANY TRANSFER OF THE COMMON SHARES
REPRESENTED BY THIS CERTIFICATE WITHIN THE TIME PERIOD REFERRED TO
ABOVE, THE HOLDER MUST CHECK THE APPROPRIATE BOX SET FORTH ON THE
REVERSE HEREOF RELATING TO THE MANNER OF SUCH TRANSFER AND SUBMIT THIS
CERTIFICATE TO THE TRANSFER AGENT AND REGISTRAR. IF THE PROPOSED
TRANSFEREE IS AN INSTITUTIONAL ACCREDITED INVESTOR, THE HOLDER MUST,
PRIOR TO SUCH TRANSFER, FURNISH TO EACH OF THE TRANSFER AGENT AND
REGISTRAR AND THE COMPANY SUCH CERTIFICATIONS, LEGAL OPINIONS OR OTHER
INFORMATION AS EITHER OF THEM MAY REASONABLY REQUIRE TO CONFIRM THAT
SUCH TRANSFER IS BEING MADE PURSUANT TO AN EXEMPTION FROM, OR IN A
TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT. AS USED HEREIN, THE TERMS "OFFSHORE TRANSACTION,"
"UNITED STATES" AND "U.S. PERSON" HAVE THE MEANINGS GIVEN TO THEM BY
REGULATION S UNDER THE SECURITIES ACT. THE COMPANY HAS INSTRUCTED THE
TRANSFER AGENT AND REGISTRAR TO REFUSE TO REGISTER ANY TRANSFER OF THE
SHARES OF COMMON STOCK REPRESENTED BY THIS CERTIFICATE IN VIOLATION OF
THE FOREGOING RESTRICTIONS.
<PAGE> 51
46
Section 12.11. Third Party Beneficiaries. The Holders shall
be third party beneficiaries to the agreements made hereunder between the
Company, on the one hand, and the Warrant Agent, on the other hand, and each
Holder shall have the right to enforce such agreements directly to the extent
it deems such enforcement necessary or advisable to protect its rights or the
rights of Holders hereunder. By acquiring Warrants, each Holder agrees to be
bound by the obligations of Holders generally as set forth herein and as such
obligations may be applicable to such Holder.
Section 12.12. Termination. Except as otherwise specified
herein, this Agreement shall terminate at 5:00 p.m. (New York City time) on the
tenth anniversary of the Closing Date. Notwithstanding the foregoing, this
Agreement shall terminate on any earlier date as of which all Warrants have
been exercised.
Section 12.13. Governing Law. This Agreement shall be
governed by the laws of the State of New York. The Warrant Agent, 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
Agreement or the Warrants.
<PAGE> 52
IN WITNESS WHEREOF, the parties have caused this Agreement to
be duly executed, as of the day and year first above written.
ALLEGIANCE TELECOM, INC.
By: /s/ ROYCE J. HOLLAND
-----------------------------------
Name: Royce J. Holland
Title: Chief Executive Officer
THE BANK OF NEW YORK
By: /s/ VAN BROWN
-----------------------------------
Name: Van Brown
Title: Assistant Vice President
<PAGE> 53
EXHIBIT A
FORM OF WARRANT CERTIFICATE
ALLEGIANCE TELECOM, INC.
CUSIP No. _________
No. _____
WARRANTS TO PURCHASE COMMON SHARES
This certifies that ______________, or its registered assigns,
is the owner of ___________ Warrants, each of which represents the right to
purchase from ALLEGIANCE TELECOM, INC., a Delaware corporation (the "Company"),
after February 3, 1999 (or in connection with the initial public offering of
equity securities (other than nonconvertible preferred stock) of the Company),
.0034224719 shares of the common stock, par value $.01 per share, of the
Company (the "Common Shares") at an exercise price (the "Exercise Price") of
$.01 per Common Share (subject to adjustment as provided in the Warrant
Agreement hereinafter referred to below), upon surrender hereof at the office
of The Bank of New York, or to its successor, as the warrant agent under the
Warrant Agreement (any such warrant agent being herein called the "Warrant
Agent"), or such other location contemplated by Section 12.5(b) of the Warrant
Agreement, with the Subscription Form on the reverse hereof duly executed, with
signature guaranteed as therein specified and simultaneous payment in full in
cash or by certified or official bank or bank cashier's check payable to the
order of the Company. Notwithstanding the foregoing, the Exercise Price may be
paid by surrendering additional Warrants to the Warrant Agent having an
aggregate Spread equal to the aggregate Exercise Price of the Warrants being
exercised. At any time after one year after the Closing Date and on or before
the Expiration Date, any outstanding Warrants may be exercised on any Business
Day; provided that the Warrant Registration Statement is, at the time of
exercise, effective and available for the exercise of Warrants or the exercise
of such Warrants is exempt from the registration requirements of the Securities
Act.
This Warrant Certificate is issued under and in accordance
with a Warrant Agreement dated as of February 3, 1998 (the "Warrant
Agreement"), between the Company and The Bank of New York, as Warrant Agent,
and a Registration Rights Agreement dated as of February 3, 1998 (the "Warrant
Registration Rights Agreement"), between the Company and The Bank of New York,
and is subject to the Certificate of Incorporation and Bylaws of the Company
and to the terms and provisions contained therein, to all of which terms and
provisions the Holder of this Warrant Certificate consents by acceptance
hereof. The terms of the Warrant Agreement and the Warrant Registration
Rights Agreement are hereby incorporated herein by reference and made a part
hereof. Reference is hereby made to the Warrant Agreement and the Warrant
Registration Rights Agreement for a full description of
<PAGE> 54
A-2
the rights, limitations of rights, obligations, duties and immunities
thereunder of the Company and the Holders of the Warrants. The summary of the
terms of the Warrant Agreement and the Warrant Registration Rights Agreement
contained in this Warrant Certificate is qualified in its entirety by express
reference to the Warrant Agreement and the Warrant Registration Rights
Agreement. All terms used in this Warrant Certificate that are defined in the
Warrant Agreement and the Warrant Registration Rights Agreement shall have the
meanings assigned to them in such agreements.
Copies of the Warrant Agreement and the Warrant Registration
Rights Agreement are on file at the office of the Warrant Agent and may be
obtained by writing to the Warrant Agent at the following address:
The Bank of New York
101 Barclay Street
Floor 21 West
New York, New York 10286
Attention: Corporate Trust Administration
A "Repurchase Event", as defined in the Warrant Agreement,
shall be deemed to occur on any date when the Company (i) consolidates with or
merges into or with another person (but only where the holders of Common Stock
receive consideration in exchange for all or part of such Common Stock), if the
Common Stock (or other securities) thereafter issuable upon exercise of the
Warrants is not registered under the Exchange Act or (ii) sells all or
substantially all of its assets to another person, if the Common Stock (or
other securities) thereafter issuable upon exercise of the Warrants is not
registered under the Exchange Act; provided that, in each case, a "Repurchase
Event" shall not be deemed to have occurred if the consideration for such
transaction consists solely of cash.
Following a Repurchase Event, the Company must make an offer to
repurchase for cash all outstanding Warrants (a "Repurchase Offer"). If the
Company makes a Repurchase Offer, Holders may, until the expiration date of
such offer, surrender all or part of their Warrants for repurchase by the
Company.
Warrants received by the Warrant Agent in proper form during a
Repurchase Offer will, except as otherwise provided in the Warrant Agreement,
be repurchased by the Company at a price in cash (the "Repurchase Price") equal
to the value on the Valuation Date relating thereto of the Common Shares
issuable, and other securities or property of the Company which would have been
delivered upon exercise of the Warrants had the Warrants been exercised
(whether or not the Warrants are then exercisable), less the Exercise Price in
effect on the Notice Date for such Repurchase Offer. The value of such Common
Shares and other securities will be (i) if the Common Shares (or other
securities) are registered under the
<PAGE> 55
A-3
Exchange Act, determined based upon the average of the daily market prices (as
determined pursuant to Section 3.4(d)(ii)(1) of the Warrant Agreement) of the
Common Shares (or other securities) for the 20 consecutive trading days
immediately preceding such Valuation Date or (ii) if the Common Shares (or
other securities) are not registered under the Exchange Act or if the value
cannot be computed under clause (i) above, determined by the Independent
Financial Expert (as defined in the Warrant Agreement), in each case as set
forth in the Warrant Agreement.
The "Valuation Date" as defined in the Warrant Agreement shall
be deemed to occur on the date five Business Days prior to the date notice of
the Repurchase Offer is first given.
If the Company fails to make or complete a Repurchase Offer (a
"Default") as required by the Warrant Agreement, it shall be obligated to
increase the amount otherwise payable pursuant to the Warrant Agreement in
respect of the Repurchase Offer by an amount equal to interest thereon at a
rate per annum of 11 3/4% from the date of the Default to the date of payment,
which interest shall compound quarterly.
If the Company merges or consolidates with or into, or sells
all or substantially all of its property and assets to, another Person and the
consideration received by holders of Common Shares consists solely of cash, the
Holders of Warrants shall be entitled to receive distributions on the date of
such event on an equal basis with holders of Common Shares (or other securities
issuable upon exercise of the Warrants) as if the Warrants had been exercised
immediately prior to such event (less the Exercise Price). Upon receipt of
such payment, if any, the rights of a Holder shall terminate and cease and such
Holder's Warrants shall expire.
The number of Common Shares purchasable upon the exercise of
each Warrant and the price per share are subject to adjustment as provided in
the Warrant Agreement. Except as stated in the immediately preceding paragraph
and in the Warrant Agreement, in the event the Company merges or consolidates
with, or sells all or substantially all of its assets to, another Person, each
Warrant will, upon exercise, entitle the Holder thereof to receive the number
of shares of capital stock or other securities or the amount of money and other
property which the holder of a Common Share (or other securities or property
issuable upon exercise of a Warrant) is entitled to receive upon completion of
such merger, consolidation or sale.
As to any final fraction of a share which the same Holder of
one or more Warrant Certificates would otherwise be entitled to purchase upon
exercise thereof in the same transaction, the Company may pay the cash value
thereof determined as provided in the Warrant Agreement.
<PAGE> 56
A-4
Subject to Article VI of the Warrant Agreement, all Common
Shares issuable by the Company upon the exercise of Warrants shall be validly
issued, fully paid and not subject to any calls for funds, and the Company
shall pay any taxes and other governmental charges that may be imposed under
the laws of the United States of America or any political subdivision or taxing
authority thereof or therein in respect of the issue or delivery thereof upon
exercise of Warrants (other than income taxes imposed on the Holders). The
Company shall not be required, however, to pay any tax or other charge imposed
in connection with any transfer involved in the issue of any certificate for
Common Shares (including other securities or property issuable upon the
exercise of the Warrants) or payment of cash to any Person other than the
Holder of a Warrant Certificate surrendered upon the exercise of a Warrant and
in case of such transfer or payment, the Warrant Agent and the Company shall
not be required to issue any share certificate or pay any cash until such tax
or charge has been paid or it has been established to the Warrant Agent's and
the Company's satisfaction that no such tax or charge is due.
Subject to the restrictions on and conditions to transfer set
forth in Articles II and VIII of the Warrant Agreement, this Warrant
Certificate and all rights hereunder are transferable by the registered Holder
hereof, in whole or in part, on the register of the Company maintained by the
Warrant Agent for such purpose at the Warrant Agent's office in New York, New
York upon surrender of this Warrant Certificate duly endorsed, or accompanied
by a written instrument of transfer in form satisfactory to the Company and the
Warrant Agent duly executed, with signatures guaranteed as specified in the
attached Form of Assignment, by the registered Holder hereof or his attorney
duly authorized in writing and by such other documentation required pursuant to
the Warrant Agreement and upon payment of any necessary transfer tax or other
governmental charge imposed upon such transfer. Upon any partial transfer, the
Company will sign and issue and the Warrant Agent will countersign and deliver
to such Holder a new Warrant Certificate or Certificates with respect to any
portion not so transferred. Each taker and Holder of this Warrant Certificate,
by taking and holding the same, consents and agrees that prior to the
registration of transfer as provided in the Warrant Agreement, the Company and
the Warrant Agent may treat the person in whose name the Warrants are
registered as the absolute owner hereof for any purpose and as the Person
entitled to exercise the rights represented hereby, any notice to the contrary
notwithstanding. Accordingly, the Company and/or the Warrant Agent shall not,
except as ordered by a court of competent jurisdiction as required by law, be
bound to recognize any equitable or other claim to or interest in the Warrants
on the part of any person other than such Registered Holder, whether or not it
shall have express or other notice thereof.
This Warrant Certificate may be exchanged at the office of the
Warrant Agent maintained for such purpose in New York, New York, for Warrant
Certificates representing the same aggregate number of Warrants, each new
Warrant Certificate to represent such number of Warrants as the Holder hereof
shall designate at the time of such exchange.
<PAGE> 57
A-5
Prior to the exercise of the Warrants represented hereby, the
Holder of this Warrant Certificate, as such, shall not be entitled to any
rights of a stockholder of the Company, including, without limitation, the
right to vote or to consent to any action of the stockholders, to receive any
distributions, to exercise any pre-emptive right or to receive any notice of
meetings of stockholders, and shall not be entitled to receive any notice of
any proceedings of the Company except as provided in the Warrant Agreement.
This Warrant Certificate shall be void and all rights
evidenced hereby shall cease on February 3, 2008, unless sooner terminated by
the liquidation, dissolution or winding-up of the Company or as otherwise
provided in the Warrant Agreement upon the consolidation or merger of the
Company with, or sale of the Company to, another Person or unless such date is
extended as provided in the Warrant Agreement.
<PAGE> 58
This Warrant Certificate shall not be valid for any purpose
until it shall have been countersigned by the Warrant Agent.
ALLEGIANCE TELECOM, INC.
By:
------------------------
Name:
Title:
By:
------------------------
Name:
Title:
Dated:
Countersigned:
THE BANK OF NEW YORK,
as Warrant Agent
By:
--------------------------------
Authorized Signatory
<PAGE> 59
FORM OF REVERSE OF WARRANT CERTIFICATE
SUBSCRIPTION FORM
(To be executed only upon exercise of Warrant)
To: The Bank of New York,
as Warrant Agent
101 Barclay Street
Floor 21 West
New York, New York 10286
Attention: Corporate Trust Administration
The undersigned irrevocably exercises ________ of the Warrants
represented by this Warrant Certificate and herewith makes payment of $ _______
(such payment being in cash or by certified or official bank or bank cashier's
check payable to the order or at the direction of Allegiance Telecom, Inc. or
the exercise price may be paid by surrendering additional Warrants to the
Warrant Agent having an aggregate Spread equal to the aggregate exercise price
of the Warrants being exercised) all at the exercise price and on the terms and
conditions specified in this Warrant Certificate and in the Warrant Agreement
and the Warrant Registration Rights Agreement referred to herein and surrenders
this Warrant Certificate and all right, title and interest therein to and
directs that the common stock, par value $0.01 per share, of Allegiance
Telecom, Inc. (the "Common Shares") deliverable upon the exercise of such
Warrants be registered or placed in the name and at the address specified below
and delivered thereto.
[THE FOLLOWING PROVISION TO BE INCLUDED ONLY
ON OFFSHORE CERTIFICATED WARRANTS]
The undersigned certifies that:
Check One
[ ] (a) (i) it is not a U.S. person (as defined in Rule 902
of Regulation S under the U.S. Securities Act of 1933, as
amended) and the Warrants are not being exercised on
behalf of a U.S. person.
or
[ ] (ii) it is furnishing to the Warrant Agent a written
opinion of counsel to the effect that the Warrants and
the Common Shares issuable upon exercise of the Warrants
have been registered under the U.S. Securities Act of
1933, as amended, or are exempt from registration
thereunder.
<PAGE> 60
A-8
and (b) if an opinion is not being furnished, the undersigned is located
outside the United States at the time of the exercise hereof.
Dated:
-----------------------------------
(Signature of Owner)
-----------------------------------
(Street Address)
-----------------------------------
(City) (State) (Zip Code)
Signature Guaranteed By:
-----------------------------------
Signatures must be guaranteed by an
"eligible guarantor institution"
meeting the requirements of the
Warrant Agent, which requirements
include membership or participation
in the Security Transfer Agent
Medallion Program ("STAMP") or such
other "signature guarantee program"
as may be determined by the Warrant
Agent in addition to, or in
substitution for, STAMP, all in
accordance with the Securities
Exchange Act of 1934, as amended.
Securities and/or check or other property to be issued or delivered to:
Please insert social security or identifying number:
Name:
Street Address:
City, State and Zip Code:
<PAGE> 61
A-9
FORM OF CERTIFICATE FOR REPURCHASE OFFER
(To be executed only upon repurchase
of Warrant by Allegiance Telecom, Inc.)
To:
The undersigned, having received prior notice of the
consideration for which ALLEGIANCE TELECOM, INC. will repurchase the Warrants
represented by the within Warrant Certificate, hereby surrenders this Warrant
Certificate for repurchase by ALLEGIANCE TELECOM, INC. of the number of
Warrants specified below for the consideration set forth in such notice.
Dated:
-----------------------------------
(Number of Warrants)
-----------------------------------
(Signature of Owner)
-----------------------------------
(Street Address)
-----------------------------------
(City) (State) (Zip Code)
Signature Guaranteed By:
-----------------------------------
Signatures must be guaranteed by an
"eligible guarantor institution"
meeting the requirements of the
Warrant Agent, which requirements
include membership or participation
in the Security Transfer Agent
Medallion Program ("STAMP") or such
other "signature guarantee program"
as may be determined by the Warrant
Agent in addition to, or in
substitution for, STAMP, all in
accordance with the Securities
Exchange Act of 1934, as amended.
<PAGE> 62
A-10
Securities and/or check to be issued to:
Please insert social security or identifying number:
Name:
Street Address:
City, State and Zip Code:
<PAGE> 63
A-11
FORM OF ASSIGNMENT
In consideration of monies or other valuable consideration
received from the Assignee(s) named below, the undersigned registered Holder of
this Warrant Certificate hereby sells, assigns, and transfers unto the
Assignee(s) named below (including the undersigned with respect to any Warrants
constituting a part of the Warrants evidenced by this Warrant Certificate not
being assigned hereby) all of the right of the undersigned under this Warrant
Certificate, with respect to the number of Warrants set forth below:
Name(s) of Assignee(s): _____________________________________
Address: __________________________________________________
No. of Warrants: ___________________________________________
Please insert social security or other identifying number of assignee(s):
and does hereby irrevocably constitute and appoint ________________________ the
undersigned's attorney to make such transfer on the books of __________________
maintained for the purposes, with full power of substitution in the premises.
[THE FOLLOWING PROVISION TO BE INCLUDED ON ALL CERTIFICATES EXCEPT UNLEGENDED
REGULATION S GLOBAL WARRANTS AND UNLEGENDED OFFSHORE CERTIFICATED WARRANTS]
In connection with any transfer of Warrants, the undersigned
confirms that without utilizing any general solicitation or general advertising
that:
Check One
[ ] (a) these Warrants are being transferred in compliance with the
exemption from registration under the U.S. Securities Act of 1933,
as amended, provided by Rule 144A thereunder.
or
[ ] (b) these Warrants are being transferred other than in accordance with
(a) above and documents are being furnished which comply with the
conditions of transfer set forth in this Warrant Certificate and
the Warrant Agreement.
or
[ ] (c) these Warrants are being transferred pursuant to an effective
registration statement under the U.S. Securities Act of 1933, as
amended.
If none of the foregoing boxes is checked, the Warrant Agent shall not be
obligated to register the Warrants in the name of any Person other than the
Holder hereof unless and until the
<PAGE> 64
conditions to any such transfer of registration set forth herein and in Article
VIII of the Warrant Agreement shall have been satisfied.
Dated:
-----------------------------
(Signature of Owner)
-----------------------------
(Street Address)
-----------------------------
(City) (State) (Zip Code)
Signature Guaranteed By:
-----------------------------
Signatures must be guaranteed by an
"eligible guarantor institution" meeting the
requirements of the Warrant Agent, which
requirements include membership or
participation in the Security Transfer Agent
Medallion Program ("STAMP") or such
other "signature guarantee program" as may
be determined by the Warrant Agent in
addition to, or in substitution for, STAMP,
all in accordance with the Securities
Exchange Act of 1934, as amended.
TO BE COMPLETED BY PURCHASER IF (a) ABOVE IS CHECKED.
The undersigned represents and warrants that it is purchasing
the Warrant(s) for its own account or an account with respect to which it
exercises sole investment discretion and that it and any such account is a
"qualified institutional buyer" within the meaning of Rule 144A under the U.S.
Securities Act of 1933, as amended, and is aware that the sale to it is being
made in reliance on Rule 144A and acknowledges that it has received such
information regarding Allegiance Telecom, Inc. as the undersigned has requested
pursuant to Rule 144A or has determined not to request such information and
that it is aware that the transferor is relying upon the undersigned's
foregoing representations in order to claim the exemption from registration
provided by Rule 144A.
Dated:
----------------
-------------------------------
<PAGE> 65
A-13
[NOTE: To be executed by an executive officer]
<PAGE> 66
EXHIBIT B
Form of Certificate to be Delivered
in Connection with
Transfers Pursuant to Regulation S
[Date]
Allegiance Telecom, Inc.
1950 Stemmons Frwy., Suite 3026
Dallas, Texas 75207
Attention: Chief Financial Officer
The Bank of New York
101 Barclay Street
Floor 21 West
New York, New York 10286
Attention: Corporate Trust Administration
Re: Warrants (the "Warrants") to Purchase
Common Shares of Allegiance Telecom, Inc. (the "Company")
Ladies and Gentlemen:
In connection with our proposed sale of _______________ Warrants,
we hereby certify that such sale has been effected pursuant to and in
accordance with Regulation S under the U.S. Securities Act of 1933, as amended
(the "Securities Act"), and, accordingly, we represent that:
(1) the offer of the Warrants was not made to a person in the
United States and not to a U.S. Person (as defined in Regulation S
under the Securities Act);
(2) at the time the buy order was originated, the transferee was
outside the United States or we and any person acting on our behalf
reasonably believed that the transferee was outside the United
States;
(3) no directed selling efforts (as such term is defined in Rule
902(b) of Regulation S under the Securities Act) have been made by
us, any of our affiliates or any persons acting on our behalf in
the United States in contravention of the requirements of Rule
903(b) or Rule 904(b) of Regulation S under the Securities Act, as
applicable; and
<PAGE> 67
B-2
(4) the transaction is not part of a plan or scheme to evade the
registration requirements of the Securities Act.
You and the Company are entitled to rely upon this letter and are
irrevocably authorized to produce this letter or a copy hereof to any
interested party in any administrative or legal proceedings or official inquiry
with respect to the matters covered hereby. Terms used in this certificate
have the meanings set forth in Regulation S.
Very truly yours,
[Name of Transferor]
By:
---------------------------
Authorized Signature
<PAGE> 68
EXHIBIT C-1
Form of Certificate to be
Delivered by Transferor in Connection with
Transfers to Institutional Accredited Investors
[Date]
Allegiance Telecom, Inc.
1950 Stemmons Frwy., Suite 3026
Dallas, Texas 75207
Attention: Chief Financial Officer
The Bank of New York
101 Barclay Street
Floor 21 West
New York, New York 10286
Attention: Corporate Trust Administration
Re: Warrants (the "Warrants") to Purchase
Common Shares of Allegiance Telecom, Inc. (the "Company")
Ladies and Gentlemen:
We hereby certify that such transfer is being effected in
compliance with the transfer restrictions applicable to the Warrants or
interests therein transferred pursuant to and in accordance with the U.S.
Securities Act of 1933, as amended (the "Securities Act"), and accordingly we
hereby further certify that (check one):
(a) [ ] such transfer is being effected pursuant to and in
accordance with Rule 144 under the Securities Act;
or
(b) [ ] such transfer is being effected to the Company or a
subsidiary thereof;
or
(c) [ ] such transfer is being effected pursuant to an
effective registration statement under the Securities Act;
or
<PAGE> 69
C1-2
(d) [ ] such transfer is being effected pursuant to an
exemption from the registration requirements of the Securities Act other than
Rule 144A, Rule 144 or Rule 904 thereunder, and we hereby further certify that
such transfer complies with the transfer restrictions applicable to the
Warrants or interests therein transferred to Institutional Accredited Investors
and in accordance with the requirements of the exemption claimed, which
certification is supported by an Opinion of Counsel provided by us or the
transferee (a copy of which we have attached to this certification), to the
effect that such transfer is in compliance with the Securities Act. Upon
consummation of the proposed transfer in accordance with the terms of the
Warrant Agreement, the transferred Warrants or interests therein will be
subject to the restrictions on transfer enumerated in the Private Placement
Legend printed on the IAI Certificated Warrant and in the Warrant Agreement and
the Securities Act.
Very truly yours,
[Name of Transferor]
By:
-------------------------------
Authorized Signatory
<PAGE> 70
EXHIBIT C-2
Form of Certificate to be
Delivered By Transferees in Connection with
Transfers to Institutional Accredited Investors
[Date]
Allegiance Telecom, Inc.
1950 Stemmons Frwy., Suite 3026
Dallas, Texas 75207
Attention: Chief Financial Officer
The Bank of New York
101 Barclay Street
Floor 21 West
New York, New York 10286
Attention: Corporate Trust Administration
Re: Warrants (the "Warrants") to Purchase
Common Shares of Allegiance Telecom, Inc. (the "Company")
Dear Sirs:
In connection with our proposed purchase of ___________
aggregate number of Warrants, we confirm that:
1. We understand that any subsequent transfer of the
Warrants, any interest therein or the Common Shares issuable upon
exercise of any Warrant (the "Warrant Shares") is subject to certain
restrictions and conditions set forth in the Warrant Agreement dated as
of February 3, 1998 relating to the Warrants (the "Warrant Agreement")
and the Warrant Registration Rights Agreement dated as of February 3,
1998 relating to the Warrants (the "Warrant Registration Rights
Agreement") and the undersigned agrees to be bound by, and not to
resell, pledge or otherwise transfer the Warrants or Warrant Shares
except in compliance with, such restrictions and conditions and the U.S.
Securities Act of 1933, as amended (the "Securities Act").
2. We understand that the Warrants represented by this
Warrant Certificate and, as of the date this Warrant Certificate was
originally issued, the Warrant Shares have not been registered under the
Securities Act, and accordingly may not be offered, sold, pledged or
otherwise transferred within the United States or to, or for the account
or benefit of, U.S. Persons except as set forth in the following
sentence. We agree that
<PAGE> 71
C2-2
we will not, within the time period referred to under Rule 144(k) of the
Securities Act (taking into account the provisions of Rule 144(d) under
the Securities Act, if applicable) under the Securities Act as in effect
on the date of the transfer of this Warrant, resell or otherwise
transfer the Warrants represented by this Warrant Certificate except (a)
to Allegiance Telecom, Inc. or any subsidiary thereof, (b) to a
qualified institutional buyer in compliance with Rule 144A under the
Securities Act, (c) outside the United States in an offshore transaction
in compliance with Rule 904 under the Securities Act, (d) pursuant to
the exemption from registration provided by Rule 144 under the
Securities Act (if available), (e) to an institutional accredited
investor that, prior to such transfer, furnishes to you, to the Company
and, in the case of the Warrant Shares, to the transfer agent and
registrar therefor, a signed letter containing certain representations
and agreements relating to the restrictions on transfer of the Warrants
represented by this Warrant Certificate (the form of which letter can be
obtained from the Warrant Agent) and an opinion of counsel acceptable to
Allegiance Telecom, Inc. and its counsel that such transfer is in
compliance with the Securities Act or (f) pursuant to an effective
registration statement under the Securities Act and, in each case, in
accordance with applicable state securities laws.
3. We understand that, on any proposed resale of any
Warrants, any interest therein or Warrant Shares, we will be required to
furnish to you and the Company such certifications, legal opinions and
other information as you and the Company may reasonably require to
confirm that the proposed sale complies with the foregoing restrictions.
We further understand that the Warrants purchased by us will bear a
legend to the foregoing effect.
4. We are an institutional "accredited investor" (as
defined in Rule 501(a)(1), (2), (3) or (7) of Regulation D under the
Securities Act) and have such knowledge and experience in financial and
business matters as to be capable of evaluating the merits and risks of
our investment in the Warrants, and we and any accounts for which we are
acting are each able to bear the economic risk of our or its investment
for an indefinite period of time.
5. We are acquiring the Warrants purchased by us for our
own account or for one or more accounts (each of which is an
institutional "accredited investor") as to each of which we exercise
sole investment discretion.
<PAGE> 72
C2-3
You, the Company and, if applicable, the transfer agent
and registrar for the Warrant Shares are entitled to rely upon this
letter and are irrevocably authorized to produce this letter or a copy
hereof to any interested party in any administrative or legal
proceedings or official inquiry with respect to the matters covered
hereby.
Very truly yours,
[Name of Transferee]
By:
---------------------------
Authorized Signature
<PAGE> 73
EXHIBIT D
Form of Certificate
[Date]
Allegiance Telecom, Inc.
1950 Stemmons Frwy., Suite 3026
Dallas, Texas 75207
Attention: Chief Financial Officer
The Bank of New York
101 Barclay Street
Floor 21 West
New York, New York 10286
Attention: Corporate Trust Administration
Re: Warrants (the "Warrants") to Purchase
Common Shares of Allegiance Telecom, Inc. (the "Company")
Dear Sirs:
This letter relates to _______________ Warrants (the "Legended
Warrants") represented by a Warrant Certificate which bears a legend outlining
restrictions upon transfer of such Legended Warrants. Pursuant to Section 2.1
of the Warrant Agreement dated as of February 3, 1998 (the "Warrant Agreement")
relating to the Warrants, we hereby certify that we are (or we will hold such
securities on behalf of) a person outside the United States to whom the
Warrants could be transferred in accordance with Rule 904 of Regulation S
promulgated under the U.S. Securities Act of 1933, as amended. Accordingly,
you are hereby requested to exchange the legended certificate for an unlegended
certificate representing an identical number of Warrants, all in the manner
provided for in the Warrant Agreement.
You and the Company are entitled to rely upon this letter and are
irrevocably authorized to produce this letter or a copy hereof to any
interested party in any administrative or legal proceedings or official inquiry
with respect to the matters covered hereby. Terms used in this certificate
have the meanings set forth in Regulation S.
Very truly yours,
[Name of Holder]
By:
----------------------------------
Authorized Signature
<PAGE> 74
APPENDIX A
LIST OF FINANCIAL EXPERTS
Alex. Brown & Sons
Bear, Stearns & Co. Inc.
Credit Suisse First Boston Corporation
Dillon, Read & Co. Inc.
Donaldson, Lufkin & Jenrette Securities Corporation
Furman Selz, LLP
Goldman, Sachs & Co.
Lazard Freres & Co.
Lehman Brothers
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Morgan Stanley & Co. Incorporated
Oppenheimer & Co., Inc.
PaineWebber Incorporated
Prudential Securities Inc.
Salomon Brothers Inc
<PAGE> 1
EXHIBIT 12.1
ALLEGIANCE TELECOM, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
PRO FORMA
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1997 1997
------------ ------------
Earnings:
Net loss $ (3,478,000) $(26,023,119)
Add: Fixed charges -- 22,545,119
------------ ------------
(3,478,000) (3,478,000)
Fixed charges:
Interest in indebtedness -- 22,080,407
Amortization of debt discount and debt
issuance costs -- 464,712
Interest portion of rental and lease
expense -- --
------------ ------------
-- 22,545,119
Deficiency of earnings available to
cover fixed charges $ (3,478,000) $(26,023,119)
============ ============
<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 March 13, 1998,
for the year ended December 31, 1997, 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-4.
ARTHUR ANDERSEN LLP
Dallas, Texas
March 30, 1998
