<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 30, 1998
REGISTRATION NO. 333-53479
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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ALLEGIANCE TELECOM, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 4832 75-2721491
(State or other jurisdiction (Primary Standard Industrial (IRS Employer
of incorporation or
organization) Classification Code Number) Identification Number)
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1950 STEMMONS FREEWAY
SUITE 3026
DALLAS, TEXAS 75207
TELEPHONE: (214) 853-7100
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
---------------------
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)
Copies to:
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MARK B. TRESNOWSKI ANDREW R. SCHLEIDER
Kirkland & Ellis Shearman & Sterling
200 East Randolph Drive 599 Lexington Avenue
Chicago, Illinois 60601 New York, New York 10022
(312) 861-2000 (212) 848-4000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [ ]
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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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.
PROSPECTUS (Subject to Completion)
Issued June 30, 1998
$200,000,000
[ALLEGIANCE TELECOM, INC. LOGO]
% SENIOR NOTES DUE 2008
------------------------
Interest payable May 15 and November 15
------------------------
THE NOTES WILL BE REDEEMABLE AT THE OPTION OF THE COMPANY, IN WHOLE OR IN PART,
AT ANY TIME ON OR AFTER MAY 15, 2003, AT THE REDEMPTION PRICES SET FORTH HEREIN,
PLUS ACCRUED INTEREST, IF ANY, TO THE DATE OF REDEMPTION. IN ADDITION, AT ANY
TIME PRIOR TO MAY 15, 2001, THE COMPANY MAY REDEEM UP TO 35% OF THE AGGREGATE
PRINCIPAL AMOUNT OF THE NOTES WITH THE PROCEEDS OF ONE OR MORE PUBLIC EQUITY
OFFERINGS (AS DEFINED HEREIN) AT THE REDEMPTION PRICE SET FORTH HEREIN PLUS
ACCRUED INTEREST, IF ANY, TO THE DATE OF REDEMPTION; PROVIDED, HOWEVER, THAT
AFTER ANY SUCH REDEMPTION AT LEAST 65% OF THE AGGREGATE PRINCIPAL AMOUNT OF
NOTES ORIGINALLY ISSUED REMAINS OUTSTANDING.
ON THE CLOSING DATE, THE COMPANY WILL USE A PORTION OF THE PROCEEDS FROM THE
OFFERING OF THE NOTES HEREBY (THE "DEBT OFFERING") TO PURCHASE A PORTFOLIO OF
PLEDGED SECURITIES (AS DEFINED HEREIN), CONSISTING OF U.S. GOVERNMENT
SECURITIES, THAT WILL BE PLEDGED AS SECURITY FOR THE FIRST SIX SCHEDULED
INTEREST PAYMENTS ON THE NOTES.
CONCURRENT WITH THE DEBT OFFERING, THE COMPANY WILL MAKE A PUBLIC OFFERING OF
12,000,000 SHARES OF ITS COMMON STOCK (THE "EQUITY OFFERING"). THE CLOSING OF
THE DEBT OFFERING IS CONDITIONED UPON THE CLOSING OF THE EQUITY OFFERING, BUT
THE CLOSING OF THE EQUITY OFFERING IS NOT CONDITIONED UPON THE CLOSING OF THE
DEBT OFFERING.
THE NOTES WILL BE UNSUBORDINATED, UNSECURED (EXCEPT AS DESCRIBED ABOVE)
INDEBTEDNESS OF THE COMPANY, WILL RANK PARI PASSU IN RIGHT OF PAYMENT WITH ALL
UNSUBORDINATED, UNSECURED INDEBTEDNESS OF THE COMPANY, INCLUDING THE COMPANY'S
11 3/4% SENIOR DISCOUNT NOTES DUE 2008, AND WILL BE SENIOR IN RIGHT OF PAYMENT
TO ALL SUBORDINATED INDEBTEDNESS OF THE COMPANY. AT MARCH 31, 1998, ON A PRO
FORMA BASIS AFTER GIVING EFFECT TO THE DEBT OFFERING, THE COMPANY WOULD HAVE HAD
APPROXIMATELY $447.3 MILLION OF INDEBTEDNESS OUTSTANDING, ALL OF WHICH WOULD
HAVE BEEN UNSUBORDINATED, UNSECURED INDEBTEDNESS.
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 11 FOR INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
PRICE % AND ACCRUED INTEREST, IF ANY
------------------------
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC(1) COMMISSIONS(2) COMPANY(1)(3)
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Per Note............. % % %
Total................ $ $ $
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(1) Plus accrued interest, if any, from , 1998
(2) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriters."
(3) Before deducting expenses payable by the Company estimated at $750,000.
------------------------
The Notes are offered, subject to prior sale, when, as and if accepted by
the Underwriters and subject to approval of certain legal matters by Shearman &
Sterling, counsel for the Underwriters. It is expected that delivery of the
Notes will be made on or about , 1998 at the office of Morgan Stanley
& Co. Incorporated, New York, N.Y., against payment therefor in immediately
available funds.
------------------------
MORGAN STANLEY DEAN WITTER
SALOMON SMITH BARNEY
DONALDSON, LUFKIN & JENRETTE
Securities Corporation
GOLDMAN, SACHS & CO.
, 1998
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NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS,
AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY UNDERWRITER. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITY OTHER THAN THE NOTES OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE NOTES OFFERED HEREBY TO ANY
PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR
SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREBY SHALL UNDER ANY CIRCUMSTANCE IMPLY THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
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PAGE
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Prospectus Summary.......................................... 4
Risk Factors................................................ 11
Use of Proceeds............................................. 25
Capitalization.............................................. 26
Selected Financial Data..................................... 27
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 30
Business.................................................... 36
Management.................................................. 55
Certain Relationships and Related Transactions.............. 64
Security Ownership of Certain Beneficial Owners and
Management................................................ 65
Description of Certain Indebtedness......................... 66
Description of the Notes.................................... 67
Description of Capital Stock................................ 93
Certain United States Federal Tax Considerations............ 96
ERISA Considerations........................................ 99
Underwriters................................................ 100
Legal Matters............................................... 100
Experts..................................................... 100
Additional Information...................................... 101
Index to Consolidated Financial Statements.................. F-1
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THIS PROSPECTUS INCLUDES "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
THE FEDERAL SECURITIES LAWS. ALL STATEMENTS REGARDING THE COMPANY'S AND ITS
SUBSIDIARIES' EXPECTED FINANCIAL POSITION, BUSINESS AND FINANCING PLANS ARE
FORWARD-LOOKING STATEMENTS. ALTHOUGH THE COMPANY AND ITS SUBSIDIARIES BELIEVE
THAT THE EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE
REASONABLE, THEY CAN GIVE NO ASSURANCE THAT SUCH EXPECTATIONS WILL PROVE TO HAVE
BEEN CORRECT. IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM SUCH EXPECTATIONS ("CAUTIONARY STATEMENTS") ARE DISCLOSED IN
THIS PROSPECTUS, INCLUDING, WITHOUT LIMITATION, IN CONJUNCTION WITH THE
FORWARD-LOOKING STATEMENTS INCLUDED IN THIS PROSPECTUS AND UNDER "RISK FACTORS"
HEREIN. ALL SUBSEQUENT WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE
TO THE COMPANY, ITS SUBSIDIARIES OR PERSONS ACTING ON THEIR BEHALF ARE EXPRESSLY
QUALIFIED BY THE CAUTIONARY STATEMENTS.
------------------------
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE NOTES.
SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE OFFERING
AND MAY BID FOR AND PURCHASE THE NOTES IN THE OPEN MARKET. FOR A DESCRIPTION OF
THESE ACTIVITIES, SEE "UNDERWRITERS."
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PROSPECTUS 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.
Unless otherwise indicated, the information contained in this Prospectus: (i)
gives effect to the Equity Offering, assuming a public offering price of $17.00
per share and assumes no exercise of the underwriters' over-allotment option and
(ii) gives effect to a 426.2953905-for-one stock split of the Company's Common
Stock. 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 of approximately $50.1
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 stated that CLECs should
be able to acquire the unbundled network elements ("UNEs") from the incumbent
local exchange carriers ("ILECs"), which are necessary for the cost-effective
provision of service. As such, the Telecommunications Act will enable the
Company to deploy digital switching platforms with local and long distance
capability and initially lease fiber trunking capacity from the ILECs and other
CLECs to connect the Company's switch with its transmission equipment collocated
in ILEC central offices. Thereafter, the Company plans to lease capacity or
overbuild specific network segments 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 many ILECs, CLECs and long distance
carriers, which systems were developed prior to the passage of the
Telecommunications Act, generally require multiple entries of customer
information to accomplish order management, provisioning, switch administration
and billing. This process is not only labor intensive, but it also creates
numerous opportunities for errors in provisioning service and billing, delays in
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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 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 operational in three Phase I markets: New
York City, Dallas and Atlanta; and is in the process of deploying networks in
six additional Phase I markets: Chicago, Los Angeles, San Francisco, Boston,
Fort Worth and Washington, D.C. In each of these markets, the Company will use a
Lucent Technologies, Inc. ("Lucent") Series 5ESS(R)-2000 digital switch, which
provides local and long distance functionality. With the proceeds from the
Offerings (as defined herein) and funds expected to be available under the
Vendor Financing (as defined herein), the Company intends to begin network
development in its Phase II markets. These additional 12 markets are estimated
to encompass approximately 18.7% of the total non-residential access lines in
the U.S. Management expects to commence network deployment in these cities in
1999, with service anticipated to begin during 1999 and 2000.
As of June 25, 1998, the Company has sold 18,858 lines to 1,120 customers,
of which 10,993 lines for 688 customers were in service as of such date.
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").
5
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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.
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 may evolve its networks to the next stage of the "smart build"
strategy where Allegiance plans to lease dark fiber 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. This "smart build" strategy is currently being implemented by the
Company in all its networks where it is leasing high capacity circuits to
connect the ILEC central offices with the Company's switches. In New York City,
the Company is moving to the next stage of its "smart-build" strategy, where the
Company will lease from Metromedia Fiber Network, Inc. ("MFN"), a thirty-mile
dark fiber ring in Manhattan that extends into Brooklyn.
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;
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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.
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 favorable terms and conditions.
To pre-fund each Phase I market's expansion to Positive Free Cash Flow, the
Company consummated the following transactions:
(i) the Company received equity contributions (the "Equity
Contributions") aggregating approximately $50.1 million, of which
approximately $47.6 million was from affiliates of four private equity
investment funds with extensive experience in financing telecommunications
companies (Morgan Stanley Capital Partners, Madison Dearborn Capital
Partners, Frontenac Company, and Battery Ventures (such affiliates
collectively, the "Fund Investors")) and approximately $2.5 million was
from certain members of the Allegiance management team (the "Management
Investors"); and
(ii) the Company received approximately $240.7 million of net
proceeds, after deducting estimated underwriting discounts and commissions
and other expenses payable by the Company, from the sale of 445,000 units
(the "Units"), consisting in the aggregate of $445.0 million principal
amount at maturity of the Company's 11 3/4% Senior Discount Notes due 2008
(the "11 3/4% Notes") and 445,000 warrants (the "Warrants") to purchase an
aggregate of 649,248 shares of Common Stock (the "Unit Offering").
Since completion of the Unit Offering, the Company has increased the scope
of its business plan to accommodate (i) an expansion of the Company's network
buildout in certain Phase I markets to include additional central offices,
thereby giving the Company access to a larger number of potential customers in
those markets, (ii) an accelerated and expanded deployment of data, Internet and
enhanced services in the Company's markets and (iii) the acceleration of network
deployment in Phase II markets.
The Company estimates that its cumulative cash requirements to fund its
modified business plan, including pre-funding each Phase I and Phase II market's
expansion to Positive Free Cash Flow, will be between $650 million and $700
million. To finance this modified business plan, the Company intends to
consummate the following transactions:
(i) the Company is offering $200.0 million aggregate principal amount
of % Senior Notes due 2008 (the "Notes"), of which approximately $67.4
million will be used to purchase a portfolio of Pledged
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<PAGE> 8
Securities, consisting of U.S. government securities, that will be pledged
as security for the first six scheduled interest payments on the Notes; and
(ii) the Company is offering 12,000,000 shares of its Common Stock
(the "Equity Offering" and, together with the Debt Offering, the
"Offerings").
The closing of the Debt Offering is conditioned upon the closing of the
Equity Offering.
The Company is seeking to obtain approximately $100.0 million of equipment
lease or vendor financing (the "Vendor Financing") for the acquisition of
digital switches, software, electronics and associated transmission equipment.
The amount of Vendor Financing the Company will ultimately seek to obtain will
depend on a number of factors including the terms and conditions thereof, the
availability and terms of other financing and the Company's ability to acquire
digital switches, software, electronics and associated transmission equipment in
connection with the acquisition of other companies for Common Stock. There can
be no assurance that the Vendor Financing will be available on terms acceptable
to the Company or at all.
The Company believes, based on its modified business plan, that the net
proceeds from the Offerings, together with cash on hand (including proceeds from
the Equity Contributions and the Unit Offering) and funding expected to be
available under the Vendor Financing will be sufficient to pre-fund its Phase I
and Phase II market deployment to Positive Free Cash Flow. If the Vendor
Financing is not obtained, the Company intends to modify its deployment schedule
by developing only eight to ten Phase II markets. In such case, the Company
would delay deployment of networks in the remaining Phase II markets until it
obtains additional financing on acceptable terms and conditions.
The actual amount and timing of the Company's future capital requirements
may differ materially from the Company's estimates as a result of, among other
things, the demand for the Company's services and regulatory, technological and
competitive developments (including additional market developments and new
opportunities) in the Company's industry. The Company also expects that it will
require additional financing (or require financing sooner than anticipated) if:
(i) the Company's development plans or projections change or prove to be
inaccurate; (ii) the Company engages in any acquisitions; (iii) the Vendor
Financing is not obtained on a timely basis or at all; or (iv) the Company
alters the schedule or targets of its roll-out plan. Sources of additional
financing may include commercial bank borrowings, vendor financing, or the
private or public sale of equity or debt securities. There can be no assurance
that such financing will be available on terms acceptable to the Company or at
all. 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."
RECENT DEVELOPMENTS
In February 1998, the Company hired C. Daniel Yost to serve as its
President and Chief Operating Officer. Mr. Yost brings to the Company over 26
years of experience in the telecommunications industry, most recently as
President and Chief Operating Officer for U.S. Operations of NETCOM On-Line
Communications Services, Inc., a leading Internet service provider. Mr. Yost
also serves as a member of the Company's Board of Directors.
In March 1998, Reed E. Hundt was elected to the Company's Board of
Directors. Mr. Hundt served as the chairman of the Federal Communications
Commission from 1993 to 1997. See "Management."
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THE DEBT OFFERING
Securities Offered......... $200,000,000 aggregate principal amount of %
Senior Notes due 2008 of the Company.
Maturity................... May 15, 2008.
Interest................... Interest on the Notes will be payable semiannually
in cash on May 15 and November 15 of each year,
commencing November 15, 1998.
Optional Redemption........ The Notes will be redeemable at the option of the
Company, in whole or in part, at any time on or
after May 15, 2003, at % of their principal
amount, plus accrued interest, declining to 100% of
their principal amount, plus accrued interest, on
or after May 15, 2006. In addition, prior to May
15, 2001, the Company may redeem up to 35% of the
aggregate principal amount of the Notes with the
proceeds of one or more Public Equity Offerings (as
defined herein) at % of their principal
amount, plus accrued interest; provided, however,
that after any such redemption at least 65% of the
aggregate principal amount of the Notes originally
issued remains outstanding. See "Description of the
Notes -- Optional Redemption."
Security................... The indenture pursuant to which the Notes will be
issued (the "Indenture") will require the Company
to purchase and pledge to the Trustee as security
for the benefit of the holders of the Notes, a
portfolio of securities (the "Pledged Securities"),
consisting of U.S. government securities, in an
amount sufficient to provide for the payment in
full of the first six scheduled interest payments
due on the Notes. The Company expects to use
approximately $67.4 million of the net proceeds
from the Debt Offering to acquire the Pledged
Securities. However, the precise amount of the
Pledged Securities to be acquired will depend upon
interest rates prevailing on the closing date of
the Debt Offering (the "Closing Date"). See
"Description of the Notes -- Security."
Change of Control.......... Upon a Change of Control (as defined herein), the
Company will be required to make an offer to
purchase the Notes at a purchase price equal to
101% of their principal amount plus accrued
interest. There can be no assurance that 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 Notes will be unsubordinated, unsecured (except
as described above under "-- Security")
indebtedness of the Company, will rank pari passu
in right of payment with all unsubordinated,
unsecured indebtedness of the Company, including
the 11 3/4% Notes, and will be senior in right of
payment to all subordinated indebtedness of the
Company. At March 31, 1998, after giving pro forma
effect to the Offerings, the Company would have had
approximately $447.3 million of indebtedness
outstanding, all of which would have been
unsubordinated, unsecured indebtedness. 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 will contain certain covenants that,
among other things, restrict the ability of the
Company and its Restricted Subsidiaries (as
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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
will be subject to a number of important
qualifications and exceptions. See "Risk
Factors -- Restrictive Covenants" and "Description
of the Notes -- Covenants."
Use of Proceeds............ The Company intends to use the net proceeds from
the Offerings, together with the proceeds remaining
from the Equity Contributions and the Unit Offering
and funding expected to be available under the
Vendor Financing, to fund the cost of deploying
networks in its remaining Phase I and Phase II
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. If the Vendor
Financing is not obtained, the Company intends to
modify its deployment schedule by developing only
eight to ten Phase II markets. In such case, the
Company would delay deployment of networks in the
remaining Phase II markets until it obtains
additional financing on acceptable terms and
conditions. However, a portion of such proceeds may
be used to fund acquisitions or the deployment of
networks and operating costs in other markets. See
"Use of Proceeds."
RISK FACTORS
See "Risk Factors" for a discussion of certain factors relating to the
Company, its business, and an investment in the Notes. Prior to purchasing any
of the Notes offered hereby, prospective purchasers should carefully consider
such risk factors in addition to the other information contained in this
Prospectus.
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RISK FACTORS
Prior to purchasing any of the Notes offered hereby, prospective investors
should carefully consider the following risk factors in addition to the other
information contained in this Prospectus.
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 of June 25, 1998, the Company has
sold 18,858 lines to 1,120 customers, of which 10,993 lines for 688 customers
were in service as of such 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 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. For the three months ended March
31, 1998 and from inception (April 22, 1997) through December 31, 1997, the
Company had operating losses of $5.9 million and $3.8 million, net losses (after
accreting redeemable preferred stock and warrant values) of $13.7 million and
$7.5 million and negative EBITDA of $5.7 million and $3.8 million, respectively.
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."
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 and Phase II markets to Positive Free Cash Flow will total between $650
million and $700 million. Actual capital requirements may vary based upon the
timing and success of the Company's implementation of its business plan.
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Since the completion of the Unit Offering, the Company has increased the
scope of its business plan to accommodate (i) an expansion of the Company's
network buildout in certain Phase I markets to include additional central
offices, thereby giving the Company access to a larger number of potential
customers in those markets, (ii) an accelerated and expanded deployment of data,
Internet and enhanced services in the Company's markets and (iii) the
acceleration of network deployment in Phase II markets. The Company believes,
based on its modified business plan, that the net proceeds from the Offerings,
together with cash on hand (including proceeds from the Equity Contributions and
the Unit Offering) and funding expected to be available under the Vendor
Financing, will be sufficient to pre-fund its Phase I and Phase II market
deployment to Positive Free Cash Flow. If the Vendor Financing is not obtained,
the Company intends to modify its deployment schedule by developing only eight
to ten Phase II markets. In such case, the Company would delay deployment of
networks in the remaining Phase II markets until it obtains additional financing
on acceptable terms and conditions. There can be no assurance that the Vendor
Financing will be available on terms acceptable to the Company or at all.
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 Company engages in any acquisitions; (iii) the Vendor
Financing is not obtained on a timely basis or at all; or (iv) the Company
alters the schedule or targets of its roll-out plan. Sources of additional
financing may include commercial bank borrowings, vendor financing, or the
private or public sale of equity or debt securities.
There can be no assurance that 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 and the
indenture relating to the 11 3/4% Notes (the "11 3/4% Notes Indenture"; and,
together with the Indenture, the "Indentures"), 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 eight 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, market to, sell and 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
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
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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. The Company and two of
its executives have been named as defendants in a lawsuit by WorldCom relating
to the Company's hiring of certain former WorldCom employees. See
"Business -- Legal Proceedings."
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.
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 would have a
material adverse effect on the Company and its ability to meet its obligations
on the Notes.
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SUBSTANTIAL LEVERAGE; POSSIBLE INABILITY TO SERVICE INDEBTEDNESS
The Company is highly leveraged. The Company's earnings for the three
months ended March 31, 1998 and the period from inception (April 22, 1997)
through December 31, 1997 were insufficient to cover fixed charges by $8.9
million and $3.7 million, respectively. On a pro forma basis, giving effect to
the Unit Offering and the Debt Offering (assuming a 12 7/8% per annum effective
interest rate on the Notes) and giving effect to $179.7 million and $205.1
million of management ownership allocation charge to be recorded in connection
with the Equity Offering, as if such transactions had occurred on January 1,
1998 and April 22, 1997, the Company's earnings before fixed charges would have
been insufficient to cover its fixed charges by $198.2 million for the three
months ended March 31, 1998 and $249.6 million for the period from inception
(April 22, 1997) through December 31, 1997, respectively. After giving pro forma
effect to the Offerings, as of March 31, 1998, the Company's aggregate
outstanding indebtedness would have been $447.3 million and the Company's
stockholders' equity would have been $228.4 million. In addition, the accretion
of original issue discount on the 11 3/4% Notes will cause an increase in
indebtedness of $197.7 million by February 15, 2008. The Company also plans to
obtain approximately $100.0 million of Vendor Financing. 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." The Company's leverage will
increase upon consummation of the Debt Offering. The Indentures limit, but do
not prohibit, the incurrence of additional indebtedness by the Company. In
particular, the Indentures permit the Company and its subsidiaries to incur an
unlimited amount of indebtedness to finance the cost of equipment, inventory and
network assets. See "-- Restrictive 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 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 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
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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 Vendor Financing, if obtained, 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.
CONTROL BY FUND 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
"Management -- Election of Directors; Voting Agreement," "Security Ownership of
Certain Beneficial Owners and Management" and "Certain Relationships and Related
Transactions." Certain decisions concerning the operations or financial
structure of the Company may present conflicts of interest between the Fund
Investors and Management 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 investments 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. Royce J.
Holland, the Company's Chairman and Chief Executive Officer also has an
investment in, and serves on the board of directors of WNP Communications, Inc.,
which will operate in certain of the Company's target markets.
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. The Vendor Financing will most likely be
incurred at the subsidiary level. Claims of creditors of the Company's
subsidiaries, including trade creditors and the creditor providing the Vendor
Financing, 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) of the subsidiaries of
the Company.
EFFECTIVE SUBORDINATION OF NOTES TO SECURED INDEBTEDNESS
Except as described under "Description of the Notes -- Security," the Notes
will not be secured by any of the Company's or its subsidiaries' assets. The
Indentures do not limit the amount of indebtedness the Company may incur to
finance the acquisition of inventory, equipment or network assets and permit the
Company to secure such indebtedness. The Company's obligations under the Vendor
Financing, if obtained,
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may be secured by a security interest in the capital stock or assets of the
subsidiaries of the Company. The Indentures also permit the Company to incur up
to $100 million of unsubordinated indebtedness and to secure such indebtedness.
See "Description of Certain Indebtedness" and "Description of the
Notes -- Covenants." In the event that a default were to occur with respect to
any of the Company's secured indebtedness and the holders 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.
RESTRICTIVE COVENANTS
The Indentures and the agreements entered into in connection with the
Equity Contributions 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. In addition, the Vendor
Financing, if obtained, is expected to contain covenants, including financial
covenants, customary for such agreements. See "Certain Relationships and Related
Transactions," "Description of Certain Indebtedness," and "Description of the
Notes."
A failure to comply with the covenants and restrictions contained in the
Indentures, the Vendor Financing 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 such other
agreements could be terminated.
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
decisions create uncertainty about the rules governing pricing, terms and
conditions of interconnection agreements, and could make negotiating and
enforcing such agreements more difficult and protracted and may require
renegotiation of existing agreements. See "-- Competition." The Supreme Court
has granted a writ of certiorari to review the Eighth Circuit decisions.
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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 Telecommunications Act created
incentives for regional Bell operating companies ("RBOCs") to cooperate with new
carriers and permit access to their facilities by denying the RBOCs the ability
to provide in-region long distance services until they have satisfied statutory
conditions designed to open their local markets to competition. A federal
District Court has recently held these provisions of the Telecommunications Act
unconstitutional, which decision is subject to appeal. See "-- Government
Regulation." The RBOCs 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 RBOCs
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 a RBOC
in a region, whether or not such RBOC 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, including 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. Under the Eighth Circuit
decisions, however, the states have primary jurisdiction over the determination
of reciprocal compensation arrangements and as a result, the treatment of this
issue can vary from state to state. Currently, 20 state commissions, two federal
courts and one state court 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
eight states. The National Association of Regulatory 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 service 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 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
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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 also have long-standing relationships with regulatory
authorities at the federal and state levels. While some FCC and state
administrative decisions and initiatives provide 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
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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. Certain federal and state laws
and regulations that allow CLECs such as the Company to interconnect with ILEC
facilities, provide increased business opportunities for the Company. However,
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 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 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 Company may also
increasingly face competition from companies offering long distance data and
voice services over the Internet. Such companies could enjoy a significant cost
advantage because they do not currently pay carrier access charges or universal
service fees. In addition, in June 1998, Sprint announced its intention to offer
voice, data and video services over its nationwide asynchronous transfer mode
network, which Sprint anticipates will significantly reduce its cost to provide
such services. Sprint plans to bill
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its customers based upon the amount of traffic carried, irrespective of the time
required to send the traffic or the traffic's destination.
The Internet services market is highly competitive and 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. For example, WorldCom acquired MFS in
December 1996, has recently acquired another CLEC, Brooks Fiber Properties,
Inc., and has a pending agreement to merge with MCI. In January 1998, AT&T
announced its intention to acquire Teleport Communications Group Inc. In May
1998, SBC Communications Inc. and Ameritech Corporation agreed to merge. On June
24, 1998, AT&T announced that it has entered into a merger agreement with
Tele-Communications, Inc., a cable, telecommunications, and high speed Internet
services provider. These types of consolidations and 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 while an appeal is pending before the United States
Court of Appeals for the Fifth Circuit. The Company cannot predict the likely
outcome of that appeal, although on May 15, 1998, the Court of Appeals for the
District of Columbia Circuit rejected a very similar challenge to the
constitutionality of Section 274 of the Telecommunications Act. 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
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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.
The FCC released a report to Congress on April 10, 1998 concerning its
implementation of the telecommunications subsidy provisions of the
Telecommunications Act. In that report, the FCC clarified that entities that
provide transmission capacity to ISPs are providing telecommunications services
subject to contribution requirements. The FCC indicated that it would address
the issues of whether ISPs would contribute to the universal service fund based
on the utilization of their own transmission facilities and whether certain ISP
services such as phone-to-phone IP telephony are telecommunications services
subject to universal service fund contributions and access charges at a later
date.
NEED TO ADAPT TO TECHNOLOGICAL CHANGE
The telecommunications industry is subject to rapid and significant changes
in technology, 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. The
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Indentures 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 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.
INVESTMENT COMPANY ACT CONSIDERATIONS
After giving effect to the Unit Offering and the Offerings, the Company
will have substantial short-term investments. See "Capitalization" and "Use of
Proceeds." This may result in the Company being treated as an "investment
company" under the Investment Company Act of 1940 (the "1940 Act"). The 1940 Act
requires the registration of, and imposes various substantive restrictions on,
certain companies ("investment companies") that are, or hold themselves out as
being, engaged primarily, or propose to engage primarily in, the business of
investing, reinvesting or trading in securities, or that fail certain
statistical tests regarding composition of assets and sources of income and are
not primarily engaged in businesses other than investing, reinvesting, owning,
holding or trading securities.
The Company believes that it is primarily engaged in a business other than
investing, reinvesting, owning, holding or trading securities and, therefore, is
not an investment company within the meaning of the 1940 Act. If the Company is
found to be an investment company, the Company currently intends to rely upon a
safeharbor from the 1940 Act for certain "transient" or temporary investment
companies. However, such exemption is only available to the Company for one year
and this one-year period may terminate as soon as January 1999.
If the Company were required to register as an investment company under the
1940 Act, it would become subject to substantial regulation with respect to its
capital structure, management, operations, transactions with affiliated persons
(as defined in the 1940 Act) and other matters. To avoid having to register as
an investment company, beginning in as early as January 1999, the Company may
have to invest a portion of its liquid assets in cash and demand deposits
instead of securities. The extent to which the Company will have to do so will
depend on the composition and value of the Company's total assets at that time.
Having to register as an investment company under the 1940 Act or having to
invest a material portion of the Company's liquid assets in cash and demand
deposits to avoid such registration, would have a material adverse effect on the
Company's business, financial condition and results of operations.
ABSENCE OF A PUBLIC MARKET
The Notes constitute a new issue of securities for which there presently is
no active trading market and none may develop. If the Notes are traded after
their initial issuance, they may trade at a discount from their initial offering
price, depending upon prevailing interest rates, the market for similar
securities, the financial condition and prospects of the Company and other
factors beyond the control of the Company, including general economic
conditions. Although the Underwriters (other than Morgan Stanley & Co.
Incorporated) have informed the Company that they currently intend to make a
market in the Notes, the Underwriters are
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not obligated to do so and any such market-making may be discontinued at any
time without notice at the sole discretion of the Underwriters. Accordingly,
there can be no assurance as to the development or liquidity of any market for
the Notes. See "Underwriters."
RISKS REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus contains "forward-looking statements", which generally can
be identified by the use of forward-looking terminology such as "believes",
"expects", "may", "will", "should", or "anticipates" or the negative thereof or
other variations thereon or comparable terminology, or by discussion of strategy
that involve risks and uncertainties. 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.
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USE OF PROCEEDS
The net proceeds to the Company from the Debt Offering are estimated to be
approximately $192.8 million, after deducting estimated underwriting discounts
and commissions and other expenses payable by the Company. The net proceeds to
the Company from the Equity Offering are estimated to be approximately $189.5
million (approximately $218.0 million if the underwriters' over-allotment option
is exercised in full), assuming a public offering price of $17.00 per share,
after deducting estimated underwriting discounts and commissions and other
expenses payable by the Company.
The Company intends to use the net proceeds from the Offerings, together
with the remaining proceeds from the Equity Contributions and the Unit Offering
and funding expected to be available under the Vendor Financing, to fund the
costs of deploying networks in all 24 Phase I and Phase II 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. In addition, on the Closing Date, the Company will use approximately
$67.4 million of the net proceeds from the Debt Offering to purchase the Pledged
Securities, consisting of U.S. government securities. The Pledged Securities
will be pledged to the Trustee as security for the benefit of the holders of the
Notes and will be used to fund the first six scheduled payments of interest on
the Notes. See "Description of the Notes -- Security." The precise amount of
proceeds to be used to purchase the Pledged Securities will depend on the
interest rates on U.S. government securities prevailing on the Closing Date. The
Trustee will hold the Pledged Securities pursuant to a pledge agreement pending
disbursement.
If the Vendor Financing is not obtained, the Company intends to modify its
deployment schedule by developing only eight to ten Phase II markets. In such
case, the Company would delay deployment of networks in the remaining Phase II
markets until it obtains additional financing on acceptable terms and
conditions.
As part of its strategy, the Company may make acquisitions and enter into
joint ventures, and a portion of the net proceeds from the Offerings 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
require additional financing to complete its Phase I and Phase II market
buildout (or require financing sooner than anticipated) if: (i) the Company's
development plans or projections change or prove to be inaccurate; (ii) the
Company engages in any acquisitions; (iii) the Vendor Financing is not obtained
on a timely basis or at all; or (iv) the Company alters the schedule or targets
of its roll-out plan. There can be no assurance that such additional financing
will be available on terms acceptable to the Company or at all. See "Prospectus
Summary -- Financing Plan," "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."
25
<PAGE> 26
CAPITALIZATION
The following table sets forth the cash and capitalization of the Company
as of March 31, 1998, and as adjusted to give effect to the sale of Common Stock
in the Equity Offering (based on an assumed public offering price of $17.00 per
share) and the sale of Notes in the Debt Offering. The closing of the Debt
Offering is conditioned upon the closing of the Equity Offering. 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 MARCH 31, 1998
-------------------------------
AS ADJUSTED FOR
THE EQUITY AND
ACTUAL DEBT OFFERINGS
------------ ---------------
(AUDITED) (UNAUDITED)
<S> <C> <C>
Cash, cash equivalents, and short-term investments.......... $257,594,702 $ 572,424,702
Restricted cash............................................. -- 67,400,000
------------ -------------
Total cash, cash equivalents, short-term
investments and restricted cash.................. $257,594,702 $ 639,824,702
============ =============
Long-term debt(1):
11 3/4% Notes, at accreted value(2)....................... $247,329,420 $ 247,329,420
Notes offered hereby...................................... -- 200,000,000
------------ -------------
Total long-term debt............................... 247,329,420 447,329,420
------------ -------------
Redeemable convertible preferred stock(3)(4):
Redeemable convertible preferred stock, $.01 par value,
96,000 and 0 shares authorized, 95,641.25 and 0 shares
issued and outstanding at March 31, 1998 and as
adjusted, respectively.................................. 59,206,139 --
Preferred stock subscriptions receivable.................. (275,000) --
------------ -------------
Total redeemable convertible preferred stock....... 58,931,139 --
------------ -------------
Redeemable warrants(2)...................................... 8,257,542 8,257,542
Stockholders' (deficit) equity:
Preferred stock, $.01 par value, 0 and 1,000,000 shares
authorized, 0 and 0 shares issued and outstanding at
March 31, 1998 and as adjusted, respectively(5)......... -- --
Common stock, $.01 par value per share, 102,524 and
150,000,000 shares authorized, 1 share and 52,341,554
shares issued and outstanding at March 31, 1998 and as
adjusted, respectively(4)............................... -- 523,416
Additional paid-in capital(3)(4)(6)....................... 14,405,519 495,312,187
Stock subscriptions receivable............................ -- (275,000)
Deferred compensation..................................... (13,216,518) (13,216,518)
Deferred management ownership allocation charge(6)........ -- (98,199,717)
Accumulated (deficit) equity(6)........................... (21,162,048) (155,706,276)
------------ -------------
Total stockholders' (deficit) equity(6)............ (19,973,047) 228,438,092
------------ -------------
Total capitalization............................... $294,545,054 $ 684,025,054
============ =============
</TABLE>
- ---------------
(1) Does not reflect any of the financing expected to be available under the
Vendor Financing.
(2) Of the $250,477,150 gross proceeds from the Unit Offering, $242,293,600 was
allocated to the initial accreted value of the 11 3/4% Notes, and $8,183,550
was allocated to 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.
(3) In connection with the consummation of the Equity Offering, the outstanding
shares of Redeemable Convertible Preferred Stock will be converted into
Common Stock. At such time, the obligations of the Company to redeem the
Redeemable Convertible Preferred Stock terminates and, therefore the value
of the Redeemable Convertible Preferred Stock accreted to the date of the
Equity Offering will be reclassified as an increase in the amount of Common
Stock and additional paid-in capital in the stockholders' equity section of
the balance sheet.
(4) As adjusted reflects the net proceeds from the issuance of Common Stock in
the Equity Offering and the conversion of the outstanding Redeemable
Convertible Preferred Stock into Common Stock.
(5) In connection with the consummation of the Equity Offering, the Company will
authorize 1,000,000 shares of Preferred Stock with a $.01 par value.
(6) Upon the consummation of the Equity Offering, Allegiance LLC, the holder of
substantially all of the Company's outstanding capital stock, will dissolve
and its assets (which consist almost entirely of such capital stock) will be
distributed to the Fund Investors and the Management Investors in accordance
with a final allocation calculated immediately prior to such dissolution
(the "Equity Allocation"). The LLC Agreement (as defined herein) provides
that the Equity Allocation between the Fund Investors and the Management
Investors will range between 95.0%/5.0% and 66.7%/33.3% based upon the
valuation of the Company's Common Stock. Based upon the valuation of the
Company's Common Stock implied by the Equity Offering, the Equity Allocation
will be 66.7% to the Fund Investors and 33.3% to the Management Investors.
Under generally accepted accounting principles, upon consummation of the
Equity Offering, the Company will be required to record the $232.7 million
increase in the assets of Allegiance LLC allocated to the Management
Investors as an increase in additional paid-in capital, of which the Company
will be required to record $134.5 million as a non-cash, non-recurring
charge to operating expense and $98.2 million will be recorded as deferred
management ownership allocation charge. The deferred charge will be
amortized at $64.6 million, $24.7 million, $8.8 million and $.1 million
during 1998, 1999, 2000 and 2001, respectively, which is the period over
which the Company has the right to repurchase the securities (at the lower
of fair market value or the price paid by the employee) in the event the
management employee's employment with the Company is terminated. See
"Certain Relationships and Related Transactions."
26
<PAGE> 27
SELECTED FINANCIAL DATA
The selected consolidated financial data presented below as of and for the
three months ended March 31, 1998 and as of 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. The selected pro forma statement of operations
data set forth below is unaudited and gives effect to the Debt Offering, the
Equity Offering (including the conversion of the Redeemable Convertible
Preferred Stock and the Equity Allocation) and the sale of the 11 3/4% Notes in
the Unit Offering as if such transactions had occurred on April 22, 1997 for the
period from inception through December 31, 1997 and on January 1, 1998 for the
three months ended March 31, 1998 and the selected pro forma balance sheet data
set forth below is unaudited and gives effect to such transactions as if they
had occurred on March 31, 1998. Operating results for the three months ended
March 31, 1998 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 Common Stock.
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
THREE MONTHS ENDED MARCH 31, 1998 DECEMBER 31, 1997
----------------------------------------------- -----------------------------------------------
PRO FORMA PRO FORMA
-------------------------------- --------------------------------
AS ADJUSTED FOR AS ADJUSTED FOR
THE EQUITY AND THE EQUITY AND
ACTUAL ADJUSTMENT DEBT OFFERINGS ACTUAL ADJUSTMENT DEBT OFFERINGS
------------ ------------- --------------- ------------ ------------- ---------------
(AUDITED) (UNAUDITED) (UNAUDITED) (AUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues..................... $ 202,925 $ -- $ 202,925 $ 403 $ -- $ 403
Operating expenses:
Technical.................. 234,831 -- 234,831 151,269 -- 151,269
Selling, general and
administrative........... 5,680,031 -- 5,680,031 3,635,872 -- 3,635,872
Management ownership
allocation charge........ -- 179,670,386(1) 179,670,386 -- 205,092,580(1) 205,092,580
Depreciation and
amortization............. 208,424 -- 208,424 12,639 -- 12,639
------------ ------------- ------------- ------------ ------------- -------------
Total operating
expenses............... 6,123,286 179,670,386 185,793,672 3,799,780 205,092,580 208,892,360
------------ ------------- ------------- ------------ ------------- -------------
Loss from operations......... (5,920,361) (179,670,386) (185,590,747) (3,799,377) (205,092,580) (208,891,957)
Interest income.............. 2,194,226 --(2) 2,194,226 111,417 --(2) 111,417
Interest expense............. (4,669,079) (9,639,452)(3) (14,308,531) -- (40,856,994)(3) (40,856,994)
------------ ------------- ------------- ------------ ------------- -------------
Net loss..................... $ (8,395,214) $(189,309,838) $(197,705,052) $(3,687,960) $(245,949,574) $(249,637,534)
Accretion of redeemable
convertible preferred stock
and warrant values......... (5,264,684) (7,435)(4) (5,272,119) (3,814,190) (288,568)(4) (4,102,758)
------------ ------------- ------------- ------------ ------------- -------------
Net loss applicable to common
stock...................... $(13,659,898) $(189,317,273) $(202,977,171) $(7,502,150) $(246,238,142) $(253,740,292)
============ ============= ============= ============ ============= =============
Net loss per share, basic.... $(13,659,898) $ (3.88) $(7,502,150) $ (4.87)
============ ============= ============ =============
Net loss per share,
diluted.................... $(13,659,898) $ (3.81) $(7,502,150) $ (4.80)
============ ============= ============ =============
Weighted average number of
shares outstanding,
basic...................... 1 52,341,553(5) 52,341,554 1 52,068,191(5) 52,068,192
============ ============= ============= ============ ============= =============
</TABLE>
27
<PAGE> 28
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION (APRIL 22, 1997) THROUGH
THREE MONTHS ENDED MARCH 31, 1998 DECEMBER 31, 1997
----------------------------------------------- -----------------------------------------------
PRO FORMA PRO FORMA
-------------------------------- --------------------------------
AS ADJUSTED FOR AS ADJUSTED FOR
THE EQUITY AND THE EQUITY AND
ACTUAL ADJUSTMENT DEBT OFFERINGS ACTUAL ADJUSTMENT DEBT OFFERINGS
------------ ------------- --------------- ------------ ------------- ---------------
(AUDITED) (UNAUDITED) (UNAUDITED) (AUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
EBITDA (6)................... $ (5,711,937) $(179,670,386)(1) $(185,382,323) $(3,786,738) $(205,092,580)(1) $(208,879,318)
Net cash used in operating
activities................. (2,195,564) -- (2,195,564) (1,942,897) (15,950,000)(7) (17,892,897)
Net cash used in investing
activities................. (43,525,476) (67,400,000)(7) (110,925,476) (21,926,058) (54,525,000)(7) (76,451,058)
Net cash provided by
financing activities....... 261,672,797 381,598,696(8) 643,271,493 29,595,314 622,940,450(8) 652,535,764
Capital expenditures......... 8,510,255 -- 8,510,255 23,912,659 -- 23,912,659
Ratio of earnings to fixed
charges(9)................. -- -- -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1998
--------------------------------------------------
PRO FORMA
----------------------------------- DECEMBER 31,
AS ADJUSTED FOR 1997
THE EQUITY AND ------------
ACTUAL ADJUSTMENT DEBT OFFERINGS ACTUAL
------------ ------------- --------------- ------------
(AUDITED) (UNAUDITED) (UNAUDITED) (AUDITED)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA
(AT END OF PERIOD):
Cash, cash equivalents and short-
term investments................. $257,594,702 $314,830,000(8) $ 572,424,702 $ 5,726,359
Restricted cash.................... -- 67,400,000(7) 67,400,000 --
Property and equipment, net........ 32,669,385 -- 32,669,385 23,900,020
Total assets....................... 300,227,692 389,480,000(3)(8) 689,707,692 30,047,014
Long-term debt..................... 247,329,420 200,000,000(10) 447,329,420(11) --
Redeemable convertible preferred
stock, net....................... 58,931,139 (58,931,139)(12) -- 33,409,404
Redeemable warrants................ 8,257,542 -- 8,257,542 --
Stockholders' (deficit) equity..... (19,973,047) 248,411,139(13) 228,438,092 (7,292,090)
</TABLE>
- ---------------
(1) Upon the consummation of the Equity Offering, Allegiance LLC, the holder of
substantially all of the Company's outstanding capital stock, will dissolve
and its assets (which consist almost entirely of such capital stock) will
be distributed to the Fund Investors and the Management Investors in
accordance with a final allocation calculated immediately prior to such
dissolution (the "Equity Allocation"). The LLC Agreement (as defined
herein) provides that the Equity Allocation between the Fund Investors and
the Management Investors will range between 95.0%/5.0% and 66.7%/33.3%
based upon the valuation of the Company's Common Stock. Based upon the
valuation of the Company's Common Stock implied by the Equity Offering, the
Equity Allocation will be 66.7% to the Fund Investors and 33.3% to the
Management Investors. Under generally accepted accounting principles, upon
consummation of the Equity Offering, the Company will be required to record
the $232.7 million increase in the assets of Allegiance LLC allocated to
the Management Investors as an increase in additional paid-in capital, of
which the Company will be required to record $134.5 million as a non-cash,
non-recurring charge to operating expense and $98.2 million will be
recorded as deferred management ownership allocation charge. The deferred
charge will be amortized at $64.6 million, $24.7 million, $8.8 million and
$.1 million during 1998, 1999, 2000 and 2001, respectively, which is the
period over which the Company has the right to repurchase the securities
(at the lower of fair market value or the price paid by the employee) in
the event the management employee's employment with the Company is
terminated. See "Certain Relationships and Related Transactions." The pro
forma gives effect to the initial $134.5 million non-cash, non-recurring
charge to operating expense and the related amortization of the deferred
management ownership allocation charge for each period.
(2) Pro forma interest income excludes interest income that would have been
earned on the estimated $67.4 million of the proceeds from the Debt
Offering required to be placed in a pledged account to secure and fund the
first six scheduled interest payments on the Notes.
(3) Reflects $6.4 million and $17.8 million of interest expense related to the
Notes offered in the Debt Offering (assuming an effective interest rate of
12 7/8%), $.2 million and $.5 million of amortization of the $7.2 million
of deferred debt issuance cost related thereto, $3.0 million and $22.1
million of interest expense related to the accretion of the 11 3/4% Notes
and $67,350 and $.5 million of amortization of deferred debt issuance cost
related to the 11 3/4% Notes for the three months ended March 31, 1998 and
for the period from Inception (April 22, 1997) through December 31, 1997,
respectively.
(4) Reflects the increase of $7,435 and $.3 million of accretion for the
warrants for the three months ended March 31, 1998 and for the period from
inception (April 22, 1997) through December 31, 1997, respectively.
(5) The pro forma weighted average number of shares outstanding gives effect to
(i) the 426.2953905 per share stock split to be effective in connection
with the Equity Offering, (ii) 12,000,000 shares of the Company's Common
Stock issued as a result of the Equity Offering and (iii) the conversion of
95,641.25 and 95,000 shares of Redeemable Convertible Preferred Stock to
Common Stock for the three months ended March 31, 1988 and for the period
from inception (April 22, 1997) through December 31, 1997, respectively.
(6) 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
28
<PAGE> 29
as an alternative to net loss as an indicator of the Company's operating
performance or to cash flows as a measure of liquidity. The Company believes
that EBITDA is widely used by analysts, investors and other interested parties
in the telecommunications industry. EBITDA is not necessarily comparable with
similarly titled measures for other companies.
(7) Reflects the purchase of $67.4 million of U.S. government securities, which
securities will be placed in a pledged account, to fund the first six
scheduled interest payments on the Notes. The period from inception (April
22, 1997) through December 31, 1997 also reflects the $12.9 million cash
interest payment on the Notes, which is funded through a reduction of the
pledged account.
(8) Reflects $192.8 million of net proceeds to be received from the Debt
Offering of which $67.4 million will be required to be placed in a pledged
account to secure and fund the first six scheduled interest payments on the
Notes and $189.5 million of net proceeds to be received from the Equity
Offering. In addition, net cash provided by financing activities for the
three months ended March 31, 1998 on a pro forma basis also reflects $.6
million of deferred debt issuance cost related to the Unit Offering and for
the period from inception (April 22, 1997) through December 31, 1997 on a
pro forma basis also reflects the $240.7 million of net proceeds from the
Unit Offering.
(9) 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 three months ended
March 31, 1998 and for the period from inception (April 22, 1997) through
December 31, 1997 were insufficient to cover fixed charges by approximately
$8.9 million and $3.7 million, respectively. After giving pro forma effect
to the increase in interest expense resulting from the issuance of the
Notes in the Debt Offering (assuming a 12 7/8% per annum effective interest
rate on the Notes) and the 11 3/4% Notes in the Unit Offering and giving
effect to $179.7 million and $205.1 million of management ownership
allocation charge to be recorded in connection with the Equity Offering,
the Company's earnings would have been insufficient to cover fixed charges
by approximately $198.2 million and $249.6 million, for the three months
ended March 31, 1998 and for the period from inception (April 22, 1997)
through December 31, 1997, respectively.
(10) Reflects the issuance of the Notes hereby.
(11) Does not reflect any of the financing expected to be available under the
Vendor Financing.
(12) In connection with the consummation of the Equity Offering, all outstanding
shares of Redeemable Convertible Preferred Stock will be converted into
Common Stock. At such time, the obligation of the Company to redeem the
Redeemable Convertible Preferred Stock terminates and, therefore, the value
of the Redeemable Convertible Preferred Stock accreted to the date of the
Equity Offering will be reclassified as an increase in the amount of Common
Stock and additional paid-in capital in the stockholders' equity section of
the balance sheet.
(13) Reflects the $189.5 million of net proceeds received from the sale of
Common Stock in the Equity Offering, the conversion of the $58.9 million
Redeemable Convertible Preferred Stock into Common Stock and the management
ownership allocation described in footnote (1) above.
29
<PAGE> 30
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 of approximately $50.1 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. Allegiance is currently operational in three
Phase I markets: New York City, Dallas and Atlanta; and is in the process of
deploying networks in six additional Phase I markets: Chicago, Los Angeles, San
Francisco, Boston, Fort Worth and Washington D.C. The Company expects to
continue to experience increasing operating losses and negative EBITDA as it
expands its operations. See "Risk Factors -- Limited History of Operations;
Historical and Anticipated Future Negative EBITDA and Operating Losses."
The Fund Investors and the Management Investors currently own 95.0% and
5.0%, respectively, of the ownership interests of Allegiance LLC, an entity that
owns substantially all of the Company's outstanding capital stock. Upon
consummation of the Equity Offering, Allegiance LLC will dissolve and its assets
(which consist almost entirely of such capital stock) will be distributed to the
Fund Investors and the Management Investors in accordance with the LLC Agreement
(as defined herein). The LLC Agreement provides that the Equity Allocation
between the Fund Investors and the Management Investors will range between
95.0%/5.0% and 66.7%/33.3% based upon the valuation of the Company's Common
Stock implied by the Equity Offering. Based upon the current valuation of the
Company's Common Stock implied by the Equity Offering, the Equity Allocation
will be 66.7% to the Fund Investors and 33.3% to the Management Investors. Under
generally accepted accounting principles, upon consummation of the Equity
Offering, the Company will be required to record the $232.7 million increase in
the assets of Allegiance LLC allocated to the Management Investors as an
increase in additional paid-in capital, of which the Company will be required to
record $134.5 million as a non-cash, non-recurring charge to operating expense
and $98.2 million will be recorded as deferred management ownership allocation
charge. The deferred charge will be amortized at $64.6 million, $24.7 million,
$8.8 million and $.1 million during 1998, 1999, 2000 and 2001, respectively,
which is the period over which the Company has the right to repurchase the
securities (at the lower of fair market value or the price paid by the employee)
in the event the management employee's employment with the Company is
terminated. See "Certain Relationships and Related Transactions."
30
<PAGE> 31
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 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 long 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. The costs to lease unbundled copper loop
lines and high capacity digital lines from the ILECs will vary by ILEC and are
regulated by state authorities pursuant to the Telecommunications Act. The
Company believes that in most of the markets it plans to enter there are
multiple carriers in addition to the ILEC from
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which it could lease trunking capacity. The Company expects that the costs
associated with these leases will increase with customer volume and will be a
significant part of the Company's ongoing cost of services.
Collocation costs are also expected to be a significant part of the
Company's network development and ongoing cost of services. Under the
Telecommunications Act, carriers like the Company must be allowed to place their
equipment within the central offices of the ILEC for the purposes of
interconnecting its network with that of the ILEC ("collocation"). For example,
Allegiance will use collocation to access the ILECs unbundled networks elements.
This collocation can be a physical space or cage within the ILEC central office
where the Company would place its equipment. In some cases, virtual collocation
would be used where the ILEC places equipment within the central office and
would maintain the equipment on behalf of the Company. In this virtual
collocation scenario, the Company would not have physical access to the ILEC's
central office. For use of their central offices for collocation, ILECs
typically charge both a start-up fee as well as a monthly recurring fee. The
Company will be required to invest a significant amount of funds to develop the
central office collocation sites and to deploy the transmission and distribution
electronics.
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 has entered into one resale agreement with a long distance
carrier to provide the Company with transmission services and expects to enter
into resale agreements with other carriers in the future. Such agreements
typically provide for the resale of long distance services on a per-minute basis
and may contain minimum volume commitments; however, the existing resale
agreement does not contain any minimum volume commitments. In the event the
Company fails to meet its minimum volume commitments, it may be obligated to pay
underutilization charges and in the event it underestimates its need for
transmission capacity, the Company may be required to obtain capacity through
more expensive means. These costs will increase as the Company's customers' long
distance calling volume increases, and the Company expects that these costs will
be a significant portion of its cost of long distance services. As traffic on
specific routes increases, the Company may lease long distance trunk capacity.
Selling, General and Administrative Expenses. The Company's selling,
general and administrative expenses will include its infrastructure costs,
including selling and marketing costs, customer care, billing, corporate
administration, personnel and network maintenance.
The Company plans to employ a large direct sales force in each market and
to build a national sales force as the Company grows. To attract and retain a
highly qualified sales force, the Company plans to offer its sales and customer
care personnel a compensation package emphasizing commissions and stock options.
The Company expects to incur significant selling and marketing costs as it
continues to expand its operations. In addition, Allegiance plans to offer sales
promotions to win customers, especially in the first few years as its
establishes its market presence.
Allegiance 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.
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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 inception (April 22, 1997) through December 31, 1997, the
Company's operations resulted in a $7.5 million net loss (after accreting
redeemable preferred stock and warrant values). As of December 31, 1997, the
Company generated only nominal revenues.
For the three months ended March 31, 1998, the Company generated revenues
of $.2 million from local and long distance services provided to customers in
the Dallas market. The net loss for the first quarter was $13.7 million (after
accreting redeemable preferred stock and warrant values). The Company incurred
approximately $.5 million in delivering service and preparing its local exchange
facilities in Dallas, New York City and Atlanta to become operational. For the
three months ended March 31, 1998, the Company also incurred $5.7 million for
selling and general and administrative expenses, primarily resulting from $3.6
million of payroll, employee benefits, travel, legal and consulting fees
relating to the commencement of business in several Phase I markets and $1.0
million in amortization of deferred stock compensation expense. The Company also
incurred $.5 million for office space and related operating costs. Interest
expense during the three months ended March 31, 1998 was $4.7 million,
reflecting the issuance of the 11 3/4% Notes during February 1998. Interest
income during such period was $2.2 million resulting from the investment of the
net proceeds from the Equity Contributions and the Unit Offering.
As required by accounting principles promulgated by the Securities and
Exchange Commission, the Company is recording the potential redemption values of
the Redeemable Convertible Preferred Stock and the redeemable warrants in the
potential event that they are redeemed at fair market value in August 2004 and
February 2008, respectively. Amounts are accreted using the effective interest
method and managements' estimates of the future fair market value of these
securities when redemption is first permitted. Amounts accreted increase the
recorded value of the Redeemable Convertible Preferred Stock and redeemable
warrants on the balance sheet and result in a non-cash charge to increase the
net loss applicable to Common Stock. Upon consummation of the Equity Offering,
the redemption provisions of the Redeemable Convertible Preferred Stock
terminate and such preferred stock will be converted into Common Stock.
Accordingly, the amounts accreted for the Redeemable Convertible Preferred Stock
will be reclassified as an increase in the amount of the Common Stock and
additional paid-in capital in the stockholders' equity section of the balance
sheet.
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.
To pre-fund each Phase I market's expansion, the Company raised
approximately $50.1 million from the Equity Contributions and received
approximately $240.7 million of net proceeds, after deducting estimated
underwriting discounts and commissions and other expenses payable by the
Company, from the Unit Offering. Allegiance is currently operational in three
Phase I markets: New York City, Dallas and Atlanta; and is in the process of
deploying networks in six additional Phase I markets: Chicago, Los Angeles, San
Francisco, Boston, Fort Worth and Washington, D.C. As part of this effort, in
October 1997, the Company acquired two Lucent Series 5ESS(R)2000 digital
switches in New York City and Atlanta and certain furniture and fixtures in
Dallas from US ONE Communications, Inc. for an aggregate purchase price of $19.3
million. The Company has also purchased from Lucent, switches for the Dallas,
Chicago, Los Angeles, San Francisco, Boston and Washington, D.C. markets. The
cost of these switches and related equipment and installation will be
approximately $41.6 million.
Since completion of the Unit Offering, the Company has increased the scope
of its business plan to accommodate (i) an expansion of the Company's network
buildout in certain Phase I markets to include additional central offices,
thereby giving the Company access to a larger number of potential customers in
those markets, (ii) an accelerated and expanded deployment of data, Internet and
enhanced services in the Company's markets and (iii) the acceleration of network
deployment in Phase II markets.
The Company estimates that its cumulative cash requirements to fund its
modified business plan, including pre-funding each Phase I and Phase II market's
expansion to Positive Free Cash Flow, will be between $650 million and $700
million.
In addition to the Offerings, the Company is seeking to obtain
approximately $100.0 million of Vendor Financing for the acquisition of digital
switches, software, electronics and associated transmission equipment. The
amount of Vendor Financing the Company will ultimately seek to obtain will
depend on a number of factors including the terms and conditions thereof, the
availability and terms of other financing and the Company's ability to acquire
digital switches, software, electronics and associated transmission equipment in
connection with the acquisition of other companies for Common Stock. There can
be no assurance that the Vendor Financing will be available on terms acceptable
to the Company or at all.
The Company believes, based on its modified business plan, that the net
proceeds from the Offerings, together with cash on hand (including proceeds from
the Equity Contributions and the Unit Offering) and funding expected to be
available under the Vendor Financing will be sufficient to pre-fund its Phase I
and Phase II 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 Company engages in any acquisitions; (iii) the Vendor
Financing is not obtained on a timely basis or at all; or (iv) the Company
alters the schedule or targets of its roll-out plan. Sources of additional
financing may include commercial bank borrowings, vendor financing, or the
private or public sale of equity or debt securities. There can be no assurance
that such financing will be available on terms acceptable to the Company or at
all. See "Risk Factors -- Significant Capital Requirements; Uncertainty of
Additional Financing."
Because the Company's cost of rolling out its networks and operating its
business, as well as the Company's revenues, will depend on a variety of factors
(including the ability of the Company to meet its roll-out schedules, negotiate
favorable prices for purchases of equipment, and develop, acquire and integrate
the necessary OSS and other back office systems, as well as the number of
customers and the services for which they subscribe, the nature and penetration
of new services that may be offered by the Company, regulatory
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changes and changes in technology), actual costs and revenues will vary from
expected amounts, possibly to a material degree, and such variations are likely
to affect the Company's future capital requirements. Accordingly, there can be
no assurance that the Company's actual capital requirements will not exceed the
anticipated amounts described above. Further, the exact amount of the Company's
future capital requirements will depend upon many factors, including the cost of
the development of its networks in each of its markets, the extent of
competition and pricing of telecommunications services in its markets, and the
acceptance of the Company's services. Also, the Company expects that the
expansion into additional markets will require additional financing, which may
include commercial bank borrowing, vendor financing, or the public or private
sale of equity or debt securities. There can be no assurance that the Company
will be successful in raising sufficient additional capital at all or on terms
acceptable to the Company. See "Risk Factors -- Significant Capital
Requirements; Uncertainty of Additional Financing."
YEAR 2000
The Company has reviewed its computer systems to identify those areas that
could be affected by the "Year 2000" issue. The Company believes that its
systems are Year 2000 compliant. In addition, the Company believes that many of
its customers and suppliers, particularly the ILECs and long distance carriers,
are also impacted by the Year 2000 issue, which in turn could affect the
Company. The Company is assessing the compliance efforts of its major customers
and suppliers. If the systems of certain of the Company's customers and
suppliers, particularly the ILECs, long distance carriers and others on whose
services the Company depends or with whom the Company's systems interface, are
not Year 2000 compliant, it would have a material adverse effect on the Company.
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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 of approximately $50.1 million has been
provided by the Management Investors and the Fund Investors.
The Company believes that the Telecommunications Act, by opening the local
exchange market to competition, has created an attractive opportunity for new
facilities-based CLECs like the Company. Most importantly, the
Telecommunications Act stated that CLECs should be able to acquire the UNEs from
the ILECs, which are necessary for the cost-effective provision of service. As
such, the Telecommunications Act will enable the Company to deploy digital
switching platforms with local and long distance capability and initially lease
fiber trunking capacity from the ILECs and other CLECs to connect the Company's
switch with its transmission equipment collocated in ILEC central offices.
Thereafter, the Company plans to lease capacity or overbuild specific network
segments 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 many ILECs, CLECs and long distance
carriers, which systems were developed prior to the passage of the
Telecommunications Act, generally require multiple entries of customer
information to accomplish order management, provisioning, switch administration
and billing. This process is not only labor intensive, but it also creates
numerous opportunities for errors in provisioning service and billing, delays in
installing orders, service interruptions, poor customer service, increased
customer churn and significant added expenses due to duplicated efforts and the
need to correct service and billing problems. The Company believes that the
practical problems 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 operational
in three Phase I markets: New York City, Dallas and Atlanta; and is in the
process of deploying networks in six additional Phase I markets: Chicago, Los
Angeles, San Francisco, Boston, Fort Worth and Washington, D.C. In each of these
markets, the Company will use a Lucent Series 5ESS(R)-2000 digital switch, which
provides local and long distance functionality. With the proceeds from the
Offerings and funds expected to be available under the
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Vendor Financing, the Company intends to begin network development in its Phase
II markets. These additional 12 markets are estimated to encompass approximately
18.7% of the total non-residential access lines in the U.S. Management expects
to commence network deployment in these cities in 1999, with service anticipated
to begin during 1999 and 2000.
As of June 25, 1998, the Company has sold 18,858 lines to 1,120 customers,
of which 10,993 lines for 688 customers were in service as of such date.
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
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 may evolve its networks to the next stage of the "smart build"
strategy where Allegiance plans to lease dark fiber 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
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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. This "smart build" strategy is
currently being implemented by the Company in all its networks where it is
leasing high capacity circuits to connect the ILEC central offices with the
Company's switches. In New York City, the Company is moving to the next stage of
its "smart-build" strategy, where the Company will lease from MFN, a thirty-mile
dark fiber ring in Manhattan that extends into Brooklyn.
Achieve Broad Coverage of Attractive Areas within Each Targeted Market. As
a result of the substantial up-front capital requirements necessary to construct
metropolitan area fiber networks, CLECs have traditionally limited their initial
network buildout to highly concentrated downtown areas, thereby limiting their
ability to provide service to customers in other attractive, but geographically
dispersed, portions of their targeted markets. The Company intends to leverage
the benefits of using a "smart build" strategy by selectively deploying its
facilities to address attractive service areas throughout each target market in
order to optimize the Company's penetration. Prior to entering a market,
Allegiance prepares a detailed, "bottoms-up" analysis of that market's local
exchange areas using FCC and demographic data. The Company uses this analysis,
together with estimates of the costs and potential benefits of addressing
particular service areas, to identify attractive areas, determine the optimal
concentration of areas to be served and develop its schedule for network
deployment and expansion.
Maximize Operating Margins by Emphasizing Facilities-Based Services.
Allegiance believes that facilities-based solutions where the Company provides
local exchange, local access, and long distance 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.
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Expand Customer Base Through Potential Acquisitions. The Company believes
that strategic acquisitions may produce a number of benefits, including
acceleration of market penetration, providing a customer base for cross-selling
additional services, acquiring experienced management and improving margins by
migrating resold services to the Company's network facilities.
MARKET OPPORTUNITY
U.S. Census Bureau data indicates that the United States communications
services market (including cable television, but excluding Internet access and
content) in 1995 totaled approximately $221 billion in annual revenue. As
depicted on the chart below, wireline telecommunications services (other than
Internet access and content) purchased by non-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.
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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 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
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eliminate network congestion problems. Allegiance plans to supplement its core
end user product offerings by providing a full array of local services to ISPs,
including telephone numbers and switched and dedicated access to the Internet.
SALES AND CUSTOMER SUPPORT
The Company will offer an integrated package of local exchange, local
access, domestic and international long distance, enhanced voice, data
transmission, and a full suite of Internet services to small and medium-sized
businesses, with "medium-sized" describing a user having approximately 200-300
phone lines and 250 employees. Unlike large corporate, government, or other
institutional users, small and medium-sized businesses often have no in-house
telecommunications manager. Based on management's previous experience,
Allegiance believes that a direct sales and customer care program focusing on
turn-key, "one-stop shopping" solutions will have a competitive advantage in
capturing this type of customers' total telecommunications traffic.
Although the vast majority of the Company's sales force will focus
primarily on the small and medium-sized business segment, the Company also
intends to provide services to large business, government, and other
institutional users, as well as to ISPs, and expects that a significant portion
of its initial revenue will come from these segments. Therefore, Allegiance will
organize its sales and customer care organizations to serve each of these three
market segments. Sales and marketing approaches in the telecommunications market
are market-segment specific, and the Company believes the following are the most
effective approaches with respect to its three targeted market segments:
- Small/medium business -- The Company will use direct sales, print
advertising, and agency programs.
- Large business, government, and other institutional users -- The Company
will use account teams, established business relationships, applications
sales, trade show advertising, and technical journal articles.
- Wholesale (ISPs) -- The Company will use direct sales, established
business relationships, and competitive pricing.
The principal portion of Allegiance's sales and customer care resources
will be dedicated to the small and medium-sized business segment. The Company
will organize account executives into teams with a team manager and a sales
support specialist. These teams will utilize telemarketing to "qualify" leads
and set up initial appointments. The Company will closely manage account
executives with regard to activity (i.e. number of sales calls per 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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<PAGE> 42
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 has been designed to permit
programming into the system of a standard schedule of tasks which must be
accomplished in order to initiate service to a customer, as well as the standard
time intervals during which each such task must be completed. This way, when a
standard order is selected in the system, each required task in the service
initiation process can be efficiently managed to its assigned time interval.
External Interfaces. Several external interfaces are required to initiate
service for a customer. While some of these will be automated initially via
gateways from the order management software, the most important interfaces
(those to the ILEC) will be accomplished initially via fax or e-mail. Certain
ILECs are just beginning to develop automated interfaces on a limited basis.
Allegiance intends to take a lead role with selected ILECs to create standards
for automation of these interfaces.
Network Element Administration. The Company has signed a contract with a
third-party vendor to license their network element administration software. The
Company is currently developing an interface between its order management system
and the network element manager to integrate data integrity and eliminate
redundant data entry.
Customer Billing. Allegiance has selected a billing services provider, and
a contract for this service is currently being negotiated. Customer information
will be electronically interfaced with this provider from the Company's order
management system via a gateway being developed, thereby integrating all
repositories of information.
Billing Records. Billing records will be generated by the Lucent Series
5ESS(R)-2000 switches to record customer calling activity. These records will be
automatically processed by the billing services provider in order to calculate
and produce bills in a customer-specified billing format.
Allegiance believes this integrated 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 operational in three Phase
I markets: New York City, Dallas and Atlanta; and is in the process of deploying
networks in six additional Phase II markets: Chicago, Los Angeles, San
Francisco, Boston, Fort Worth and Washington, D.C. 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,
the regulatory environment, the
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Company's results of operations and the existence of specific market
opportunities, such as acquisitions, and no assurance can be given that the
Company will deploy networks in each such market:
PHASE I MARKET SIZE AND BUILDOUT SCHEDULE
<TABLE>
<CAPTION>
ESTIMATED TOTAL NON- % OF TOTAL U.S. NON- INITIAL FACILITIES-
MARKET RESIDENTIAL ACCESS LINES(1) RESIDENTIAL ACCESS LINES(2) BASED SERVICE DATE(3)
------ --------------------------- --------------------------- -----------------------------
(THOUSANDS)
<S> <C> <C> <C>
New York City................. 3,298(4) 6.7%(4) March 1998
Dallas, TX.................... 867(5) 1.8%(5) April 1998
Atlanta, GA................... 612 1.2% April 1998
Fort Worth, TX................ --(5) --(5) 3Q, 1998
Chicago, IL................... 1,951 4.0% 3Q, 1998
Los Angeles, CA............... 3,430(6) 7.0%(6) 3Q, 1998
Northern New Jersey........... --(4) --(4) 4Q, 1998
San Francisco, CA............. 2,148(7) 4.4%(7) 4Q, 1998
Boston, MA.................... 649 1.3% 4Q, 1998
Long Island, NY............... --(4) --(4) 1999
Washington, D.C............... 871 1.8% 1999
Orange County, CA............. --(6) --(6) 1999
------ -----
Total............... 13,826(7) 28.2%(7)
</TABLE>
- ---------------
(1) Data as of December 31, 1996.
(2) Based on an estimated 49.0 million U.S. non-residential access lines as of
December 31, 1996.
(3) Refers to the first month during which the Company could offer
facilities-based service or the quarter or year during which the Company
expects to be able to offer facilities-based service based on its current
business plan.
(4) Data for New York City also includes Northern New Jersey and Long Island,
NY.
(5) Data for Dallas, TX also includes Fort Worth, TX.
(6) Data for Los Angeles, CA also includes Orange County, CA.
(7) Data for San Francisco, CA also includes San Jose, CA and Oakland, CA, both
of which are Phase II markets.
The following table sets forth the markets targeted by the Company in Phase
II, although the order and timing of network deployment may vary and will depend
on a number of factors, including recruiting city management, the regulatory
environment, the Company's results of operations and the existence of specific
market opportunities, such as acquisitions, and no assurance can be given that
the Company will deploy networks in each such market. Assuming the Vendor
Financing is available to the Company, management currently expects to commence
network deployment in the following Phase II markets in 1999, with service
anticipated to begin during 1999 and 2000.
PHASE II MARKET SIZE
<TABLE>
<CAPTION>
ESTIMATED TOTAL NON- % OF TOTAL U.S. NON-
MARKET RESIDENTIAL ACCESS LINES(1) RESIDENTIAL ACCESS LINES(2)
------ --------------------------- ---------------------------
(THOUSANDS)
<S> <C> <C>
San Jose, CA................................. --(3) --(3)
Oakland, CA.................................. --(3) --(3)
San Diego, CA................................ 790 1.6%
Houston, TX.................................. 765 1.6%
Philadelphia, PA............................. 1,754 3.6%
Detroit, MI.................................. 821 1.7%
Denver, CO................................... 632 1.3%
Baltimore, MD................................ 639 1.3%
Seattle, WA.................................. 779 1.6%
Miami, FL.................................... 769 1.6%
St. Louis, MO................................ 449 0.9%
Cleveland, OH................................ 654 1.3%
----- ----
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
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<PAGE> 45
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, San Francisco, Washington,
D.C. and Boston. The Company currently plans to deploy similar switches in its
other markets. As a result of the network unbundling provisions of the
Telecommunications Act, the Company believes it can accelerate its market entry,
reduce its initial capital requirements and mitigate risks in estimating market
share growth by employing a "smart build" strategy. The Company plans to install
the Lucent switch and related equipment at a central location in each market and
deploy transmission equipment in ILEC central offices. Allegiance intends
initially to lease local network trunking facilities from the ILEC and/or one or
more CLECs in order to connect Allegiance's switch to major ILEC central offices
serving the central business district and outlying areas of business
concentrations in each market. The switch will also be connected to ILEC tandem
switches and certain interexchange carrier ("IXC") points-of-presence ("POPs").
Allegiance will deploy integrated digital loop carriers ("IDLCs") and related
equipment in each of the ILEC central offices in which it is connected. As each
customer is obtained, service will be provisioned by leasing unbundled loops
from the ILEC to connect the Company's IDLC (located in the serving central
office) to the customer premise equipment. For large business, government, or
other institutional customers or for numerous customers located in large
buildings, it may be more cost-effective for Allegiance to use leased ILEC or
CLEC capacity in the 1.5 to 150 megabit range (or perhaps a wireless local loop
leased from one of the emerging wireless CLECs) to connect the customer(s) to
the Allegiance network. In this case, Allegiance will locate its IDLC or other
equipment in the customer's building. A diagram of the Company's typical network
layout is presented in the following figure:
[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.
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<PAGE> 46
As traffic on a specific route increases (for example, on the New York
City-Chicago route), Allegiance will subsequently lease long distance trunk
capacity connecting its switches between the two markets. Allegiance would thus
transport its calls from New York City to Chicago (or vice versa) over its own
network and terminate the calls at the ILEC tandem switch in Chicago. For
international calls, the Company plans to negotiate agreements with various
international carriers for termination of its international calls throughout the
world. As Allegiance's international traffic volumes increase to major
destinations (e.g. Canada, Mexico, the United Kingdom, France, Germany and
Japan), the Company expects to be able to improve its resale margins.
IMPLEMENTATION OF SERVICES
In order to offer services in a market, Allegiance generally must secure
certification from the state regulator and typically must file tariffs or price
lists for the services that it will offer. The certification process varies from
state to state; however, the fundamental requirements are largely the same.
State regulators require new entrants to demonstrate that they have secured
adequate financial resources to establish and maintain good customer service.
New entrants are also required to show that they have a staff that possesses the
knowledge and ability required to establish and operate a telecommunications
network. Allegiance has made such demonstrations in Texas, Georgia, California,
Illinois, Maryland and New York, where the Company has obtained certificates to
provide local exchange and intrastate toll services. Applications for such
authority are pending in the District of Columbia and Massachusetts. The Company
intends to file similar applications in the near future for 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 Wireless of Texas, Inc. in Texas and has begun to negotiate
enhancements to that agreement for ultimate inclusion in Allegiance's customized
agreement with Southwestern Bell.
While such interconnection agreements include key terms and prices for
interconnection 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 worked closely with
Southwestern Bell in order to devise and implement an efficient 911 call routing
plan that will meet the requirements of each individual 911 service bureau in
Southwestern Bell areas that Allegiance will serve using its own switches.
Allegiance meets with key personnel from 911 service bureaus to obtain their
acceptance and to establish dates for circuit establishment and joint testing.
Other examples of traffic 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.
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<PAGE> 47
Federal Regulation
The FCC regulates interstate and international telecommunications services.
The Company provides service on a common carrier basis. The FCC imposes certain
regulations on common carriers such as the RBOCs that have some degree of market
power. The FCC imposes less regulation on common carriers without market power
including, to date, CLECs. The FCC requires common carriers to receive an
authorization to construct and operate telecommunications facilities, and to
provide or resell telecommunications services, between the United States and
international points.
In August 1996, the FCC released a decision (the "Interconnection
Decision") establishing rules implementing the Telecommunications Act
requirements that ILECs negotiate interconnection agreements and providing
guidelines for review of such agreements by state public utilities commissions.
On July 18, 1997, the Eighth Circuit vacated certain portions of the
Interconnection Decision, including provisions establishing a pricing
methodology and a procedure permitting new entrants to "pick and choose" among
various provisions of existing interconnection agreements between ILECs and
their competitors. On October 14, 1997, the Eighth Circuit issued a decision
vacating additional FCC rules that will likely have the effect of increasing the
cost of obtaining the use of combinations of an ILEC's unbundled network
elements. The Eighth Circuit decisions create uncertainty about the rules
governing pricing and the terms and conditions of interconnection agreements,
and could make negotiating and enforcing such agreements more difficult and
protracted and may require renegotiation of existing agreements. There can be no
assurance that the Company will be able to obtain or enforce interconnection
agreements on terms acceptable to the Company. The Supreme Court has granted a
writ of certiorari to review the Eighth Circuit decisions.
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.
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<PAGE> 48
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).
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, as well as several petitions for
administrative reconsideration of the order.
The Telecommunications Act codifies the ILECs' equal access and
nondiscrimination obligations and preempts inconsistent state regulation. The
Telecommunications Act also contains special provisions that eliminate the AT&T
Antitrust Consent Decree (and similar antitrust restrictions on the GTOCs)
restricting the RBOCs from providing long distance services and engaging in
telecommunications equipment manufacturing. The Telecommunications Act permitted
the RBOCs to enter the out-of-region long distance market immediately upon its
enactment. Further, provisions of the Telecommunications 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"
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<PAGE> 49
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. The Company cannot predict the likely
outcome of that appeal, although on May 15, 1998, the Court of Appeals for the
District of Columbia Circuit rejected a very similar challenge to the
constitutionality of Section 274 of the Telecommunications Act. 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 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 a few
cases, or permit other forms of rate flexibility. The FCC has adopted some
proposals that significantly lessen the regulation of ILECs that are subject to
competition in their service areas and provide such ILECs with additional
flexibility in pricing their interstate switched and special access on a central
office specific basis; and, as discussed in the following paragraph, is
considering expanding such flexibility.
In two orders released on December 24, 1996, and May 16, 1997, the FCC made
major changes in the interstate access charge structure. In the December 24th
order, the FCC removed restrictions on ILECs' ability to lower access prices and
relaxed the regulation of new switched access services in those markets where
there are other providers of access services. If this increased pricing
flexibility is not effectively monitored by federal regulators, it could have a
material adverse effect on the Company's ability to compete in providing
interstate access services. The May 16th order substantially increased the costs
that ILECs subject to the FCC's price cap rules ("price cap LECs") recover
through monthly, non-traffic sensitive access charges
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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 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, including 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. Under the Eighth
Circuit decisions, however, the states have primary jurisdiction over the
determination of reciprocal compensation arrangements and as a result, the
treatment of this issue can vary from state to state. Currently, 20 state
commissions, two federal courts and one state court 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 eight states. The 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 service this group of customers profitably.
State Regulation
The Telecommunications Act is intended to increase competition in the
telecommunications industry, especially in the local exchange market. With
respect to local services, ILECs are required to allow interconnection to their
networks and to provide unbundled access to network facilities, as well as a
number of other procompetitive measures. Because the implementation of the
Telecommunications Act is subject to numerous state rulemaking proceedings on
these issues, it is currently difficult to predict how quickly full competition
for local services, including local dial tone, will be introduced.
State regulatory agencies have regulatory jurisdiction when Company
facilities and services are used to provide intrastate services. A portion of
the Company's current traffic may be classified as intrastate and therefore
subject to state regulation. The Company expects that it will offer more
intrastate services (including intrastate switched services) as its business and
product lines expand and state regulations are modified to allow increased local
services competition. To provide intrastate services, the Company generally must
obtain a certificate of public convenience and necessity from the state
regulatory agency and comply with state requirements for telecommunications
utilities, including state tariffing requirements. The Company has obtained such
certificates to provide local exchange and intrastate toll service in Texas,
Georgia, California, Illinois, Maryland and New York. Applications for authority
to provide local exchange and intrastate toll services are currently pending in
the District of Columbia and Massachusetts. In Georgia, the Company has also
received certificate authority to provide intrastate interexchange alternate
operator services. In New Jersey, the Company is authorized to resell services,
and intends to file an application for facilities-based authority in the near
future. The Company also intends to file similar applications in the near future
in Virginia, Michigan, Pennsylvania, Florida and Washington. There can be no
assurance that such state authorizations will be granted.
Local Regulation
The Company's networks are subject to numerous local regulations such as
building codes and licensing. Such regulations vary on a city by city and county
by county basis. To the extent the Company decides in the future to install its
own fiber optic transmission facilities, it will need to obtain rights-of-way
over private and
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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.
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
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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, WorldCom acquired MFS in December 1996,
has recently acquired another CLEC, Brooks Fiber Properties, Inc., and has a
pending agreement to merge with MCI. In January 1998 AT&T announced its
intention to acquire Teleport Communications Group Inc. In May 1998, SBC
Communications Inc. and Ameritech Corporation agreed to merge. On June 24, 1998,
AT&T announced that it has entered into a merger agreement with
Tele-Communications, Inc., a cable, telecommunications, and high-speed Internet
services provider. These types of consolidations and strategic alliances could
put the Company at a competitive disadvantage. The Telecommunications Act
includes provisions which impose certain regulatory requirements on all local
exchange carriers, including competitors such as the Company, while granting the
FCC expanded authority to reduce the level of regulation applicable to any or
all telecommunications carriers, including ILECs. The manner in which these
provisions of the Telecommunications Act are implemented and enforced could have
a material adverse effect on the Company's ability to successfully compete
against ILECs and other telecommunications service providers. The Company also
competes with equipment vendors and installers, and telecommunications
management companies with respect to certain portions of its business.
The changes in the Telecommunications Act radically altered the market
opportunity for traditional CAPs and CLECs. Due to the fact that most existing
CAP/CLECs initially entered the market providing dedicated access in the
pre-1996 era, these companies had to build a fiber infrastructure before
offering services. Switches were added by most CAP/CLECs in the last year to
take advantage of the opening of the local market. With the Telecommunications
Act requiring unbundling of the LEC networks, CAP/CLECs will now be able to more
rapidly enter the market by installing switches and leasing trunk and loop
capacity until traffic volume justifies building facilities. New CLECs will not
have to replicate existing facilities and can be more opportunistic in designing
and implementing networks.
The Company believes the major IXCs (AT&T, MCI, Sprint) have a two pronged
strategy: (1) keep the RBOCs out of in-region long distance as long as possible
and (2) develop facilities-based and unbundled local service, an approach
already being 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. The
Company expects to increasingly face competition from companies offering long
distance data and voice services over the Internet. Such companies could enjoy a
significant cost advantage because they do not currently pay carrier access
charges or universal service fees.
Data/Internet Services Providers. The Internet services market is highly
competitive, and the Company expects that competition will continue to
intensify. The Company's competitors in this market will include ISPs, other
telecommunications companies, online services providers and Internet software
providers. Many of these competitors have greater financial, technological and
marketing resources than those available to the Company.
Competition from International Telecommunications Providers. Under the
recent WTO agreement on basic telecommunications services, the United States and
72 other members of the WTO committed themselves to opening their respective
telecommunications markets and/or foreign ownership and/or to adopting
regulatory measures to protect competitors against anticompetitive behavior by
dominant telecommunications companies, effective in some cases as early as
January 1998. Although the Company believes that the WTO agreement could provide
the Company with significant opportunities to compete in markets that were not
previously accessible and to provide more reliable services at lower costs than
the
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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 June 25, 1998, the Company had approximately 250 employees. The
Company believes that its future success will depend on its continued ability to
attract and retain highly skilled and qualified employees. None of the Company's
employees are currently represented by a collective bargaining agreement. The
Company believes that it enjoys good relationships with its employees.
LEGAL PROCEEDINGS
On August 29, 1997, WorldCom sued the Company and two of its Senior Vice
Presidents. In its complaint, WorldCom alleges that these employees violated
certain noncompete and nonsolicitation agreements by accepting employment with
the Company and by soliciting then-current WorldCom employees to leave
WorldCom's employment and join the Company. In addition, WorldCom claims that
the Company tortiously interfered with WorldCom's relationships with its
employees, and that the Company's behavior constituted unfair competition.
WorldCom seeks injunctive relief, including barring two of the Company's
executives from continued employment with the Company, and monetary damages,
although it has filed no motion for a temporary restraining order or preliminary
injunction. The Company denies all claims and will vigorously defend itself. The
Company does not expect the ultimate outcome of this matter to have a material
adverse effect on the results of operations or financial condition of the
Company.
On October 7, 1997, the Company filed a counterclaim against WorldCom for,
among other things, attempted monopolization of the "one-stop shopping"
telecommunications market, abuse of process, and unfair competition. WorldCom
did not move to dismiss the attempted monopolization claim, but moved to dismiss
the abuse of process and unfair competition claims. On March 4, 1998, the court
dismissed the claim for unfair competition.
The Company is not party to any other pending legal proceedings that the
Company believes would, individually or in the aggregate, have a material
adverse effect on the Company's financial condition or results of operations.
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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
Chicago, IL................................................. February 2009 9,200
Chicago, IL................................................. July 2008 14,000
Los Angeles, CA............................................. June 2008 11,000
Los Angeles, CA............................................. June 2008 10,000
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 eight markets in which it has begun to deploy networks, and
that additional facilities are available to meet its development and expansion
needs in existing and projected target markets for the foreseeable future.
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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 May 1, 1998:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
---- --- -----------
<S> <C> <C>
Royce J. Holland(1).......... 49 Chairman of the Board and Chief Executive Officer
C. Daniel Yost............... 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.............. 37 Director
James E. Crawford, III(1).... 52 Director
John B. Ehrenkranz........... 33 Director
Paul J. Finnegan............. 45 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, 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 -- Partnership Vice President and Director. In that
position, he was responsible for the development of gas-fired power plants from
conceptual stages through project financing. Prior to joining Destec, Mr. Long
was Manager of Project Finance at Morrison-Knudsen, where he was responsible for
analyzing and arranging finance packages for various industrial, mining and
civil projects and also served as financial consultant and analyst.
L.C. Baird, who became the Company's Regional Vice President -- Southeast
Division in September 1997, has more than 25 years of experience in the
telecommunications industry. Prior to joining Allegiance, Mr. Baird held several
senior level positions in operating units of MFS, including serving as President
of MFS Intelenet's Southern Division from January 1993 to April 1997 and as vice
president of sales and marketing for MFS Network Technologies from August 1987
to January 1993. Mr. Baird also served as area manager for Motorola's Latin
American Communications where he was responsible for sales in Central America,
Mexico, South America and the Caribbean.
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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
Imaging Systems, Inc., a publicly held document imaging software company, and
Cornerstone Imaging, Inc., 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.
Paul J. Finnegan, who was elected to the Company's Board of Directors in
August 1997, is a vice president of Madison Dearborn Partners, Inc., a
Chicago-based private equity investing firm, where he specializes in investing
in companies in the telecommunications industry. Mr. Finnegan also presently
serves on the boards of directors of Focal, a privately held CLEC that will
compete with the Company, and Omnipoint Corporation, a publicly traded PCS
provider.
Richard D. Frisbie, who was elected to the Company's Board of Directors in
August 1997, is a Managing Partner of Battery Ventures, a Boston-based private
equity investing firm, where he specializes in investing in companies in the
telecommunications industry. Mr. Frisbie also presently serves on the board of
directors of Focal, a privately held CLEC that will compete with the Company.
Reed E. Hundt was elected to the Company's Board of Directors in March
1998. Mr. Hundt served as chairman of the Federal Communications Commission from
1993 to 1997. He currently serves as chairman of The Forum on Communications and
Society (FOCAS) at The Aspen Institute and is a principal of Charles Ross
Partners, LLC, a consulting firm. Prior to joining the FCC, Mr. Hundt was a
partner at Latham & Watkins, an international law firm.
Robert H. Niehaus, who was elected to the Company's Board of Directors in
August 1997, is a Managing Director of Morgan Stanley & Co. Incorporated where
he has been employed since 1982. Mr. Niehaus also presently serves on the boards
of directors of numerous companies including American Italian Pasta Company,
PageMart Wireless, Inc., Silgan Holdings Inc., and Waterford Wedgewood, plc. Mr.
Niehaus is also a Managing Director and a Director of Morgan Stanley Capital
Partners III, Inc.
James N. Perry, Jr., who was elected to the Company's Board of Directors in
August 1997, is a vice president of Madison Dearborn Partners, Inc., a
Chicago-based private equity investing firm, where he specializes in investing
in companies in the telecommunications industry. Mr. Perry also presently serves
on the boards of directors of Focal, a privately held CLEC that will compete
with the Company, as well as
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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
The Company's bylaws establish the size of the Company's Board of Directors
at 13 Directors; there is presently one vacancy. The Company anticipates that
one additional director not otherwise affiliated with the Company or any of its
stockholders will be elected by the Board of Directors following the completion
of the Equity Offering. The Company's certificate of incorporation and by-laws
provide that its Directors will be appointed and may be removed by majority vote
of the Company's stockholders (without cumulative voting).
At present all directors are elected annually and serve until the next
annual meeting of stockholders, or until the election and qualification of their
successors. Effective upon the consummation of the Equity Offering, the Board of
Directors will be divided into three classes, as nearly equal in number as
possible, with each Director serving a three year term and one class being
elected at each year's annual meeting of stockholders. Messrs. Callahan,
Finnegan, Carbery, and Ehrenkranz will be in the class of directors whose term
expires at the 1999 annual meeting of the Company's stockholders. Messrs. Lord,
Yost, Crawford, Frisbie and the additional director anticipated to be appointed
by the Board of Directors will be in the class of directors whose term expire at
the 2000 annual meeting of the Company's stockholders. Messrs. Holland, Hundt,
Perry, and Niehaus will be in the class of directors whose term expires at the
2001 annual meeting of the Company's stockholders. At each annual meeting of the
Company's stockholders, successors to the class of directors whose term expires
at such meeting will be elected to serve for three-year terms and until their
successors are elected and qualified.
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 two directorships may
be filled by representatives designated by the Fund Investors and acceptable to
the Management Investors.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors currently has three committees: (i) an Executive
Committee, (ii) an Audit Committee and (iii) a Compensation Committee.
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). The Executive Committee will be authorized, subject to certain
limitations, to exercise all of the powers of the Board of Directors during
periods between Board meetings.
The Audit Committee is currently comprised of Messrs. Yost, Hundt, Carbery,
Ehrenkranz and Finnegan. The Audit Committee is responsible for making
recommendations to the Board of Directors regarding the selection of independent
auditors, reviewing the results and scope of the audit and other services
provided by the Company's independent accountants and reviewing and evaluating
the Company's audit and control functions.
The Compensation Committee is currently comprised of Messrs. Holland,
Frisbie, Crawford, Niehaus and Perry. The Compensation Committee is responsible
for reviewing, and as it deems appropriate, recommending to the Board of
Directors, policies, practices and procedures relating to the compensation of
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the officers and other managerial employees of the Company and the establishment
and administration of employee benefit plans. The Compensation Committee
exercises all authority under any stock option or stock purchase plans of the
Company (unless the Board appoints any other committee to exercise such
authority), and advises and consults with the officers of the Company as may be
requested regarding managerial personnel policies.
COMPENSATION OF DIRECTORS
The Company will reimburse the members of its Board of Directors for their
reasonable out-of-pocket expenses incurred in connection with attending Company
Board or committee meetings. Additionally, the Company is obligated to maintain
its present level of directors' and officers' insurance. Members of the
Company's Board of Directors receive no other compensation for services provided
as a Director or as a member of any Board committee.
EXECUTIVE COMPENSATION
The following table sets forth compensation paid during the period from
April 22, 1997 to December 31, 1997 to the Chief Executive Officer of the
Company (the "Named Executive Officer"). There were no other executive officers
of the Company whose annual salary and bonus exceeded $100,000 for all services
rendered to the Company during such period.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------------------------
OTHER ANNUAL ALL OTHER
COMPENSATION COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) ($)(A) ($)
--------------------------- ---- --------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Royce J. Holland.................... 1997 $72,308 $ -- $ -- $ --
Chairman of the Board and Chief
Executive Officer
</TABLE>
- ---------------
(a) Includes perquisites and other benefits paid to the Named Executive Officer
in excess of 10% of the total annual salary and bonus received by the Named
Executive Officer during the last fiscal year.
Prior to April 1998, the Board did not have a Compensation Committee and
decisions concerning the compensation of executive officers and other key
employees of the Company were determined by the Company's Board of Directors.
During the Company's fiscal year ending December 31, 1998, Royce J. Holland, C.
Daniel Yost, Thomas M. Lord, and John J. Callahan expect to earn salaries at an
annual rate of $200,000, $200,000, $175,000, and $175,000, respectively.
STOCK PLANS
1997 NONQUALIFIED STOCK OPTION PLAN
On November 13, 1997, the Company's Board of Directors adopted the 1997
Nonqualified Stock Option Plan (the "Option Plan"), under which the Company may
issue to Directors, consultants, and executive and other key employees of the
Company, stock options (the "Options") exercisable for shares of the Company's
Common Stock. As of May 31, 1998, Options to acquire an aggregate of 886,594
shares of Common Stock have been granted under such Option Plan and the Company
will not grant Options for any additional shares under the Option Plan. The
Option Plan is administered by the Compensation Committee. The Option Plan
authorizes the Compensation Committee to issue Options in such forms and amounts
and on such terms as determined by the Compensation Committee. The per-share
exercise price for Options will be set by the Compensation Committee, but may
not be less than the fair market value of a share of the Company's Common Stock
on the date of grant (as determined in good faith by the Compensation
Committee). The Compensation Committee 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
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<PAGE> 60
annual component of an employee's compensation package. The terms of the Options
issued under the Option Plan to date are, and the Compensation Committee
presently anticipates that the terms of all Options issued under the Option Plan
in the future will be, as summarized below.
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
business day of the quarter succeeding the date which a participant joins the
Company. Such Options will vest over a three-year period, with 1/3 "cliff"
vesting on the first anniversary of the date of grant and 1/12 vesting on each
of the first eight quarter-ends thereafter. Subject to available Options under
the Option Plan, one year's amount of Options will be issued on each anniversary
of the initial grant, and such Options will vest in the third year after grant,
with 1/4 vesting on each of the 27-, 30-, 33-, and 36-month anniversaries of the
date of grant. Through this mechanism, a participant will at any given time have
three years' amount of Options unvested. Vesting is accelerated 100% upon an
employee's death or permanent physical disability. If there is a sale of the
Company and the participant is terminated (or constructively terminated) within
the two-year period following the sale, vesting is accelerated 100% upon such
termination. Options expire if not exercised within six years after the date of
grant. If a participant is terminated for any reason, all unvested Options
immediately expire and all vested Options must be exercised within 90 days after
termination. Options are nontransferable during the life of the participant.
Shares of Common Stock issued upon exercise of Options are subject to various
restrictions on transferability, holdback periods in the event of a public
offering of the Company's securities and provisions requiring the holder of such
shares to approve and, if requested by the Company, sell its shares in any sale
of the Company that is approved by the Board.
1998 STOCK INCENTIVE PLAN
Prior to the consummation of the Equity Offering, the Board and
stockholders of the Company will approve the Company's 1998 Stock Incentive Plan
(the "1998 Stock Plan"). The 1998 Stock Plan will be administered by the
Compensation Committee. Certain employees, directors, advisors and consultants
of the Company will be eligible to participate in the 1998 Stock Plan (a
"Participant"). The Compensation Committee will be authorized under the 1998
Stock Plan to select the Participants and determine the terms and conditions of
the awards under the 1998 Stock Plan. The 1998 Stock Plan provides for the
issuance of the following types of incentive awards: stock options, stock
appreciation rights, restricted stock, performance grants and other types of
awards that the Compensation Committee deems consistent with the purposes of the
1998 Stock Plan. An aggregate of 3,806,658 shares of Common Stock of the Company
will be reserved for issuance under the 1998 Stock Plan, subject to certain
adjustments reflecting changes in the Company's capitalization.
Options granted under the 1998 Stock Plan may be either incentive stock
options ("ISOs") or such other forms of non-qualified stock options ("NQOs") as
the Compensation Committee may determine. ISOs are intended to qualify as
"incentive stock options" within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"). The exercise price of (i) an ISO
granted to an individual who owns shares possessing more than 10% of the total
combined voting power of all classes of stock of the Company (a "10% Owner")
will be at least 110% of the fair market value of a share of Common Stock on the
date of grant and (ii) an ISO granted to an individual other than a 10% Owner
and an NQO will be at least 100% of the fair market value of a share of Common
Stock on the date of grant.
Options granted under the 1998 Stock Plan may be subject to time vesting
and certain other restrictions at the sole discretion of the Compensation
Committee. Subject to certain exceptions, the right to exercise an option
generally will terminate at the earlier of (i) the first date on which the
initial grantee of such option is not employed by the Company for any reason
other than termination without cause, death or permanent disability or (ii) the
expiration date of the option. If the holder of an option dies or suffers a
permanent disability while still employed by the Company, the right to exercise
all unexpired installments of such option shall be accelerated and shall vest as
of the latest of the date of such death, the date of such permanent disability
and the date of the discovery of such permanent disability, and such option
shall be exercisable, subject to certain exceptions, for 180 days after such
date. If the holder of an option is terminated without cause, to the extent the
option has vested, such option will be exercisable for 30 days after such date.
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<PAGE> 61
All outstanding awards under the 1998 Stock Plan will terminate immediately
prior to consummation of a liquidation or dissolution of the Company, unless
otherwise provided by the Board. In the event of the sale of all or
substantially all of the assets of the Company or the merger of the Company with
another corporation, all restrictions on any outstanding awards will terminate
and Participants will be entitled to the full benefit of their awards
immediately prior to the closing date of such sale or merger, unless otherwise
provided by the Board.
The Board generally will have the power and authority to amend the 1998
Stock Plan at any time without approval of the Company's stockholders, subject
to applicable federal securities and tax laws limitations (including regulations
of the Nasdaq National Market).
STOCK PURCHASE PLAN
The Company's Employee Stock Discount Purchase Plan (the "Stock Purchase
Plan") will be approved by the Board and stockholders prior to the consummation
of the Equity Offering. The Stock Purchase Plan is intended to give employees
desiring to do so a convenient means of purchasing shares of Common Stock
through payroll deductions. The Stock Purchase Plan is intended to provide an
incentive to participate by permitting purchases at a discounted price. The
Company believes that ownership of stock by employees will foster greater
employee interest in the success, growth and development of the Company.
Subject to certain restrictions, each employee of the Company who is a U.S.
resident or a U.S. citizen temporarily on location at a facility outside of the
United States will be eligible to participate in the Stock Purchase Plan if he
or she has been employed by the Company for more than three months.
Participation will be discretionary with each eligible employee. The Company
will reserve 2,305,718 shares of Common Stock for issuance in connection with
the Stock Purchase Plan. Elections to participate and purchases of stock will be
made on a quarterly basis. Each participating employee contributes to the Stock
Purchase Plan by choosing a payroll deduction in any specified amount, with a
specified minimum deduction per payroll period. A participating employee may
increase or decrease the amount of such employee's payroll deduction, including
a change to a zero deduction as of the beginning of any calendar quarter.
Elected contributions will be credited to participants' accounts at the end of
each calendar quarter.
Each participating employee's contributions will be used to purchase shares
for the employee's share account as promptly as practicable after each calendar
quarter. The cost per share will be 85% of the lower of the closing price of the
Company's Common Stock on the Nasdaq National Market on the first or the last
day of the calendar quarter. The number of shares purchased on each employee's
behalf and deposited in his/her share account will be based on the amount
accumulated in such participant's cash account and the purchase price for shares
with respect to any calendar quarter. Shares purchased under the Stock Purchase
Plan carry full rights to receive dividends declared from time to time. Under
the Stock Purchase Plan, any dividends attributable to shares in the employee's
share account will be automatically used to purchase additional shares for such
employee's share account. Share distributions and share splits will be credited
to the participating employee's share account as of the record date and
effective date, respectively. A participating employee will have full ownership
of all shares in such employee's share account and may withdraw them for sale or
otherwise by written request to the Compensation Committee following the close
of each calendar quarter. Subject to applicable federal securities and tax laws,
the Board will have the right to amend or to terminate the Stock Purchase Plan.
Amendments to the Stock Purchase Plan will not affect a participating employee's
right to the benefit of the contributions made by such employee prior to the
date of any such amendment. In the event the Stock Purchase Plan is terminated,
the Compensation Committee will be required to distribute all shares held in
each participating employee's share account plus an amount of cash equal to the
balance in each participating employee's cash account.
401(k) PLAN
The Company is in the process of adopting a tax-qualified employee savings
and retirement plan (the "401(k) Plan") covering all of the Company's full-time
employees. Pursuant to the 401(k) Plan, employees may elect to reduce their
current compensation up to the statutorily prescribed annual limit and have the
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<PAGE> 62
amount of such reduction contributed to the 401(k) Plan. The 401(k) Plan is
intended to qualify under Section 401 of the Code so that contributions by
employees to the 401(k) Plan, and income earned on plan contributions, are not
taxable to employees until withdrawn from the 401(k) Plan. The trustees under
the 401(k) Plan, at the direction of each participant, invest such participant's
assets in the 401(k) Plan in selected investment options.
EXECUTIVE AGREEMENTS
Royce J. Holland Executive Agreement
In August 1997, in connection with Royce J. Holland's purchase of an
ownership interest in Allegiance, LLC, the Company's sole shareholder (see
"Certain Relationships and Related 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 will be
accelerated by one year upon the consummation of the Equity Offering, 100.0% in
the event of Mr. Holland's death or disability, and 100.0% upon a sale of the
Company where at least 50.0% of the consideration for such sale is cash or
marketable securities.
Repurchase of Securities. If Mr. Holland's employment is terminated for any
reason other than a termination by the Company without cause, Allegiance LLC and
the Company (or their assignees) will have the right to repurchase all vested
Holland Executive Securities at fair market value, and all unvested Holland
Executive Securities at the lesser of fair market value and original cost.
Restrictions on Transfer; Holdback and "Drag Along" Agreements. The Holland
Executive Securities are subject to various restrictions on transferability,
holdback periods in the event of a public offering of the Company's securities
and provisions requiring the holder of such shares to approve and, if requested
by the Company, sell its shares in any sale of the Company that is approved by
the Board.
Terms of Employment. Mr. Holland is an "at will" employee of the Company
and, thus, may be terminated by the Company at any time and for any reason. Mr.
Holland is not entitled to receive any severance payments upon any such
termination, other than payments in consideration of the noncompetition and
nonsolicitation agreements discussed below.
Noncompetition and Nonsolicitation Agreements. During the Noncompete Period
(as defined below), Mr. Holland may not hire or attempt to induce any employee
of the Company to leave the Company's employ, nor attempt to induce any customer
or other business relation of the Company to cease doing business with the
Company, nor in any other way interfere with the Company's relationships with
its employees, customers, and other business relations. Also, during the
Noncompete Period, Mr. Holland may not participate in any business engaged in
the provision of telecommunications services in any Covered Market. As used in
the Holland Executive Agreement, the "Noncompete Period" means the period of
employment and the following additional period: (i) if Mr. Holland is terminated
prior to August 13, 2000, the period ending on the later of August 13, 2001 and
the second anniversary of termination; (ii) if Mr. Holland is terminated at any
time on or after August 13, 2000 but prior to August 13, 2001, the period ending
on August 13, 2002; and (iii) if Mr. Holland is terminated at any time on or
after August 13, 2001, the one-year period following termination; provided that
the "Noncompete Period" shall end if at any time the Company ceases to pay Mr.
Holland his base salary and benefits in existence at the time of termination
(reduced by any salary or benefits Mr. Holland receives as a result of other
employment). As used in the Holland Executive Agreement, "Covered Market" means:
(i) any market in which the Company is conducting business or preparing,
pursuant to a business plan approved by the Board of Directors and the Fund
Investors, to conduct business; (ii) Dallas, New York City, Atlanta, Chicago,
Los Angeles and 15 additional Phase I and Phase II markets; and (iii) any market
for
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<PAGE> 63
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 Relationships and Related Transactions" and "Security Ownership of
Certain Beneficial Owners and Management"), the Company, Allegiance LLC, and Mr.
Yost entered into an Executive Purchase Agreement, containing the same terms as
the Holland Executive Agreement described above.
Thomas M. Lord Executive Agreement
In August 1997, in connection with Thomas M. Lord's purchase of an
ownership interest in Allegiance LLC, the Company's sole shareholder (see
"Certain Relationships and Related Transactions" and "Security Ownership of
Certain Beneficial Owners and Management"), the Company, Allegiance LLC, and Mr.
Lord entered into an Executive Purchase Agreement, containing the same terms as
the Holland Executive Agreement described above.
Executive Agreements Entered into by Other Management Investors
Each of the Management Investors has entered into an Executive Purchase
Agreement (the "Other Executive Agreements"), including, among others, the
following terms:
Vesting. The Allegiance LLC securities purchased by a Management Investor,
as well as any Company securities distributed with respect to such Allegiance
LLC securities (collectively, the "Executive Securities") are subject to vesting
over a four-year period, with 25.0% vesting on each of the first four
anniversaries of the grant date. Vesting will be accelerated by one year upon
the consummation of the Equity Offering, 100.0% in the event of such Management
Investor's death or disability, and 100.0% upon a sale of the Company where at
least 50.0% of the consideration for such sale is cash or marketable securities.
Repurchase of Securities. If a Management Investor's employment is
terminated for any reason, Allegiance LLC and the Company (or their assignees)
will have the right to repurchase all such Management Investor's vested
Executive Securities at fair market value, and all unvested Executive Securities
at the lesser of fair market value and original cost.
Restrictions on Transfer; Holdback and "Drag Along" Agreements. The
Executive Securities are subject to various restrictions on transferability,
holdback periods in the event of a public offering of the Company's securities
and provisions requiring the holder of such shares to approve and, if requested
by the Company, sell its shares in any sale of the Company that is approved by
the Board.
Terms of Employment. Each Management Investor is an "at will" employee of
the Company and, thus, may be terminated by the Company at any time and for any
reason. No Management Investor is entitled to receive any severance payments
upon any such termination.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to April 1998, the Company did not have a Compensation Committee and
the compensation of executive officers and other key employees of the Company
was determined by the Company's Board of Directors. Royce J. Holland, the
Company's Chairman and Chief Executive Officer, Thomas M. Lord, the Company's
Executive Vice President of Corporate Development and Chief Financial Officer,
C. Daniel Yost, the Company's President and Chief Operating Officer, and John J.
Callahan, the Company's Senior Vice President of Sales and Marketing, are all
currently members of the Company's Board of Directors. The Board of Directors
established the Compensation Committee, which is responsible for decisions
regarding salaries, incentive compensation, stock option grants and other
matters regarding executive officers and key employees of the Company. See
" -- Committees of the Board of Directors."
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
LIMITED LIABILITY COMPANY AGREEMENT
On August 13, 1997, the Fund Investors and the Management Investors entered
into a limited liability company agreement (the "LLC Agreement") in order to
govern the affairs of Allegiance LLC, which presently holds the one outstanding
share of the Company's Common Stock and all substantially all of the outstanding
shares of the Company's Preferred Stock.
Upon consummation of the Equity Offering, Allegiance LLC will dissolve and
its assets (which consist almost entirely of Company stock) will be distributed
to the Fund Investors and the Management Investors in accordance with the LLC
Agreement. The LLC Agreement provides that the Equity Allocation between the
Fund Investors and the Management Investors will range between 95.0%/5.0% and
66.7%/33.3% based upon the valuation of the Company's Common Stock implied by
the Equity Offering. Based upon the current valuation of the Company's Common
Stock implied by the Equity Offering, the Equity Allocation will be 66.7% to the
Fund Investors and 33.3% to the Management Investors. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Overview."
SECURITYHOLDERS AGREEMENT
The Fund Investors, the Management Investors, the Company, and Allegiance
LLC are parties to a securityholders agreement dated as of August 13, 1997 (the
"Securityholders Agreement"). Pursuant to the terms of the Securityholders
Agreement, in the event of an approved sale of the Company, each of the Fund
Investors (and their transferees) agrees to approve and, if requested, to sell
its shares in such sale of the Company. The Securityholders Agreement, apart
from certain provisions thereof, will be automatically terminated upon the
consummation of the Equity Offering.
REGISTRATION AGREEMENT
The Fund Investors, the Management Investors, and the Company are parties
to the Registration Agreement dated as of August 13, 1997. See "Description of
Capital Stock -- Registration Rights."
VOTING AGREEMENT
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 two directorships may
be filled by representatives designated by the Fund Investors and acceptable to
the Management Investors.
OTHER
Morgan Stanley & Co. Incorporated ("Morgan Stanley"), an affiliate of
Morgan Stanley Capital Partners, one of the Fund Investors, acted as a placement
agent in connection with the Unit Offering and received fees of approximately
$4.4 million. In addition, Morgan Stanley is one of the Underwriters and will
receive fees in connection with each of the Offerings. See "Underwriters."
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Prior to the Equity Offering, substantially all of the Company's
outstanding equity securities were held by Allegiance LLC. The following table
sets forth certain information regarding the beneficial ownership of the
outstanding Common Stock of the Company after giving effect to the LLC
Dissolution and the Equity Allocation and as adjusted for the Equity Offering
by: (i) each of the directors and the executive officers of the Company; (ii)
all directors and executive officers as a group and (iii) each owner of more
than 5% of the equity securities of the Company ("5% Owners"). Unless otherwise
noted, the address for each director and executive officer of the Company is c/o
the Company, 1950 Stemmons Freeway, Suite 3026, Dallas, Texas 75207.
<TABLE>
<CAPTION>
SHARES OWNED PRIOR TO SHARES OWNED AFTER THE
EQUITY OFFERING EQUITY OFFERING(1)
--------------------- -----------------------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENT NUMBER PERCENT
------------------------------------ ---------- ------- ----------- --------
<S> <C> <C> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS:
Royce J. Holland(2).............................. 3,881,105 9.6% 3,881,105 7.4%
C. Daniel Yost................................... 1,619,940 4.0 1,619,940 3.1
Thomas M. Lord(3)................................ 1,822,432 4.5 1,822,432 3.5
John J. Callahan................................. 607,477 1.5 607,477 1.2
Paul D. Carbery(4)............................... 4,262,999 10.6 4,262,999 8.1
James E. Crawford, III(4)........................ 4,262,999 10.6 4,262,999 8.1
John B. Ehrenkranz............................... -- -- -- --
Paul J. Finnegan(5).............................. -- -- -- --
Richard D. Frisbie(6)............................ 2,131,499 5.3 2,131,499 4.1
Reed E. Hundt(7)................................. 101,246 * 101,246 *
Robert H. Niehaus(8)............................. -- -- -- --
James N. Perry, Jr.(5)........................... -- -- -- --
All directors and executive officers as a group
(12 persons)................................... 14,426,698 35.8 14,426,698 27.6
5% OWNERS:
Madison Dearborn Capital Partners(9)............. 10,302,247 25.5 10,302,247 19.7
Morgan Stanley Capital Partners(10).............. 10,302,247 25.5 10,302,247 19.7
Frontenac Company(11)............................ 4,262,999 10.6 4,262,999 8.1
Battery Ventures(12)............................. 2,131,499 5.3 2,131,499 4.1
</TABLE>
- ---------------
* Denotes less than one percent.
(1) Assumes no exercise of the underwriters' over-allotment option and does not
give effect to any purchases, if any, by such persons named in the table in
the Equity Offering.
(2) Includes 1,940,552 shares of Common Stock owned by the Royce J. Holland
Family Limited Partnership, of which Royce J. Holland is the sole general
partner. All of the shares of Common Stock owned by Mr. Holland and the
Royce J. Holland Family Limited Partnership are subject to vesting, with
20% of such shares of Common Stock vested on August 13, 1997, 20% vesting
upon the consummation of the Equity Offering and an additional 20% vesting
on each of August 13, 1998, 1999 and 2000. See "Management -- Executive
Agreements."
(3) Includes 911,216 shares of Common Stock owned by Mr. Lord's wife and
children, as to which Mr. Lord disclaims beneficial ownership. All of the
shares of Common Stock owned by Mr. Lord and his family are subject to
vesting with 20% of such shares of Common Stock vested on August 13, 1997,
20% vesting upon the consummation of the Equity Offering and an additional
20% vesting on each of August 13, 1998, 1999 and 2000. See
"Management -- Executive Agreements."
(4) All shares of Common Stock shown are owned by Frontenac VII Limited
Partnership and Frontenac Masters VII Limited Partnership. Messrs. Carbery
and Crawford are members of Frontenac Company, VII, L.L.C., the general
partner of Frontenac VII Limited Partnership and Frontenac Masters VII
Limited Partnership and their address is c/o Frontenac Company, 135 S.
LaSalle Street, Suite 3800, Chicago, IL 60603. They disclaim beneficial
ownership of these shares of Common Stock.
(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 shares of Common Stock shown are owned by Battery Ventures IV, L.P. and
Battery Investment Partners IV, LLC. Mr. Frisbie is a managing partner of
Battery Ventures, the general partner of these funds and his address is c/o
Battery Ventures, 20 William Street, Wellesley, MA 02181. He disclaims
beneficial ownership of these shares of Common Stock.
(7) Mr. Hundt owns options to acquire 50,623 shares of Common Stock and Charles
Ross Partners, LLC, a Delaware limited liability company, of which Mr.
Hundt is a member, owns 50,623 shares of Common Stock.
(8) Mr. Niehaus is a managing director and director of Morgan Stanley Capital
Partners III, Inc., the general partner of the general partner of these
funds and their address is c/o Morgan Stanley Capital Partners, 1221 Avenue
of the Americas, New York, NY 10020.
(9) These shares of Common Stock are owned by Madison Dearborn Capital Partners
II, L.P.
(10) These shares of Common Stock are owned by Morgan Stanley Capital Partners
III, L.P., MSCP III 892 Investors, L.P. and Morgan Stanley Capital
Investors, L.P.
(11) These shares of Common Stock are owned by Frontenac VII Limited Partnership
and Frontenac Masters VII Limited Partnership.
(12) These shares of Common Stock are owned by Battery Ventures IV, L.P. and
Battery Investment Partners IV, LLC.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
11 3/4% NOTES
The Company issued $445,000,000 aggregate principal amount at maturity of
11 3/4% Senior Discount Notes due February 15, 2008 pursuant to the 11 3/4%
Notes Indenture between the Company and The Bank of New York. The 11 3/4% Notes
were issued in units, with each unit consisting of one 11 3/4% Note and one
Warrant.
No interest will be payable on the 11 3/4% Notes prior to August 15, 2003.
From and after February 15, 2003, interest on the 11 3/4% Notes will accrue at
the rate of 11 3/4% per annum from February 15, 2003 or from the most recent
interest payment date to which interest has been paid or provided for, payable
semiannually (to holders of record at the close of business on the February 1 or
August 1 immediately preceding the interest payment date) on February 15 and
August 15 of each year, commencing August 15, 2003.
The 11 3/4% Notes are unsubordinated, unsecured obligations of the Company,
ranking pari passu in right of payment with all unsubordinated, unsecured
indebtedness of the Company, including the Notes offered hereby, and will rank
senior in right of payment to all future subordinated indebtedness of the
Company.
The 11 3/4% Notes may be redeemed at any time on or after February 15,
2003, in whole or in part, at 105.8750% of their principal amount at maturity,
plus accrued interest, declining to 100% of their principal amount at maturity,
plus accrued interest, on and after February 15, 2006. In addition, at any time
on or before February 15, 2001, the Company may redeem up to 35% of the
aggregate principal amount at maturity of the 11 3/4% Notes with the net
proceeds of one or more public equity offerings at a redemption price equal to
111.75% (expressed as a percentage of the accreted value of the 11 3/4% Notes on
the redemption date), provided that at least $289,250,000 aggregate principal
amount at maturity of the 11 3/4% Notes remains outstanding immediately after
such redemption.
The 11 3/4% Notes Indenture contains certain restrictive covenants,
including among others, limitations on the ability of the Company and its
restricted subsidiaries to incur indebtedness, pay dividends, prepay
subordinated indebtedness, repurchase capital stock, make investments, engage in
transactions with affiliates, create liens, sell assets and engage in mergers
and consolidations and certain other events which could cause an event of
default, which are substantially similar to those relating to the Notes offered
hereby. See "Description of the Notes."
VENDOR FINANCING
In addition to the Offerings, the Company is seeking to obtain
approximately $100.0 million of Vendor Financing for the acquisition of digital
switches, software, electronics and associated transmission equipment. The
Company anticipates that if the Vendor Financing is obtained, it will most
likely be obtained by some or all of the Company's subsidiaries and may be
secured by a security interest in the capital stock or assets of such
subsidiaries. In addition, if the Vendor Financing is obtained, it is expected
to bear interest at floating rates and contain covenants, including financial
covenants, customary for such agreements. The amount of Vendor Financing the
Company will ultimately seek to obtain will depend on a number of factors
including the terms and conditions thereof, the availability and terms of other
financing and the Company's ability to acquire digital switches, software,
electronics and associated transmission equipment in connection with the
acquisition of other companies for Common Stock. There can be no assurance that
the Vendor Financing will be available on terms acceptable to the Company or at
all.
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DESCRIPTION OF THE NOTES
The Notes are to be issued under an Indenture, dated as of the Closing
Date, between the Company, as issuer, and The Bank of New York (the "Trustee").
The terms of the Notes include those stated in the Indenture and those made part
of the Indenture by reference to the Trust Indenture Act of 1939, as amended
(the "Trust Indenture Act"). The Notes are subject to all such terms, and
holders of the Notes are referred to the Indenture and the Trust Indenture Act
for a statement of them. The following is a summary of the material terms and
provisions of the Notes. This summary does not purport to be a complete
description of the Notes and is subject to the detailed provisions of, and
qualified in its entirety by reference to, the Notes and the Indenture
(including the definitions contained therein). A copy of the form of Indenture
is filed as an exhibit to the Registration Statement of which this Prospectus
forms a part. For definitions of certain capitalized terms, see "-- Certain
Definitions."
GENERAL
The Notes will be unsecured (except to the extent described under
"-- Security" below), unsubordinated obligations of the Company, initially
limited to $200.0 million aggregate principal amount, and will mature on May 15,
2008. Each Note will bear interest at the rate shown on the front cover of this
Prospectus from the Closing Date or from the most recent Interest Payment Date
to which interest has been paid or provided for, payable semiannually (to
Holders of record at the close of business on the May 1 or November 1
immediately preceding the Interest Payment Date) on May 15 and November 15 of
each year, commencing November 15, 1998. Interest will be computed on the basis
of a 360-day year of twelve 30-day months.
Principal of, premium, if any, and interest on the Notes will be payable,
and the Notes may be exchanged or transferred, at the office or agency of the
Company in the Borough of Manhattan, the City of New York (which initially will
be the corporate trust office of the Trustee at One Wall Street, New York, New
York 10286); provided that, at the option of the Company, payment of interest
may be made by check mailed to the Holders at their addresses as they appear in
the Security Register.
The Notes will be issued only in fully registered form, without coupons, in
denominations of $1,000 of principal amount and any integral multiple thereof.
The Notes will initially be represented by one or more global notes (the "Global
Notes") and will be deposited with, or on behalf of, The Depository Trust
Company (the "Depositary") and registered in the name of a nominee of the
Depositary. Except as set forth under "-- Book-Entry; Delivery and Form," owners
of beneficial interests in such Global Notes will not be entitled to have Notes
registered in their names, will not receive or be entitled to receive physical
delivery of Notes in definitive form and will not be considered the owners or
Holders thereof under the Indenture. See "Book-Entry; Delivery and Form." No
service charge will be made for any registration of transfer or exchange of
Notes, but the Company may require payment of a sum sufficient to cover any
transfer tax or other similar governmental charge payable in connection
therewith.
Subject to the covenants described below under "Covenants" and applicable
law, the Company may issue additional Notes under the Indenture. The Notes
offered hereby and 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 will be redeemable, at the Company's option, in whole or in part,
at any time or from time to time, on or after May 15, 2003 and prior to
maturity, upon not less than 30 nor more than 60 days' prior notice mailed by
first class mail to each Holder's last address as it appears in the Security
Register, at the Redemption Prices (expressed in percentages of principal
amount) set forth below, plus accrued and unpaid interest to the Redemption Date
(subject to the right of Holders of record on the relevant Regular Record Date
that is on or prior to the Redemption Date to receive interest due on an
Interest Payment Date), if redeemed during the 12-month period commencing May 15
of the years set forth below:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
---- ----------------
<S> <C>
2003........................................................ %
2004........................................................
2005........................................................
2006 and thereafter......................................... 100.000%
</TABLE>
In addition, at any time prior to May 15, 2001, the Company may redeem up
to 35% of the principal amount of the Notes originally issued with the proceeds
of one or more Public Equity Offerings following which there is a Public Market,
at any time or from time to time in part, at a Redemption Price (expressed as a
percentage of principal amount) of % plus accrued and unpaid interest to
the Redemption Date (subject to the right of Holders of record on the relevant
Regular Record Date that is on or prior to the Redemption Date to receive
interest due on an Interest Payment Date); provided that at least 65% of the
aggregate principal amount of Notes originally issued remains outstanding after
each such redemption and notice of any such redemption is mailed within 60 days
after the related Public Equity Offering.
In the case of any partial redemption, selection of the Notes for
redemption will be made by the Trustee in compliance with the requirements of
the principal national securities exchange, if any, on which the Notes are
listed or, if the Notes are not listed on a national securities exchange, by lot
or by such other method as the Trustee in its sole discretion shall deem to be
fair and appropriate; provided that no Note of $1,000 in principal amount or
less shall be redeemed in part. If any Note is to be redeemed in part only, the
notice of redemption relating to such Note shall state the portion of the
principal amount thereof to be redeemed. A new Note in principal amount equal to
the unredeemed portion thereof will be issued in the name of the Holder thereof
upon cancellation of the original Note.
SINKING FUND
There will be no sinking fund payments for the Notes.
SECURITY
The Indenture will provide that on the Closing Date, the Company must
purchase and pledge to the Trustee as security for the benefit of the Holders of
the Notes, the Pledged Securities in such amount as will be sufficient upon
receipt of scheduled interest and principal payments of such securities to
provide for payment in full of the first six scheduled interest payments due on
the Notes. The Company expects to use approximately $67.4 million of the net
proceeds from the Debt Offering to acquire the Pledged Securities; however, the
precise amount of the Pledged Securities to be acquired will depend upon
interest rates prevailing on the Closing Date.
The Pledged Securities will be pledged by the Company to the Trustee for
the benefit of the Holders of the Notes pursuant to the Pledge Agreement and
will be held by the Trustee in the Pledge Account. Pursuant to the Pledge
Agreement, immediately prior to an Interest Payment Date, the Company may either
deposit with the Trustee from funds otherwise available to the Company cash
sufficient to pay the interest scheduled to be paid on such date or the Company
may direct the Trustee to release from the Pledge Account proceeds sufficient to
pay interest then due on the Notes. In the event the Company exercises the
former option, the Company may direct the Trustee to release a like amount of
proceeds from the Pledge Account. A failure to pay interest on the Notes in a
timely manner through the first six scheduled interest payment dates will
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constitute an immediate Event of Default under the Indenture, with no grace or
cure period. The Pledged Securities and Pledge Account will also secure the
repayment of the principal amount and premium on the Notes.
Under the Pledge Agreement, once the Company makes the first six scheduled
interest payments on the Notes, all of the remaining Pledged Securities, if any,
will be released from the Pledge Account and thereafter the Notes will be
unsecured.
RANKING
The Indebtedness evidenced by the Notes will rank pari passu in right of
payment with all existing and future unsubordinated indebtedness of the Company,
including the 11 3/4% Notes, and senior in right of payment to all subordinated
indebtedness of the Company. After giving pro forma effect to the Offerings, as
of March 31, 1998, the Company and its subsidiaries would have had approximately
$447.3 million of indebtedness outstanding all of which would have been
unsubordinated, unsecured indebtedness. In addition, all existing and future
liabilities (including trade payables) of the Company's subsidiaries will be
effectively senior to the Notes. See "Risk Factors -- Holding Company Structure;
Structural Subordination of Notes" and "Effective Subordination of Notes to
Secured Indebtedness."
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
covenants and other provisions of the Indenture. Reference is made to the
Indenture for the definition of any other capitalized term used herein for which
no definition is provided.
"Acquired Indebtedness" means Indebtedness of a Person existing at the time
such Person becomes a Restricted Subsidiary or assumed in connection with an
Asset Acquisition by a Restricted Subsidiary and not Incurred in connection
with, or in anticipation of, such Person becoming a Restricted Subsidiary or
such Asset Acquisition.
"Adjusted Consolidated Net Income" means, for any period, the aggregate net
income (or loss) of the Company and its Restricted Subsidiaries for such period
determined in conformity with GAAP; provided that the following items shall be
excluded in computing Adjusted Consolidated Net Income (without duplication):
(i) the net income (or loss) of any Person that is not a Restricted Subsidiary,
except (x) with respect to net income, to the extent of the amount of dividends
or other distributions actually paid to the Company or any of its Restricted
Subsidiaries by such Person during such period and (y) with respect to net
losses, to the extent of the amount of Investments made by the Company or any
Restricted Subsidiary in such Person during such period; (ii) solely for the
purposes of calculating the amount of Restricted Payments that may be made
pursuant to clause (C) of the first paragraph of the "Limitation on Restricted
Payments" covenant described below (and in such case, except to the extent
includable pursuant to clause (i) above), the net income (or loss) of any Person
accrued prior to the date it becomes a Restricted Subsidiary or is merged into
or consolidated with the Company or any of its Restricted Subsidiaries or all or
substantially all of the property and assets of such Person are acquired by the
Company or any of its Restricted Subsidiaries; (iii) the net income of any
Restricted Subsidiary to the extent that the declaration or payment of dividends
or similar distributions by such Restricted Subsidiary of such net income is not
at the time permitted by the operation of the terms of its charter or any
agreement, instrument, judgment, decree, order, statute, rule or governmental
regulation applicable to such Restricted Subsidiary; (iv) any gains or losses
(on an after-tax basis) attributable to Asset Sales; (v) except for purposes of
calculating the amount of Restricted Payments that may be made pursuant to
clause (C) of the first paragraph of the "Limitation on Restricted Payments"
covenant described below, any amount paid or accrued as dividends on Preferred
Stock of the Company or any Restricted Subsidiary owned by Persons other than
the Company and any of its Restricted Subsidiaries; (vi) all extraordinary gains
and extraordinary losses; and (vii) any compensation expense paid or payable
solely with Capital Stock (other than Disqualified Stock) of the Company or any
options, warrants or other rights to acquire Capital Stock (other than
Disqualified Stock) of the Company.
"Adjusted Consolidated Net Tangible Assets" means the total amount of
assets of the Company and its Restricted Subsidiaries (less applicable
depreciation, amortization and other valuation reserves), except to the
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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 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.
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"Capitalized Lease" means, as applied to any Person, any lease of any
property (whether real, personal or mixed) of which the discounted present value
of the rental obligations of such Person as lessee, in conformity with GAAP, is
required to be capitalized on the balance sheet of such Person.
"Capitalized Lease Obligations" means the discounted present value of the
rental obligations under a Capitalized Lease.
"Change of Control" means such time as (i) a "person" or "group" (within
the meaning of Sections 13(d) and 14(d)(2) of the Exchange Act) becomes the
ultimate "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of
more than 35% of the total voting power of the Voting Stock of the Company on a
fully diluted basis and such ownership represents a greater percentage of the
total voting power of the Voting Stock of the Company, on a fully diluted basis,
than is held by the Existing Stockholders on such date; or (ii) individuals who
on the Closing Date constitute the Board of Directors (together with any new
directors whose election by the Board of Directors or whose nomination by the
Board of Directors for election by the Company's stockholders was approved by a
vote of at least two-thirds of the members of the Board of Directors then in
office who either were members of the Board of Directors on the Closing Date or
whose election or nomination for election was previously so approved) cease for
any reason to constitute a majority of the members of the Board of Directors
then in office.
"Closing Date" means the date on which the Notes are originally issued
under 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 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 Offerings, 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
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four fiscal quarter period being the "Four Quarter Period"); provided that, in
making the foregoing calculation, (A) pro forma effect shall be given to any
Indebtedness to be Incurred or repaid on the Transaction Date; (B) pro forma
effect shall be given to Asset Dispositions and Asset Acquisitions (including
giving pro forma effect to the application of proceeds of any Asset Disposition)
that occur from the beginning of the Four Quarter Period through the Transaction
Date (the "Reference Period"), as if they had occurred and such proceeds had
been applied on the first day of such Reference Period; (C) pro forma effect
shall be given to asset dispositions and asset acquisitions (including giving
pro forma effect to the application of proceeds of any asset disposition) that
have been made by any Person that has become a Restricted Subsidiary or has been
merged with or into the Company or any Restricted Subsidiary during such
Reference Period and that would have constituted Asset Dispositions or Asset
Acquisitions had such transactions occurred when such Person was a Restricted
Subsidiary as if such asset dispositions or asset acquisitions were Asset
Dispositions or Asset Acquisitions that occurred on the first day of such
Reference Period; provided that to the extent that clause (B) or (C) of this
sentence requires that pro forma effect be given to an Asset Acquisition or
Asset Disposition, such pro forma calculation shall be based upon the four full
fiscal quarters immediately preceding the Transaction Date of the Person, or
division or line of business of the Person, that is acquired or disposed of for
which financial information is available; and (D) the aggregate amount of
Indebtedness outstanding as of the end of the Reference Period will be deemed to
include the total amount of funds outstanding and/or available on the
Transaction Date under any revolving credit or similar facilities of the Company
or its Restricted Subsidiaries.
"Consolidated Net Worth" means, at any date of determination, stockholders'
equity as set forth on the most recently available quarterly or annual
consolidated balance sheet of the Company and its Restricted Subsidiaries (which
shall be as of a date not more than 90 days prior to the date of such
computation, and which shall not take into account Unrestricted Subsidiaries),
less any amounts attributable to Disqualified Stock or any equity security
convertible into or exchangeable for Indebtedness, the cost of treasury stock
and the principal amount of any promissory notes receivable from the sale of the
Capital Stock of the Company or any of its Restricted Subsidiaries, each item to
be determined in conformity with GAAP (excluding the effects of foreign currency
exchange adjustments under Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 52).
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement.
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Disqualified Stock" means any class or series of Capital Stock of any
Person that by its terms or otherwise is (i) required to be redeemed prior to
the Stated Maturity of the Notes, (ii) redeemable at the option of the holder of
such class or series of Capital Stock at any time prior to the Stated Maturity
of the Notes or (iii) convertible into or exchangeable for Capital Stock
referred to in clause (i) or (ii) above or Indebtedness having a scheduled
maturity prior to the Stated Maturity of the Notes; provided that any Capital
Stock that would not constitute Disqualified Stock but for provisions thereof
giving holders thereof the right to require such Person to repurchase or redeem
such Capital Stock upon the occurrence of an "asset sale" or "change of control"
occurring prior to the Stated Maturity of the Notes shall not constitute
Disqualified Stock if the "asset sale" or "change of control" provisions
applicable to such Capital Stock are no more favorable to the holders of such
Capital Stock than the provisions contained in "Limitation on Asset Sales" and
"Repurchase of Notes upon a Change of Control" covenants described below and
such Capital Stock, or the agreements or instruments governing the redemption
rights thereof, specifically provides that such Person will not repurchase or
redeem any such stock pursuant to such provision prior to the Company's
repurchase of such Notes as are required to be repurchased pursuant to the
"Limitation on Asset Sales" and "Repurchase of Notes upon a Change of Control"
covenants described below.
"Existing Stockholders" means Madison Dearborn Partners, Inc., Morgan
Stanley Capital Partners III, Inc., Frontenac Company, Battery Partners IV, L.P.
and Battery Investment Partners IV, LLC and their respective Affiliates.
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"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 Offerings 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 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
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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 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
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consolidated results of operations of the Company and its Restricted
Subsidiaries, taken as a whole, (iii) payments made to repay Indebtedness or any
other obligation outstanding at the time of such Asset Sale that either (A) is
secured by a Lien on the property or assets sold or (B) is required to be paid
as a result of such sale and (iv) appropriate amounts to be provided by the
Company or any Restricted Subsidiary as a reserve against any liabilities
associated with such Asset Sale, including, without limitation, pension and
other post-employment benefit liabilities, liabilities related to environmental
matters and liabilities under any indemnification obligations associated with
such Asset Sale, all as determined in conformity with GAAP and (b) with respect
to any issuance or sale of Capital Stock, the proceeds of such issuance or sale
in the form of cash or cash equivalents, including payments in respect of
deferred payment obligations (to the extent corresponding to the principal, but
not interest, component thereof) when received in the form of cash or cash
equivalents (except to the extent such obligations are financed or sold with
recourse to the Company or any Restricted Subsidiary) and proceeds from the
conversion of other property received when converted to cash or cash
equivalents, net of attorney's fees, accountants' fees, underwriters' or
placement agents' fees, discounts or commissions and brokerage, consultant and
other fees incurred in connection with such issuance or sale and net of taxes
paid or payable as a result thereof.
"Offer to Purchase" means an offer to purchase Notes by the Company from
the Holders commenced by mailing a notice to the Trustee and each Holder
stating: (i) the covenant pursuant to which the offer is being made and that all
Notes validly tendered will be accepted for payment on a pro rata basis; (ii)
the purchase price and the date of purchase (which shall be a Business Day no
earlier than 30 days nor later than 60 days from the date such notice is mailed)
(the "Payment Date"); (iii) that any Note not tendered will continue to accrue
interest pursuant to its terms; (iv) that, unless the Company defaults in the
payment of the purchase price, any Note accepted for payment pursuant to the
Offer to Purchase shall cease to accrue interest on and after the Payment Date;
(v) that Holders electing to have a Note purchased pursuant to the Offer to
Purchase will be required to surrender the Note, together with the form entitled
"Option of the Holder to Elect Purchase" on the reverse side of the Note
completed, to the Paying Agent at the address specified in the notice prior to
the close of business on the Business Day immediately preceding the Payment
Date; (vi) that Holders will be entitled to withdraw their election if the
Paying Agent receives, not later than the close of business on the third
Business Day immediately preceding the Payment Date, a telegram, facsimile
transmission or letter setting forth the name of such Holder, the principal
amount of Notes delivered for purchase and a statement that such Holder is
withdrawing his election to have such Notes purchased; and (vii) that Holders
whose Notes are being purchased only in part will be issued new Notes equal in
principal amount to the unpurchased portion of the Notes surrendered; provided
that each Note purchased and each new Note issued shall be in a principal amount
of $1,000 or an integral multiple thereof. On the Payment Date, the Company
shall (i) accept for payment on a pro rata basis Notes or portions thereof
tendered pursuant to an Offer to Purchase; (ii) deposit with the Paying Agent
money sufficient to pay the purchase price of all Notes or portions thereof so
accepted; and (iii) deliver, or cause to be delivered, to the Trustee all Notes
or portions thereof so accepted together with an Officers' Certificate
specifying the Notes or portions thereof accepted for payment by the Company.
The Paying Agent shall promptly mail to the Holders of Notes so accepted payment
in an amount equal to the purchase price, and the Trustee shall promptly
authenticate and mail to such Holders a new Note equal in principal amount to
any unpurchased portion of the Note surrendered; provided that each Note
purchased and each new Note issued shall be in a principal amount of $1,000 or
an integral multiple thereof. The Company will publicly announce the results of
an Offer to Purchase as soon as practicable after the Payment Date. The Trustee
shall act as the Paying Agent for an Offer to Purchase. The Company will comply
with Rule 14e-1 under the Exchange Act and any other securities laws and
regulations thereunder to the extent such laws and regulations are applicable,
in the event that the Company is required to repurchase Notes pursuant to an
Offer to Purchase.
"Permitted Investment" means (i) an Investment in the Company or a
Restricted Subsidiary or a Person which will, upon the making of such
Investment, become a Restricted Subsidiary or be merged or consolidated with or
into or transfer or convey all or substantially all its assets to, the Company
or a Restricted Subsidiary; provided that such person's primary business is
related, ancillary or complementary to the businesses of the Company and its
Restricted Subsidiaries on the date of such Investment; (ii) Temporary Cash
Investments; (iii) payroll, travel and similar advances to cover matters that
are expected at the time of
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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 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
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of business in accordance with the past practices of the Company and its
Restricted Subsidiaries prior to the Closing Date; (xviii) Liens on or sales of
receivables; and (xix) Liens that secure Indebtedness with an aggregate
principal amount not in excess of $5 million at any time outstanding.
"Pledge Account" means an account established with the Trustee pursuant to
the terms of the Pledge Agreement for the deposit of the Pledged Securities to
be purchased by the Company with the net proceeds from the sale of the Notes.
"Pledge Agreement" means the Collateral Pledge and Security Agreement,
dated as of the Closing Date, made by the Company in favor of the Trustee,
governing the disbursement of funds from the Pledge Account, as such agreement
may be amended, restated, supplemented or otherwise modified from time to time.
"Pledged Securities" means the U.S. government securities to be purchased
by the Company and held in the Pledge Account in accordance with the Pledge
Agreement.
"Public Equity Offering" means an underwritten primary public offering of
Common Stock of the Company pursuant to an effective registration statement
under the Securities Act.
A "Public Market" shall be deemed to exist if (i) a Public Equity Offering
has been consummated and (ii) at least 15% of the total issued and outstanding
Common Stock of the Company immediately prior to the consummation of such Public
Equity Offering has been distributed by means of an effective registration
statement under the Securities Act or sales pursuant to Rule 144 under the
Securities Act.
"Restricted Subsidiary" means any Subsidiary of the Company other than an
Unrestricted Subsidiary.
"Significant Subsidiary" means, at any date of determination, any
Restricted Subsidiary that, together with its Subsidiaries, (i) for the most
recent fiscal year of the Company, accounted for more than 10% of the
consolidated revenues of the Company and its Restricted Subsidiaries or (ii) as
of the end of such fiscal year, was the owner of more than 10% of the
consolidated assets of the Company and its Restricted Subsidiaries, all as set
forth on the most recently available consolidated financial statements of the
Company for such fiscal year.
"S&P" means Standard & Poor's Ratings Services and its successors.
"Stated Maturity" means, (i) with respect to any debt security, the date
specified in such debt security as the fixed date on which the final installment
of principal of such debt security is due and payable and (ii) with respect to
any scheduled installment of principal of or interest on any debt security, the
date specified in such debt security as the fixed date on which such installment
is due and payable.
"Strategic Subordinated Indebtedness" means Indebtedness of the Company
Incurred to finance the acquisition of a Person engaged in a business that is
related, ancillary or complementary to the business conducted by the Company or
any of its Restricted Subsidiaries, which Indebtedness by its terms, or by the
terms of any agreement or instrument pursuant to which such Indebtedness is
Incurred, (i) is expressly made subordinate in right of payment to the Notes and
(ii) provides that no payment of principal, premium or interest on, or any other
payment with respect to, such Indebtedness may be made prior to the payment in
full of all of the Company's obligations under the Notes; provided that such
Indebtedness may provide for and be repaid at any time from the proceeds of a
capital contribution or the sale of Capital Stock (other than Disqualified
Stock) of the Company after the Incurrence of such Indebtedness.
"Subsidiary" means, with respect to any Person, any corporation,
association or other business entity of which more than 50% of the voting power
of the outstanding Voting Stock is owned, directly or indirectly, by such Person
and one or more other Subsidiaries of such Person.
"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
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aggregating in excess of $50 million (or the foreign currency equivalent
thereof) and has outstanding debt which is rated "A" (or such similar equivalent
rating) or higher by at least one nationally recognized statistical rating
organization (as defined in Rule 436 under the Securities Act) or any
money-market fund sponsored by a registered broker dealer or mutual fund
distributor, (iii) repurchase obligations with a term of not more than 30 days
for underlying securities of the types described in clause (i) above entered
into with a bank meeting the qualifications described in clause (ii) above, (iv)
commercial paper, maturing not more than one year after the date of acquisition,
issued by a corporation (other than an Affiliate of the Company) organized and
in existence under the laws of the United States of America, any state thereof
or any foreign country recognized by the United States of America with a rating
at the time as of which any investment therein is made of "P-1" (or higher)
according to Moody's or "A-1" (or higher) according to S&P, and (v) securities
with maturities of six months or less from the date of acquisition issued or
fully and unconditionally guaranteed by any state, commonwealth or territory of
the United States of America, or by any political subdivision or taxing
authority thereof, and rated at least "A" by S&P or Moody's.
"Trade Payables" means, with respect to any Person, any accounts payable or
any other indebtedness or monetary obligation to trade creditors created,
assumed or Guaranteed by such Person or any of its Subsidiaries arising in the
ordinary course of business in connection with the acquisition of goods or
services.
"Transaction Date" means, with respect to the Incurrence of any
Indebtedness by the Company or any of its Restricted Subsidiaries, the date such
Indebtedness is to be Incurred and, with respect to any Restricted Payment, the
date such Restricted Payment is to be made.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at
the time of determination shall be designated an Unrestricted Subsidiary by the
Board of Directors in the manner provided below; and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Restricted
Subsidiary (including any newly acquired or newly formed Subsidiary of the
Company) to be an Unrestricted Subsidiary unless such Subsidiary owns any
Capital Stock of, or owns or holds any Lien on any property of, the Company or
any Restricted Subsidiary; provided that (A) any Guarantee by the Company or any
Restricted Subsidiary of any Indebtedness of the Subsidiary being so designated
shall be deemed an "Incurrence" of such Indebtedness and an "Investment" by the
Company or such Restricted Subsidiary (or both, if applicable) at the time of
such designation; (B) either (I) the Subsidiary to be so designated has total
assets of $1,000 or less or (II) if such Subsidiary has assets greater than
$1,000, such designation would be permitted under the "Limitation on Restricted
Payments" covenant described below and (C) if applicable, the Incurrence of
Indebtedness and the Investment referred to in clause (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.
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COVENANTS
Limitation on Indebtedness
(a) The Company will not, and will not permit any of its Restricted
Subsidiaries to, Incur any Indebtedness (other than the Notes and Indebtedness
existing on the Closing Date); provided that the Company may Incur Indebtedness
if, after giving effect to the Incurrence of such Indebtedness and the receipt
and application of the proceeds therefrom, the Consolidated Leverage Ratio would
be greater than zero and less than 6:1.
Notwithstanding the foregoing, the Company and any Restricted Subsidiary
(except as specified below) may Incur each and all of the following: (i)
Indebtedness outstanding at any time in an aggregate principal amount not to
exceed $100 million, less any amount of such Indebtedness permanently repaid as
provided under the "Limitation on Asset Sales" covenant described below; (ii)
Indebtedness owed (A) to the Company evidenced by a promissory note or (B) to
any Restricted Subsidiary; provided that any event which results in any such
Restricted Subsidiary ceasing to be a Restricted Subsidiary or any subsequent
transfer of such Indebtedness (other than to the Company or another Restricted
Subsidiary) shall be deemed, in each case, to constitute an Incurrence of such
Indebtedness not permitted by this clause (ii); (iii) Indebtedness issued in
exchange for, or the net proceeds of which are used to refinance or refund, then
outstanding Indebtedness (other than Indebtedness Incurred under clause (i),
(ii), (iv), (vi), (viii) or (xi) of this paragraph) and any refinancings thereof
in an amount not to exceed the amount so refinanced or refunded (plus premiums,
accrued interest, fees and expenses); provided that Indebtedness the proceeds of
which are used to refinance or refund the Notes or Indebtedness that is pari
passu with, or subordinated in right of payment to, the Notes shall only be
permitted under this clause (iii) if (A) in case the Notes are refinanced in
part or the Indebtedness to be refinanced is pari passu with the Notes, such new
Indebtedness, by its terms or by the terms of any agreement or instrument
pursuant to which such new Indebtedness is outstanding, is expressly made pari
passu with, or subordinate in right of payment to, the remaining Notes, (B) in
case the Indebtedness to be refinanced is subordinated in right of payment to
the Notes, such new Indebtedness, by its terms or by the terms of any agreement
or instrument pursuant to which such new Indebtedness is issued or remains
outstanding, is expressly made subordinate in right of payment to the Notes at
least to the extent that the Indebtedness to be refinanced is subordinated to
the Notes and (C) such new Indebtedness, determined as of the date of Incurrence
of such new Indebtedness, does not mature prior to the Stated Maturity of the
Indebtedness to be refinanced or refunded, and the Average Life of such new
Indebtedness is at least equal to the remaining Average Life of the Indebtedness
to be refinanced or refunded; and provided further that in no event may
Indebtedness of the Company be refinanced by means of any Indebtedness of any
Restricted Subsidiary pursuant to this clause (iii); (iv) Indebtedness (A) in
respect of performance, surety or appeal bonds provided in the ordinary course
of business, (B) under Currency Agreements and Interest Rate Agreements;
provided that such agreements (a) are designed solely to protect the Company or
its Restricted Subsidiaries against fluctuations in foreign currency exchange
rates or interest rates and (b) do not increase the Indebtedness of the obligor
outstanding at any time other than as a result of fluctuations in foreign
currency exchange rates or interest rates or by reason of fees, indemnities and
compensation payable thereunder; and (C) arising from agreements providing for
indemnification, adjustment of purchase price or similar obligations, or from
Guarantees or letters of credit, surety bonds or performance bonds securing any
obligations of the Company or any of its Restricted Subsidiaries pursuant to
such agreements, in any case Incurred in connection with the disposition of any
business, assets or Restricted Subsidiary (other than Guarantees of Indebtedness
Incurred by any Person acquiring all or any portion of such business, assets or
Restricted Subsidiary for the purpose of financing such acquisition), in a
principal amount not to exceed the gross proceeds actually received by the
Company or any Restricted Subsidiary in connection with such disposition; (v)
Indebtedness of the Company, to the extent the net proceeds thereof are promptly
(A) used to purchase Notes tendered in an Offer to Purchase made as a result of
a Change in Control or (B) deposited to defease the Notes as described below
under "Defeasance"; (vi) Guarantees of the Notes and Guarantees of Indebtedness
of the Company by any Restricted Subsidiary provided the Guarantee of such
Indebtedness is permitted by and made in accordance with the "Limitation on
Issuance of Guarantees by Restricted Subsidiaries" covenant described below;
(vii) Indebtedness (including Guarantees) Incurred to finance the
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cost (including the cost of design, development, acquisition, construction,
installation, improvement, transportation or integration) to acquire equipment,
inventory or network assets (including acquisitions by way of Capitalized Lease
and acquisitions of the Capital Stock of a Person that becomes a Restricted
Subsidiary to the extent of the fair market value of the equipment, inventory or
network assets so acquired) by the Company or a Restricted Subsidiary after the
Closing Date; (viii) Indebtedness of the Company not to exceed, at any one time
outstanding, two times (A) the Net Cash Proceeds received by the Company after
February 3, 1998 as a capital contribution or from the issuance and sale of its
Capital Stock (other than Disqualified Stock) to a Person that is not a
Subsidiary of the Company, to the extent (I) such capital contribution or Net
Cash Proceeds have not been used pursuant to clause (C)(2) of the first
paragraph or clause (iii), (iv), (vi), (vii), or (viii) of the second paragraph
of the "Limitation on Restricted Payments" covenant described below to make a
Restricted Payment and (II) if such capital contribution or Net Cash Proceeds
are used to consummate a transaction pursuant to which the Company Incurs
Acquired Indebtedness, the amount of such Net Cash Proceeds exceeds one-half of
the amount of Acquired Indebtedness so Incurred and (B) 80% of the fair market
value of property (other than cash and cash equivalents) received by the Company
after February 3, 1998 from the sale of its Capital Stock (other than
Disqualified Stock) to a Person that is not a Subsidiary of the Company, to the
extent (I) such capital contribution or sale of Capital Stock has not been used
pursuant to clause (iii), (iv), (vi) or (vii) of the second paragraph of the
"Limitation on Restricted Payments" covenant described below to make a
Restricted Payment and (II) if such capital contribution or Capital Stock is
used to consummate a transaction pursuant to which the Company Incurs Acquired
Indebtedness, 80% of the fair market value of the property received exceeds
one-half of the amount of Acquired Indebtedness so Incurred; provided that such
Indebtedness does not mature prior to the Stated Maturity of the Notes and has
an Average Life longer than the Notes; (ix) Acquired Indebtedness; (x) Strategic
Subordinated Indebtedness; and (xi) subordinated Indebtedness of the Company (in
addition to Indebtedness permitted under clauses (i) through (x) above) in an
aggregate principal amount outstanding at any time not to exceed $100 million,
less any amount of such Indebtedness permanently repaid as provided under the
"Limitation on Asset Sales" covenant described below.
(b) Notwithstanding any other provision of this "Limitation on
Indebtedness" covenant, the maximum amount of Indebtedness that the Company or a
Restricted Subsidiary may Incur pursuant to this "Limitation on Indebtedness"
covenant shall not be deemed to be exceeded, with respect to any outstanding
Indebtedness due solely to the result of fluctuations in the exchange rates of
currencies.
(c) For purposes of determining any particular amount of Indebtedness under
this "Limitation on Indebtedness" covenant, (1) Guarantees, Liens or obligations
with respect to letters of credit supporting Indebtedness otherwise included in
the determination of such particular amount shall not be included and (2) any
Liens granted pursuant to the equal and ratable provisions referred to in the
"Limitation on Liens" covenant described below shall not be treated as
Indebtedness. For purposes of determining compliance with this "Limitation on
Indebtedness" covenant, in the event that an item of Indebtedness meets the
criteria of more than one of the types of Indebtedness described in the above
clauses, the Company, in its sole discretion, shall classify, and from time to
time may reclassify, such item of Indebtedness and only be required to include
the amount and type of such Indebtedness in one of such clauses.
Limitation on Restricted Payments
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, (i) declare or pay any dividend or make any distribution
on or with respect to its Capital Stock (other than (x) dividends or
distributions payable solely in shares of its Capital Stock (other than
Disqualified Stock) or in options, warrants or other rights to acquire shares of
such Capital Stock and (y) pro rata dividends or distributions on Common Stock
of Restricted Subsidiaries held by minority stockholders) held by Persons other
than the Company or any of its Restricted Subsidiaries, (ii) purchase, redeem,
retire or otherwise acquire for value any shares of Capital Stock of (A) the
Company or an Unrestricted Subsidiary (including options, warrants or other
rights to acquire such shares of Capital Stock) held by any Person or (B) a
Restricted Subsidiary (including options, 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
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holder) of 5% or more of the Capital Stock of the Company, (iii) make any
voluntary or optional principal payment, or voluntary or optional redemption,
repurchase, defeasance, or other acquisition or retirement for value, of
Indebtedness of the Company that is subordinated in right of payment to the
Notes or (iv) make any Investment, other than a Permitted Investment, in any
Person (such payments or any other actions described in clauses (i) through (iv)
above being collectively "Restricted Payments") if, at the time of, and after
giving effect to, the proposed Restricted Payment: (A) a Default or Event of
Default shall have occurred and be continuing, (B) the Company could not Incur
at least $1.00 of Indebtedness under the first paragraph of the "Limitation on
Indebtedness" covenant or (C) the aggregate amount of all Restricted Payments
(the amount, if other than in cash, to be determined in good faith by the Board
of Directors, whose determination shall be conclusive and evidenced by a Board
Resolution) made after the Closing Date shall exceed the sum of (1) 50% of the
aggregate amount of the Adjusted Consolidated Net Income (or, if the Adjusted
Consolidated Net Income is a loss, minus 100% of the amount of such loss)
(determined by excluding income resulting from transfers of assets by the
Company or a Restricted Subsidiary to an Unrestricted Subsidiary) accrued on a
cumulative basis during the period (taken as one accounting period) beginning on
April 1, 1998 and ending on the last day of the last fiscal quarter preceding
the Transaction Date for which reports have been filed with the Commission or
provided to the Trustee pursuant to the "Commission Reports and Reports to
Holders" covenant plus (2) the aggregate Net Cash Proceeds received by the
Company after February 3, 1998 as a capital contribution or from the issuance
and sale permitted by the Indenture of its Capital Stock (other than
Disqualified Stock) to a Person who is not a Subsidiary of the Company,
including an issuance or sale permitted by the Indenture of Indebtedness of the
Company for cash subsequent to February 3, 1998 upon the conversion of such
Indebtedness into Capital Stock (other than Disqualified Stock) of the Company,
or from the issuance to a Person who is not a Subsidiary of the Company of any
options, warrants or other rights to acquire Capital Stock of the Company (in
each case, exclusive of any Disqualified Stock or any options, warrants or other
rights that are redeemable at the option of the holder, or are required to be
redeemed, prior to the Stated Maturity of the Notes), in each case except to the
extent such Net Cash Proceeds are used to Incur Indebtedness pursuant to clause
(viii) of the second paragraph under the "Limitation on Indebtedness" covenant,
plus (3) an amount equal to the net reduction in Investments (other than
reductions in Permitted Investments) in any Person resulting from payments of
interest on Indebtedness, dividends, repayments of loans or advances, or other
transfers of assets, in each case to the Company or any Restricted Subsidiary or
from the Net Cash Proceeds from the sale of any such Investment (except, in each
case, to the extent any such payment or proceeds are included in the calculation
of Adjusted Consolidated Net Income), or from redesignations of Unrestricted
Subsidiaries as Restricted Subsidiaries (valued in each case as provided in the
definition of "Investments"), not to exceed, in each case, the amount of
Investments previously made by the Company or any Restricted Subsidiary in such
Person or Unrestricted Subsidiary.
The foregoing provision shall not be violated by reason of: (i) the payment
of any dividend within 60 days after the date of declaration thereof if, at said
date of declaration, such payment would comply with the foregoing paragraph;
(ii) the redemption, repurchase, defeasance or other acquisition or retirement
for value of Indebtedness that is subordinated 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
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complementary to the business of the Company and its Restricted Subsidiaries on
the date of such Investments; provided that the aggregate amount of Investments
made pursuant to this clause (vi) does not exceed the sum of (a) $20 million and
(b) the amount of Net Cash Proceeds received by the Company after February 3,
1998 as a capital contribution or from the sale of its Capital Stock (other than
Disqualified Stock) to a Person who is not a Subsidiary of the Company, except
to the extent such Net Cash Proceeds are used to Incur Indebtedness pursuant to
clause (viii) under the "Limitation on Indebtedness" covenant or to make
Restricted Payments pursuant to clause (C)(2) of the first paragraph, or clauses
(iii), (iv) or (viii) of this paragraph, of this "Limitation on Restricted
Payments" covenant, plus (z) the net reduction in Investments made pursuant to
this clause (vi) resulting from distributions on or repayments of such
Investments or from the Net Cash Proceeds from the sale of any such Investment
(except in each case to the extent any such payment or proceeds is included in
the calculation of Adjusted Consolidated Net Income) or from such Person
becoming a Restricted Subsidiary (valued in each case as provided in the
definition of "Investments"), provided that the net reduction in any Investment
shall not exceed the amount of such Investment; (vii) Investments acquired in
exchange for Capital Stock (other than Disqualified Stock) of the Company;
(viii) the declaration or payment of dividends on Capital Stock (other than
Disqualified Stock) of the Company in an aggregate annual amount not to exceed
6% of the Net Cash Proceeds received by the Company from the sale of such
Capital Stock after the Closing Date; (ix) repurchases of Warrants pursuant to a
Repurchase Offer; (x) any purchase of any fractional share of Common Stock (or
other Capital Stock of the Company issuable upon exercise of the Warrants) in
connection with an exercise of the Warrants; and (xi) other Restricted Payments
in an aggregate amount not to exceed $2 million; provided that, except in the
case of clauses (i) and (iii), no Default or Event of Default shall have
occurred and be continuing or occur as a consequence of the actions or payments
set forth therein.
Each Restricted Payment permitted pursuant to the preceding paragraph
(other than the Restricted Payment referred to in clause (ii) thereof, an
exchange of Capital Stock for Capital Stock or Indebtedness referred to in
clause (iii) or (iv) thereof and an Investment 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
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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 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.
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Notwithstanding the foregoing, any Subsidiary Guarantee by a Restricted
Subsidiary may provide by its terms that it shall be automatically and
unconditionally released and discharged upon (i) any sale, exchange or transfer,
to any Person not an Affiliate of the Company, of all of the Company's and each
Restricted Subsidiary's Capital Stock in, or all or substantially all the assets
of, such Restricted Subsidiary (which sale, exchange or transfer is not
prohibited by the Indenture) or (ii) the release or discharge of the Guarantee
which resulted in the creation of such Subsidiary Guarantee, except a discharge
or release by or as a result of payment under such Guarantee.
Limitation on Transactions with Shareholders and Affiliates
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, enter into, renew or extend any transaction (including,
without limitation, the purchase, sale, lease or exchange of property or assets,
or the rendering of any service) with any holder (or any Affiliate of such
holder) of 5% or more of any class of Capital Stock of the Company or with any
Affiliate of the Company or any Restricted Subsidiary, except upon fair and
reasonable terms no less favorable to the Company or such Restricted Subsidiary
than could be obtained, at the time of such transaction or, if such transaction
is pursuant to a written agreement, at the time of the execution of the
agreement providing therefor, in a comparable arm's-length transaction with a
Person that is not such a holder or an Affiliate.
The foregoing limitation does not limit, and shall not apply to (i)
transactions (A) approved by a majority of the disinterested members of the
Board of Directors or (B) for which the Company or a Restricted Subsidiary
delivers to the Trustee a written opinion of a nationally recognized investment
banking firm stating that the transaction is fair to the Company or such
Restricted Subsidiary from a financial point of view; (ii) any transaction
solely between the Company and any of its Wholly Owned Restricted Subsidiaries
or solely between Wholly Owned Restricted Subsidiaries; (iii) the payment of
reasonable and customary regular fees to directors of the Company who are not
employees of the Company; (iv) any payments or other transactions pursuant to
any tax-sharing agreement between the Company and any other Person with which
the Company files a consolidated tax return or with which the Company is part of
a consolidated group for tax purposes; or (v) any Restricted Payments not
prohibited by the "Limitation on Restricted Payments" covenant. Notwithstanding
the foregoing, any transaction or series of related transactions covered by the
first paragraph of this "Limitation on Transactions with Shareholders and
Affiliates" covenant and not covered by clauses (ii) through (v) of this
paragraph, the aggregate amount of which exceeds $1 million in value, must be
approved or determined to be fair in the manner provided for in clause (i)(A) or
(B) above.
Limitation on Liens
The Company will not, and will not permit any Restricted Subsidiary to,
create, incur, assume or suffer to exist any Lien on any of its assets or
properties of any character (including, without limitation, licenses), or any
shares of Capital Stock or Indebtedness of any Restricted Subsidiary, without
making effective provision for all of the Notes and all 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
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$100.0 million of Indebtedness Incurred under clause (vii) of the "Limitation on
Indebtedness" covenant; or (vii) Permitted Liens.
Limitation on Sale-Leaseback Transactions
The Company will not, and will not permit any Restricted Subsidiary to,
enter into any sale-leaseback transaction involving any of its assets or
properties whether now owned or hereafter acquired, whereby the Company or a
Restricted Subsidiary sells or transfers such assets or properties and then or
thereafter leases such assets or properties or any part thereof or any other
assets or properties which the Company or such Restricted Subsidiary, as the
case may be, intends to use for substantially the same purpose or purposes as
the assets or properties sold or transferred.
The foregoing restriction does not apply to any sale-leaseback transaction
if (i) the lease is for a period, including renewal rights, of not in excess of
three years; (ii) the lease secures or relates to industrial revenue or
pollution control bonds; (iii) the transaction is solely between the Company and
any Wholly Owned Restricted Subsidiary or solely between Wholly Owned Restricted
Subsidiaries; or (iv) the Company or such Restricted Subsidiary, within 12
months after the sale or transfer of any assets or properties is completed,
applies an amount not less than the net proceeds received from such sale in
accordance with clause (A) or (B) of the first paragraph of the "Limitation on
Asset Sales" covenant described below.
Limitation on Asset Sales
The Company will not, and will not permit any Restricted Subsidiary to,
consummate any Asset Sale, unless (i) the consideration received by the Company
or such Restricted Subsidiary is at least equal to the fair market value of the
assets sold or disposed of and (ii) at least 75% of the consideration received
consists of cash or Temporary Cash Investments; provided, however, that this
clause (ii) shall not apply to long-term assignments in capacity in a
telecommunications network. In the event and to the extent that the Net Cash
Proceeds received by the Company or any of its Restricted Subsidiaries from one
or more Asset Sales occurring on or after the Closing Date in any period of 12
consecutive months exceed 10% of Adjusted Consolidated Net Tangible Assets
(determined as of the date closest to the commencement of such 12-month period
for which a consolidated balance sheet of the Company and its Subsidiaries has
been filed with the Commission pursuant to the "Commission Reports and Reports
to Holders" covenant), then the Company shall or shall cause the relevant
Restricted Subsidiary to (i) within 12 months after the date Net Cash Proceeds
so received exceed 10% of Adjusted Consolidated Net Tangible Assets (A) apply an
amount equal to such excess Net Cash Proceeds to permanently repay
unsubordinated Indebtedness of the Company, or any Restricted Subsidiary
providing a Subsidiary Guarantee pursuant to the "Limitation on Issuances of
Guarantees by Restricted Subsidiaries" covenant described above or Indebtedness
of any other Restricted Subsidiary, in each case owing to a Person other than
the Company or any of its Restricted Subsidiaries or (B) invest an equal amount,
or the amount not so applied pursuant to clause (A) (or enter into a definitive
agreement committing to so invest within 12 months after the date of such
agreement), in property or assets (other than current assets) of a nature or
type or that are used in a business (or in a company having property and assets
of a nature or type, or engaged in a business) similar or related to the nature
or type of the property and assets of, or the business of, the Company and its
Restricted Subsidiaries existing on the date of such investment (as determined
in good faith by the Board of Directors, whose determination shall be conclusive
and evidenced by a Board Resolution) and (ii) apply (no later than the end of
the 12-month period referred to in clause (i)) such excess Net Cash Proceeds (to
the extent not applied pursuant to clause (i)) as provided in the following
paragraph of this "Limitation on Asset Sales" covenant. The amount of such
excess Net Cash Proceeds required to be applied (or to be committed to be
applied) during such 12-month period as set forth in clause (i) of the preceding
sentence and not applied as so required by the end of such period shall
constitute "Excess Proceeds."
If, as of the first day of any calendar month, the aggregate amount of
Excess Proceeds not theretofore subject to an Offer to Purchase pursuant to this
"Limitation on Asset Sales" covenant totals at least $5 million, the Company
must commence, not later than the fifteenth Business Day of such month, and
consummate an Offer to Purchase from the Holders on a pro rata basis an
aggregate principal amount of
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Notes equal to the Excess Proceeds on such date, at a purchase price equal to
100% of the principal amount of the Notes, plus accrued interest to the Payment
Date.
REPURCHASE OF NOTES UPON A CHANGE OF CONTROL
The Company must commence, within 30 days of the occurrence of a Change of
Control, and consummate an Offer to Purchase for all Notes then outstanding, at
a purchase price equal to 101% of the principal amount thereof, plus accrued
interest to the Payment Date.
There can be no assurance that the Company will have sufficient funds
available at the time of any Change of Control to make any debt payment
(including repurchases of Notes) required by the foregoing covenant (as well as
may be contained in other securities of the Company which might be outstanding
at the time). The above covenant requiring the Company to repurchase the Notes
will, unless consents are obtained, require the Company to repay all
indebtedness then outstanding which by its terms would prohibit such Note
repurchase, either prior to or concurrently with such Note repurchase.
COMMISSION REPORTS AND REPORTS TO HOLDERS
Whether or not the Company is then required to file reports with the
Commission, the Company shall file with the Commission all such reports and
other information as it would be required to file with the Commission by
Sections 13(a) or 15(d) under the Securities Exchange Act of 1934 if it were
subject thereto. The Company shall supply the Trustee and each Holder or shall
supply to the Trustee for forwarding to each such Holder, without cost to such
Holder, copies of such reports and other information.
EVENTS OF DEFAULT
The following events will be defined as "Events of Default" in the
Indenture: (a) default in the payment of principal of (or premium, if any, on)
any Note when the same becomes due and payable at maturity, upon acceleration,
redemption or otherwise; (b) default in the payment of interest on any Note when
the same becomes due and payable, and such default continues for a period of 30
days; provided that a failure to make any of the first six scheduled interest
payments on the Notes on the applicable Interest Payment Date will constitute an
Event of Default with no grace or cure period; (c) default in the performance or
breach of the provisions of the Indenture applicable to mergers, consolidations
and transfers of all or substantially all of the assets of the Company or the
failure to make or consummate an Offer to Purchase in accordance with the
"Limitation on Asset Sales" or "Repurchase of Notes upon a Change of Control"
covenant; (d) the Company defaults in the performance of or breaches any other
covenant or agreement of the Company in the Indenture or under the Notes (other
than a default specified in clause (a), (b) or (c) above) and such default or
breach continues for a period of 30 consecutive days after written notice by the
Trustee or the Holders of 25% or more in aggregate principal amount of the
Notes; (e) there occurs with respect to any issue or issues of Indebtedness of
the Company or any Significant Subsidiary having an outstanding principal amount
of $5 million or more in the aggregate for all such issues of all such Persons,
whether such Indebtedness now exists or shall hereafter be created, (I) an event
of default that has caused the holder thereof to declare such Indebtedness to be
due and payable prior to its Stated Maturity and such Indebtedness has not been
discharged in full or such acceleration has not been rescinded or annulled
within 30 days of such acceleration and/or (II) the failure to make a principal
payment at the final (but not any interim) fixed maturity and such defaulted
payment shall not have been made, waived or extended within 30 days of such
payment default; (f) any final judgment or order (not covered by insurance) for
the payment of money in excess of $5 million in the aggregate for all such final
judgments or orders against all such Persons (treating any deductibles, self-
insurance or retention as not so covered) shall be rendered against the Company
or any Significant Subsidiary and shall not be paid or discharged, and there
shall be any period of 30 consecutive days following entry of the final judgment
or order that causes the aggregate amount for all such final judgments or orders
outstanding and not paid or discharged against all such Persons to exceed $5
million during which a stay of enforcement of such final judgment or order, by
reason of a pending appeal or otherwise, shall not be in effect; (g) a court
having jurisdiction in the premises enters a decree or order for (A) relief in
respect of the Company or any Significant Subsidiary in an involuntary case
under any applicable bankruptcy, insolvency or other similar law
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now or hereafter in effect, (B) appointment of a receiver, liquidator, assignee,
custodian, trustee, sequestrator or similar official of the Company or any
Significant Subsidiary or for all or substantially all of the property and
assets of the Company or any Significant Subsidiary or (C) the winding up or
liquidation of the affairs of the Company or any Significant Subsidiary and, in
each case, such decree or order shall remain unstayed and in effect for a period
of 30 consecutive days; (h) the Company or any Significant Subsidiary (A)
commences a voluntary case under any applicable bankruptcy, insolvency or other
similar law now or hereafter in effect, or consents to the entry of an order for
relief in an involuntary case under any such law, (B) consents to the
appointment of or taking possession by a receiver, liquidator, assignee,
custodian, trustee, sequestrator or similar official of the Company or any
Significant Subsidiary or for all or substantially all of the property and
assets of the Company or any Significant Subsidiary or (C) effects any general
assignment for the benefit of creditors; or (i) the Pledge Agreement shall cease
to be in full force and effect or enforceable in accordance with its terms,
other than in accordance with its terms.
If an Event of Default (other than an Event of Default specified in clause
(g) or (h) above that occurs with respect to the Company) occurs and is
continuing under the Indenture, the Trustee or the Holders of at least 25% in
aggregate principal amount of the Notes, then outstanding, by written notice to
the Company (and to the Trustee if such notice is given by the Holders), may,
and the Trustee at the request of such Holders shall, declare the principal of,
premium, if any, and accrued interest on the Notes to be immediately due and
payable. Upon a declaration of acceleration, such principal of, premium, if any,
and accrued interest shall be immediately due and payable. In the event of a
declaration of acceleration because an Event of Default set forth in clause (e)
above has occurred and is continuing, such declaration of acceleration shall be
automatically rescinded and annulled if the event of default triggering such
Event of Default pursuant to clause (e) shall be remedied or cured by the
Company or the relevant Significant Subsidiary or waived by the holders of the
relevant Indebtedness within 60 days after the declaration of acceleration with
respect thereto. If an Event of Default specified in clause (g) or (h) above
occurs with respect to the Company, the principal of, premium, if any, and
accrued interest on the Notes then outstanding shall ipso facto become and be
immediately due and payable without any declaration or other act on the part of
the Trustee or any Holder. The Holders of at least a majority in principal
amount of the outstanding Notes by written notice to the Company and to the
Trustee, may waive all past defaults and rescind and annul a declaration of
acceleration and its consequences if (i) all existing Events of Default, other
than the nonpayment of the principal of, premium, if any, and interest on the
Notes that have become due solely by such declaration of acceleration, have been
cured or waived and (ii) the rescission would not conflict with any judgment or
decree of a court of competent jurisdiction. For information as to the waiver of
defaults, see "-- Modification and Waiver."
The Holders of at least a majority in aggregate principal amount of the
outstanding Notes may direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred on the Trustee. However, the Trustee may refuse to follow any
direction that conflicts with law or the Indenture, that may involve the Trustee
in personal liability, or that the Trustee determines in good faith may be
unduly prejudicial to the rights of Holders of Notes not joining in the giving
of such direction and may take any other action it deems proper that is not
inconsistent with any such direction received from Holders of Notes. A Holder
may not pursue any remedy with respect to the Indenture or the Notes unless: (i)
the Holder gives the Trustee written notice of a continuing Event of Default;
(ii) the Holders of at least 25% in aggregate principal amount of outstanding
Notes make a written request to the Trustee to pursue the remedy; (iii) such
Holder or Holders offer the Trustee indemnity satisfactory to the Trustee
against any costs, liability or expense; (iv) the Trustee does not comply with
the request within 60 days after receipt of the request and the offer of
indemnity; and (v) during such 60-day period, the Holders of a majority in
aggregate principal amount of the outstanding Notes do not give the Trustee a
direction that is inconsistent with the request. However, such limitations do
not apply to the right of any Holder of a Note to receive payment of the
principal of, premium, if any, or interest on, such Note or to bring suit for
the enforcement of any such payment, on or after the due date expressed in the
Notes, which right shall not be impaired or affected without the consent of the
Holder.
The Indenture requires certain officers of the Company to certify, on or
before a date not more than 90 days after the end of each fiscal year, that a
review has been conducted of the activities of the Company and
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its Restricted Subsidiaries and the Company's and its Restricted Subsidiaries'
performance under the Indenture and that the Company has fulfilled all
obligations thereunder, or, if there has been a default in the fulfillment of
any such obligation, specifying each such default and the nature and status
thereof. The Company will also be obligated to notify the Trustee of any default
or defaults in the performance of any covenants or agreements under the
Indenture.
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Company will not consolidate with, merge with or into, or sell, convey,
transfer, lease or otherwise dispose of all or substantially all of its property
and assets (as an entirety or substantially an entirety in one transaction or a
series of related transactions) to, any Person or permit any Person to merge
with or into the Company unless: (i) the Company shall be the continuing Person,
or the Person (if other than the Company) formed by such consolidation or into
which the Company is merged or that acquired or leased such property and assets
of the Company shall be a corporation organized and validly existing under the
laws of the United States of America or any jurisdiction thereof and shall
expressly assume, by a supplemental indenture, executed and delivered to the
Trustee, all of the obligations of the Company on all of the Notes and under the
Indenture; (ii) immediately after giving effect to such transaction, no Default
or Event of Default shall have occurred and be continuing; (iii) immediately
after giving effect to such transaction on a pro forma basis, the Company or any
Person becoming the successor obligor of the Notes shall have a Consolidated Net
Worth equal to or greater than the Consolidated Net Worth of the Company
immediately prior to such transaction; (iv) immediately after giving effect to
such transaction on a pro forma basis the Company, or any Person becoming the
successor obligor of the Notes, as the case may be, could Incur at least $1.00
of Indebtedness under the first paragraph of the "Limitation on Indebtedness"
covenant; provided that this clause (iv) shall not apply to (x) a consolidation,
merger or sale of all (but not less than all) of the assets of the Company if
all Liens and Indebtedness of the Company or any Person becoming the successor
obligor on the Notes, as the case may be, and its Restricted Subsidiaries
outstanding immediately after such transaction would, if Incurred at such time,
have been permitted to be Incurred (and all such Liens and Indebtedness, other
than Liens and Indebtedness of the Company and its Restricted Subsidiaries
outstanding immediately prior to the transaction, shall be 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
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to the effect that Holders will not recognize income, gain or loss for federal
income tax purposes as a result of the Company's exercise of its option under
this "Defeasance" provision and will be subject to federal income tax on the
same amount and in the same manner and at the same times as would have been the
case if such deposit, defeasance and discharge had not occurred, which Opinion
of Counsel must be based upon (and accompanied by a copy of) a ruling of the
Internal Revenue Service to the same effect unless there has been a change in
applicable federal income tax law after the Closing Date such that a ruling is
no longer required or (y) a ruling directed to the Trustee received from the
Internal Revenue Service to the same effect as the aforementioned Opinion of
Counsel and (ii) an Opinion of Counsel to the effect that the creation of the
defeasance trust does not violate the Investment Company Act of 1940 and after
the passage of 123 days following the deposit, the trust fund will not be
subject to the effect of Section 547 of the United States Bankruptcy Code or
Section 15 of the New York Debtor and Creditor Law, (C) immediately after giving
effect to such deposit on a pro forma basis, no Event of Default, or event that
after the giving of notice or lapse of time or both would become an Event of
Default, shall have occurred and be continuing on the date of such deposit or
during the period ending on the 123rd day after the date of such deposit, and
such deposit shall not result in a breach or violation of, or constitute a
default under, any other agreement or instrument to which the Company or any of
its Subsidiaries is a party or by which the Company or any of its Subsidiaries
is bound and (D) if at such time the Notes are listed on a national securities
exchange, the Company has delivered to the Trustee an Opinion of Counsel to the
effect that the Notes will not be delisted as a result of such deposit,
defeasance and discharge.
Defeasance of Certain Covenants and Certain Events of Default. The
Indenture further provides that the provisions of the Indenture will no longer
be in effect with respect to clauses (iii) and (iv) under "Consolidation, Merger
and Sale of Assets" and all the covenants described herein under "Covenants,"
clause (c) under "Events of Default" with respect to such clauses (iii) and (iv)
under "Consolidation, Merger and Sale of Assets," clause (d) under "Events of
Default" with respect to such other covenants and clauses (e) and (f) under
"Events of Default" shall be deemed not to be Events of Default upon, among
other things, the deposit with the Trustee, in trust, of money and/or U.S.
Government Obligations that through the payment of interest and principal in
respect thereof in accordance with their terms will provide money in an amount
sufficient to pay the principal of, premium, if any, and accrued interest on the
Notes on the Stated Maturity of such payments in accordance with the terms of
the Indenture and the Notes, the satisfaction of the provisions described in
clauses (B)(ii), (C) and (D) of the preceding paragraph and the delivery by the
Company to the Trustee of an Opinion of Counsel to the effect that, among other
things, the Holders will not recognize income, gain or loss for federal income
tax purposes as a result of such deposit and defeasance of certain covenants and
Events of Default and will be subject to federal income tax on the same amount
and in the same manner and at the same times as would have been the case if such
deposit and defeasance had not occurred.
Defeasance and Certain Other Events of Default. In the event the Company
exercises its option to omit compliance with certain covenants and provisions of
the Indenture with respect to the Notes as described in the immediately
preceding paragraph and the Notes are declared due and payable because of the
occurrence of an Event of Default that remains applicable, the amount of money
and/or U.S. Government Obligations on deposit with the Trustee will be
sufficient to pay amounts due on the Notes at the time of their Stated Maturity
but may not be sufficient to pay amounts due on the Notes at the time of the
acceleration resulting from such Event of Default. However, the Company will
remain liable for such payments.
MODIFICATION AND WAIVER
Modifications and amendments of the Indenture may be made by the Company
and the Trustee with the consent of the Holders of not less than a majority in
aggregate principal amount of the outstanding Notes; provided, however, that no
such modification or amendment may, without the consent of each Holder affected
thereby, (i) change the Stated Maturity of the principal of, or any installment
of interest on, any Note, (ii) reduce the principal of, or premium, if any, or
interest on, any Note, (iii) change the place or currency of payment of
principal of, or premium, if any, or interest on, any Note, (iv) impair the
right to institute suit for the enforcement of any payment on or after the
Stated Maturity (or, in the case of a redemption, on or after
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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, stockholder, officer, director, employee
or controlling person of the Company or of any successor Person thereof. Each
Holder, by accepting the Notes, waives and releases all such liability.
CONCERNING THE TRUSTEE
The Indenture provides that, except during the continuance of a Default,
the Trustee will not be liable, except for the performance of such duties as are
specifically set forth in such Indenture. If an Event of Default has occurred
and is continuing, the Trustee will use the same degree of care and skill in its
exercise of the rights and powers vested in it under the Indenture as a prudent
person would exercise under the circumstances in the conduct of such person's
own affairs.
The Indenture and provisions of the Trust Indenture Act of 1939, as
amended, incorporated by reference therein contain limitations on the rights of
the Trustee, should it become a creditor of the Company, to obtain payment of
claims in certain cases or to realize on certain property received by it in
respect of any such claims, as security or otherwise. The Trustee is permitted
to engage in other transactions; provided, however, that if it acquires any
conflicting interest, it must eliminate such conflict or resign.
The Trustee is also the trustee under the 11 3/4% Notes Indenture.
BOOK-ENTRY; DELIVERY AND FORM
The Notes will be initially represented by one or more global notes (the
"Global Notes") issued in the form of fully registered Global Notes, which will
be deposited with, or on behalf of, the Depositary and registered in the name of
a nominee of the Depositary. Transfers between participants in the Depositary
will be effected in the ordinary way in accordance with the Depositary's rules
and will be settled in same-day funds.
The Depositary has advised the Company and the Underwriters that the
Depositary intends to follow the procedures described below:
The Depositary will act as securities depository for the Global Notes.
The Global Notes will be issued as a fully registered security registered
in the name of Cede & Co. (the Depositary's nominee).
The Depositary is a limited-purpose trust company organized under the
New York Banking Law, a "banking organization" within the meaning of the
New York Banking Law, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code,
and a "clearing agency" registered pursuant to the Provisions of Section
17A of the Exchange Act. The Depositary holds securities that its
participants ("Participants") deposit with the Depositary. The Depositary
also facilitates the settlement among Participants of securities
transactions, such as transfers and pledges, in deposited securities
through electronic computerized book-entry changes in Participants'
accounts, thereby eliminating the need for physical movement of securities
certificates. Direct Participants include securities brokers and dealers,
banks, trust companies, clearing corporations, and certain other
organizations ("Direct Participants"). The Depositary is owned by a number
of its Direct Participants and by the New York Stock Exchange, Inc., the
AMEX and the National Association of Securities Dealers, Inc. Access to the
Depositary's system is also available to others such as securities
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brokers and dealers, banks, and trust companies that clear through or
maintain a custodial relationship with a Direct Participant, either
directly or indirectly ("Indirect Participants"). The Rules applicable to
the Depositary and its Participants are on file with the Commission.
Purchases of Notes must be made by or through Direct Participants,
which will receive a credit for the Notes on the Depositary's records. The
ownership interest of each actual purchaser of each Note ("Beneficial
Owner") is in turn recorded on the Direct and Indirect Participant's
records. Transfers of ownership interests in the Notes are to be
accomplished by entries made on the books of Participants acting on behalf
of Beneficial Owners. Beneficial Owners will not receive certificates
representing their ownership interests in the Notes, except in the event
that use of the book-entry system for the Notes is discontinued.
Conveyance of Notes and other communications by the Depositary to
Direct Participants, by Direct Participants to Indirect Participants, and
Direct Participants and Indirect Participants to Beneficial Owners are
governed by arrangements among them, subject to any statutory or regulatory
requirements as may be in effect from time to time.
Redemption notices shall be sent to Cede & Co. If less than all of the
Notes are being redeemed, the Depositary's practice is to determine by lot
the amount of the interest of each Direct Participant in such issue to be
redeemed.
Neither the Depositary nor Cede & Co. will consent or vote with
respect to the Notes. Under its usual procedures, the Depositary mails an
Omnibus Proxy to the issuer as soon as possible after the record date. The
Omnibus Proxy assigns Cede & Co.'s consenting or voting rights to those
Direct Participants to whose accounts the Notes are credited on the record
date (identified in a listing attached to the Omnibus Proxy).
Principal, premium (if any), and interest payments on the Notes will
be made to the Depositary. The Depositary's practice is to credit Direct
Participants' accounts on the payable date in accordance with their
respective holdings shown on the Depositary's records unless the Depositary
has reason to believe that it will not receive payment on the payable date.
Payments by Participants to Beneficial Owners will be governed by standing
instructions and customary practices, as is the case with securities held
for the accounts of customers in bearer form or registered in "street
name," and will be the responsibility of such Participant and not of the
Depositary, the Paying Agent, or the Company, subject to any statutory or
regulatory requirements as may be in effect from time to time. Payment to
the Depositary of principal, premium (if any) and interest on the Notes are
the responsibility of the Company or the Paying Agent, disbursement of such
payments to Direct Participants shall be the responsibility of the
Depositary, and disbursement of such payments to the Beneficial Owners
shall be the responsibility of Direct and Indirect Participants.
The information in this section concerning the Depositary and the
Depositary's book-entry system has been obtained from sources that the Company
believes to be reliable, but the Company takes no responsibility for the
accuracy thereof.
So long as the Depositary for the Global Notes, or its nominee, is the
registered owner of the Global Notes, the Depositary or its nominee, as the case
may be, will be considered the sole owner or Holder of the Notes represented by
the Global Notes for all purposes under the Indenture. Except as set forth
below, owners of beneficial interests in such Global Notes will not be entitled
to have Notes represented by such Global Notes registered in their names, will
not receive or be entitled to receive physical delivery of Notes in definitive
form and will not be considered the owners or Holders thereof under the
Indenture. Accordingly, each person owning a beneficial interest in Global Notes
must rely on the procedures of the Depositary and, if such person is not a
Participant, those of the Participant through which such person owns its
interests, in order to exercise any rights of a Holder under the Indenture or
such Note.
The Indenture provides that the Depositary, as a Holder, may appoint agents
and otherwise authorize Participants to give or take any request, demand,
authorization, direction, notice, consent, waiver or other
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action which a Holder is entitled to give or take under the Indenture, including
the right to sue for payment of principal or interest pursuant to Section 316(b)
of the Trust Indenture Act of 1939, as amended. The Company understands that
under existing industry practices, when the Company requests any action of
Holders or when a Beneficial Owner desires to give or take any action which a
Holder is entitled to give or take under the Indenture, the Depositary generally
will give or take such action, or authorize the relevant Participants to give or
take such action, and such Participants would authorize Beneficial Owners owning
through such Participants to give or take such action or would otherwise act
upon the instructions of Beneficial Owners owning through them.
The Company has been informed by the Depositary that the Depositary will
assist its Participants and their customers (Beneficial Owners) in taking any
action a Holder is entitled to take under the Indenture or exercise any rights
available to Cede & Co., as the holder of record of the Notes and including the
right to demand acceleration of the Notes upon an Event of Default or to
institute suit for the enforcement of payment or interest pursuant to Section
316(b) of the Trust Indenture Act of 1939, as amended. The Depositary has
advised the Company that it will act with respect to such matters upon written
instructions from a Participant to whose account with the Depositary the
relevant beneficial ownership in the Notes is credited. The Company understands
that a Participant will deliver such written instructions to the Depositary upon
itself receiving similar written instructions from either Indirect Participants
or Beneficial Owners, as the case may be. Under Rule 6 of the rules and
procedures filed by the Depositary with the Commission pursuant to Section 17 of
the Exchange Act, Participants are required to indemnify the Depositary against
all liability the Depositary may sustain, without fault on the part of the
Depositary or its nominee, as a result of any action they may take pursuant to
the instructions of the Participant in exercising any such rights.
The laws of some jurisdictions require that certain purchasers of
securities take physical delivery of such securities in definitive form. Such
limits and such laws may impair the ability to transfer beneficial interests in
the Global Notes.
Principal, premium, if any, and interest payments on Notes registered in
the name of or held by the Depositary or its nominee will be made to the
Depositary or its nominee, as the case may be, as the registered owner or the
Holder of the Global Notes representing such Notes. Neither the Company nor the
Trustee will have any responsibility or liability for any aspect of the records
relating to or payments made on account of beneficial ownership interests in the
Global Notes or for maintaining, supervising or reviewing any records relating
to such beneficial ownership interests.
If the Depositary is at any time unwilling, unable or ineligible to
continue as depositary and a successor depositary is not appointed by the
Company within 60 days or, if an Event of Default under the Indenture has
occurred and is continuing, the Company will issue Notes in definitive
registered form, without coupons, in denominations of $1,000 of principal amount
and any integral multiple thereof, in exchange for the Global Notes representing
such Notes. In addition, the Company may at any time and in its sole discretion
determine not to have any Notes in registered form represented by the Global
Notes and, in such event, will issue Notes or in definitive registered form in
exchange for the Global Notes representing such Notes. In any such instance, an
owner of a beneficial interest in a Global Note will be entitled to physical
delivery in definitive form of Notes registered in its name. Upon the exchange
of the Global Notes for Notes in definitive form, the Global Notes will be
cancelled by the Trustee.
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DESCRIPTION OF CAPITAL STOCK
GENERAL MATTERS
At the time of the Equity Offering, the total amount of authorized capital
stock of the Company will consist of 150,000,000 shares of Common Stock, par
value $.01 per share, and 1,000,000 shares of preferred stock, par value $.01
per share (the "Preferred Stock"). Upon completion of the Equity Offering,
52,341,554 shares of Common Stock will be issued and outstanding and no shares
of Preferred Stock will be issued and outstanding. The discussion herein
describes the Company's capital stock, the Restated Certificate and By-laws to
be in effect upon consummation of the Equity Offering. The following summary of
certain provisions of the Company's capital stock describes all material
provisions of, but does not purport to be complete and is subject to, and
qualified in its entirety by, the Restated Certificate and the By-laws of the
Company that are included as exhibits to the Registration Statement of which
this Prospectus forms a part and by the provisions of applicable law.
The Restated Certificate and By-laws will contain certain provisions that
are intended to enhance the likelihood of continuity and stability in the
composition of the Board of Directors and which may have the effect of delaying,
deferring or preventing a future takeover or change in control of the Company
unless such takeover or change in control is approved by the Board of Directors.
COMMON STOCK
The issued and outstanding shares of Common Stock are, and the shares of
Common Stock being offered by the Company will be upon payment therefor, validly
issued, fully paid and nonassessable. Subject to the prior rights of the holders
of any Preferred Stock, the holders of outstanding shares of Common Stock are
entitled to receive dividends out of assets legally available therefor at such
time and in such amounts as the Board of Directors may from time to time
determine. The shares of Common Stock are not convertible and the holders
thereof have no preemptive or subscription rights to purchase any securities of
the Company. Upon liquidation, dissolution or winding up of the Company, the
holders of Common Stock are entitled to receive pro rata the assets of the
Company which are legally available for distribution, after payment of all debts
and other liabilities and subject to the prior rights of any holders of
Preferred Stock then outstanding. Each outstanding share of Common Stock is
entitled to one vote on all matters submitted to a vote of stockholders. There
is no cumulative voting.
PREFERRED STOCK
The Company's Board of Directors may, without further action by the
Company's stockholders, from time to time, direct the issuance of shares of
Preferred Stock in series and may, at the time of issuance, determine the
rights, preferences and limitations of each series. Satisfaction of any dividend
preferences of outstanding shares of Preferred Stock would reduce the amount of
funds available for the payment of dividends on shares of Common Stock. Holders
of shares of Preferred Stock may be entitled to receive a preference payment in
the event of any liquidation, dissolution or winding-up of the Company before
any payment is made to the holders of shares of Common Stock. Under certain
circumstances, the issuance of shares of Preferred Stock may render more
difficult or tend to discourage a merger, tender offer or proxy contest, the
assumption of control by a holder of a large block of the Company's securities
or the removal of incumbent management. Upon the affirmative vote of a majority
of the total number of directors then in office, the Board of Directors of the
Company, without stockholder approval, may issue shares of Preferred Stock with
voting and conversion rights which could adversely affect the holders of shares
of Common Stock. Upon consummation of the Equity Offering, there will be no
shares of Preferred Stock outstanding, and the Company has no present intention
to issue any shares of Preferred Stock.
CERTAIN PROVISIONS OF THE RESTATED CERTIFICATE OF INCORPORATION AND BY-LAWS
The Restated Certificate provides for the Board of Directors to be divided
into three classes, as nearly equal in number as possible, serving staggered
terms. Approximately one-third of the Board of Directors will
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be elected each year. See "Management." Under the Delaware General Corporation
Law, directors serving on a classified board can only be removed for cause. The
provision for a classified board could prevent a party who acquires control of a
majority of the outstanding voting stock from obtaining control of the Board of
Directors until the second annual stockholders meeting following the date the
acquiror obtains the controlling stock interest. The classified board provision
could have the effect of discouraging a potential acquiror from making a tender
offer or otherwise attempting to obtain control of the Company and could
increase the likelihood that incumbent directors will retain their positions.
The Restated Certificate provides that stockholder action can be taken only
at an annual or special meeting of stockholders and cannot be taken by written
consent in lieu of a meeting. The Restated Certificate and the By-laws provides
that, except as otherwise required by law, special meetings of the stockholders
can only be called pursuant to a resolution adopted by a majority of the Board
of Directors or by the Chief Executive Officer of the Company. Stockholders will
not be permitted to call a special meeting or to require the Board of Directors
to call a special meeting.
The By-laws establish an advance notice procedure for stockholder proposals
to be brought before an annual meeting of stockholders of the Company, including
proposed nominations of persons for election to the Board of Directors.
Stockholders at an annual meeting may only consider proposals or
nominations specified in the notice of meeting or brought before the meeting by
or at the direction of the Board of Directors or by a stockholder who was a
stockholder of record on the record date for the meeting, who is entitled to
vote at the meeting and who has given to the Company's Secretary timely written
notice, in proper form, of the stockholder's intention to bring that business
before the meeting. Although the By-laws do not give the Board of Directors the
power to approve or disapprove stockholder nominations of candidates or
proposals regarding other business to be conducted at a special or annual
meeting, the By-laws may have the effect of precluding the conduct of certain
business at a meeting if the proper procedures are not followed or may
discourage or defer a potential acquiror from conducting a solicitation of
proxies to elect its own slate of directors or otherwise attempting to obtain
control of the Company.
The Restated Certificate and By-laws provide that the affirmative vote of
holders of at least 66 2/3% of the total votes eligible to be cast in the
election of directors is required to amend, alter, change or repeal certain of
their provisions. This requirement of a super-majority vote to approve
amendments to the Restated Certification of Incorporation and By-laws could
enable a minority of the Company's stockholders to exercise veto power over any
such amendments.
CERTAIN PROVISIONS OF DELAWARE LAW
Following the consummation of the Equity Offering, the Company will be
subject to the "Business Combination" provisions of the Delaware General
Corporation Law. In general, such provisions prohibit a publicly held Delaware
corporation from engaging in various "business combination" transactions with
any "interested stockholder" for a period of three years after the date of the
transaction which the person became an "interested stockholder," unless (i) the
transaction is approved by the Board of Directors prior to the date the
"interested stockholder" obtained such status; (ii) upon consummation of the
transaction which resulted in the stockholder becoming an "interested
stockholder," the "interested stockholder," owned at least 85% of the voting
stock of the corporation outstanding at the time the transaction commenced,
excluding for purposes of determining the number of shares outstanding those
shares owned by (a) persons who are directors and also officers and (b) employee
stock plans in which employee participants do not have the right to determine
confidentially whether shares held subject to the plan will be tendered in a
tender or exchange offer; or (iii) on or subsequent to such date the "business
combination" is approved by the Board of Directors and authorized at an annual
or special meeting of stockholders by the affirmative vote of at least 66 2/3%
of the outstanding voting stock which is not owned by the "interested
stockholder." A "business combination" is defined to include mergers, asset
sales and other transactions resulting in financial benefit to a stockholder. In
general, an "interested stockholder" is a Person who, together with affiliates
and associates, owns (or within three years, did own) 15% or more of a
corporation's voting stock. The statute could prohibit or delay mergers or other
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<PAGE> 95
takeover or change in control attempts with respect to the Company and,
accordingly, may discourage attempts to acquire the Company.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Restated Certificate limits the liability of Directors to the fullest
extent permitted by the Delaware General Corporation Law. In addition, the
Restated Certificate of Incorporation will provide that the Company shall
indemnify Directors and officers of the Company to the fullest extent permitted
by such law. The Company anticipates entering into indemnification agreements
with its current Directors and executive officers prior to the completion of the
Offerings and any new Directors or executive officers following such time.
WARRANTS
In connection with the Unit Offering, the Company issued 445,000 Warrants
pursuant to the Warrant Agreement between the Company and The Bank of New York.
Wherever particular terms of the Warrant Agreement, not otherwise defined
herein, are referred to, such defined terms are incorporated herein by
reference. A copy of the Warrant Agreement is filed as an exhibit to the
Registration Statement of which this Prospectus forms a part.
Each Warrant is exercisable to purchase 1.458983995 shares of Common Stock
at an exercise price of $.01 per share, subject to adjustment. The Warrants may
be exercised at any time on or after February 3, 1999 and prior to February 3,
2008. Upon the occurrence of a merger with a person that does not have a class
of equity securities registered under the Securities Exchange Act of 1934, as
amended (the "Exchange Act") in connection with which the consideration to
stockholders of the Company is not all cash, the Company or its successor by
merger or consolidation will be required to offer to repurchase the Warrants.
All such repurchases will be at the market price of the Common Stock or other
securities issuable upon exercise of the Warrants (or, if the Common Stock (or
such other securities) are not registered under the Exchange Act, the value of
the Common Stock or other securities as determined by an independent financial
expert), less the exercise price thereof.
REGISTRATION RIGHTS
The Fund Investors, the Management Investors, and the Company are parties
to a Registration Agreement dated as of August 13, 1997 (the "Registration
Agreement"). Each of Morgan Stanley Capital Partners, Madison Dearborn Capital
Partners, and Frontenac Company are entitled to demand two long-form
registrations and unlimited short-form registrations, and Battery Ventures is
entitled to demand one long-form registration and unlimited short-form
registrations. In addition, the Fund Investors and the Management Investors may
"piggyback" on primary or secondary registered public offerings of the Company's
securities. Each Fund Investor and Management Investor is subject to holdback
restrictions in the event of a public offering of Company securities. The
parties to the Registration Agreement have agreed to permit the holders of
Warrants to "piggyback" on any registrations under the Registration Agreement.
The Company and The Bank of New York are parties to a Warrant Registration
Rights Agreement dated as of February 3, 1998 (the "Warrant Registration
Agreement"). The holders of the Warrants are entitled to "piggyback"
registration rights in connection with certain public offerings of the Common
Stock. In addition, the Company is required to use its best efforts to cause to
become effective under the Securities Act, within 180 days after the closing of
the Equity Offering, a shelf registration statement with respect to the issuance
of the Common Stock issuable upon exercise of the Warrants; provided, however,
that such shelf registration statement may not be declared effective prior to
the first anniversary of the issuance of the Warrants. Once the shelf
registration statement is declared effective, the Company is required to
maintain the effectiveness of such registration statement until all Warrants
have expired or been exercised.
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<PAGE> 96
CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS
The following is a general discussion of the principal United States
federal income tax consequences of the purchase, ownership and disposition of
the Notes to initial purchasers thereof. This discussion is based on currently
existing provisions of the Code, existing, temporary and proposed Treasury
regulations promulgated thereunder, and administrative and judicial
interpretations thereof, all as in effect or proposed on the date hereof and all
of which are subject to change, possibly with retroactive effect, or different
interpretations. This discussion does not address the tax consequences to
subsequent purchasers of Notes and is limited to purchasers who acquire the
Notes at their issue price and hold such Notes as capital assets, within the
meaning of section 1221 of the Code. Moreover, this discussion is for general
information only and does not address all of the tax consequences that may be
relevant to particular initial purchasers in light of their personal
circumstances or to certain types of initial purchasers, such as certain
financial institutions, insurance companies, tax-exempt entities, dealers in
securities, certain U.S. expatriates, persons who have hedged the risk of owning
a Note or holders whose "functional currency" is not the U.S. dollar.
As used herein, the term "U.S. Holder" means an initial purchaser of a Note
that is, for United States federal income tax purposes, (a) a citizen or
individual resident of the United States, (b) a corporation, partnership or
other entity created or organized in or under the laws of the United States or
any political subdivision thereof, (c) an estate the income of which is subject
to United States federal income taxation regardless of source, or (d) a trust
subject to the primary supervision of a court within the United States and the
control of a United States person, as described in the Code. An individual may,
subject to certain exceptions, be deemed to be a United States resident (as
opposed to a non-resident alien) by virtue of being present in the United States
on at least 31 days in the calendar year and for an aggregate of at least 183
days during a three-year period ending in the current calendar year (counting
for such purposes all of the days present in the current year, one-third of the
days present in the immediately preceding year, and one-sixth of the days
present in the second preceding year). Resident aliens are subject to U.S.
federal tax as if they were U.S. citizens. As used herein, a "Non-U.S. Holder"
is a holder that is not a U.S. Holder.
ALL PROSPECTIVE PURCHASERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS
TO THE PARTICULAR TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND
DISPOSITION OF THE NOTES, INCLUDING THE APPLICABILITY OF ANY FEDERAL TAX LAWS OR
ANY STATE, LOCAL OR FOREIGN TAX LAWS, AND ANY CHANGES (OR PROPOSED CHANGES) IN
APPLICABLE TAX LAWS OR INTERPRETATIONS THEREOF.
UNITED STATES FEDERAL INCOME TAXATION OF UNITED STATES HOLDERS
Interest. Interest paid on a Note generally will be taxable to a U.S.
Holder as ordinary interest income as it accrues or is received, in accordance
with such U.S. Holder's method of accounting for United States federal income
tax purposes.
Optional Redemption. Notes may be redeemed prior to their stated maturity
at the option of the Company. For purposes of computing the yield of such
instruments, the Company will be deemed to exercise or not exercise its option
to redeem the Notes in a manner that minimizes the yield on the Notes. In the
event the Company were deemed to exercise its option to redeem, for purposes of
determining whether the Notes were issued with OID, the Notes' yield to maturity
would be computed by treating the deemed redemption date as the maturity date of
the Note and the amount payable on redemption as the principal amount of the
Note. It is not anticipated that the Company's option to redeem the Notes prior
to stated maturity will be treated as exercised.
Redemption, Sale, Exchange or Retirement of the Notes. In general, a U.S.
Holder will recognize gain or loss on the redemption, sale, exchange or
retirement of the Notes equal to the difference between the amount realized on
the redemption, sale, exchange or retirement (reduced by any amounts
attributable to accrued but unpaid interest, which will be taxable as such) and
such U.S. Holder's adjusted tax basis in the Note. A U.S. Holder's adjusted tax
basis in the Note generally will be its cost to such U.S. Holder. As a general
rule, such
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<PAGE> 97
gain or loss recognized on the redemption, sale, exchange or retirement of the
Notes will be capital gain or loss. With respect to individuals, gain is subject
to reduced rates of tax if the Note was held for more than twelve months and is
subject to further reduced rates if the Note was held for more than eighteen
months, in each case as of the date of redemption, sale, exchange or retirement.
UNITED STATES FEDERAL INCOME TAXATION OF NON-U.S. HOLDERS
Under present U.S. federal income and estate tax law and subject to the
discussion of backup withholding below:
(i) payments of principal, premium (if any) and interest on a Note by
the Company or any agent of the Company to any Non-U.S. Holder will not be
subject to withholding of U.S. federal income tax, provided that, in the
case of interest (1) the Non-U.S. Holder does not actually or
constructively own 10% or more of the total combined voting power of all
classes of stock of the Company entitled to vote, (2) the Non-U.S. Holder
is not (x) a controlled foreign corporation that is related to the Company
through stock ownership, or (y) a bank receiving interest described in
Section 881(c)(3)(A) of the Code, and (3) the beneficial owner of the Note
certifies to the Company or its agent, under penalties of perjury, that it
is not a "United States person" (as defined in the Code) and provides its
name and address, and (A) such beneficial owner files the Form W-8 with the
withholding agent or (B) in the case of a securities clearing organization,
bank or other financial institution that holds customers' securities in the
ordinary course of its trade or business (a "financial institution") and
holds the Note on behalf of the beneficial owner, such financial
institution certifies to the Company or its agent under penalties of
perjury that such statement has been received from the beneficial owner and
furnishes the payor with a copy thereof;
(ii) a Non-U.S. Holder will not be subject to U.S. federal income tax
on gain realized on the sale, exchange, redemption, retirement at maturity
or other disposition of a Note unless (1) such holder is an individual who
is present in the United States for 183 days or more during the taxable
year and certain other conditions are met, or (2) the gain is effectively
connected with a U.S. trade or business of the holder, and if an income tax
treaty applies, is generally attributable to a U.S. "permanent
establishment" maintained by the holder;
(iii) a Note held by an individual who at the time of death is not a
citizen or resident of the United States will not be subject to U.S.
federal estate tax as a result of such individual's death if, at the time
of such death, (1) the individual did not actually or constructively own 10
percent or more of the total combined voting power of all classes of stock
of the Company entitled to vote, and (2) the income on the Note would not
have been effectively connected with the conduct of a trade or business by
the individual in the United States; and
If a Non-U.S. Holder is engaged in a trade or business in the United
States, and interest on the Note or gain realized on the sale, exchange or other
disposition of the Note is effectively connected with the conduct of such trade
or business (and, if an income tax treaty applies, the Non-U.S. Holder maintains
a U.S. "permanent establishment" to which the interest or gain is attributable),
the Non-U.S. Holder, although exempt from the withholding tax discussed in the
preceding paragraph (i) (provided that such holder furnishes a properly executed
Internal Revenue Service ("IRS") Form 4224 or successor form on or before any
payment date to claim such exemption), generally will be subject to U.S. federal
income tax on such interest or gain on a net basis in the same manner as if it
were a U.S. Holder.
In addition, a foreign corporation that is a Non-U.S. Holder may be subject
to a branch profits tax equal to 30% of its effectively connected earnings and
profits for the taxable year, subject to certain adjustments, unless it
qualifies for a lower rate under an applicable tax treaty. For this purpose,
interest on a Note or gain on the disposition of a Note will be included in
earnings and profits if such interest or gain is effectively connected with the
conduct by the foreign corporation of a trade or business in the United States.
Recently finalized Treasury regulations pertaining to U.S. federal
withholding tax, generally effective for payments made after December 31, 1999
(the "Final Withholding Tax Regulations"), will provide alternative
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<PAGE> 98
methods for satisfying the certification requirement described in paragraph
(i)(3) above and will require a Non-U.S. Holder that provides an IRS Form 4224
or successor form (as discussed above) to also provide its U.S. taxpayer
identification number. The Final Withholding Tax Regulations generally also will
require, in the case of a Note held by a foreign partnership, that (x) the
certification described in paragraph (i)(3) above be provided by the partners
rather than the partnership and (y) the partnership provide certain information,
including a U.S. taxpayer identification number. A look-through rule will apply
in the case of tiered partnerships.
Non-U.S. Holders should consult with their tax advisors regarding U.S. and
foreign tax consequences with respect to the Notes.
INFORMATION REPORTING AND BACKUP WITHHOLDING
In general, information reporting requirements will apply to certain
payments made in respect of a Note made to U.S. Holders other than certain
exempt recipients (such as corporations). A 31% backup withholding tax will
apply to such payments if the U.S. Holder fails to provide a correct taxpayer
identification number or certification of exempt status or, with respect to
certain payments, the U.S. Holder fails to report in full all dividend and
interest income and the IRS notifies the payor of such underreporting.
Under current Treasury Regulations, backup withholding and information
reporting will not apply to payments made by the Company or any agent thereof
(in its capacity as such) to a Non-U.S. Holder of a Note if such holder has
provided the required certification that it is not a United States person as set
forth in paragraph (i) under "United States Federal Income Taxation of Foreign
Holders," provided that neither the Company nor its agent has actual knowledge
that the holder is a United States person. The Company or its agent may,
however, report (on IRS Form 1042S) payments of interest on the Notes.
Payment of the proceeds from the disposition of a Note made to or through a
foreign office of a broker will not be subject to information reporting or
backup withholding, except that if the broker is a United States person, a
controlled foreign corporation for U.S. tax purposes or a foreign person 50% or
more of whose gross income from all sources for the three-year period ending
with the close of its taxable year preceding the payment was effectively
connected with a U.S. trade or business, information reporting may apply to such
payments. Payments of the proceeds from a disposition of a Note made to or
through the U.S. office of a broker is subject to information reporting and
backup withholding unless the holder or beneficial owner certifies as to its
taxpayer identification number or otherwise establishes an exemption from
information reporting and backup withholding.
In general, the Final Withholding Tax Regulations do not significantly
alter the current substantive backup withholding and information reporting
requirements, but unify current certification procedures and clarify reliance
standards. Under the Final Withholding Tax Regulations, special rules apply
which permit the shifting of primary responsibility for withholding to certain
financial intermediaries acting on behalf of beneficial owners. A holder of a
Note should consult with its tax advisor regarding the application of the backup
withholding rules to its particular situation, the availability of an exemption
therefrom, the procedure for obtaining such an exemption, if available, and the
impact of the Final Withholding Tax Regulations on payments made with respect to
Notes after December 31, 1999.
Any amounts withheld under the backup withholding rules from a payment to a
holder would be allowed as a refund or a credit against such holder's U.S.
federal income tax liability, provided the required information is timely
furnished to the IRS.
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ERISA CONSIDERATIONS
A fiduciary of a pension, profit-sharing, retirement, or other employee
benefit plan ("Plan") subject to Title I of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), should consider the fiduciary
standards under ERISA in the context of the Plan's particular circumstances
before authorizing an investment of a portion of such Plan's assets in the
Notes. Accordingly, such fiduciary should consider (i) whether the investment
satisfies the diversification requirements of Section 404(a)(1)(C) of ERISA,
(ii) whether the investment is in accordance with the documents and instruments
governing the Plan as required by Section 404(a)(1)(D) of ERISA and (iii)
whether the investment is prudent under ERISA.
In addition to the imposition of general fiduciary standards of investment
prudence and diversification, ERISA and the corresponding provisions of the Code
prohibit a wide range of transactions involving the assets of a Plan or a plan
subject to Section 4975 of the Code (such plans are collectively referred to as
"ERISA Plans") and persons who have certain specified relationships to the ERISA
Plan ("parties in interest" within the meaning of ERISA, and "disqualified
persons" within the meaning of the Code). A prohibited transaction described in
Section 406 of ERISA or Section 4975 of the Code could arise if the Company
were, or were to become, a party in interest or a disqualified person with
respect to an ERISA Plan purchasing the Notes. Certain exemptions from the
prohibited transaction rules could be applicable to the purchase of the Notes by
an ERISA Plan depending on the type and circumstances of the fiduciary of the
ERISA Plan making the decision to acquire the Notes. Included among these
exemptions are: Prohibited Transaction Class Exemption ("PTCE") 90-1, regarding
investments by insurance company pooled separate accounts; PTCE 91-38, regarding
investments by bank collective investment funds; PTCE 84-14, regarding
transactions effected by a qualified professional asset manager; PTCE 95-60,
regarding investments by insurance company general amounts; and PTCE 96-23,
regarding transactions effected by an in-house asset manager. Thus, a fiduciary
of an ERISA Plan considering an investment in the Notes also should consider
whether the acquisition or the continued holding of the Notes might constitute
or give rise to a non-exempt prohibited transaction. No ERISA Plan with respect
to which the Company is a party in interest or a disqualified person may
purchase the Notes, unless a statutory or administrative exemption is available.
Certain employee benefit plans, such as governmental plans and church plans
(if no election has been made under Section 410(d) of the Code), are not subject
to the restrictions of ERISA, and assets of such Plans may be invested in the
Notes without regard to the ERISA considerations described above. The investment
in the Notes by such employee benefit plans may, however, be subject to other
applicable federal and state laws, which should be carefully considered by such
employee benefit plans before investing in the Notes.
Every ERISA Plan investor considering the acquisition of the Notes should
consult with its counsel with respect to the potential applicability of ERISA
and Section 4975 of the Code to such investment, and whether any prohibited
transaction exemption would be applicable.
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UNDERWRITERS
Under the terms and subject to the conditions contained in the Underwriting
Agreement dated as of the date hereof (the "Underwriting Agreement"), the form
of which is filed as an exhibit to the Registration Statement of which this
Prospectus forms a part, the Underwriters named herein (the "Underwriters") have
severally agreed to purchase, and the Company has agreed to sell to them, the
respective principal amount of Notes set forth opposite the names of such
Underwriters below:
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OF
NAME NOTES
---- ------------
<S> <C>
Morgan Stanley & Co. Incorporated........................... $
Salomon Brothers Inc........................................
Donaldson, Lufkin & Jenrette Securities Corporation.........
Goldman, Sachs & Co.........................................
------------
Total............................................. $200,000,000
============
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the Notes offered hereby are
subject to the approval of certain legal matters by their counsel and to certain
other conditions. The Underwriters are obligated to take and pay for all of the
Notes offered hereby if any are taken.
The Underwriters propose to offer part of the Notes directly to the public
at the Price to Public set forth on the cover page thereof and part to certain
dealers at a price which represents a concession not in excess of % of the
public offering price for the Notes. Each Underwriter may allow, and such
dealers may reallow, a concession to certain other dealers not in excess of
% of the public offering price for the Notes. After the initial offering of
the Notes, the offering price and other selling terms may from time to time be
varied by the Underwriters.
In order to facilitate the Debt Offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Notes. Specifically, the Underwriters may over-allot in connection with the Debt
Offering, creating a short position in the Notes for their own account. In
addition, to cover over-allotments or to stabilize the price of the Notes, the
Underwriters may bid for, and purchase, Notes in the open market. Finally, the
underwriting syndicate may reclaim selling concessions allowed to an underwriter
or a dealer for distributing the Notes in the Debt Offering, if the syndicate
purchases previously distributed Notes in transactions to cover syndicate short
positions, in stabilizing transactions or otherwise. Any of these activities may
stabilize or maintain the market price of the Notes above independent market
levels. The Underwriters are not required to engage in these activities, and may
end any of these activities at any time.
This Prospectus may be used by Morgan Stanley & Co. Incorporated for market
making transactions.
The Company and the Underwriters have agreed to indemnify each other
against certain liabilities, including liabilities under the Securities Act.
LEGAL MATTERS
The validity of the Notes offered hereby will be passed upon for the
Company by Kirkland & Ellis (a partnership including professional corporations),
Chicago, Illinois. Certain legal matters will be passed upon for the
Underwriters by Shearman & Sterling, New York, New York.
EXPERTS
The consolidated balance sheets of the Company as of March 31, 1998 and
December 31, 1997, and the related consolidated statements of operations,
stockholders' deficit, and cash flows for the three months ended March 31, 1998
and for the period from inception (April 22, 1997) to December 31, 1997, have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report with respect thereto and are included herein in
reliance upon the authority of said firm as experts in giving said report.
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ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 (the "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, with respect to the Notes offered
hereby. This Prospectus does not contain all of the information set forth in the
Registration Statement. For further information with respect to the Company and
the Notes, reference is made to the Registration Statement. Statements made in
this Prospectus as to the contents of any contract, agreement or any other
document referred to are not necessarily complete. With respect to each such
contract, agreement or other document filed as an exhibit to the 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.
As a result of the effectiveness of its Registration Statement on Form S-4
(Registration No. 333-49013) relating to the 11 3/4% Notes, the Company is
subject to the informational requirements of the Exchange Act and in accordance
therewith is required to file periodic reports and other information with the
Commission. Copies of the Registration Statement, periodic reports and other
information filed by the Company with the Commission can be obtained at
prescribed rates at the public reference facilities maintained by the Commission
at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, or at its regional
offices located at Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661 and Seven World Trade Center, Suite 1300, New York, New
York 10048. In addition, the Commission maintains a website that contains
periodic reports and other information filed by the Company via the Commission's
Electronic Data Gathering and Retrieval System (EDGAR). This website can be
accessed at www.sec.gov.
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<PAGE> 102
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheet as of March 31, 1998 and December
31, 1997.................................................. F-3
Consolidated Statement of Operations for the three months
ended March 31, 1998 and the period from Inception (April
22, 1997) through December 31, 1997....................... F-4
Consolidated Statement of Stockholders' Deficit for the
three months ended March 31, 1998 and the period from
Inception (April 22, 1997) through December 31, 1997...... F-5
Consolidated Statement of Cash Flows for the three months
ended March 31, 1998 and the period from Inception (April
22, 1997) through December 31, 1997....................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 103
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Allegiance Telecom, Inc.:
We have audited the accompanying consolidated balance sheets of Allegiance
Telecom, Inc. (a Delaware corporation) and subsidiaries (the "Company") as of
March 31, 1998 and December 31, 1997, and the related consolidated statements of
operations, stockholders' deficit and cash flows for the three months ended
March 31, 1998, and for the period from inception (April 22, 1997) to December
31, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Allegiance Telecom, Inc. and
subsidiaries as of March 31, 1998 and December 31, 1997, and the results of
their operations and their cash flows for the three months ended March 31, 1998,
and for the period from inception to December 31, 1997, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
April 24, 1998 (except for
Note 10 which date
is June 5, 1998)
F-2
<PAGE> 104
ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
MARCH 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $221,678,116 $ 5,726,359
Short-term investments.................................... 35,916,586 --
Accounts receivable....................................... 307,430 4,310
Prepaid expenses and other current assets................. 396,460 245,152
------------ ------------
Total current assets.............................. 258,298,592 5,975,821
PROPERTY AND EQUIPMENT:
Property and equipment.................................... 32,890,448 23,912,659
Accumulated depreciation and amortization................. (221,063) (12,639)
------------ ------------
Property and equipment, net....................... 32,669,385 23,900,020
OTHER NON-CURRENT ASSETS:
Deferred debt issuance costs (net of accumulated
amortization of $100,793).............................. 9,034,603 --
Other assets.............................................. 225,112 171,173
------------ ------------
Total other non-current assets.................... 9,259,715 171,173
------------ ------------
Total assets...................................... $300,227,692 $ 30,047,014
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable.......................................... $ 1,962,575 $ 2,261,690
Accrued liabilities and other............................. 3,651,842 1,668,010
Deferred revenue.......................................... 68,221 --
------------ ------------
Total current liabilities......................... 5,682,638 3,929,700
LONG-TERM DEBT.............................................. 247,329,420 --
REDEEMABLE CUMULATIVE CONVERTIBLE PREFERRED STOCK:
Redeemable cumulative convertible preferred stock -- $.01
par value, 96,000 and 95,000 shares authorized,
95,641.25 and 95,000 shares issued and outstanding at
March 31, 1998, and December 31, 1997, respectively.... 59,206,139 33,409,404
Preferred stock subscriptions receivable.................. (275,000) --
------------ ------------
Total redeemable cumulative convertible preferred
stock........................................... 58,931,139 33,409,404
REDEEMABLE WARRANTS......................................... 8,257,542 --
COMMITMENTS AND CONTINGENCIES (see Notes 5 and 7)
STOCKHOLDERS' DEFICIT:
Common stock -- $.01 par value, 102,524 and 100,001 shares
authorized, 1 share issued and outstanding at March 31,
1998, and December 31, 1997............................ -- --
Additional paid-in capital................................ 14,405,519 3,008,437
Deferred compensation..................................... (13,216,518) (2,798,377)
Accumulated deficit....................................... (21,162,048) (7,502,150)
------------ ------------
Total stockholders' deficit....................... (19,973,047) (7,292,090)
------------ ------------
Total liabilities and stockholders' deficit....... $300,227,692 $ 30,047,014
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 105
ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
THREE MONTHS (APRIL 22, 1997),
ENDED THROUGH
MARCH 31, DECEMBER 31,
1998 1997
------------ -----------------
<S> <C> <C>
REVENUES.................................................... $ 202,925 $ 403
OPERATING EXPENSES:
Technical................................................. 234,831 151,269
Selling................................................... 689,778 22,844
General and administrative................................ 4,990,253 3,613,028
Depreciation and amortization............................. 208,424 12,639
------------ ------------
Total operating expenses.......................... 6,123,286 3,799,780
------------ ------------
Loss from operations.............................. (5,920,361) (3,799,377)
OTHER (EXPENSE) INCOME:
Interest income........................................... 2,194,226 111,417
Interest expense.......................................... (4,669,079) --
------------ ------------
Total other (expense) income...................... (2,474,853) 111,417
------------ ------------
NET LOSS.................................................... (8,395,214) (3,687,960)
ACCRETION OF REDEEMABLE PREFERRED STOCK AND WARRANT
VALUES.................................................... (5,264,684) (3,814,190)
------------ ------------
NET LOSS APPLICABLE TO COMMON STOCK......................... $(13,659,898) $ (7,502,150)
============ ============
NET LOSS PER SHARE, basic and diluted....................... $(13,659,898) $ (7,502,150)
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 106
ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK
------------------ ADDITIONAL
NUMBER OF PAID-IN DEFERRED ACCUMULATED
SHARES AMOUNT CAPITAL COMPENSATION DEFICIT TOTAL
--------- ------ ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, April 22, 1997 (date of
inception)...................... -- $ -- $ -- $ -- $ -- $ --
Issuance of common stock at $100
per share.................... 1 -- 100 -- -- 100
Accretion of redeemable
preferred stock and warrant
values....................... -- -- -- -- (3,814,190) (3,814,190)
Deferred compensation........... -- -- 3,008,337 (3,008,337) -- --
Amortization of deferred
compensation................. -- -- -- 209,960 -- 209,960
Net loss........................ -- -- -- -- (3,687,960) (3,687,960)
-- ---- ----------- ------------ ------------ ------------
BALANCE, December 31, 1997........ 1 -- 3,008,437 (2,798,377) (7,502,150) (7,292,090)
Accretion of redeemable
preferred stock and warrant
values....................... -- -- -- -- (5,264,684) (5,264,684)
Deferred compensation........... -- -- 11,397,082 (11,397,082) -- --
Amortization of deferred
compensation................. -- -- -- 978,941 -- 978,941
Net loss........................ -- -- -- -- (8,395,214) (8,395,214)
-- ---- ----------- ------------ ------------ ------------
BALANCE, March 31, 1998........... 1 $ -- $14,405,519 $(13,216,518) $(21,162,048) $(19,973,047)
== ==== =========== ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 107
ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(APRIL 22,
THREE MONTHS 1997),
ENDED THROUGH
MARCH 31, DECEMBER 31,
1998 1997
------------ ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $ (8,395,214) $ (3,687,960)
Adjustments to reconcile net loss to net cash used in
operating activities --
Depreciation and amortization.......................... 208,424 12,639
Accretion of senior discount notes..................... 4,568,286 --
Amortization of deferred debt issuance costs........... 100,793 --
Deferred compensation.................................. 978,941 209,960
Changes in assets and liabilities --
Accounts receivable.................................. (303,120) (4,310)
Prepaid expenses and other current assets............ (151,308) (245,152)
Other assets......................................... (53,939) (171,173)
Accounts payable..................................... 45,951 275,089
Accrued liabilities and other........................ 737,401 1,668,010
Deferred revenue..................................... 68,221 --
------------ ------------
Net cash used in operating activities............. (2,195,564) (1,942,897)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................... (7,608,890) (21,926,058)
Short-term investments.................................... (35,916,586) --
------------ ------------
Net cash used in investing activities............. (43,525,476) (21,926,058)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from senior discount notes....................... 242,293,600 --
Proceeds from issuance of warrants........................ 8,183,550 --
Debt issuance costs....................................... (9,135,396) --
Proceeds from issuance of redeemable preferred stock...... 62,500 5,000,000
Proceeds from redeemable capital contributions............ 20,268,543 24,595,214
Proceeds from issuance of common stock.................... -- 100
------------ ------------
Net cash provided by financing activities......... 261,672,797 29,595,314
------------ ------------
INCREASE IN CASH AND CASH EQUIVALENTS....................... 215,951,757 5,726,359
CASH AND CASH EQUIVALENTS, beginning of period.............. 5,726,359 --
------------ ------------
CASH AND CASH EQUIVALENTS, end of period.................... $221,678,116 $ 5,726,359
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 108
ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998 AND 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 Service Corporation,
Allegiance Telecom of California, Inc., Allegiance Telecom of Georgia, Inc.,
Allegiance Telecom of Illinois, Inc., Allegiance Telecom of New Jersey, Inc.,
Allegiance Telecom of New York, Inc., Allegiance Telecom of Texas, Inc., and
Allegiance Telecom International, 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 U.S. metropolitan areas 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 began in the first quarter of 1998. Initial facilities-based
services for 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 and Boston markets 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 OSS and other back office
systems, develop a sufficient customer base, and attract, retain, and motivate
qualified personnel. The Company's networks and the provisions of
telecommunications services are subject to significant regulation at the
federal, state, and local levels. Delays in receiving required regulatory
approvals or the enactment of new adverse regulation or regulatory requirements
may have a material adverse effect upon the Company. Although management
believes that the Company will be able to successfully mitigate these risks,
there is no assurance that the Company will be able to do so or that the Company
will ever operate profitably.
Expenses are expected to exceed revenues in each location in which the
Company offers service until a sufficient customer base is established. It is
anticipated that obtaining a sufficient customer base will take a number of
years, and positive cash flows from operations are not expected in the near
future.
F-7
<PAGE> 109
ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CONSOLIDATION
The accompanying financial statements include the accounts of Allegiance
Telecom, Inc. and its wholly owned subsidiaries. All significant intercompany
balances and transactions have been eliminated.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, the Company includes as cash and cash
equivalents, cash, marketable securities and commercial paper with original
maturities of three months or less.
SHORT-TERM INVESTMENTS
Short-term investments consist primarily of commercial paper with original
maturities at date of purchase beyond three months and less than 12 months. Such
short-term investments are carried at their accreted value, which approximates
fair value, due to the short period of time to maturity.
ACCOUNTS RECEIVABLE
Accounts receivable consists of end user receivables, interest receivable,
and at December 31, 1997, a receivable from an employee.
PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of prepaid rent, prepaid
insurance, and refundable deposits. Prepayments are expensed on a straight-line
basis over the life of the underlying agreements.
PROPERTY AND EQUIPMENT
Property and equipment includes switches, office equipment, furniture and
fixtures, and construction-in-progress of switches and leasehold improvements.
These assets are stated at cost, which includes direct costs and interest
expense capitalized and are depreciated once placed in service using the
straight-line method. Interest expense for the three months ended March 31, 1998
was $5,136,613 before the capitalization of $467,534 of interest expense related
to construction-in-progress. The estimated useful lives of office equipment,
furniture and fixtures, leasehold improvements and switches are two, five, and
seven years, respectively. Repair and maintenance costs are expensed as
incurred. Property and equipment at March 31, 1998, and December 31, 1997,
consisted of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
----------- ------------
<S> <C> <C>
Construction-in-progress switches......................... $10,774,433 $19,989,924
Construction-in-progress leasehold improvements........... 521,546 2,458,728
Construction-in-progress office equipment................. 3,272,779 1,186,457
Switches.................................................. 13,835,717 --
Leasehold improvements.................................... 3,696,150 37,466
Office equipment.......................................... 583,560 89,855
Furniture and fixtures.................................... 206,263 150,229
Less: Accumulated depreciation............................ (221,063) (12,639)
----------- -----------
Property and equipment, net............................... $32,669,385 $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
F-8
<PAGE> 110
ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$19.3 million. Operating and application software costs for both network and
administration systems are capitalized and amortized over the estimated life of
the system, which approximates five years.
REVENUE RECOGNITION
Revenue is recognized in the month in which the service is provided. All
expenses related to services provided are recognized as incurred. Deferred
revenue represents advance billings for services not yet performed. Such revenue
is deferred and recognized in the month in which the service is provided.
USE OF ESTIMATES IN FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of expenses during the reporting period.
Actual results could 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, warrants and options were not included in the net
loss per share calculation as the effect from the conversion would be
antidilutive (see Note 3). The net loss applicable to common stock at March 31,
1998, and December 31, 1997, includes the accretion of redeemable preferred
stock and warrant values of $5,264,684 and $3,814,190, respectively.
COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"). SFAS 130 establishes reporting and disclosure requirements for
comprehensive income and its components within the Financial Statements. The
Company's comprehensive income components were immaterial as of March 31, 1998
and the Company had no comprehensive income components as of December 31, 1997;
therefore, comprehensive income is the same as net income for both periods.
RECLASSIFICATIONS
Certain amounts in the prior period's consolidated financial statements
have been reclassified to conform with the current period presentation.
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 LLC") (see Note 6). Allegiance LLC
purchased 95,000 shares of 12% redeemable 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 LLC detailing the funds necessary to build
out the Company's business in a new market. Allegiance LLC is not required to
make any contributions until the proposal has been approved by Allegiance LLC.
The maximum commitment of Allegiance LLC is $100 million and no capital
contributions are required to be made after the Company consummates an initial
public offering of its stock (see Note 10). As of March 31, 1998, and December
31, 1997, Allegiance LLC has contributed a total of $49.9 million and $29.6
million, respectively. At any time and from time to time after August 13, 2004,
but not after the consummation of a public offering
F-9
<PAGE> 111
ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(see Note 10) or sale of the Company, each security holder in Allegiance LLC
shall have the right to require Allegiance LLC to repurchase all of the
outstanding securities held by such security holder at the greater of the
original cost 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 LLC together with interest thereon at 12% per
annum. Twenty-three days after the issuance of a Repurchase Notice (as defined
in the Securityholders Agreement), the security holders may have the fair value
of their securities determined. Fair market value is defined as the amount
agreed to be the fair market value by Allegiance LLC, the majority of the Fund
Investors, and the majority of the Management Investors. If mutual agreement
cannot be reached, fair market value for (a) publicly traded securities
generally means the average of the closing prices of such securities for the 21
day period after the filing of the Repurchase Notice and (b) non-publicly traded
securities, a valuation determined by an appraisal mechanism. In the event the
repurchase provisions are exercised, the Company has agreed, at the request and
direction of Allegiance LLC, to take any and all actions necessary, including
declaring and paying dividends and repurchasing preferred or common stock to
enable Allegiance LLC to satisfy its repurchase obligations. Accordingly, as
required by SEC accounting standards the Company is recognizing the accretion of
the value of the Preferred Stock (as defined below) to reflect management's
estimate of the potential future fair market value of the Preferred Stock
payable in the event the repurchase provisions are exercised. Amounts are
accreted using the effective interest method assuming the Preferred Stock is
redeemed at a redemption price based on the estimated potential future fair
market value of the equity of the Company in August 2004. The accretion is
recorded each period as an increase in the balance of Preferred Stock
outstanding and a non-cash increase in the net loss applicable to common stock.
In the event of an initial public offering of the common stock of the Company
before August 2004, the redemption provision terminates. At such time, the
Preferred Stock would convert to common stock and the amounts accreted would be
reclassified as a component of additional paid-in capital in the stockholders'
equity section of the balance sheet.
REDEEMABLE CUMULATIVE CONVERTIBLE PREFERRED STOCK
As of March 31, 1998, and December 31, 1997, the Company had authorized
96,000 and 95,000 shares, respectively of 12% redeemable cumulative convertible
Preferred Stock ("Preferred Stock"), par value $.01 per share. Each share is
convertible into shares of the Company's common stock with a par value of $.01
per share (the "Common Stock"). 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 1998 or in 1997. As of March 31, 1998,
and December 31, 1997, the Company had recorded accretion in the value of the
Preferred Stock using the effective interest method of $5,190,692 and
$3,814,190, to reflect the potential future repurchase value of the Preferred
Stock in August 2004 based upon management's estimate of the fair market value
of the Preferred Stock at that date.
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 Closings occurring in October 1997
and January 1998, and other capital contributions totaled approximately $45.2
million.
On February 25, 1998, the Company issued 522.50 shares of Preferred Stock.
The Preferred Stock was issued at a per share price of $526.32, for an aggregate
price of $275,000 which is recorded as a subscription receivable on the balance
sheet.
On March 13, 1998, the Company issued 118.75 shares of Preferred Stock. The
Preferred Stock was issued at a per share price of $526.32, for an aggregate
price of $62,500.
F-10
<PAGE> 112
ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
COMMON STOCK
As of December 31, 1997, the Company had authorized 100,001 shares of $.01
par value Common Stock. One share was issued and outstanding at March 31, 1998,
and December 31, 1997. In February 1998, the Company increased the number of
authorized shares of Common Stock to 102,524 shares. Of the authorized but
unissued Common Stock, 96,000 shares are reserved for issuance upon conversion
of Preferred Stock, 5,000 shares are reserved for issuance upon exercise of
stock options issued under the Stock Option Plan (see Note 9) and 1,523 shares
are reserved for issuance, sale, and delivery upon the exercise of warrants (see
Note 4).
4. LONG-TERM DEBT:
On February 3, 1998, the Company raised gross proceeds of approximately
$250.5 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 (the
"11 3/4% Notes") and one warrant to purchase .0034224719 shares of Common Stock
(the "Redeemable Warrants") at an exercise price of $.01 per share, subject to
certain antidilution provisions. Of the gross proceeds, $242.3 million was
allocated to the initial accreted value of the 11 3/4% Notes and $8.2 million
was allocated to the Redeemable Warrants. The Redeemable Warrants are separately
transferable and are exercisable at any time beginning February 3, 1999, through
their expiration on February 3, 2008. The Redeemable Warrants will also become
exercisable in connection with a public equity offering. The 11 3/4% Notes have
a principal amount at maturity of $445.0 million and an effective interest rate
of 12.45%. The 11 3/4% Notes mature on February 15, 2008. From and after
February 15, 2003, interest on the 11 3/4% Notes will be payable semi-annually
in cash at the rate of 11 3/4% per annum.
The fair market value of the Redeemable Warrants was determined based upon
estimates of the fair value of the Common Stock the Redeemable Warrants could be
used to acquire and the achievement of an effective interest rate on the 11 3/4%
Notes of 12.45% required to sell the Units. The fair market value of the
Redeemable Warrants was also corroborated using the Black-Scholes valuation
model.
The Company must make an offer to purchase the Redeemable Warrants for cash
at the Relevant Value upon the occurrence of a Repurchase Event. A Repurchase
Event is defined to occur when (i) the Company consolidates with or merges into
another person if the Common Stock thereafter issuable upon exercise of the
Redeemable Warrants is not registered under the Securities Exchange Act of 1934,
as amended (the "Exchange Act") or (ii) the Company sells all or substantially
all of its assets to another person, if the Common Stock thereafter issuable
upon the exercise of the Redeemable Warrants is not registered under the
Exchange Act, unless the consideration for such a transaction is cash. The
Relevant Value is defined to be the fair market value of the Common Stock as
determined by the trading value of the securities if publicly traded or at an
estimated fair market value without giving effect to any discount for lack of
liquidity, lack of registered securities, or the fact that the securities
represent a minority of the total shares outstanding. As required by SEC
accounting standards the Company is recognizing the potential future redemption
value of the Redeemable Warrants by recording accretion of the Redeemable
Warrant to its estimated fair market value at February 3, 2008 using the
effective interest method. In the event the Redeemable Warrant is exercised and
used to purchase the common stock of the Company or expires, the redemption
provisions terminate and amounts accreted would be reversed as a reduction of
the losses applicable to common stock in measuring results of operations of the
Company. Accretion recorded in the first quarter of 1998 was $73,992.
The 11 3/4% Notes are redeemable by the Company, in whole or in part,
anytime on or after February 15, 2003, at 105.875% of their principal amount at
maturity, plus accrued and unpaid interest, declining to 100% of their principal
amount at maturity, plus accrued and unpaid interest on and after February 15,
2006. In addition, at any time prior to February 15, 2001, the Company may, at
its option, redeem up to 35% of the principal amount at maturity of the 11 3/4%
Notes in connection with a public equity offering at 111.750% of the
F-11
<PAGE> 113
ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
accreted value on the redemption date; provided that at least $289.3 million
aggregate principal amount at maturity of the 11 3/4% Notes remains outstanding
after such redemption.
The 11 3/4% Notes carry certain restrictive covenants that, among other
things, limit the ability of the Company to incur indebtedness, pay dividends,
issue or sell capital stock, create liens, sell assets, and enter into
transactions with any holder of 5% or more of any class of capital stock of the
Company or any of its affiliates. The Company was in compliance with all such
restrictive covenants at March 31, 1998.
5. LEGAL MATTERS:
On August 29, 1997, WorldCom, Inc. ("WorldCom") sued the Company and two
individual employees. In its complaint, WorldCom alleges that these employees
violated certain noncompete and nonsolicitation agreements by accepting
employment with the Company and by soliciting then current WorldCom employees to
leave WorldCom's employment and join the Company. In addition, WorldCom claims
that the Company tortiously interfered with WorldCom's relationships with its
employees, and that the Company's behavior constituted unfair competition.
WorldCom seeks injunctive relief and damages, although it has filed no motion
for a temporary restraining order or preliminary injunction. The Company denies
all claims and will vigorously defend itself. The Company does not expect the
ultimate outcome to have a material adverse effect on the results of operations
or financial condition of the Company and an estimate of possible loss cannot be
made at this time.
On October 7, 1997, the Company filed a counterclaim against WorldCom for,
among other things, attempted monopolization of the "one stop shopping"
telecommunications market, abuse of process, and unfair competition. WorldCom
did not move to dismiss the attempted monopolization claim, but has moved to
dismiss the abuse of process and unfair competition claims. On March 4, 1998,
the court dismissed the claim for unfair competition.
6. RELATED PARTIES:
The Company is a majority owned subsidiary of Allegiance LLC. As of March
31, 1998, and December 31, 1997, Allegiance LLC has made aggregate capital
contributions to the Company of approximately $49.9 million and $29.6 million,
respectively. Allegiance LLC may continue to make additional capital
contributions to the Company as discussed in Note 3 to these financial
statements, but no such contributions will be required after the Company
consummates an initial public offering of its stock. Certain investors in
Allegiance LLC 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 LLC 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 LLC 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 LLC in accordance with generally
accepted accounting principles and SEC regulations in effect at the time of such
increase, and this will result in a charge to the Company's earnings (see Note
10).
As the estimated fair market value of the Company has exceeded the price at
which units of Allegiance LLC have been sold to management employees since the
foundation of the Company, the Company has recognized deferred compensation of
$9,436,950 and $977,632 at March 31, 1998 and December 31, 1997, respectively,
of which $650,911 and $40,735 has been amortized to expense at March 31, 1998
and December 31, 1997, respectively. The deferred compensation charge is
amortized based upon the period over which the Company has the right to
repurchase the securities (at the lower of fair market value or the price paid
by the employee) in the event the management employee's employment with the
Company is terminated which expires over a four year period from the date of
issuance. During 1998 and 1997, the Company paid all
F-12
<PAGE> 114
ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
organizational and legal fees of Allegiance LLC, the amount of which was not
material. No amounts are due from Allegiance LLC at March 31, 1998, or December
31, 1997.
In connection with the Unit Offering (see Note 4), the Company incurred
approximately $4.4 million in fees to an affiliate of an investor in Allegiance
LLC.
7. COMMITMENTS AND CONTINGENCIES:
The Company has entered into various operating lease agreements, with
expirations through 2007, for office space and equipment. Future minimum lease
obligations related to the Company's operating leases as of March 31, 1998 are
as follows:
<TABLE>
<S> <C>
1998............................................. $1,199,679
1999............................................. 1,588,907
2000............................................. 1,597,751
2001............................................. 1,160,961
2002............................................. 1,119,128
Thereafter....................................... 4,743,351
</TABLE>
Total rent expense for the three months ended March 31, 1998, was $331,862
and 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.
8. FEDERAL INCOME TAXES:
The Company accounts for income tax under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). SFAS 109 requires an asset and liability approach which requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events which have been recognized in the Company's financial
statements. The Company had approximately $2,916,156 and $460,475 of net
operating loss carryforwards for federal income tax purposes at March 31, 1998
and December 31, 1997, respectively. The net operating loss carryforwards will
expire in the years 2012 and 2013 if not previously utilized. The Company has
recorded a valuation allowance equal to the net deferred tax assets at March 31,
1998, and December 31, 1997, due to the uncertainty of future operating results.
The valuation allowance will be reduced at such time as management believes it
is more likely than not that the net deferred tax assets will be realized. Any
reductions in the valuation allowance will reduce future provisions for income
tax expense.
The Company's deferred tax assets and the changes in those assets are:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 CHANGE 1998
------------ --------- -----------
<S> <C> <C> <C>
Start-up costs capitalized for tax
purposes................................... $ 1,025,959 $ (59,848) $ 966,111
Net operating loss carryforwards............. 156,562 834,932 991,494
Valuation allowance.......................... (1,182,521) (775,084) (1,957,605)
----------- --------- -----------
$ -- $ -- $ --
=========== ========= ===========
</TABLE>
Amortization of the original issue discount on the Notes as interest
expense is not deductible in the income tax return until paid.
F-13
<PAGE> 115
ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Under existing income tax law, all operating expenses incurred prior to a
company commencing its principal operations are capitalized and amortized over a
five-year period for tax purposes.
9. 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 March 31, 1998, and 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 calculations for March 31, 1998, and December 31, 1997: weighted average
risk-free interest rates of 5.88% and 6.06%, respectively, expected life of six
years, and no dividends being paid over the life of the options.
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
---------- ------------
<S> <C> <C>
Net loss -- As reported.................................... $8,395,214 $3,687,960
Net loss -- Pro forma...................................... $8,409,836 $3,698,012
</TABLE>
A summary of the status of the Plan as of March 31, 1998, and December 31,
1997, is presented in the table below:
<TABLE>
<CAPTION>
MARCH 31, 1998 DECEMBER 31, 1997
-------------------------- --------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------- ---------------- ------- ----------------
<S> <C> <C> <C> <C>
Outstanding, beginning of period...... 444 $1,052.63 -- $ --
Granted............................... 314 1,052.63 444 1,052.63
Exercised............................. -- -- -- --
Forfeited............................. (131) 1,052.63 -- --
------- -------
Outstanding, end of period............ 627 $1,052.63 444 $1,052.63
======= =======
Options exercisable at period-end..... -- --
======= =======
Weighted average fair value of options
granted............................. $314.25 $320.85
======= =======
</TABLE>
As of March 31, 1998, the 627 options outstanding under the Plan have an
exercise price of $1,052.63 and a weighted average remaining contractual life of
5.6 years. As of December 31, 1997, the 444 options outstanding have an exercise
price of $1,052.63 and a weighted average remaining contractual life of 5.8
years.
As the estimated fair market value of the Company stock exceeded the
exercise price of the options granted, the Company has recognized deferred
compensation expense of $2,559,281 and $2,030,705 at March 31, 1998 and December
31, 1997, respectively of which $328,030 and $169,225 has been amortized to
expense at March 31, 1998 and December 31, 1997, respectively over the vesting
period of the options. As of March 31, 1998, the Company has reversed $599,149
of deferred compensation related to options forfeited.
F-14
<PAGE> 116
ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. SUBSEQUENT EVENTS:
CAPITAL LEASE
On May 29, 1998, the Company signed a capital lease agreement for three,
four-fiber rings at an expected total cost of $3,485,000 for a term of ten years
with a renewal term of ten years.
PUBLIC STOCK AND NOTE OFFERINGS
The Company will seek to raise approximately $200.0 million of gross
proceeds in an initial public offering of Common Stock (the "Equity Offering")
and an additional $290.0 million of gross proceeds in an offering of Senior
Notes due 2008 (the "Debt Offering") of which approximately $88.0 million will
be required to be placed in a pledged account to secure and fund the first six
scheduled payments of interest on the notes.
The Fund Investors and Management Investors currently own 95.0% and 5.0%,
respectively, of the ownership interests of Allegiance LLC, an entity that owns
substantially all of the Company's outstanding capital stock. If the Equity
Offering is consummated, Allegiance LLC will dissolve and its assets (which
consist almost entirely of such capital stock) will be distributed to the Fund
Investors and the Management Investors in accordance with the LLC Agreement. The
LLC Agreement provides that the Equity Allocation between the Fund Investors and
the Management Investors will range between 95.0%/5.0% and 66.7%/33.3% based
upon the valuation of the Company's Common Stock implied by the Equity Offering.
Based upon the current valuation of the Company's Common Stock implied by the
Equity Offering, the Equity Allocation will be 66.7% to the Fund Investors and
33.3% to the Management Investors. Under generally accepted accounting
principles, upon the consummation of the Equity Offering, the Company will be
required to record the increase (based upon the valuation of the Common Stock
implied by the Equity Offering) in the assets of Allegiance LLC allocated to the
Management Investors as an increase in additional paid-in capital, a portion of
which will be recorded as a non-cash, non-recurring charge to operating expense
and a portion of which will be recorded as a deferred management ownership
allocation charge. The deferred charge will be amortized over 1998, 1999, 2000
and 2001, which is the period over which the Company has the right to repurchase
the securities (at the lower of fair market value or the price paid by the
employee) in the event the management employee's employment with the Company is
terminated. Based upon the Common Stock valuation estimated in the Equity
Offering the total management ownership allocation charge is estimated to be
$232.7 million.
In connection with the consummation of the Equity Offering, the outstanding
shares of Preferred Stock will be converted to Common Stock and the obligation
of Allegiance LLC to make additional capital contributions to the Company (and
the obligation of the members of Allegiance LLC to make capital contributions to
it) will terminate. Upon such conversion of the Preferred Stock, the obligation
of the Company to redeem the Preferred Stock also terminates and, therefore, the
Preferred Stock dividends accrued to the date of the Equity Offering will be
reclassified to additional paid-in capital in the stockholders' equity section
of the balance sheet.
F-15
<PAGE> 117
[ALLEGIANCE TELECOM, INC. LOGO]
<PAGE> 118
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following is a statement of estimated expenses, to be paid solely by
the Company, of the issuance and distribution of the securities being
registered:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $ 85,550
NASD filing fee............................................. $ 29,500
Blue Sky fees and expenses (including attorneys' fees and
expenses)................................................. $ 15,000
Printing expenses........................................... $250,000
Accounting fees and expenses................................ $ 30,000
Legal fees and expenses..................................... $200,000
Miscellaneous expenses...................................... $139,950
--------
Total............................................. $750,000
========
</TABLE>
- ---------------
All amounts are estimated except for the SEC registration fee and the NASD
filing fee.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
General Corporation Law
The Company is incorporated under the laws of the State of Delaware.
Section 145 ("Section 145") of the General Corporation Law of the State of
Delaware, as the same exists or may hereafter be amended (the "General
Corporation Law"), inter alia, provides that a Delaware corporation may
indemnify any persons who were, are or are threatened to be made, parties to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of such corporation), by reason of the fact that such person is or was an
officer, director, employee or agent of such corporation, or is or was serving
at the request of such corporation as a director, officer employee or agent of
another corporation or enterprise. The indemnity may include expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding, provided such person acted in good faith and in a manner he
reasonably believed to be in or not opposed to the corporation's best interests
and, with respect to any criminal action or proceeding, had no reasonable cause
to believe that his conduct was illegal. A Delaware corporation may indemnify
any persons who are, were or are threatened to be made, a party to any
threatened, pending or completed action or suit by or in the right of the
corporation by reasons of the fact that such person was a director, officer,
employee or agent of such corporation, or is or was serving at the request of
such corporation as a director, officer, employee or agent of another
corporation or enterprise. The indemnity may include expenses (including
attorneys' fees) actually and reasonably incurred by such person in connection
with the defense or settlement of such action or suit, provided such person
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the corporation's best interests, provided that no indemnification is
permitted without judicial approval if the officer, director, employee or agent
is adjudged to be liable to the corporation. Where an officer, director,
employee or agent is successful on the merits or otherwise in the defense of any
action referred to 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.
II-1
<PAGE> 119
Certificate of Incorporation
The Company's Certificate of Incorporation and By-laws provides for the
indemnification of officers and directors to the fullest extent permitted by the
General Corporation Law.
All of the Company's directors and officers are covered by insurance
policies maintained by it against certain liabilities for actions taken in their
capacities as such, including liabilities under the Securities Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since its inception, the Company has issued the following securities
without registration under the Securities Act (the number of shares set forth
below does not give effect to the proposed stock split of the Company's Common
Stock referred to in the Prospectus).
On August 13, 1997, in connection with the Company's formation, the Company
issued one share of Common Stock to Allegiance LLC for consideration of $1,000.
On August 13, 1997, the Company issued 95,000 shares of Redeemable
Convertible Preferred Stock to Allegiance LLC for an aggregate initial purchase
price of approximately $5 million.
On February 25, 1998, the Company issued: (i) 71.25 shares of Redeemable
Convertible Preferred Stock to Richard Fields for an aggregate initial purchase
price of $37,500; (ii) 95 shares of Redeemable Convertible Preferred Stock to
Roger Curry for an aggregate initial purchase price of $50,000; (iii) 23.75
shares of Redeemable Convertible Preferred Stock to Northwestern University for
an aggregate initial purchase price of $12,500; (iv) 237.5 shares of Redeemable
Convertible Preferred Stock to MKW Partners, L.P. for an aggregate initial
purchase price of $125,001; (v) 47.5 shares of Redeemable Convertible Preferred
Stock to Tom Shattan for an aggregate initial purchase price of $25,000; (vi)
28.5 shares of Redeemable Convertible Preferred Stock to Greg Mendel for an
aggregate initial purchase price of $15,000; and (vii) 19 shares of Redeemable
Convertible Preferred Stock to Kevin Fechtmeyer for an aggregate initial
purchase price of $10,000.
On March 13, 1998, the Company issued 118.75 shares of Redeemable
Convertible Preferred Stock to Charles Ross Partners, LLC for an aggregate
initial purchase price of $62,500.
The above-described transactions were exempt from registration under the
Securities Act pursuant to Section 4(2) of the Securities Act, as transactions
not involving any public offering.
On February 3, 1998, the Company issued 445,000 units (the "Units"), with
each Unit consisting of one 11 3/4% Senior Discount Note due 2008 and one
warrant to purchase .0034224719 shares of the Company's Common Stock. The
Company received approximately $240.7 million of net proceeds, after deducting
underwriting discounts and commissions of approximately $8.75 million and other
expenses payable by the Company of approximately $1.0 million, from the issuance
of the Units. Such Units were issued to (i) "qualified institutional buyers" (as
defined in Rule 144A of the Securities Act), (ii) other institutional
"accredited investors" (as defined in Rule 501(a) of the Securities Act), and
(iii) outside the United States in compliance with Regulation S under the
Securities Act, and therefore, the issuance of such Units was exempt from
registration under the Securities Act. Morgan Stanley & Co. Incorporated,
Salomon Brothers Inc, Bear, Stearns & Co. Inc. and Donaldson, Lufkin & Jenrette
Securities Corporation were the initial purchasers of the Units.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1 Form of Amended and Restated Certificate of Incorporation of
Allegiance Telecom, Inc.
</TABLE>
II-2
<PAGE> 120
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
3.2 Form of Amended and Restated By-Laws of Allegiance Telecom,
Inc.
4.1 Form of Indenture by and between the Company and The Bank of
New York, as trustee (including the Form of Notes).
4.2 Indenture, dated as of February 3, 1998, by and between the
Company and The Bank of New York, as trustee (incorporated
by reference to Exhibit 4.2 to Allegiance Telecom, Inc.'s
Registration Statement on Form S-4 (Registration No.
333-49013), filed on March 31, 1998 and amended on May 6,
1998, May 15, 1998 and May 22, 1998 (the "Form S-4
Registration Statement")).
4.3 Form of 11 3/4% Senior Discount Notes (incorporated by
reference to Exhibit 4.3 to the Form S-4 Registration
Statement).
4.4 Form of Collateral Pledge and Security Agreement by and
between the Company and The Bank of New York, as trustee.
5.1 Opinion of Kirkland & Ellis.
10.1 Stock Purchase Agreement, dated August 13, 1997, between
Allegiance LLC and the Company (incorporated by reference to
Exhibit 10.1 to the Form S-4 Registration Statement).
10.2 Securityholders Agreement, dated August 13, 1997, among
Allegiance LLC, the Fund Investors, the Management Investors
and the Company (incorporated by reference to Exhibit 10.2
to the Form S-4 Registration Statement).
10.3 Registration Agreement, dated August 13, 1997, among the
Fund Investors, the Management Investors and the Company
(incorporated by reference to Exhibit 10.3 to the Form S-4
Registration Statement).
10.4 Warrant Registration Rights Agreement, dated as of January
29, 1998, by and among the Company and Morgan Stanley & Co.
Incorporated, Salomon Brothers Inc, Bear, Stearns & Co. Inc.
and Donaldson, Lufkin & Jenrette Securities Corporation, as
initial purchasers of the 11 3/4% Senior Discount Notes
(incorporated by reference to Exhibit 10.11 to the Form S-4
Registration Statement).
10.5 Allegiance Telecom, Inc. 1997 Nonqualified Stock Option Plan
(incorporated by reference to Exhibit 10.4 to the Form S-4
Registration Statement).
10.6 Allegiance Telecom, Inc. 1998 Stock Incentive Plan.
10.7 Executive Purchase Agreement, dated August 13, 1997, among
Allegiance LLC, the Company and Royce J. Holland
(incorporated by reference to Exhibit 10.5 to the Form S-4
Registration Statement).
10.8 Executive Purchase Agreement, dated August 13, 1997, among
Allegiance LLC, the Company and Thomas M. Lord (incorporated
by reference to Exhibit 10.6 to the Form S-4 Registration
Statement).
10.9 Executive Purchase Agreement, dated January 28, 1998, among
Allegiance LLC, the Company and C. Daniel Yost (incorporated
by reference to Exhibit 10.7 to the Form S-4 Registration
Statement).
10.10 Form of Executive Purchase Agreement among Allegiance LLC,
the Company and each of the other Management Investors
(incorporated by reference to Exhibit 10.8 to the Form S-4
Registration Statement).
10.11 Warrant Agreement, dated February 3, 1998, by and between
the Company and The Bank of New York, as Warrant Agent
(including the form of the Warrant Certificate)
(incorporated by reference to Exhibit 10.9 to the Form S-4
Registration Statement).
</TABLE>
II-3
<PAGE> 121
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
10.12 General Agreement, dated October 16, 1997, as amended,
between the Company and Lucent Technologies Inc.
(incorporated by reference to Exhibit 10.10 to the Form S-4
Registration Statement).
10.13 Form of Indemnification Agreement by and between the Company
and its directors and officers.
11.1 Statement Regarding Computation of Pro Forma Per Share
Earnings for the three months ended March 31, 1998.
11.2 Statement Regarding Computation of Pro Forma Per Share
Earnings for the period from inception (April 22, 1997)
through December 31, 1997.
12.1 Statement Regarding Computation of Ratios of Earnings (Loss)
to Fixed Charges.
21.1 Subsidiaries of the Company.
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 for the three months ended March 31,
1998 (incorporated by reference to Exhibit 27.1 to the Form
S-4 Registration Statement).
27.2 Financial Data Schedule for the period from inception (April
22, 1997) through December 31, 1997 (incorporated by
reference to Exhibit 27.2 to the Form S-4 Registration
Statement).
</TABLE>
- ---------------
** Previously filed.
(b) FINANCIAL STATEMENT SCHEDULES.
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required
under the related instructions, are inapplicable or not material, or the
information called for thereby is otherwise included in the financial
statements and therefore has been omitted.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes to provide to the underwriter
at closing specified in the underwriting agreement certificates in such
denominations and registered in such names as requested by the underwriter to
permit prompt delivery to each purchaser.
The undersigned registrant hereby undertakes:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 122
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-5
<PAGE> 123
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 2 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Dallas,
State of Texas, on June 29, 1998.
ALLEGIANCE TELECOM, INC.
By: /s/ ROYCE J. HOLLAND
----------------------------------
Royce J. Holland
Chief Executive Officer
****
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to Registration Statement has been signed on June 29, 1998 by the
following persons in the capacities indicated:
<TABLE>
<CAPTION>
SIGNATURE CAPACITY
--------- --------
<C> <S> <C>
/s/ ROYCE J. HOLLAND Chairman of the Board and Chief
- ----------------------------------------------------- Executive Officer (Principal
Royce J. Holland Executive Officer)
* President, Chief Operating
- ----------------------------------------------------- Officer and Director
C. Daniel Yost
* Executive Vice President, Chief
- ----------------------------------------------------- Financial Officer, and
Thomas M. Lord Director (Principal Financial
Officer)
/s/ DENNIS M. MAUNDER Vice President and Controller
- ----------------------------------------------------- (Principal Accounting Officer)
Dennis M. Maunder
* Senior Vice President of Sales
- ----------------------------------------------------- and Marketing and Director
John J. Callahan
* Director
- -----------------------------------------------------
Paul D. Carbery
* Director
- -----------------------------------------------------
James E. Crawford, III
* Director
- -----------------------------------------------------
John B. Ehrenkranz
* Director
- -----------------------------------------------------
Paul J. Finnegan
* Director
- -----------------------------------------------------
Richard D. Frisbie
</TABLE>
II-6
<PAGE> 124
<TABLE>
<CAPTION>
SIGNATURE CAPACITY
--------- --------
<C> <S> <C>
* Director
- -----------------------------------------------------
Reed E. Hundt
* Director
- -----------------------------------------------------
Robert H. Niehaus
* Director
- -----------------------------------------------------
James N. Perry, Jr.
</TABLE>
* The undersigned, by signing his name hereto, does sign and execute this
Amendment No. 2 to Registration Statement on behalf of the above named
officers and directors of Allegiance Telecom, Inc. pursuant to the Power of
Attorney executed by such officers and directors and filed with the Securities
and Exchange Commission.
<TABLE>
<C> <S> <C>
/s/ DENNIS M. MAUNDER Attorney-in-Fact
- -----------------------------------------------------
Dennis M. Maunder
</TABLE>
II-7
<PAGE> 125
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1 Form of Amended and Restated Certificate of Incorporation of
Allegiance Telecom, Inc.
3.2 Form of Amended and Restated By-Laws of Allegiance Telecom,
Inc.
4.1 Form of Indenture by and between the Company and The Bank of
New York, as trustee (including the Form of Notes).
4.2 Indenture, dated as of February 3, 1998, by and between the
Company and The Bank of New York, as trustee (incorporated
by reference to Exhibit 4.2 to Allegiance Telecom, Inc.'s
Registration Statement on Form S-4 (Registration No.
333-49013), filed on March 31, 1998 and amended on May 6,
1998, May 15, 1998 and May 22, 1998 (the "Form S-4
Registration Statement")).
4.3 Form of 11 3/4% Senior Discount Notes (incorporated by
reference to Exhibit 4.3 to the Form S-4 Registration
Statement).
4.4 Form of Collateral Pledge and Security Agreement by and
between the Company and The Bank of New York, as trustee.
5.1 Opinion of Kirkland & Ellis.
10.1 Stock Purchase Agreement, dated August 13, 1997, between
Allegiance LLC and the Company (incorporated by reference to
Exhibit 10.1 to the Form S-4 Registration Statement).
10.2 Securityholders Agreement, dated August 13, 1997, among
Allegiance LLC, the Fund Investors, the Management Investors
and the Company (incorporated by reference to Exhibit 10.2
to the Form S-4 Registration Statement).
10.3 Registration Agreement, dated August 13, 1997, among the
Fund Investors, the Management Investors and the Company
(incorporated by reference to Exhibit 10.3 to the Form S-4
Registration Statement).
10.4 Warrant Registration Rights Agreement, dated as of January
29, February 3, 1998, by and among the Company and Morgan
Stanley & Co. Incorporated, Salomon Brothers Inc, Bear,
Stearns & Co. Inc. and Donaldson, Lufkin & Jenrette
Securities Corporation, as initial purchasers of the 11 3/4%
Senior Discount Notes (incorporated by reference to Exhibit
10.11 to the Form S-4 Registration Statement).
10.5 Allegiance Telecom, Inc. 1997 Nonqualified Stock Option Plan
(incorporated by reference to Exhibit 10.4 to the Form S-4
Registration Statement).
10.6 Allegiance Telecom, Inc. 1998 Stock Incentive Plan.
10.7 Executive Purchase Agreement, dated August 13, 1997, among
Allegiance LLC, the Company and Royce J. Holland
(incorporated by reference to Exhibit 10.5 to the Form S-4
Registration Statement).
10.8 Executive Purchase Agreement, dated August 13, 1997, among
Allegiance LLC, the Company and Thomas M. Lord (incorporated
by reference to Exhibit 10.6 to the Form S-4 Registration
Statement).
10.9 Executive Purchase Agreement, dated January 28, 1998, among
Allegiance LLC, the Company and C. Daniel Yost (incorporated
by reference to Exhibit 10.7 to the Form S-4 Registration
Statement).
</TABLE>
<PAGE> 126
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
10.10 Form of Executive Purchase Agreement among Allegiance LLC,
the Company and each of the other Management Investors
(incorporated by reference to Exhibit 10.8 to the Form S-4
Registration Statement).
10.11 Warrant Agreement, dated February 3, 1998, by and between
the Company and The Bank of New York, as Warrant Agent
(including the form of the Warrant Certificate)
(incorporated by reference to Exhibit 10.9 to the Form S-4
Registration Statement).
10.12 General Agreement, dated October 16, 1997, as amended,
between the Company and Lucent Technologies Inc.
(incorporated by reference to Exhibit 10.10 to the Form S-4
Registration Statement).
10.13 Form of Indemnification Agreement by and between the Company
and its directors and officers.
11.1 Statement Regarding Computation of Pro Forma Per Share
Earnings for the three months ended March 31, 1998.
11.2 Statement Regarding Computation of Pro Forma Per Share
Earnings for the period from inception (April 22, 1997)
through December 31, 1997.
12.1 Statement Regarding Computation of Ratios of Earnings (Loss)
to Fixed Charges.
21.1 Subsidiaries of the Company.
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 for the three months ended March 31,
1998 (incorporated by reference to Exhibit 27.1 to the Form
S-4 Registration Statement).
27.2 Financial Data Schedule for the period from inception (April
22, 1997) through December 31, 1997 (incorporated by
reference to Exhibit 27.2 to the Form S-4 Registration
Statement).
</TABLE>
- ---------------
** Previously filed.
<PAGE> 1
EXHIBIT 1.1
$200,000,000
ALLEGIANCE TELECOM, INC.
[ ]% SENIOR NOTES 2008
UNDERWRITING AGREEMENT
[ ], 1998
<PAGE> 2
[ ], 1998
Morgan Stanley & Co. Incorporated
Salomon Brothers Inc
Donaldson, Lufkin & Jenrette Securities Corporation
Goldman, Sachs & Co.
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, New York 10036
Dear Sirs and Mesdames:
ALLEGIANCE TELECOM, INC., a Delaware corporation (the
"COMPANY"), proposes to issue and sell to the several Underwriters named in
Schedule I hereto (the "UNDERWRITERS") $200,000,000 principal amount of its [
]% Senior Notes due 2008 (the "SECURITIES") to be issued pursuant to the
provisions of an Indenture dated as of [ ], 1998 (the "INDENTURE")
between the Company and The Bank of New York (the "TRUSTEE").
The Company has filed with the Securities and Exchange
Commission (the "COMMISSION") a registration statement, including a prospectus,
relating to the Securities. The registration statement as amended at the time
it becomes effective, including the information (if any) deemed to be part of
the registration statement at the time of effectiveness pursuant to Rule 430A
under the Securities Act of 1933, as amended (the "SECURITIES ACT"), is
hereinafter referred to as the "REGISTRATION STATEMENT"; the prospectus in the
form first used to confirm sales of Securities is hereinafter referred to as
the "PROSPECTUS." If the Company has filed an abbreviated registration
statement to register additional Securities pursuant to Rule 462(b) under the
Securities Act (the "RULE 462 REGISTRATION STATEMENT"), then any reference
herein to the term "REGISTRATION STATEMENT" shall be deemed to include such
Rule 462 Registration Statement.
A portion of the net proceeds from the issuance of the
Securities, sufficient to purchase a sufficient amount of Pledged Securities to
provide for the first six scheduled interest payments due on the Securities,
will be held by the Trustee pursuant to a collateral pledge and security
agreement to be dated as of the Closing Date (as defined below) and to be
substantially in the form attached hereto as Exhibit A, with such revisions as
shall be reasonably satisfactory to the Underwriters and the Company (the
"Pledge Agreement").
Pursuant to an underwriting agreement, dated the date hereof,
among the Company and Morgan Stanley & Co. Incorporated, Smith Barney Inc.,
Donaldson, Lufkin & Jenrette Securities Corporation, Goldman, Sachs & Co. and
UBS Securities LLC, as representatives of the U.S. Underwriters (as defined
therein), and Morgan Stanley & Co.
<PAGE> 3
International Limited, Smith Barney Inc., Donaldson, Lufkin & Jenrette
Securities Corporation, Goldman, Sachs International and UBS Limited, as
representatives of the International Underwriters (as defined therein), the
Company will issue and sell an aggregate of 12,000,000 shares of its Common
Stock, par value $.01 per share (the "SHARES") (the "EQUITY OFFERING").
1. Representations and Warranties. The Company
represents and warrants to and agrees with each of the Underwriters that:
(a) The Registration Statement has become effective; no
stop order suspending the effectiveness of the Registration Statement
is in effect, and no proceedings for such purpose are pending before
or threatened by the Commission.
(b) (i) The Registration Statement, when it became
effective, did not contain and, when amended or supplemented, if
applicable, will not contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading; (ii) the
Registration Statement and the Prospectus comply and, as amended or
supplemented, if applicable, will comply in all material respects with
the Securities Act and the applicable rules and regulations of the
Commission thereunder and (iii) the Prospectus does not contain and,
as amended or supplemented, if applicable, will not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, except that
the representations and warranties set forth in this paragraph do not
apply (A) to statements or omissions in the Registration Statement or
the Prospectus based upon information relating to any Underwriter
furnished to the Company in writing by such Underwriter through you
expressly for use therein or (B) to that part of the Registration
Statement that constitutes the Statement of Eligibility and
Qualification (Form T-1) under the Trust Indenture Act of 1939, as
amended (the "TRUST INDENTURE ACT"), of the Trustee.
(c) The Company has been duly incorporated, is validly
existing as a corporation in good standing under the laws of the State
of Delaware, has the corporate power and authority to own its property
and to conduct its business as described in the Prospectus and is duly
qualified to transact business and is in good standing in each
jurisdiction in which the conduct of its business or its ownership or
leasing of property requires such qualification, except to the extent
that the failure to be so qualified or be in good standing would not
have a material adverse effect on the Company and its subsidiaries,
taken as a whole. Schedule A to the form of opinion of Kirkland &
Ellis, attached hereto as Exhibit A, sets forth each jurisdiction in
which the conduct of the Company's business or its ownership or
leasing of property requires it to be qualified to transact business
and be in good standing.
(d) Each subsidiary of the Company has been duly
incorporated, is validly existing as a corporation in good standing
under the laws of the jurisdiction of its
2
<PAGE> 4
incorporation, has the corporate power and authority to own its
property and to conduct its business as described in the Prospectus
and is duly qualified to transact business and is in good standing in
each jurisdiction in which the conduct of its business or its
ownership or leasing of property requires such qualification, except
to the extent that the failure to be so qualified or be in good
standing would not have a material adverse effect on the Company and
its subsidiaries, taken as a whole; all of the issued shares of
capital stock of each subsidiary of the Company have been duly and
validly authorized and issued, are fully paid and non-assessable and
are owned directly by the Company, free and clear of all liens,
encumbrances, equities or claims. There are no active subsidiaries of
the Company other than those listed on Schedule A to the form of
opinion of Kirkland & Ellis, attached hereto as Exhibit B and such
Schedule A sets forth each jurisdiction in which the conduct of the
Company's business or its ownership or leasing of property requires
any subsidiary of the Company to be qualified to transact business and
be in good standing.
(e) This Agreement has been duly authorized, executed and
delivered by the Company.
(f) The Securities have been duly authorized and, when
executed and authenticated in accordance with the provisions of the
Indenture and delivered to and paid for by the Underwriters in
accordance with the terms of this Agreement, will be valid and binding
obligations of the Company enforceable in accordance with their terms,
subject to applicable bankruptcy, insolvency or similar laws affecting
creditors' rights generally and general principles of equity, and will
be entitled to the benefits of the Indenture and the Pledge Agreement.
(g) The Indenture has been duly qualified under the Trust
Indenture Act and has been duly authorized and, when executed and
delivered by the Company, will be a valid and binding agreement of the
Company, enforceable in accordance with its terms, subject to
applicable bankruptcy, insolvency or similar laws affecting creditors'
rights generally and general principles of equity.
(h) The Pledge Agreement has been duly authorized and,
when executed and delivered, will be a valid and binding agreement
enforceable against the Company in accordance with its terms except as
(x) the enforceability thereof may be limited by bankruptcy,
insolvency or similar laws affecting creditors' rights generally and
(y) the availability of equitable remedies may be limited by equitable
principles of general applicability.
(i) Upon the delivery to the securities intermediary of
the certificates, if any, representing the Pledged Securities (as
defined in the Pledge Agreement), any filing of financing statements
required by the UCC (as defined in the Pledge Agreement) and notation
on the records of the securities intermediary that it holds the
Pledged Securities as pledgee, the pledge of and grant of a security
interest in the
3
<PAGE> 5
Collateral (as defined in the Pledge Agreement) pursuant to the Pledge
Agreement for the benefit of the Trustee and the holders of the
Securities creates a valid and perfected first priority security
interest in such Collateral, securing the payment of the Obligations
(as defined in the Pledge Agreement) enforceable as such against all
creditors of the Company (and any persons purporting to purchase any
of the Collateral from the Company).
(j) The execution and delivery by the Company of, and the
performance by the Company of its obligations under, this Agreement,
the Indenture, the Pledge Agreement and the Securities will not
contravene any provision of applicable law or the certificate of
incorporation or by-laws of the Company or any agreement or other
instrument binding upon the Company or any of its subsidiaries that is
material to the Company and its subsidiaries, taken as a whole, or any
judgment, order or decree of any governmental body, agency or court
having jurisdiction over the Company or any subsidiary, and no permit,
license, consent, approval, authorization or order of, or filing,
declaration or qualification with, any governmental body or agency is
required for the performance by the Company of its obligations under
this Agreement, the Indenture, the Pledge Agreement or the Securities,
except such as may be required by the securities or Blue Sky laws of
the various states in connection with the offer and sale of the
Securities. Schedule B to the form of opinion of Kirkland & Ellis,
attached hereto as Exhibit A, sets forth all material agreements and
instruments to which the Company or any of its subsidiaries is a
party.
(k) There has not occurred any material adverse change,
or any development involving a prospective material adverse change, in
the condition, financial or otherwise, or in the earnings, business or
operations of the Company and its subsidiaries, taken as a whole, from
that set forth in the Prospectus (exclusive of any amendments or
supplements thereto subsequent to the date of this Agreement).
Furthermore, except in each case as described in the Prospectus, (i)
the Company and its subsidiaries have not incurred any material
liability or obligation, direct or contingent, nor entered into any
material transaction not in the ordinary course of business; (ii)
neither the Company nor any of its subsidiaries has purchased any of
the Company's outstanding capital stock, nor declared, paid or
otherwise made any dividend or distribution of any kind on the
Company's capital stock; and (iii) there has not been any material
change in the capital stock, short-term debt or long- term debt of the
Company and its subsidiaries, taken as a whole.
(l) There are no legal or governmental proceedings
pending or threatened to which the Company or any of its subsidiaries
is a party or to which any of the properties of the Company or any of
its subsidiaries is subject that are required to be described in the
Registration Statement or the Prospectus and are not so described or
any statutes, regulations, contracts or other documents that are
required to be described in the
4
<PAGE> 6
Registration Statement or the Prospectus or to be filed as exhibits to
the Registration Statement that are not described or filed as
required.
(m) Each preliminary prospectus filed as part of the
registration statement as originally filed or as part of any amendment
thereto, or filed pursuant to Rule 424 or Rule 462 under the
Securities Act, complied when so filed in all material respects with
the Securities Act and the applicable rules and regulations of the
Commission thereunder.
(n) The Company is not and, after giving effect to the
offering and sale of the Securities and the Shares and the application
of the proceeds thereof as described in the Prospectus, will not be an
"investment company" as such term is defined in the Investment Company
Act of 1940, as amended.
(o) The Company and its subsidiaries (i) are in
compliance with any and all applicable foreign, federal, state and
local laws and regulations relating to the protection of human health
and safety, the environment or hazardous or toxic substances or
wastes, pollutants or contaminants, including all such laws and
regulations concerning electromagnetic radio frequency emissions
("ENVIRONMENTAL LAWS"), (ii) have received all permits, licenses or
other approvals required of them under applicable Environmental Laws
to conduct their respective businesses and (iii) are in compliance
with all terms and conditions of any such permit, license or approval,
except where such noncompliance with Environmental Laws, failure to
receive required permits, licenses or other approvals or failure to
comply with the terms and conditions of such permits, licenses or
approvals would not, singly or in the aggregate, have a material
adverse effect on the Company and its subsidiaries, taken as a whole.
(p) There are no costs or liabilities associated with
Environmental Laws (including, without limitation, any capital or
operating expenditures required for clean-up, closure of properties or
compliance with Environmental Laws or any permit, license or approval,
any related constraints on operating activities and any potential
liabilities to third parties) which would, singly or in the aggregate,
have a material adverse effect on the Company and its subsidiaries,
taken as a whole.
(q) Except as described in or contemplated by the
Prospectus, the Company and each of its subsidiaries (i) have all
necessary licenses, consents, authorizations, approvals, orders,
certificates and permits of and from, and have made all declarations
and filings with, all federal, state, local and other governmental,
administrative and regulatory authorities, all self-regulatory
organizations and all courts and other tribunals, to own, lease,
license and use its properties and assets and to conduct its business
in the manner described in the Prospectus, except to the extent that
the failure to obtain such licenses, consents, authorizations,
approvals, orders, certificates and permits or make such declarations
and filings would not have a material adverse effect on the Company
and its subsidiaries, taken as a whole and (ii) have not received any
5
<PAGE> 7
notice of proceedings relating to revocation or modification of any
such license, consent, authorization, approval, order, certificate or
permit which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would reasonably be expected
to result in a material adverse change in the condition, financial or
otherwise, or in the earnings, business or operations of the Company
and its subsidiaries, taken as a whole.
(r) The Company and each of its subsidiaries maintain a
system of internal accounting controls sufficient to provide
reasonable assurance that (i) transactions are executed in accordance
with management's general or specific authorizations; (ii)
transactions are recorded as necessary to permit preparation of
financial statements in conformity with generally accepted accounting
principles and to maintain asset accountability; (iii) access to
assets is permitted only in accordance with management's general or
specific authorization; and (iv) the recorded accountability for
assets is compared with the existing assets at reasonable intervals
and appropriate action is taken with respect to any differences.
(s) The Company and each of its subsidiaries have good
and marketable title in fee simple to all real property and good and
marketable title to all personal property owned by them which is
material to the business of the Company and its subsidiaries, taken as
a whole, in each case free and clear of all liens, encumbrances and
defects, except such as are described in the Prospectus and such other
liens as do not materially affect the value of such property and do
not interfere with the use made and proposed to be made of such
property by the Company and its subsidiaries; and any real property
and buildings held under lease by the Company and its subsidiaries are
held by them under valid, subsisting and enforceable leases with such
exceptions as are not material and do not materially interfere with
the use made and proposed to be made of such property and buildings by
the Company and its subsidiaries, in each case except as described in
or contemplated by the Prospectus.
(t) The Company and its subsidiaries own or possess, or
can acquire on reasonable terms, all material patents, patent rights,
licenses, inventions, copyrights, know-how (including trade secrets
and other unpatented and/or unpatentable proprietary or confidential
information, systems or procedures), trademarks, service marks and
trade names currently employed by them in connection with the business
now operated by them, and neither the Company nor any of its
subsidiaries has received any notice of infringement of or conflict
with asserted rights of others with respect to any of the foregoing
which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, would have a material adverse effect on
the Company and its subsidiaries, taken as a whole.
(u) No material labor dispute with the employees of the
Company or any of its subsidiaries exists or, to the knowledge of the
Company, is imminent; and the
6
<PAGE> 8
Company is not aware of any existing, threatened or imminent labor
disturbance by the employees of any of its principal suppliers,
manufacturers or contractors that could have a material adverse effect
on the Company and its subsidiaries, taken as a whole.
(v) The Company and each of its subsidiaries are insured
by insurers of recognized financial responsibility against such losses
and risks and in such amounts as are customary in the businesses in
which they are engaged; neither the Company nor any of its
subsidiaries has been refused any insurance coverage sought or applied
for; and neither the Company nor any of its subsidiaries has any
reason to believe that it will not be able to renew its existing
insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue
its business at a cost that would have a material and adverse effect
on the Company and its subsidiaries, taken as a whole, except as
described in or contemplated by the Prospectus.
(w) All licenses issued by the Federal Communications
Commission (the "FCC Licenses") required for the operation of the
business of the Company and its subsidiaries are in full force and
effect and there are no pending modifications, amendments or
revocation proceedings which would adversely affect the operations of
the Company and its subsidiaries. All fees due and payable to
governmental authorities pursuant to the rules governing FCC Licenses
have been paid and no event has occurred with respect to the FCC
Licenses held by the Company and its subsidiaries which, with the
giving of notice or the lapse of time or both, would constitute
grounds for revocation thereof. Each of the Company and its
subsidiaries is in compliance in all material respects with the terms
of the FCC Licenses, as applicable, and there is no condition, event
or occurrence existing, nor is there any proceeding being conducted of
which the Company has received notice, nor, to the Company's
knowledge, is there any proceeding threatened, by any governmental
authority, which would cause the termination, suspension, cancellation
or nonrenewal of any of the FCC Licenses, or the imposition of any
penalty or fine by any regulatory authority. No registrations,
filings, applications, notices, transfers, consents, approvals,
audits, qualifications, waivers or other action of any kind is
required by virtue of the execution and delivery of this Agreement,
the Indenture, the Pledge Agreement or the Securities or of the
consummation of the transactions contemplated hereby, other than as
previously obtained from the FCC (a) to avoid the loss of any such
license, permit, consent, concession or other authorization or any
asset, property or right pursuant to the terms thereof, or the
violation or breach of any applicable law thereto or (b) to enable the
Company or any of its subsidiaries to hold and enjoy the same after
the Closing Date (as defined herein) in the conduct of its business as
conducted prior to the Closing Date.
(x) Each of the Company and its subsidiaries is solvent
and has tangible and intangible assets having a fair value in excess
of the amount required to pay its probable liabilities on its existing
debts as they become absolute and matured, and has access to
7
<PAGE> 9
adequate capital for the conduct of its business and the ability to
pay its debts from time to time incurred in connection therewith as
such debts mature. Neither the Company nor any of its subsidiaries is
contemplating either the filing of a petition by it under any state or
federal bankruptcy or insolvency laws or the liquidating of all or a
substantial portion of its property, and neither the Company nor any
of its subsidiaries has any knowledge of any person contemplating the
filing of any such petition against it.
(y) Except as described in the Prospectus, there are no
contracts, agreements or understandings between the Company and any
person granting such person the right to require the Company to file a
registration statement under the Securities Act with respect to any
securities of the Company or to require the Company to include such
securities with the Securities registered pursuant to the Registration
Statement.
2. Agreements to Sell and Purchase. The Company hereby
agrees to sell to the several Underwriters, and each Underwriter, upon the
basis of the representations and warranties herein contained, but subject to
the conditions hereinafter stated, agrees, severally and not jointly, to
purchase from the Company the respective principal amounts of Securities set
forth in Schedule I hereto opposite its name at [ ]% of their principal
amount (the "PURCHASE PRICE") plus accrued interest, if any, from [
], 1998 to the date of payment and delivery.
The Company hereby agrees that, without the prior written
consent of Morgan Stanley & Co. Incorporated on behalf of the Underwriters, it
will not, during the period beginning on the date hereof and continuing to and
including the Closing Date, offer, sell, contract to sell or otherwise dispose
of any debt of the Company or warrants to purchase debt of the Company
substantially similar to the Securities, other than the sale of the Securities
under this Agreement and commercial paper issued in the ordinary course of
business.
3. Terms of Public Offering. The Company is advised by you
that the Underwriters propose to make a public offering of their respective
portions of the Securities as soon after the Registration Statement has become
effective and this Agreement has been executed as in your judgment is
advisable. The Company is further advised by you that the Securities are to be
offered to the public initially at [ ]% of their principal amount (the
"PUBLIC OFFERING PRICE") plus accrued interest, if any, and to certain dealers
selected by you at a price that represents a concession not in excess of [
]% of the Public Offering Price, and that any Underwriter may allow, and such
dealers may reallow, a concession, not in excess of [ ]% of the Public
Offering Price, to any Underwriter or to certain other dealers.
4. Payment and Delivery. Payment for the Securities shall be
made to the Company (which will immediately deposit a portion of the proceeds
sufficient to purchase the Pledged Securities with the Trustee pursuant to the
Pledge Agreement) in Federal or other funds immediately available in New York
City against delivery of the Securities for the respective accounts of the
several Underwriters at a closing to be held at the offices of Shearman &
Sterling, 599 Lexington Avenue, New York, New York, at 9:00 a.m., New York City
time, on [ ],
8
<PAGE> 10
1998, or at such other time on the same or such other date, not later than [
], 1998, as shall be designated in writing by you. The time and date of such
payment are hereinafter referred to as the "CLOSING DATE".
Certificates for the Securities shall be in definitive form or
global form, as specified by you, and registered in such names and in such
denominations as you shall request in writing not later than one full business
day prior to the Closing Date. The certificates evidencing the Securities
shall be delivered to you on the Closing Date for the respective accounts of
the several Underwriters, with any transfer taxes payable in connection with
the transfer of the Securities to the Underwriters duly paid, against payment
of the Purchase Price therefor plus accrued interest, if any to the date of
payment and delivery.
5. Conditions to the Underwriters' Obligations. The
obligations of the Company to sell the Securities to the Underwriters and the
several obligations of the Underwriters to purchase and pay for the Securities
on the Closing Date are subject to the condition that the Registration
Statement shall have become effective not later than [ ] (New York City time)
on the date hereof.
The several obligations of the Underwriters are subject to the
following further conditions:
(a) Subsequent to the execution and delivery of this
Agreement and prior to the Closing Date,
(i) there shall not have occurred any
downgrading, nor shall any notice have been given of any
intended or potential downgrading or of any review for a
possible change that does not indicate the direction of the
possible change, in the rating accorded any of the Company's
securities by any "nationally recognized statistical rating
organization," as such term is defined for purposes of Rule
436(g)(2) under the Securities Act; and
(ii) there shall not have occurred any change, or
any development involving a prospective change, in the
condition, financial or otherwise, or in the earnings,
business or operations, of the Company and its subsidiaries,
taken as a whole, from that set forth in the Prospectus
(exclusive of any amendments or supplements thereto subsequent
to the date of this Agreement), that, in your judgment, is
material and adverse and that makes it, in your judgment,
impracticable to market the Securities on the terms and in the
manner contemplated in the Prospectus.
(b) The Underwriters shall have received on the Closing
Date a certificate, dated the Closing Date and signed by an executive
officer of the Company, to the effect set forth in Section 5(a)(i)
above and to the effect that the representations and warranties
9
<PAGE> 11
of the Company contained in this Agreement are true and correct as of
the Closing Date and that the Company has complied with all of the
agreements and satisfied all of the conditions on its part to be
performed or satisfied hereunder on or before the Closing Date.
The officer signing and delivering such certificate may rely
upon the best of his or her knowledge as to proceedings threatened.
(c) The Underwriters shall have received on the Closing
Date an opinion of Kirkland & Ellis, outside counsel for the Company,
dated the Closing Date, to the effect set forth in Exhibit B.
(d) The Underwriters shall have received on the Closing
Date an opinion of Swidler & Berlin, Chartered, regulatory counsel for
the Company, dated the Closing Date, to the effect set forth in
Exhibit C.
The opinions of Kirkland & Ellis and Swidler & Berlin,
Chartered, shall be rendered to the Underwriters at the request of the Company
and shall so state therein.
(e) The Underwriters shall have received on the Closing
Date an opinion of Shearman & Sterling, counsel for the Underwriters,
dated the Closing Date, in form and substance reasonably satisfactory
to you.
(f) The Underwriters shall have received, on each of the
date hereof and the Closing Date, a letter dated the date hereof or
the Closing Date, as the case may be, in form and substance
satisfactory to the Underwriters, from Arthur Andersen LLP,
independent public accountants, containing statements and information
of the type ordinarily included in accountants' "comfort letters" to
underwriters with respect to the financial statements and certain
financial information contained in the Registration Statement and the
Prospectus; provided that the letter delivered on the Closing Date
shall use a "cut-off date" not earlier than the date hereof.
(g) The Underwriters shall have received such other
certificates and documents as they or their counsel may reasonably
request.
The obligations of the Underwriters hereunder are also
conditioned upon the concurrent closing of the Equity Offering as described in
the Prospectus.
6. Covenants of the Company. In further consideration of the
agreements of the Underwriters herein contained, the Company covenants with
each Underwriter as follows:
(a) To furnish to you, without charge, five signed copies
of the Registration Statement (including exhibits thereto) and for
delivery to each other Underwriter a
10
<PAGE> 12
conformed copy of the Registration Statement (without exhibits
thereto) and, to furnish to you in New York City, without charge,
prior to 10:00 a.m. New York City time on the business day next
succeeding the date of this Agreement and during the period mentioned
in Section 6(c) below, as many copies of the Prospectus and any
supplements and amendments thereto or to the Registration Statement as
you may reasonably request.
(b) Before amending or supplementing the Registration
Statement or the Prospectus, to furnish to you a copy of each such
proposed amendment or supplement and not to file any such proposed
amendment or supplement to which you reasonably object, and to file
with the Commission within the applicable period specified in Rule
424(b) under the Securities Act any prospectus required to be filed
pursuant to such Rule.
(c) If, during such period after the first date of the
public offering of the Securities as in the opinion of counsel for the
Underwriters the Prospectus is required by law to be delivered in
connection with sales by an Underwriter or dealer, any event shall
occur or condition exist as a result of which it is necessary to amend
or supplement the Prospectus in order to make the statements therein,
in the light of the circumstances when the Prospectus is delivered to
a purchaser, not misleading, or if, in the opinion of counsel for the
Underwriters, it is necessary to amend or supplement the Prospectus to
comply with applicable law, forthwith to prepare, file with the
Commission and furnish, at its own expense, to the Underwriters and to
the dealers (whose names and addresses you will furnish to the
Company) to which Securities may have been sold by you on behalf of
the Underwriters and to any other dealers upon request, either
amendments or supplements to the Prospectus so that the statements in
the Prospectus as so amended or supplemented will not, in the light of
the circumstances when the Prospectus is delivered to a purchaser, be
misleading or so that the Prospectus, as amended or supplemented, will
comply with law.
(d) To use its best effort to register or qualify the
Securities for offer and sale under all applicable state securities or
"blue sky" laws of such jurisdictions as you shall reasonably request;
provided, however, that the Company shall not be required to (i)
qualify as a foreign corporation or as a dealer in securities in any
jurisdiction where it would not otherwise be required to qualify but
for this Section 6(d), (ii) file any general consent to service of
process or (iii) subject itself to taxation in any such jurisdiction
if it is not so subject.
(e) If the Company elects to rely on Rule 462(b) under
the Securities Act, the Company shall file a Rule 462(b) Registration
Statement with the Commission in compliance with Rule 462(b) under the
Securities Act no later than the earlier of (i) 10:00 p.m. Eastern
time on the date hereof and (ii) the time confirmations are sent or
given, as specified by Rule 462(b)(2) under the Securities Act, and
shall pay the applicable fees in accordance with Rule 111 under the
Securities Act.
11
<PAGE> 13
(f) To make generally available to the Company's security
holders and to you as soon as practicable an earning statement
covering the twelve-month period beginning after the effective date of
the Registration Statement (as defined in Rule 158(c) of the
Securities Act) that satisfies the provisions of Section 11(a) of the
Securities Act and the rules and regulations of the Commission
thereunder.
(g) Whether or not the transactions contemplated in this
Agreement are consummated or this Agreement is terminated, to pay or
cause to be paid all expenses incident to the performance of its
obligations under this Agreement, including: (i) the fees,
disbursements and expenses of the Company's counsel and the Company's
accountants in connection with the registration and delivery of the
Securities under the Securities Act and all other fees or expenses in
connection with the preparation and filing of the Registration
Statement, any preliminary prospectus, the Prospectus and amendments
and supplements to any of the foregoing, including all printing costs
associated therewith, and the mailing and delivering of copies thereof
to the Underwriters and dealers, in the quantities hereinabove
specified, (ii) all costs and expenses related to the transfer and
delivery of the Securities to the Underwriters, including any transfer
or other taxes payable thereon, (iii) the cost of printing or
producing any Blue Sky or legal investment memorandum in connection
with the offer and sale of the Securities under state securities laws
and all expenses in connection with the qualification of the
Securities for offer and sale under state securities laws as provided
in Section 6(d) hereof, including filing fees and the reasonable fees
and disbursements of counsel for the Underwriters in connection with
such qualification and in connection with the Blue Sky or legal
investment memorandum, (iv) all filing fees and the reasonable fees
and disbursements of counsel to the Underwriters incurred in
connection with the review and qualification of the offering of the
Securities by the National Association of Securities Dealers, Inc.,
(v) any fees charged by rating agencies for the rating of the
Securities, (vi) the cost of preparation, issuance and delivery of the
Securities, (vii) the costs and charges of the Trustee, (viii) the
costs and expenses of the Company relating to investor presentations
on any "road show" undertaken in connection with the marketing of the
offering of the Securities, including, without limitation, expenses
associated with the production of road show slides and graphics, fees
and expenses of any consultants engaged in connection with the road
show presentations with the prior approval of the Company, travel and
lodging expenses of the representatives and officers of the Company
and any such consultants, and the cost of any aircraft chartered in
connection with the road show, and (ix) all other costs and expenses
incident to the performance of the obligations of the Company
hereunder for which provision is not otherwise made in this Section.
It is understood, however, that except as provided in this Section,
Section 7 entitled "Indemnity and Contribution", and the last
paragraph of Section 9 below, the Underwriters will pay all of their
costs and expenses, including fees and disbursements of their counsel,
transfer and income taxes payable on resale of any of the Securities
by them and any advertising expenses connected with any offers they
may make.
12
<PAGE> 14
7. Indemnity and Contribution. (a) The Company agrees to
indemnify and hold harmless each Underwriter and each person, if any, who
controls any Underwriter within the meaning of either Section 15 of the
Securities Act or Section 20 of the Securities Exchange Act of 1934, as amended
(the "EXCHANGE ACT"), from and against any and all losses, claims, damages and
liabilities (including, without limitation, any legal or other expenses
reasonably incurred in connection with defending or investigating any such
action or claim) caused by any untrue statement or alleged untrue statement of
a material fact contained in the Registration Statement or any amendment
thereof, any preliminary prospectus or the Prospectus (as amended or
supplemented if the Company shall have furnished any amendments or supplements
thereto), or caused by any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, except insofar as such losses, claims, damages or
liabilities are caused by any such untrue statement or omission or alleged
untrue statement or omission based upon information relating to any Underwriter
furnished to the Company in writing by such Underwriter through you expressly
for use therein; provided, however, that the foregoing indemnity agreement with
respect to any preliminary prospectus shall not inure to the benefit of any
Underwriter from whom the person asserting any such losses, claims, damages or
liabilities purchased Securities, or any person controlling such Underwriter,
if a copy of the Prospectus (as then amended or supplemented if the Company
shall have furnished any amendments or supplements thereto) was not sent or
given by or on behalf of such Underwriter to such person, if required by law so
to have been delivered, at or prior to the written confirmation of the sale of
the Securities to such person, and if the Prospectus (as so amended or
supplemented) would have cured the defect giving rise to such losses, claims,
damages or liabilities, unless such failure is the result of noncompliance by
the Company with Section 6(a) hereof.
(b) Each Underwriter agrees, severally and not jointly,
to indemnify and hold harmless the Company, its directors, its officers who
sign the Registration Statement and each person, if any, who controls the
Company within the meaning of either Section 15 of the Securities Act or
Section 20 of the Exchange Act to the same extent as the foregoing indemnity
from the Company to such Underwriter, but only with reference to information
relating to such Underwriter furnished to the Company in writing by such
Underwriter through you expressly for use in the Registration Statement, any
preliminary prospectus, the Prospectus or any amendments or supplements
thereto.
(c) In case any proceeding (including any governmental
investigation) shall be instituted involving any person in respect of which
indemnity may be sought pursuant to Section 7(a) or 7(b), such person (the
"INDEMNIFIED PARTY") shall promptly notify the person against whom such
indemnity may be sought (the "INDEMNIFYING PARTY") in writing and the
indemnifying party, upon request of the indemnified party, shall retain counsel
reasonably satisfactory to the indemnified party to represent the indemnified
party and any others the indemnifying party may designate in such proceeding
and shall pay the fees and disbursements of such counsel related to such
proceeding. In any such proceeding, any indemnified party shall have the right
to retain its own counsel, but the fees and expenses of such counsel shall be
at the
13
<PAGE> 15
expense of such indemnified party unless (i) the indemnifying party and the
indemnified party shall have mutually agreed to the retention of such counsel
or (ii) the named parties to any such proceeding (including any impleaded
parties) include both the indemnifying party and the indemnified party and
representation of both parties by the same counsel would be inappropriate due
to actual or potential differing interests between them. It is understood that
the indemnifying party shall not, in respect of the legal expenses of any
indemnified party in connection with any proceeding or related proceedings in
the same jurisdiction, be liable for the fees and expenses of more than one
separate firm (in addition to any local counsel) for all such indemnified
parties and that all such fees and expenses shall be reimbursed as they are
incurred. Such firm shall be designated in writing by Morgan Stanley & Co.
Incorporated, in the case of parties indemnified pursuant to Section 7(a), and
by the Company, in the case of parties indemnified pursuant to Section 7(b).
The indemnifying party shall not be liable for any settlement of any proceeding
effected without its written consent, but if settled with such consent or if
there be a final judgment for the plaintiff, the indemnifying party agrees to
indemnify the indemnified party from and against any loss or liability by
reason of such settlement or judgment. Notwithstanding the foregoing sentence,
if at any time an indemnified party shall have requested an indemnifying party
to reimburse the indemnified party for fees and expenses of counsel as
contemplated by the second and third sentences of this paragraph, the
indemnifying party agrees that it shall be liable for any settlement of any
proceeding effected without its written consent if (i) such settlement is
entered into more than 60 days after receipt by such indemnifying party of the
aforesaid request and (ii) such indemnifying party shall not have reimbursed
the indemnified party in accordance with such request prior to the date of such
settlement. No indemnifying party shall, without the prior written consent of
the indemnified party, effect any settlement of any pending or threatened
proceeding in respect of which any indemnified party is or could have been a
party and indemnity could have been sought hereunder by such indemnified party,
unless such settlement includes an unconditional release of such indemnified
party from all liability on claims that are the subject matter of such
proceeding.
(d) To the extent the indemnification provided for in
Section 7(a) or 7(b) is unavailable to an indemnified party or insufficient in
respect of any losses, claims, damages or liabilities referred to therein, then
each indemnifying party under such paragraph, in lieu of indemnifying such
indemnified party thereunder, shall contribute to the amount paid or payable by
such indemnified party as a result of such losses, claims, damages or
liabilities (i) in such proportion as is appropriate to reflect the relative
benefits received by the Company on the one hand and the Underwriters on the
other hand from the offering of the Securities or (ii) if the allocation
provided by clause 7(d)(i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause 7(d)(i) above but also the relative fault of the Company on the
one hand and of the Underwriters on the other hand in connection with the
statements or omissions that resulted in such losses, claims, damages or
liabilities, as well as any other relevant equitable considerations. The
relative benefits received by the Company on the one hand and the Underwriters
on the other hand in connection with the offering of the Securities shall be
deemed to be in the same respective proportions as the net proceeds from the
offering of the Securities (before deducting expenses) received by the
14
<PAGE> 16
Company and the total underwriting discounts and commissions received by the
Underwriters, in each case as set forth in the table on the cover of the
Prospectus, bear to the aggregate Public Offering Price of the Securities. The
relative fault of the Company on the one hand and of the Underwriters on the
other hand shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by
the Company or by the Underwriters and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission. The Underwriters' respective obligations to contribute pursuant to
this Section 7 are several in proportion to the respective principal amounts of
Securities they have purchased hereunder, and not joint.
(e) The Company and the Underwriters agree that it would
not be just or equitable if contribution pursuant to this Section 7 were
determined by pro rata allocation (even if the Underwriters were treated as one
entity for such purpose) or by any other method of allocation that does not
take account of the equitable considerations referred to in Section 7(d). The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages and liabilities referred to in the immediately preceding
paragraph shall be deemed to include, subject to the limitations set forth
above, any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 7, no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price at which the Securities underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages that such
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The remedies provided for in this
Section 7 are not exclusive and shall not limit any rights or remedies which
may otherwise be available to any indemnified party at law or in equity.
(f) The indemnity and contribution provisions contained
in this Section 7 and the representations, warranties and other statements of
the Company contained in this Agreement shall remain operative and in full
force and effect regardless of (i) any termination of this Agreement, (ii) any
investigation made by or on behalf of any Underwriter or any person controlling
any Underwriter or by or on behalf of the Company, its officers or directors or
any person controlling the Company and (iii) acceptance of and payment for any
of the Securities.
8. Termination. This Agreement shall be subject to
termination by notice given by you to the Company, if (a) after the execution
and delivery of this Agreement and prior to the Closing Date (i) trading
generally shall have been suspended or materially limited on or by, as the case
may be, any of the New York Stock Exchange, the American Stock Exchange, the
National Association of Securities Dealers, Inc., the Chicago Board of Options
Exchange, the Chicago Mercantile Exchange or the Chicago Board of Trade, (ii)
trading of any securities of the Company shall have been suspended on any
exchange or in any over-the-counter market, (iii) a
15
<PAGE> 17
general moratorium on commercial banking activities in New York shall have been
declared by either Federal or New York State authorities or (iv) there shall
have occurred any outbreak or escalation of hostilities or any change in
financial markets or any calamity or crisis that, in your judgment, is material
and adverse and (b) in the case of any of the events specified in clauses
8(a)(i) through 8(a)(iv), such event singly or together with any other such
event makes it, in your judgment, impracticable to market the Securities on the
terms and in the manner contemplated in the Prospectus.
9. Effectiveness; Defaulting Underwriters. This Agreement
shall become effective upon the execution and delivery hereof by the parties
hereto.
If, on the Closing Date, any one or more of the Underwriters
shall fail or refuse to purchase Securities that it has or they have agreed to
purchase hereunder on such date, and the aggregate principal amount of
Securities which such defaulting Underwriter or Underwriters agreed but failed
or refused to purchase is not more than one-tenth of the aggregate principal
amount of the Securities to be purchased on such date, the other Underwriters
shall be obligated severally in the proportions that the principal amount of
Securities set forth opposite their respective names in Schedule I bears to the
principal amount of Securities set forth opposite the names of all such
non-defaulting Underwriters, or in such other proportions as you may specify,
to purchase the Securities which such defaulting Underwriter or Underwriters
agreed but failed or refused to purchase on such date; provided that in no
event shall the principal amount of Securities that any Underwriter has agreed
to purchase pursuant to this Agreement be increased pursuant to this Section 9
by an amount in excess of one-ninth of such principal amount of Securities
without the written consent of such Underwriter. If, on the Closing Date, any
Underwriter or Underwriters shall fail or refuse to purchase Securities and the
aggregate principal amount of Securities with respect to which such default
occurs is more than one-tenth of the aggregate principal amount of Securities
to be purchased, and arrangements satisfactory to you and the Company for the
purchase of such Securities are not made within 36 hours after such default,
this Agreement shall terminate without liability on the part of any
non-defaulting Underwriter or the Company. In any such case either you or the
Company shall have the right to postpone the Closing Date but in no event for
longer than seven days, in order that the required changes, if any, in the
Registration Statement and in the Prospectus or in any other documents or
arrangements may be effected. Any action taken under this paragraph shall not
relieve any defaulting Underwriter from liability in respect of any default of
such Underwriter under this Agreement.
If this Agreement shall be terminated by the Underwriters, or
any of them, because of any failure or refusal on the part of the Company to
comply with the terms or to fulfill any of the conditions of this Agreement, or
if for any reason the Company shall be unable to perform its obligations under
this Agreement, the Company will reimburse the Underwriters or such
Underwriters as have so terminated this Agreement with respect to themselves,
severally, for all out-of-pocket expenses (including the fees and disbursements
of their counsel) reasonably
16
<PAGE> 18
incurred by such Underwriters in connection with this Agreement or the offering
contemplated hereunder.
10. Counterparts. This Agreement may be signed in two or
more counterparts, each of which shall be an original, with the same effect as
if the signatures thereto and hereto were upon the same instrument.
11. Headings. The headings of the sections of this Agreement
have been inserted for convenience of reference only and shall not be deemed a
part of this Agreement.
12. Applicable Law. This Agreement shall be governed by the
laws of the State of New York.
13. Notice. All notices and other communications under this
Agreement shall be in writing, and, if sent to the Underwriters, be mailed,
delivered or sent by facsimile transmission to:
Morgan Stanley & Co. Incorporated
1585 Broadway
New York, New York 10036
Attention: High Yield New Issue Group
Facsimile Number: (212) 761-0587
or, if sent to the Company, will be mailed, delivered or sent by facsimile
transmission to the Company at:
Allegiance Telecom, Inc.
1950 Stemmons Frwy.
Dallas, Texas 75207
Attention: Chief Financial Officer
Facsimile Number: (214) 853-7110
17
<PAGE> 19
Very truly yours,
ALLEGIANCE TELECOM, INC.
By:
---------------------------------
Name:
Title:
Accepted as of the date hereof
MORGAN STANLEY & CO. INCORPORATED
SALOMON BROTHERS INC
DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION
GOLDMAN, SACHS & CO.
Acting severally on behalf
of themselves and the
several Underwriters
named herein.
By: Morgan Stanley & Co. Incorporated
By:
------------------------------
Name:
Title:
<PAGE> 20
SCHEDULE I
<TABLE>
<CAPTION>
Principal Amount
of Securities
Underwriter To Be Purchased
----------- ----------------
<S> <C>
Morgan Stanley & Co. Incorporated
Salomon Brothers Inc
Donaldson, Lufkin & Jenrette Securities Corporation
Goldman, Sachs & Co.
------------------
Total . . . . . . . . . . . . . . 200,000,000
==================
</TABLE>
<PAGE> 21
EXHIBIT A
[Form of Pledge Agreement]
<PAGE> 22
EXHIBIT B
Opinion of Kirkland & Ellis
[Attach opinion of Kirkland & Ellis, to be delivered pursuant to
Section 5(c) of the Underwriting Agreement to the effect that:]
1. Each of the Company and each subsidiary of the Company listed on
Schedule A attached thereto (each, a "Subsidiary") is a corporation
validly existing and in good standing under the laws of Delaware, has
the corporate power and authority to own its property and to conduct
its business as described in the Prospectus and is duly qualified to
transact business and is in good standing in each jurisdiction set
forth opposite its name on such Schedule A.
2. All of the issued shares of capital stock of each Subsidiary have been
duly and validly authorized and issued and are fully paid and
non-assessable.
3. The Underwriting Agreement has been duly authorized, executed and
delivered by the Company.
4. The Notes have been duly authorized by the Company and, when executed
and authenticated in accordance with the provisions of the Indenture
and delivered to and paid for by the Underwriters in accordance with
the terms of the Underwriting Agreement, will be valid and binding
obligations of the Company, enforceable in accordance with their
terms; and will be entitled to the benefits of the Indenture and the
Pledge Agreement, subject to applicable bankruptcy, insolvency,
reorganization, moratorium, fraudulent transfer and similar laws
affecting creditors' rights and remedies generally and to general
principles of equity (regardless of whether enforcement is sought in a
proceeding at law or in equity).
5. The Indenture has been duly authorized, executed and delivered by, and
is a valid and binding obligation of, the Company, enforceable in
accordance with its terms, subject to applicable bankruptcy,
insolvency, reorganization, moratorium, fraudulent transfer and
similar laws affecting creditors' rights and remedies generally and to
general principles of equity (regardless of whether enforcement is
sought in a proceeding at law or in equity).
6. The Pledge Agreement has been duly authorized, executed and delivered
by, and is a valid and binding agreement of, the Company, enforceable
in accordance with its terms except as (x) the enforceability thereof
may be limited by bankruptcy, insolvency or similar laws affecting
creditors' rights generally and (y) the availability of equitable
remedies may be limited by equitable principles of general
applicability; and upon the Closing Date, the pledge of and grant of a
security interest in the Pledged Securities
<PAGE> 23
(assuming delivery thereof to the Trustee) for the benefit of the
Trustee and the holders of the Notes constitutes a perfected security
interest in the Pledged Securities, enforceable as against all
creditors of the Company (and any persons purporting to purchase any
of the Pledged Securities from the Company).
7. The execution and delivery by the Company of, and the performance by
the Company of its obligations under, the Underwriting Agreement, the
Indenture, the Pledge Agreement and the Securities, will not (i)
violate the Company's Certificate of Incorporation or Bylaws or (ii)
constitute a violation by the Company of any applicable provision of
any law, statute or regulation (except that we express no opinion in
this paragraph as to compliance with any disclosure requirement or any
prohibition against fraud or misrepresentation or as to whether
performance of any indemnification or contribution provisions would be
permitted) or (iii) breach, or result in a default under, any existing
obligation of the Company under any of the agreements listed on
Schedule B hereto (provided that we express no opinion as to
compliance with any financial test or cross default provision that may
be contained in any such agreement, if any).
8. The Company is not required to obtain any consent, approval,
authorization or order of, or qualify with, any governmental body,
court or agency for the performance by the Company of its obligations
under the Underwriting Agreement, the Indenture, the Pledge Agreement
or the Securities, except for any such consent, approval,
authorization or order which may be required under the so-called "Blue
Sky" or securities laws of any states (as to which we express no
opinion or advice).
9. To our knowledge, there is no action, suit, proceeding or
investigation before or by any court or governmental agency or body,
domestic or foreign, pending or threatened against, the Company or any
Subsidiary that is required to be described in the Registration
Statement or the Prospectus that is not so described nor are there any
statutes, regulations, contracts or other documents that are required
to be described in the Registration Statement or the Prospectus or to
be filed as exhibits to the Registration Statement that are not
described or filed as required.
10. The Company is not, and after giving effect to the offering and sale
of the Securities and the Shares and the application of the proceeds
thereof as described in the Prospectus will not be, an "investment
company" as defined in the Investment Company Act of 1940, as amended.
11. The statements in the Prospectus under the captions "Description of
the Notes," "Certain Relationships and Transactions," "Certain United
States Federal Tax Consequences," "Description of Capital Stock" and
"Underwriters," and Item 14 and Item 15 in the Registration Statement,
in each case insofar as such statements constitute summaries of the
legal matters, documents and proceedings referred to therein, in all
material respects
A-2
<PAGE> 24
fairly present the information with respect to such legal matters,
documents and proceedings and fairly summarize the matters referred to
therein.
12. The terms of the Notes and the Indenture conform in all material
respects to the descriptions thereof contained in the Prospectus under
the caption "Description of the Notes."
13. The authorized capital stock of the Company conforms in all material
respects to the description thereof set forth in the Prospectus under
the caption "Description of Capital Stock."
14. We (1) are of the opinion that the Registration Statement and
Prospectus (except for financial statements and schedules and other
financial and statistical data included therein as to which such
counsel need not express any opinion) comply as to form in all
material respects with the Securities Act and the applicable rules and
regulations of the Commission thereunder, (2) have no reason to
believe that (except for financial statements and schedules and other
financial and statistical data as to which such counsel need not
express any belief and except for that part of the Registration
Statement that constitutes the Form T-1 heretofore referred to) the
Registration Statement and the prospectus included therein at the time
the Registration Statement became effective contained any untrue
statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading and (3) have no reason to believe that (except
for financial statements and schedules and other financial and
statistical data as to which such counsel need not express any belief)
the Prospectus when issued contained or as of the date such opinion is
issued contains any untrue statement of a material fact or omitted or
omits to state a material fact necessary in order to make the
statements therein, in light of the circumstances under which they
were made, not misleading.
With respect to opinion (14) above, such counsel may state that its
opinion and belief are based upon its participation in the preparation of the
Registration Statement and Prospectus and any amendments or supplements thereto
and review and discussion of the contents thereof, but are without independent
check or verification except as specified.
A-3
<PAGE> 25
EXHIBIT C
Opinion of Swidler & Berlin
[Attach opinion of Swidler & Berlin, to be delivered pursuant to
Section 5(d) of the Underwriting Agreement to the effect that:]
(A) (1) the execution and delivery of the
Underwriting Agreement, the Indenture, the Pledge Agreement and the
Securities by the Company and the consummation of the transactions
contemplated thereby do not violate (i) the Communications Act, (ii)
any Federal Communications Law applicable to the Company and/or
Subsidiaries, (iii) any State Communications Law applicable to the
Company and/or Subsidiaries, and (iv) to the best of our knowledge,
any decree from any court; and (2) no authorization of the FCC or any
PUC that has not already been received from, or prior filing that has
not already been made with, such agency is necessary for the execution
and delivery of the Underwriting Agreement, the Indenture, the Pledge
Agreement or the Securities by the Company and the consummation of the
transactions contemplated thereby in accordance with the terms
thereof, except where the failure to obtain such authorization or make
such filling would not have a material adverse effect on the
prospects, condition, financial or otherwise, or on the earnings,
business or operations of the Company and its Subsidiaries, taken as a
whole;
(B) to the best of our knowledge and relying on the
factual representations in the Certificate: (1) each of the Company
and its Subsidiaries has made all reports and filings, and paid all
fees, required by the FCC and the PUCs, and has all certificates,
orders, permits, licenses, authorizations, consents, and approvals of
and from, and has made all filings and registrations, with the FCC and
the PUCs necessary to own, lease, license and use its properties and
assets and to conduct its business in the manner described in the
Prospectus; and (2) none of the Company or any of its Subsidiaries has
received any notice of proceedings relating to the violation,
revocation or modification of any such certificates, orders, permits,
licenses, authorizations, consents, or approvals, or the qualification
or rejection of any such filing or registration, the effect of which,
singly or in the aggregate, would have a material adverse effect on
the prospects, condition, financial or otherwise, or on the earnings,
business or operations of the Company and its Subsidiaries, taken as a
whole;
(C) to the best of our knowledge, neither the Company nor
any of its subsidiaries is in violation of, or in default under, any
provision of Federal Communications Law or State Communications Law,
the effect of which, singly or in the aggregate, would have a material
adverse effect on the prospects, condition, financial or otherwise, or
on the earnings, business or operations of the Company and its
Subsidiaries, taken as a whole;
<PAGE> 26
(D) to the best of our knowledge after due inquiry and
relying on the factual representations of the Certificate: (i) no
adverse judgment, decree or order of the FCC or any PUC has been
issued against the Company or any of its Subsidiaries and (ii) no
litigation, proceeding (other than certification applications
initiated by the Company or its Subsidiaries), inquiry or
investigation has been commenced or threatened against the Company or
any of its Subsidiaries before or by the FCC or any PUC which, if
decided adversely to the Company's interest, would have a material
adverse effect on the Company and its Subsidiaries, taken as a whole;
(E) the statements in the Prospectus under the captions
"Risk Factors -- Difficulties in Implementing Local and Enhanced
Services," "Risk Factors -- Competition," "Risk Factors -- Government
Regulation," "Business -- Regulation," "Business -- Market
Opportunity," and "Business -- Competition," exclusive of cross
references therein to other sections of the Prospectus, to the extent
that they discuss international and U.S. federal, state, and local
statutes, regulations and proceedings with respect to
telecommunications regulatory matters, fairly summarize the matters
referred to therein; and
(F) all of the issued shares of capital stock of each
Subsidiary are owned directly of record by the Company, free and clear
of all perfected liens, encumbrances, equities or claims; and to the
best of our knowledge, are owned beneficially by the Company.
B-2
<PAGE> 1
EXHIBIT 3.1
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
ALLEGIANCE TELECOM, INC.
ARTICLE I - Name
The name of the corporation is Allegiance Telecom, Inc. (hereinafter
referred to as the "Corporation").
ARTICLE II - Registered Office
The address of the registered office of the Corporation in the State of
Delaware is 1209 Orange Street, in the City of Wilmington, County of New Castle,
Delaware 19801. The name of the registered agent of the Corporation at that
address is The Corporation Trust Company.
ARTICLE III - Purpose
The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware (the "Delaware General Corporation Law").
ARTICLE IV - Capital Stock
Part A. General. The maximum number of shares of capital stock that
the Corporation is authorized to have outstanding at any one time is 151,000,000
shares, consisting of: (i) 1,000,000 shares of Preferred Stock, par value $0.01
per share (the "Preferred Stock"); and (ii) 150,000,000 shares of Common Stock,
par value $0.01 per share (the "Common Stock").
Part B. Preferred Stock. Authority is hereby expressly vested in the
Board of Directors of the Corporation (each member thereof, a "Director," and
collectively, the "Board of Directors" or the "Board"), without further action
by the Corporation's stockholders, subject to the provisions of this ARTICLE IV
and to the limitations prescribed by law, to authorize the issuance from time to
time of one or more series of Preferred Stock. The authority of the Board of
Directors with respect to each series shall include, but not be limited to, the
determination or fixing of the following by resolution or resolutions adopted by
the affirmative vote of a majority of the total number of the Directors then in
office:
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(1) The designation of such series;
(2) The dividend rate of such series, the conditions and dates upon
which such dividends shall be payable, the relation which such dividends shall
bear to the dividends payable on any other class or classes or series of the
Corporation's capital stock and whether such dividends shall be cumulative or
non-cumulative;
(3) Whether the shares of such series shall be subject to redemption
for cash, property or rights, including securities of any other corporation, by
the Corporation or upon the happening of a specified event and, if made subject
to any such redemption, the times or events, prices, rates, adjustments and
other terms and conditions of such redemptions;
(4) The terms and amount of any sinking fund provided for the
purchase or redemption of the shares of such series;
(5) Whether or not the shares of such series shall be convertible
into, or exchangeable for, at the option of either the holder or the Corporation
or upon the happening of a specified event, shares of any other class or classes
or of any other series of the same class of the Corporation's capital stock and,
if provision be made for conversion or exchange, the times or events, prices,
rates, adjustments and other terms and conditions of such conversions or
exchanges;
(6) The restrictions, if any, on the issue or reissue of any
additional Preferred Stock;
(7) The rights of the holders of the shares of such series upon the
voluntary or involuntary liquidation, dissolution or winding up of the
Corporation; and
(8) The provisions as to voting, optional and/or other special rights
and preferences, if any, including, without limitation, the right to elect one
or more Directors.
Part C. Common Stock. Except as otherwise provided by the Delaware
General Corporation Law or this Restated Certificate of Incorporation (the
"Restated Certificate"), and subject to the rights of holders of any series of
Preferred Stock, the holders of record of Common Stock shall share ratably in
all dividends payable in cash, stock or otherwise and other distributions,
whether in respect of liquidation or dissolution (voluntary or involuntary) or
otherwise and, are subject to all the powers, rights, privileges, preferences
and priorities of any series of Preferred Stock as provided herein or in any
resolution or resolutions adopted by the Board of Directors pursuant to
authority expressly vested in it by the provisions of Section B of this ARTICLE
IV.
(1) The Common Stock shall not be convertible into, or exchangeable
for, shares of any other class or classes or of any other series of the same of
the Corporation's capital stock.
(2) No holder of Common Stock shall have any preemptive,
subscription, redemption, conversion or sinking fund rights with respect to the
Common Stock, or to any
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obligations convertible (directly or indirectly) into stock of the Corporation
whether now or hereafter authorized.
(3) Except as otherwise provided by the Delaware General Corporation
Law, or the Restated Certificate and subject to the rights of holders of any
series of Preferred Stock, all of the voting power of the stockholders of the
Corporation shall be vested in the holders of the Common Stock, and each holder
of Common Stock shall have one vote for each share held by such holder on all
matters voted upon by the stockholders of the Corporation.
ARTICLE V - Existence
The Corporation is to have perpetual existence.
ARTICLE VI - By-laws
In furtherance and not in limitation of the powers conferred by the
Delaware General Corporation Law, the Board of Directors of the Corporation is
expressly authorized to make, alter, amend, change, add to or repeal the By-laws
of the Corporation by the affirmative vote of a majority of the total number of
Directors then in office. Any alteration or repeal of the By-laws of the
Corporation by the stockholders of the Corporation shall require the affirmative
vote of at least a majority of the voting power of the then outstanding shares
of capital stock of the Corporation entitled to vote on such alteration or
repeal, subject to ARTICLE IX hereof and ARTICLE VII of the Corporation's
By-laws.
ARTICLE VII - Stockholders and Directors
Part A. Stockholder Action. Election of Directors need not be by
written ballot unless the By-laws of the Corporation so provide. Subject to any
rights of holders of any series of Preferred Stock, from and after the date on
which the Common Stock of the Corporation is registered pursuant to the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), (i) any action
required or permitted to be taken by the stockholders of the Corporation must be
effected at an annual or special meeting of stockholders of the Corporation and
may not be effected in lieu thereof by any consent in writing by such
stockholders, (ii) special meetings of stockholders of the Corporation may be
called only by either the Board of Directors pursuant to a resolution adopted by
the affirmative vote of the majority of the total number of Directors then in
office or by the chief executive officer of the Corporation and (iii) advance
notice of stockholder nominations of persons for election to the Board of
Directors of the Corporation and of business to be brought before any annual
meeting of the stockholders by the stockholders of the Corporation shall be
given in the manner provided in the By-laws of the Corporation.
Part B. Number of Directors and Term of Office. Subject to any
rights of holders of any series of Preferred Stock to elect additional Directors
under specified circumstances, the number of Directors which shall constitute
the Board of Directors of the Corporation shall be
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fixed from time to time in the manner set forth in the By-laws of the
Corporation. The Directors of the Corporation shall be divided into three
classes: Class I, Class II and Class III. Membership in each such class shall be
as nearly equal in number as possible. The term of office of the initial Class I
Directors shall expire at the annual election of Directors by the stockholders
of the Corporation in 1999, the term of office of the initial Class II Directors
shall expire at the annual election of Directors by the stockholders of the
Corporation in 2000 and the term of office of the initial Class III Directors
shall expire at the annual election of Directors by the stockholders of the
Corporation in 2001, or thereafter when their respective successors in each case
are elected by the stockholders and qualified, subject however, to prior death,
resignation, retirement, disqualification or removal from office for cause. At
each succeeding annual election of Directors by the stockholders of the
Corporation beginning in 1999, the Directors chosen to succeed those whose terms
then expire shall be identified as being of the same class as the Directors they
succeed and shall be elected for a term expiring at the third succeeding annual
election of Directors by the stockholders of the Corporation, or thereafter when
their respective successors in each case are elected by the stockholders and
qualified. If the number of Directors is changed, any increase or decrease shall
be apportioned among the classes so as to maintain the number of Directors in
each class as nearly equal as possible, and any additional Director of any class
elected to fill a vacancy resulting from an increase in such class shall hold
office for a term that shall coincide with the remaining term of that class, but
in no case shall a decrease in the number of Directors shorten the term of any
incumbent Director.
Part C. Removal and Resignation. No Director may be removed from
office without cause and without the affirmative vote of the holders of a
majority of the voting power of the then outstanding shares of capital stock of
the Corporation entitled to vote generally in the election of Directors voting
together as a single class; provided, however, that if the holders of any class
or series of capital stock are entitled by the provisions of this Restated
Certificate (it being understood that any references to this Restated
Certificate shall include any duly authorized certificate of designation) to
elect one or more Directors, such Director or Directors so elected may be
removed without cause only by the vote of the holders of a majority of the
outstanding shares of that class or series entitled to vote. Any Director may
resign at any time upon written notice to the Corporation.
Part D. Vacancies and Newly Created Directorships. Subject to any
rights of holders of any series of Preferred Stock to fill such newly created
Directorships or vacancies, any newly created Directorships resulting from any
increase in the authorized number of Directors and any vacancies in the Board of
Directors resulting from death, resignation, disqualification or removal from
office for cause shall, unless otherwise provided by law or by resolution
approved by the affirmative vote of a majority of the total number of Directors
then in office, be filled only by resolution approved by the affirmative vote of
a majority of the total number of Directors then in office. Any Director so
chosen shall hold office until the next election of the class for which such
Director shall have been chosen, and until his successor shall have been duly
elected and qualified, unless he shall resign, die, become disqualified or be
removed for cause.
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ARTICLE VIII - General Provisions
Part A. Dividends. The Board of Directors shall have authority from
time to time to set apart out of any assets of the Corporation otherwise
available for dividends a reserve or reserves as working capital or for any
other purpose or purposes, and to abolish or add to any such reserve or reserves
from time to time as said board may deem to be in the interest of the
Corporation; and said Board shall likewise have power to determine in its
discretion, except as herein otherwise provided, what part of the assets of the
Corporation available for dividends in excess of such reserve or reserves shall
be declared in dividends and paid to the stockholders of the Corporation.
Part B. Issuance of Stock. The shares of all classes of stock of the
Corporation may be issued by the Corporation from time to time for such
consideration as from time to time may be fixed by the Board of Directors of the
Corporation, provided that shares of stock having a par value shall not be
issued for a consideration determined by the Board to be less than such par
value. At any time, or from time to time, the Corporation may grant rights or
options to purchase from the Corporation any shares of its stock of any class or
classes to run for such period of time, for such consideration, upon such terms
and conditions, and in such form as the Board of Directors may determine. The
Board of Directors shall have authority, as provided by law, to determine that
only a part of the consideration which shall be received by the Corporation for
the shares of its stock which it shall issue from time to time, shall be
capital; provided, however, that, if all the shares issued shall be shares
having a par value, the amount of the part of such consideration so determined
to be capital shall be equal to the aggregate par value of such shares. The
excess, if any, at any time, of the total net assets of the Corporation over the
amount so determined to be capital, as aforesaid, shall be surplus. All classes
of stock of the Corporation shall be and remain at all times nonassessable.
The Board of Directors is hereby expressly authorized, in its
discretion, in connection with the issuance of any obligations or stock of the
Corporation (but without intending hereby to limit its general power so to do in
other cases), to grant rights or options to purchase stock of the Corporation of
any class upon such terms and during such period as the Board of Directors shall
determine, and to cause such rights to be evidenced by such warrants or other
instruments as it may deem advisable.
Part C. Inspection of Books and Records. The Board of Directors
shall have power from time to time to determine to what extent and at what times
and places and under what conditions and regulations the accounts and books of
the Corporation, or any of them, shall be open to the inspection of the
stockholders; and no stockholder shall have any right to inspect any account or
book or document of the Corporation, except as conferred by the laws of the
State of Delaware, unless and until authorized so to do by resolution of the
Board of Directors or of the stockholders of the Corporation.
Part D. Location of Meetings, Books and Records. Except as otherwise
provided in the By-laws, the stockholders of the Corporation and the Board of
Directors may hold their meetings and have an office or offices outside of the
State of Delaware and, subject to the provisions of the laws of said State, may
keep the books of the Corporation outside of said State at such places as may,
from time to time, be designated by the Board of Directors.
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ARTICLE IX - Amendments
The Corporation reserves the right to amend, alter, change or repeal
any provision contained in this Restated Certificate in the manner now or
hereinafter prescribed herein and by the laws of the State of Delaware, and all
rights conferred upon stockholders herein are granted subject to this
reservation. Notwithstanding anything contained in this Restated Certificate to
the contrary, ARTICLE IV, ARTICLE VII, ARTICLE X, and this ARTICLE IX of this
Restated Certificate shall not be altered, amended or repealed and no provision
inconsistent therewith shall be adopted without the affirmative vote of the
holders of at least 66 2/3% of the voting power of the then outstanding shares
of capital stock of the Corporation entitled to vote on such alteration,
amendment or repeal, voting together as a single class (other than any
alteration or amendment to Part A of ARTICLE IV that increases the authorized
number of shares of Preferred Stock or Common Stock).
ARTICLE X - Liability
Part A. Limitation of Liability.
(1) To the fullest extent permitted by the Delaware General
Corporation Law as it now exists or may hereafter be amended (but, in the case
of any such amendment, only to the extent that such amendment permits the
Corporation to provide broader indemnification rights than permitted prior
thereto), and except as otherwise provided in the Corporation's By-laws, no
Director of the Corporation shall be liable to the Corporation or its
stockholders for monetary damages arising from a breach of fiduciary duty owed
to the Corporation or its stockholders.
(2) Any repeal or modification of the foregoing paragraph by the
stockholders of the Corporation shall not adversely affect any right or
protection of a Director of the Corporation existing at the time of such repeal
or modification.
Part B. Right to Indemnification. Each person who was or is made a
party or is threatened to be made a party to or is otherwise involved (including
involvement as a witness) in any action, suit or proceeding, whether civil,
criminal, administrative or investigative (a "proceeding"), by reason of the
fact that he or she is or was a Director or officer of the Corporation or, while
a Director or officer of the Corporation, is or was serving at the request of
the Corporation as a Director, officer, employee or agent of another corporation
or of a partnership, joint venture, trust or other enterprise, including service
with respect to an employee benefit plan (an "indemnitee"), whether the basis of
such proceeding is alleged action in an official capacity as a Director or
officer or in any other capacity while serving as a Director or officer, shall
be indemnified and held harmless by the Corporation to the fullest extent
authorized by the Delaware General Corporation Law, as the same exists or may
hereafter be amended (but, in the case of any such amendment, only to the extent
that such amendment permits the Corporation to provide broader indemnification
rights than permitted prior thereto), against all expense, liability and loss
(including attorneys' fees, judgments, fines, excise exercise taxes or penalties
and amounts paid in settlement) reasonably incurred or suffered by such
indemnitee in connection therewith and such indemnification
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shall continue as to an indemnitee who has ceased to be a Director, officer,
employee or agent and shall inure to the benefit of the indemnitee's heirs,
executors and administrators; provided, however, that, except as provided in
Part C of this ARTICLE X with respect to proceedings to enforce rights to
indemnification, the Corporation shall indemnify any such indemnitee in
connection with a proceeding (or part thereof) initiated by such indemnitee only
if such proceeding (or part thereof) was authorized by the Board of Directors of
the Corporation. The right to indemnification conferred in this Part B of this
ARTICLE X shall be a contract right and shall include the obligation of the
Corporation to pay the expenses incurred in defending any such proceeding in
advance of its final disposition (an "advance of expenses"); provided, however,
that, if and to the extent that the Delaware General Corporation Law requires,
an advance of expenses incurred by an indemnitee in his or her capacity as a
Director or officer (and not in any other capacity in which service was or is
rendered by such indemnitee, including, without limitation, service to an
employee benefit plan) shall be made only upon delivery to the Corporation of an
undertaking (an "undertaking"), by or on behalf of such indemnitee, to repay all
amounts so advanced if it shall ultimately be determined by final judicial
decision from which there is no further right to appeal (a "final adjudication")
that such indemnitee is not entitled to be indemnified for such expenses under
this Part B or otherwise. The Corporation may, by action of its Board of
Directors, provide indemnification to employees and agents of the Corporation
with the same or lesser scope and effect as the foregoing indemnification of
Directors and officers.
Part C. Procedure for Indemnification. Any indemnification of a
Director or officer of the Corporation or advance of expenses under Part B of
this ARTICLE X shall be made promptly, and in any event within forty-five days
(or, in the case of an advance of expenses, twenty days), upon the written
request of the Director or officer. If a determination by the Corporation that
the Director or officer is entitled to indemnification pursuant to this ARTICLE
X is required, and the Corporation fails to respond within sixty days to a
written request for indemnity, the Corporation shall be deemed to have approved
the request. If the Corporation denies a written request for indemnification or
advance of expenses, in whole or in part, or if payment in full pursuant to such
request is not made within forty-five days (or, in the case of an advance of
expenses, twenty days), the right to indemnification or advances as granted by
this ARTICLE X shall be enforceable by the Director or officer in any court of
competent jurisdiction. Such person's costs and expenses incurred in connection
with successfully establishing his or her right to indemnification, in whole or
in part, in any such action shall also be indemnified by the Corporation. It
shall be a defense to any such action (other than an action brought to enforce a
claim for the advance of expenses where the undertaking required pursuant to
Part B of this ARTICLE X, if any, has been tendered to the Corporation) that the
claimant has not met the standards of conduct which make it permissible under
the Delaware General Corporation Law for the Corporation to indemnify the
claimant for the amount claimed, but the burden of such defense shall be on the
Corporation. Neither the failure of the Corporation (including its Board of
Directors, independent legal counsel or its stockholders) to have made a
determination prior to the commencement of such action that indemnification of
the claimant is proper in the circumstances because he or she has met the
applicable standard of conduct set forth in the Delaware General Corporation
Law, nor an actual determination by the Corporation (including its Board of
Directors, independent legal counsel or its stockholders) that the claimant has
not met such applicable standard of conduct, shall be a defense to the action or
create a presumption that the claimant has not met the applicable standard of
conduct. The procedure for indemnification of other employees and agents for
whom indemnification is provided pursuant to Part B of this ARTICLE
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X shall be the same procedure set forth in this Part C for Directors or
officers, unless otherwise set forth in the action of the Board of Directors
providing indemnification for such employee or agent.
Part D. Insurance. The Corporation may purchase and maintain
insurance on its own behalf and on behalf of any person who is or was a
Director, officer, employee or agent of the Corporation or was serving at the
request of the Corporation as a Director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against any
expense, liability or loss asserted against him or her and incurred by him or
her in any such capacity, whether or not the Corporation would have the power to
indemnify such person against such expenses, liability or loss under the
Delaware General Corporation Law.
Part E. Service for Subsidiaries. Any person serving as a Director,
officer, employee or agent of another corporation, partnership, limited
liability company, joint venture or other enterprise, at least 50% of whose
equity interests are owned directly or indirectly by the Corporation (a
"subsidiary" for this ARTICLE X) shall be conclusively presumed to be serving in
such capacity at the request of the Corporation.
Part F. Reliance. Persons who after the date of the adoption of this
provision become or remain Directors or officers of the Corporation or who,
while a Director or officer of the Corporation, become or remain a Director,
officer, employee or agent of a subsidiary, shall be conclusively presumed to
have relied on the rights to indemnity, advance of expenses and other rights
contained in this ARTICLE X in entering into or continuing such service. The
rights to indemnification and to the advance of expenses conferred in this
ARTICLE X shall apply to claims made against an indemnitee arising out of acts
or omissions which occurred or occur both prior and subsequent to the adoption
hereof.
Part G. Non-Exclusivity of Rights. The rights to indemnification and
to the advance of expenses conferred in this ARTICLE X shall not be exclusive of
any other right which any person may have or hereafter acquire under this
Restated Certificate or under any statute, by-law, agreement, vote of
stockholders or disinterested Directors or otherwise.
Part H. Merger or Consolidation. For purposes of this ARTICLE X,
references to the "Corporation" shall include, in addition to the resulting
Corporation, any constituent Corporation (including any constituent of a
constituent) absorbed in a consolidation or merger which, if its separate
existence had continued, would have had power and authority to indemnify its
Directors, officers and employees or agents, so that any person who is or was a
Director, officer, employee or agent of such constituent Corporation, or is or
was serving at the request of such constituent Corporation as a Director,
officer, employee or agent of another Corporation, partnership, limited
liability company, joint venture, trust or other enterprise, shall stand in the
same position under this ARTICLE X with respect to the resulting or surviving
Corporation as he or she would have with respect to such constituent Corporation
if its separate existence had continued.
ARTICLE XI - Business Combinations
The Corporation expressly elects to be governed by Section 203 of the
Delaware General Corporation Law.
* * * * *
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EXHIBIT 3.2
AMENDED AND RESTATED BY-LAWS
OF
ALLEGIANCE TELECOM, INC.
A Delaware Corporation
ARTICLE I
OFFICES
Section 1. Registered Office. The registered office of Allegiance
Telecom, Inc. (the "Corporation") in the State of Delaware shall be located at
1209 Orange Street, in the City of Wilmington, County of New Castle, Delaware
19801. The name of the Corporation's registered agent at such address shall be
The Corporation Trust Company. The registered office and/or registered agent of
the Corporation may be changed from time to time by action of the Board of
Directors.
Section 2. Other Offices. The Corporation may also have offices at such
other places, both within and without the State of Delaware, as the Board of
Directors may from time to time determine or the business of the Corporation may
require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. Annual Meeting. An annual meeting of the stockholders shall
be held each year within 150 days after the close of the immediately preceding
fiscal year of the Corporation or at such other time specified by the Board of
Directors for the purpose of electing Directors and conducting such other proper
business as may come before the annual meeting. At the annual meeting,
stockholders shall elect Directors and transact such other business as properly
may be brought before the annual meeting pursuant to ARTICLE II, Section 11
hereof.
Section 2. Special Meetings. Special meetings of the stockholders may
only be called in the manner provided in the Amended and Restated Certificate of
Incorporation of the Corporation (as the same may be further amended from time
to time, the "Restated Certificate of Incorporation").
Section 3. Place of Meetings. The Board of Directors may designate any
place, either within or without the State of Delaware, as the place of meeting
for any annual meeting or for any special meeting. If no designation is made, or
if a special meeting be otherwise called, the place of meeting shall be the
principal executive office of the Corporation. If for any reason any annual
meeting shall not be held during any year, the business thereof may be
transacted at any special meeting of the stockholders.
<PAGE> 2
Section 4. Notice. Whenever stockholders are required or permitted to
take action at a meeting, written or printed notice stating the place, date,
time and, in the case of special meetings, the purpose or purposes, of such
meeting, shall be given to each stockholder entitled to vote at such meeting not
less than 10 nor more than 60 days before the date of the meeting. All such
notices shall be delivered, either personally or by mail, by or at the direction
of the Board of Directors, the chairman of the board, the president or the
secretary, and if mailed, such notice shall be deemed to be delivered when
deposited in the United States mail, postage prepaid, addressed to the
stockholder at his, her or its address as the same appears on the records of the
Corporation. Attendance of a person at a meeting shall constitute a waiver of
notice of such meeting, except when the person attends for the express purpose
of objecting at the beginning of the meeting to the transaction of any business
because the meeting is not lawfully called or convened.
Section 5. Stockholders List. The officer having charge of the stock
ledger of the Corporation shall make, at least 10 days before every meeting of
the stockholders, a complete list of the stockholders entitled to vote at such
meeting arranged in alphabetical order, showing the address of each stockholder
and the number of shares registered in the name of each stockholder. Such list
shall be open to the examination of any stockholder, for any purpose germane to
the meeting, during ordinary business hours, for a period of at least 10 days
prior to the meeting, either at a place within the city where the meeting is to
be held, which place shall be specified in the notice of the meeting or, if not
so specified, at the place where the meeting is to be held. The list shall also
be produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
Section 6. Quorum. The holders of a majority of the outstanding shares
of capital stock entitled to vote, present in person or represented by proxy,
shall constitute a quorum at all meetings of the stockholders, except as
otherwise provided by the General Corporation Law of the State of Delaware or by
the Restated Certificate of Incorporation. If a quorum is not present, the
holders of a majority of the shares present in person or represented by proxy at
the meeting, and entitled to vote at the meeting, may adjourn the meeting to
another time and/or place. When a specified item of business requires a vote by
a class or series (if the Corporation shall then have outstanding shares of more
than one class or series) voting as a class, the holders of a majority of the
shares of such class or series shall constitute a quorum (as to such class or
series) for the transaction of such item of business.
Section 7. Adjourned Meetings. When a meeting is adjourned to another
time and place, notice need not be given of the adjourned meeting if the time
and place thereof are announced at the meeting at which the adjournment is
taken. At the adjourned meeting the Corporation may transact any business which
might have been transacted at the original meeting. If the adjournment is for
more than 30 days, or if after the adjournment a new record date is fixed for
the adjourned meeting, a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the meeting.
Section 8. Vote Required. When a quorum is present, the affirmative
vote of the majority of shares present in person or represented by proxy at the
meeting and entitled to vote on the subject matter shall be the act of the
stockholders, unless (i) by express provisions of an applicable law or
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of the Restated Certificate of Incorporation a different vote is required, in
which case such express provision shall govern and control the decision of such
question, or (ii) the subject matter is the election of Directors, in which case
Section 2 of ARTICLE III hereof shall govern and control the approval of such
subject matter.
Section 9. Voting Rights. Except as otherwise provided by the General
Corporation Law of the State of Delaware, the Restated Certificate of
Incorporation or any amendments thereto or these By-laws, every stockholder
shall at every meeting of the stockholders be entitled to one vote in person or
by proxy for each share of common stock held by such stockholder.
Section 10. Proxies. Each stockholder entitled to vote at a meeting of
stockholders or to express consent or dissent to corporate action in writing
without a meeting may authorize another person or persons to act for him or her
by proxy, but no such proxy shall be voted or acted upon after three years from
its date, unless the proxy provides for a longer period. A duly executed proxy
shall be irrevocable if it states that it is irrevocable and if, and only as
long as, it is coupled with an interest sufficient in law to support an
irrevocable power. A proxy may be made irrevocable regardless of whether the
interest with which it is coupled is an interest in the stock itself or an
interest in the Corporation generally. Any proxy is suspended when the person
executing the proxy is present at a meeting of stockholders and elects to vote,
except that when such proxy is coupled with an interest and the fact of the
interest appears on the face of the proxy, the agent named in the proxy shall
have all voting and other rights referred to in the proxy, notwithstanding the
presence of the person executing the proxy. At each meeting of the stockholders,
and before any voting commences, all proxies filed at or before the meeting
shall be submitted to and examined by the secretary or a person designated by
the secretary, and no shares may be represented or voted under a proxy that has
been found to be invalid or irregular.
Section 11. Business Brought Before an Annual Meeting. At an annual
meeting of the stockholders, only such business shall be conducted as shall have
been properly brought before the meeting. To be properly brought before an
annual meeting, business must be (i) specified in the notice of meeting (or any
supplement thereto) given by or at the direction of the Board of Directors, (ii)
brought before the meeting by or at the direction of the Board of Directors or
(iii) otherwise properly brought before the meeting by a stockholder. For
business to be properly brought before an annual meeting by a stockholder, the
stockholder must have given timely notice thereof in writing to the secretary of
the Corporation. To be timely, a stockholder's notice must be delivered to or
mailed and received at the principal executive offices of the Corporation, not
less than 60 days nor more than 90 days prior to the meeting; provided, however,
that in the event that less than 70 days' notice or prior public announcement of
the date of the meeting is given or made to stockholders, notice by the
stockholder to be timely must be so received not later than the close of
business on the 10th day following the date on which such notice of the date of
the annual meeting was mailed or such public announcement was made. A
stockholder's notice to the secretary shall set forth as to each matter the
stockholder proposes to bring before the annual meeting (i) a brief description
of the business desired to be brought before the annual meeting, (ii) the name
and address, as they appear on the Corporation's books, of the stockholder
proposing such business, (iii) the class and number of shares of the Corporation
which are beneficially owned by the stockholder and (iv) any material interest
of the stockholder in such business. Notwithstanding anything in these By-laws
to the
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contrary, no business shall be conducted at an annual meeting except in
accordance with the procedures set forth in this section. The presiding officer
of an annual meeting shall, if the facts warrant, determine and declare to the
meeting that business was not properly brought before the meeting and in
accordance with the provisions of this section; if he should so determine, he
shall so declare to the meeting and any such business not properly brought
before the meeting shall not be transacted. For purposes of this section,
"public announcement" shall mean disclosure in a press release reported by Dow
Jones News Service, Associated Press or a comparable national news service.
Nothing in this section shall be deemed to affect any rights of stockholders to
request inclusion of proposals in the Corporation's proxy statement pursuant to
Rule 14a-8 under the Securities Exchange Act of 1934, as amended (the "Exchange
Act").
ARTICLE III
Directors
Section 1. General Powers. The business and affairs of the Corporation
shall be managed by or under the direction of the Board of Directors. In
addition to such powers as are herein and in the Restated Certificate of
Incorporation expressly conferred upon it, the Board of Directors shall have and
may exercise all the powers of the Corporation, subject to the provisions of the
laws of Delaware, the Restated Certificate of Incorporation and these By-laws.
Section 2. Number, Election and Term of Office. Subject to any rights
of the holders of any series of Preferred Stock to elect additional Directors
under specified circumstances, the number of Directors which shall constitute
the Board of Directors shall be fixed from time to time by resolution adopted by
the affirmative vote of a majority of the total number of Directors then in
office. The Directors shall be elected by a plurality of the votes of the shares
present in person or represented by proxy at the meeting and entitled to vote in
the election of Directors; provided that, whenever the holders of any class or
series of capital stock of the Corporation are entitled to elect one or more
Directors pursuant to the provisions of the Restated Certificate of
Incorporation (including, but not limited to, for purposes of these By-laws,
pursuant to any duly authorized certificate of designation), such Directors
shall be elected by a plurality of the votes of such class or series present in
person or represented by proxy at the meeting and entitled to vote in the
election of such Directors. The Directors shall be elected and shall hold office
only in the manner provided in the Restated Certificate of Incorporation.
Section 3. Removal and Resignation. No Director may be removed from
office without cause and without the affirmative vote of the holders of a
majority of the voting power of the then outstanding shares of capital stock
entitled to vote generally in the election of Directors voting together as a
single class; provided, however, that if the holders of any class or series of
capital stock are entitled by the provisions of the Restated Certificate of
Incorporation (it being understood that any references to the Restated
Certificate of Incorporation shall include any duly authorized certificate of
designation) to elect one or more Directors, such Director or Directors so
elected may be removed without cause only by the vote of the holders of a
majority of the outstanding shares of
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<PAGE> 5
that class or series entitled to vote. Any Director may resign at any time upon
written notice to the Corporation.
Section 4. Vacancies. Vacancies and newly created directorships
resulting from any increase in the total number of Directors may be filled only
in the manner provided in the Restated Certificate of Incorporation.
Section 5. Nominations.
(a) Only persons who are nominated in accordance with
the procedures set forth in these By-laws shall be eligible to serve as
Directors. Nominations of persons for election to the Board of Directors of the
Corporation may be made at a meeting of stockholders (i) by or at the direction
of the Board of Directors or (ii) by any stockholder of the Corporation who was
a stockholder of record at the time of giving of notice provided for in this
By-law, who is entitled to vote generally in the election of Directors at the
meeting and who shall have complied with the notice procedures set forth below
in Section 5(b).
(b) In order for a stockholder to nominate a person
for election to the Board of Directors of the Corporation at a meeting of
stockholders, such stockholder shall have delivered timely notice of such
stockholder's intent to make such nomination in writing to the secretary of the
Corporation. To be timely, a stockholder's notice shall be delivered to or
mailed and received at the principal executive offices of the Corporation (i) in
the case of an annual meeting, not less than 60 nor more than 90 days prior to
the first anniversary of the preceding year's annual meeting; provided, however,
that in the event that the date of the annual meeting is changed by more than 30
days from such anniversary date, notice by the stockholder to be timely must be
so received not later than the close of business on the 10th day following the
earlier of the day on which notice of the date of the meeting was mailed or
public disclosure of the meeting was made, and (ii) in the case of a special
meeting at which Directors are to be elected, not later than the close of
business on the 10th day following the earlier of the day on which notice of the
date of the meeting was mailed or public announcement of the meeting was made.
Such stockholder's notice shall set forth (i) as to each person whom the
stockholder proposes to nominate for election as a Director at such meeting all
information relating to such person that is required to be disclosed in
solicitations of proxies for election of Directors, or is otherwise required, in
each case pursuant to Regulation 14A under the Exchange Act (including such
person's written consent to being named in the proxy statement as a nominee and
to serving as a Director if elected); (ii) as to the stockholder giving the
notice (A) the name and address, as they appear on the Corporation's books, of
such stockholder and (B) the class and number of shares of the Corporation which
are beneficially owned by such stockholder and also which are owned of record by
such stockholder; and (iii) as to the beneficial owner, if any, on whose behalf
the nomination is made, (A) the name and address of such person and (B) the
class and number of shares of the Corporation which are beneficially owned by
such person. At the request of the Board of Directors, any person nominated by
the Board of Directors for election as a Director shall furnish to the secretary
of the Corporation that information required to be set forth in a stockholder's
notice of nomination which pertains to the nominee.
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<PAGE> 6
(c) No person shall be eligible to serve as a Director
of the Corporation unless nominated in accordance with the procedures set forth
in this section. The presiding officer of the meeting shall, if the facts
warrant, determine and declare to the meeting that a nomination was not made in
accordance with the procedures prescribed by this section, and if he should so
determine, he shall so declare to the meeting and the defective nomination shall
be disregarded. A stockholder seeking to nominate a person to serve as a
Director must also comply with all applicable requirements of the Exchange Act,
and the rules and regulations thereunder with respect to the matters set forth
in this section.
Section 6. Annual Meetings. The annual meeting of the Board of
Directors shall be held without other notice than this By-law immediately after,
and at the same place as, the annual meeting of stockholders.
Section 7. Other Meetings and Notice. Regular meetings, other than the
annual meeting, of the Board of Directors may be held without notice at such
time and at such place as shall from time to time be determined by resolution of
the board. Special meetings of the Board of Directors may be called by the
chairman of the board, the president (if the president is a Director) or, upon
the written request of at least a majority of the Directors then in office, the
secretary of the Corporation, on at least 24 hours notice to each Director,
either personally, by telephone, by mail or by telecopy.
Section 8. Chairman of the Board, Quorum, Required Vote and
Adjournment. The Board of Directors shall elect, by the affirmative vote of a
majority of the total number of Directors then in office, a chairman of the
board, who shall preside at all meetings of the stockholders and Board of
Directors at which he or she is present and shall have such powers and perform
such duties as the Board of Directors may from time to time prescribe. If the
chairman of the board is not present at a meeting of the stockholders or the
Board of Directors, the president (if the president is a Director and is not
also the chairman of the board) shall preside at such meeting, and, if the
president is not present at such meeting, a majority of the Directors present at
such meeting shall elect one of their members to so preside. A majority of the
total number of Directors then in office shall constitute a quorum for the
transaction of business. Unless by express provision of an applicable law, the
Restated Certificate of Incorporation or these By-laws a different vote is
required, the vote of a majority of Directors present at a meeting at which a
quorum is present shall be the act of the Board of Directors. If a quorum shall
not be present at any meeting of the Board of Directors, the Directors present
thereat may adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall be present.
Section 9. Committees. The Board of Directors may, by resolution passed
by a majority of the total number of Directors then in office, designate one or
more committees, each committee to consist of one or more of the Directors of
the Corporation, which to the extent provided in such resolution or these
By-laws shall have, and may exercise, the powers of the Board of Directors in
the management and affairs of the Corporation, except as otherwise limited by
law. The Board of Directors may designate one or more Directors as alternate
members of any committee, who may replace any absent or disqualified member at
any meeting of the committee. Such committee or committees shall have such name
or names as may be determined from time to time by resolution
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<PAGE> 7
adopted by the Board of Directors. Each committee shall keep regular minutes of
its meetings and report the same to the Board of Directors when required.
Section 10. Committee Rules. Each committee of the Board of Directors
may fix its own rules of procedure and shall hold its meetings as provided by
such rules, except as may otherwise be provided by a resolution of the Board of
Directors designating such committee. Unless otherwise provided in such a
resolution, the presence of at least a majority of the members of the committee
shall be necessary to constitute a quorum. Unless otherwise provided in such a
resolution, in the event that a member and that member's alternate, if
alternates are designated by the Board of Directors, of such committee is or are
absent or disqualified, the member or members thereof present at any meeting and
not disqualified from voting, whether or not such member or members constitute a
quorum, may unanimously appoint another member of the Board of Directors to act
at the meeting in place of any such absent or disqualified member.
Section 11. Communications Equipment. Members of the Board of Directors
or any committee thereof may participate in and act at any meeting of such board
or committee through the use of a conference telephone or other communications
equipment by means of which all persons participating in the meeting can hear
and speak with each other, and participation in the meeting pursuant to this
section shall constitute presence in person at the meeting.
Section 12. Waiver of Notice and Presumption of Assent. Any member of
the Board of Directors or any committee thereof who is present at a meeting
shall be conclusively presumed to have waived notice of such meeting except when
such member attends for the express purpose of objecting at the beginning of the
meeting to the transaction of any business because the meeting is not lawfully
called or convened. Such member shall be conclusively presumed to have assented
to any action taken unless his or her dissent shall be entered in the minutes of
the meeting or unless his or her written dissent to such action shall be filed
with the person acting as the secretary of the meeting before the adjournment
thereof or shall be forwarded by registered mail to the secretary of the
Corporation immediately after the adjournment of the meeting. Such right to
dissent shall not apply to any member who voted in favor of such action.
Section 13. Action by Written Consent. Unless otherwise restricted by
the Restated Certificate of Incorporation, any action required or permitted to
be taken at any meeting of the Board of Directors, or of any committee thereof,
may be taken without a meeting if all members of the board or committee, as the
case may be, consent thereto in writing, and the writing or writings are filed
with the minutes of proceedings of the board or committee.
ARTICLE IV
OFFICERS
Section 1. Number. The officers of the Corporation shall be elected by
the Board of Directors and shall consist of a chairman of the board, a chief
executive officer, a president, one or more vice presidents, a secretary, a
chief financial officer and such other officers and assistant
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<PAGE> 8
officers as may be deemed necessary or desirable by the Board of Directors. Any
number of offices may be held by the same person. In its discretion, the Board
of Directors may choose not to fill any office for any period as it may deem
advisable, except that the offices of president and secretary shall be filled as
expeditiously as possible.
Section 2. Election and Term of Office. The officers of the Corporation
shall be elected annually by the Board of Directors at its first meeting held
after each annual meeting of stockholders or as soon thereafter as convenient.
Vacancies may be filled or new offices created and filled at any meeting of the
Board of Directors. Each officer shall hold office until a successor is duly
elected and qualified or until his or her earlier death, resignation or removal
as hereinafter provided.
Section 3. Removal. Any officer or agent elected by the Board of
Directors may be removed by the Board of Directors at its discretion, but such
removal shall be without prejudice to the contract rights, if any, of the person
so removed.
Section 4. Vacancies. Any vacancy occurring in any office because of
death, resignation, removal, disqualification or otherwise may be filled by the
Board of Directors.
Section 5. Compensation. Compensation of all executive officers shall
be approved by the Board of Directors, and no officer shall be prevented from
receiving such compensation by virtue of his or her also being a Director of the
Corporation.
Section 6. Chairman of the Board. The chairman of the board shall
preside at all meetings of the stockholders and of the Board of Directors and
shall have such other powers and perform such other duties as may be prescribed
to him or her by the Board of Directors or provided in these By-laws.
Section 7. Chief Executive Officer. The chief executive officer shall
have the powers and perform the duties incident to that position. Subject to the
powers of the Board of Directors and the chairman of the board, the chief
executive officer shall be in the general and active charge of the entire
business and affairs of the Corporation, and shall be its chief policy making
officer. The chief executive officer shall have such other powers and perform
such other duties as may be prescribed by the Board of Directors or provided in
these By-laws. The chief executive officer is authorized to execute bonds,
mortgages and other contracts requiring a seal, under the seal of the
Corporation, except where required or permitted by law to be otherwise signed
and executed and except where the signing and execution thereof shall be
expressly delegated by the Board of Directors to some other officer or agent of
the Corporation. Whenever the president is unable to serve, by reason of
sickness, absence or otherwise, the chief executive officer shall perform all
the duties and responsibilities and exercise all the powers of the president.
Section 8. The President. The president of the Corporation shall,
subject to the powers of the Board of Directors, the chairman of the board and
the chief executive officer, have general charge of the business, affairs and
property of the Corporation, and control over its officers, agents and
employees. The president shall see that all orders and resolutions of the Board
of Directors are carried into effect. The president is authorized to execute
bonds, mortgages and other contracts
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<PAGE> 9
requiring a seal, under the seal of the Corporation, except where required or
permitted by law to be otherwise signed and executed and except where the
signing and execution thereof shall be expressly delegated by the Board of
Directors to some other officer or agent of the Corporation. The president shall
have such other powers and perform such other duties as may be prescribed by the
chairman of the board, the chief executive officer, the Board of Directors or as
may be provided in these By-laws.
Section 9. Vice Presidents. The vice president, or if there shall be
more than one, the vice presidents in the order determined by the Board of
Directors or the chairman of the board, shall, in the absence or disability of
the president, act with all of the powers and be subject to all the restrictions
of the president. The vice presidents shall also perform such other duties and
have such other powers as the Board of Directors, the chairman of the board, the
chief executive officer, the president or these By-laws may, from time to time,
prescribe. The vice presidents may also be designated as executive vice
presidents, senior vice presidents or regional vice presidents, as the Board of
Directors may from time to time prescribe.
Section 10. The Secretary and Assistant Secretaries. The secretary
shall attend all meetings of the Board of Directors, all meetings of the
committees thereof and all meetings of the stockholders and record all the
proceedings of the meetings in a book or books to be kept for that purpose or
shall ensure that his or her designee attends each such meeting to act in such
capacity. Under the chairman of the board's supervision, the secretary shall
give, or cause to be given, all notices required to be given by these By-laws or
by law; shall have such powers and perform such duties as the Board of
Directors, the chairman of the board, the chief executive officer, the president
or these By-laws may, from time to time, prescribe; and shall have custody of
the corporate seal of the Corporation. The secretary, or an assistant secretary,
shall have authority to affix the corporate seal to any instrument requiring it
and when so affixed, it may be attested by his or her signature or by the
signature of such assistant secretary. The Board of Directors may give general
authority to any other officer to affix the seal of the Corporation and to
attest the affixing by his or her signature. The assistant secretary, or if
there be more than one, any of the assistant secretaries, shall in the absence
or disability of the secretary, perform the duties and exercise the powers of
the secretary and shall perform such other duties and have such other powers as
the Board of Directors, the chairman of the board, the chief executive officer,
the president, or secretary may, from time to time, prescribe.
Section 11. The Chief Financial Officer. The chief financial officer
shall have the custody of the corporate funds and securities; shall keep full
and accurate all books and accounts of the Corporation as shall be necessary or
desirable in accordance with applicable law or generally accepted accounting
principles; shall deposit all monies and other valuable effects in the name and
to the credit of the Corporation as may be ordered by the chairman of the board
or the Board of Directors; shall cause the funds of the Corporation to be
disbursed when such disbursements have been duly authorized, taking proper
vouchers for such disbursements; and shall render to the Board of Directors, at
its regular meeting or when the Board of Directors so requires, an account of
the Corporation; shall have such powers and perform such duties as the Board of
Directors, the chairman of the board, the chief executive officer, the president
or these By-laws may, from time to time, prescribe.
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<PAGE> 10
Section 12. Other Officers, Assistant Officers and Agents. Officers,
assistant officers and agents, if any, other than those whose duties are
provided for in these By-laws, shall have such authority and perform such duties
as may from time to time be prescribed by resolution of the Board of Directors.
Section 13. Absence or Disability of Officers. In the case of the
absence or disability of any officer of the Corporation and of any person hereby
authorized to act in such officer's place during such officer's absence or
disability, the Board of Directors may by resolution delegate the powers and
duties of such officer to any other officer or to any Director, or to any other
person selected by it.
ARTICLE V
CERTIFICATES OF STOCK
Section 1. Form. Every holder of stock in the Corporation shall be
entitled to have a certificate, signed by, or in the name of the Corporation by
the chairman of the board, the chief executive officer or the president and the
secretary or an assistant secretary of the Corporation, certifying the number of
shares owned by such holder in the Corporation. If such a certificate is
countersigned (i) by a transfer agent or an assistant transfer agent other than
the Corporation or its employee or (ii) by a registrar, other than the
Corporation or its employee, the signature of any such chairman of the board,
chief executive officer, president, secretary or assistant secretary may be
facsimiles. In case any officer or officers who have signed, or whose facsimile
signature or signatures have been used on, any such certificate or certificates
shall cease to be such officer or officers of the Corporation whether because of
death, resignation or otherwise before such certificate or certificates have
been delivered by the Corporation, such certificate or certificates may
nevertheless be issued and delivered as though the person or persons who signed
such certificate or certificates or whose facsimile signature or signatures have
been used thereon had not ceased to be such officer or officers of the
Corporation. All certificates for shares shall be consecutively numbered or
otherwise identified. The name of the person to whom the shares represented
thereby are issued, with the number of shares and date of issue, shall be
entered on the books of the Corporation. Shares of stock of the Corporation
shall only be transferred on the books of the Corporation by the holder of
record thereof or by such holder's attorney duly authorized in writing, upon
surrender to the Corporation of the certificate or certificates for such shares
endorsed by the appropriate person or persons, with such evidence of the
authenticity of such endorsement, transfer, authorization and other matters as
the Corporation may reasonably require, and accompanied by all necessary stock
transfer stamps. In that event, it shall be the duty of the Corporation to issue
a new certificate to the person entitled thereto, cancel the old certificate or
certificates and record the transaction on its books. The Board of Directors may
appoint a bank or trust company organized under the laws of the United States or
any state thereof to act as its transfer agent or registrar, or both in
connection with the transfer of any class or series of securities of the
Corporation.
Section 2. Lost Certificates. The Board of Directors may direct a new
certificate or certificates to be issued in place of any certificate or
certificates previously issued by the Corporation alleged to have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the
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<PAGE> 11
person claiming the certificate of stock to be lost, stolen or destroyed. When
authorizing such issue of a new certificate or certificates, the Corporation
may, in its discretion and as a condition precedent to the issuance thereof,
require the owner of such lost, stolen or destroyed certificate or certificates,
or his or her legal representative, to give the Corporation a bond sufficient to
indemnify the Corporation against any claim that may be made against the
Corporation on account of the loss, theft or destruction of any such certificate
or the issuance of such new certificate.
Section 3. Fixing a Record Date for Stockholder Meetings. In order that
the Corporation may determine the stockholders entitled to notice of or to vote
at any meeting of stockholders or any adjournment thereof, the Board of
Directors may fix a record date, which record date shall not precede the date
upon which the resolution fixing the record date is adopted by the Board of
Directors, and which record date shall not be more than 60 nor less than 10 days
before the date of such meeting. If no record date is fixed by the Board of
Directors, the record date for determining stockholders entitled to notice of or
to vote at a meeting of stockholders shall be the close of business on the next
day preceding the day on which notice is first given. A determination of
stockholders of record entitled to notice of or to vote at a meeting of
stockholders shall apply to any adjournment of the meeting; provided, however,
that the Board of Directors may fix a new record date for the adjourned meeting.
Section 4. Fixing a Record Date for Other Purposes. In order that the
Corporation may determine the stockholders entitled to receive payment of any
dividend or other distribution or allotment or any rights or the stockholders
entitled to exercise any rights in respect of any change, conversion or exchange
of stock, or for the purposes of any other lawful action, the Board of Directors
may fix a record date, which record date shall not precede the date upon which
the resolution fixing the record date is adopted, and which record date shall be
not more than 60 days prior to such action. If no record date is fixed, the
record date for determining stockholders for any such purpose shall be at the
close of business on the day on which the Board of Directors adopts the
resolution relating thereto.
Section 5. Registered Stockholders. Prior to the surrender to the
Corporation of the certificate or certificates for a share or shares of stock
with a request to record the transfer of such share or shares, the Corporation
may treat the registered owner as the person entitled to receive dividends, to
vote, to receive notifications and otherwise to exercise all the rights and
powers of an owner. The Corporation shall not be bound to recognize any
equitable or other claim to or interest in such share or shares on the part of
any other person, whether or not it shall have express or other notice thereof.
Section 6. Subscriptions for Stock. Unless otherwise provided for in
the subscription agreement, subscriptions for shares shall be paid in full at
such time, or in such installments and at such times, as shall be determined by
the Board of Directors. Any call made by the Board of Directors for payment on
subscriptions shall be uniform as to all shares of the same class or as to all
shares of the same series. In case of default in the payment of any installment
or call when such payment is due, the Corporation may proceed to collect the
amount due in the same manner as any debt due the Corporation.
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ARTICLE VI
GENERAL PROVISIONS
Section 1. Dividends. Dividends upon the capital stock of the
Corporation, subject to the provisions of the certificate of, if any, may be
declared by the Board of Directors at any regular or special meeting, in
accordance with applicable law. Dividends may be paid in cash, in property or in
shares of the capital stock, subject to the provisions of the Restated
Certificate of Incorporation. Before payment of any dividend, there may be set
aside out of any funds of the Corporation available for dividends such sum or
sums as the Directors from time to time, in their absolute discretion, think
proper as a reserve or reserves to meet contingencies, or for equalizing
dividends, or for repairing or maintaining any property of the Corporation, or
any other purpose and the Directors may modify or abolish any such reserve in
the manner in which it was created.
Section 2. Checks, Drafts or Orders. All checks, drafts or other orders
for the payment of money by or to the Corporation and all notes and other
evidences of indebtedness issued in the name of the Corporation shall be signed
by such officer or officers, agent or agents of the Corporation, and in such
manner, as shall be determined by resolution of the Board of Directors or a duly
authorized committee thereof.
Section 3. Contracts. In addition to the powers otherwise granted to
officers pursuant to ARTICLE IV hereof, the Board of Directors may authorize any
officer or officers, or any agent or agents, of the Corporation to enter into
any contract or to execute and deliver any instrument in the name of and on
behalf of the Corporation, and such authority may be general or confined to
specific instances.
Section 4. Loans. The Corporation may lend money to, or guarantee any
obligation of, or otherwise assist any officer or other employee of the
Corporation or of its subsidiaries, including any officer or employee who is a
Director of the Corporation or its subsidiaries, whenever, in the judgment of
the Directors, such loan, guaranty or assistance may reasonably be expected to
benefit the Corporation. The loan, guaranty or other assistance may be with or
without interest, and may be unsecured, or secured in such manner as the Board
of Directors shall approve, including, without limitation, a pledge of shares of
stock of the Corporation. Nothing in this section shall be deemed to deny, limit
or restrict the powers of guaranty or warranty of the Corporation at common law
or under any statute.
Section 5. Fiscal Year. The fiscal year of the Corporation shall be
fixed by resolution of the Board of Directors.
Section 6. Corporate Seal. The Board of Directors may provide a
corporate seal which shall be in the form of a circle and shall have inscribed
thereon the name of the Corporation and the words "Corporate Seal, Delaware."
The seal may be used by causing it or a facsimile thereof to be impressed or
affixed or reproduced or otherwise.
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<PAGE> 13
Section 7. Voting Securities Owned By Corporation. Voting securities in
any other Corporation held by the Corporation shall be voted by the chief
executive officer, the president or a vice president, unless the Board of
Directors specifically confers authority to vote with respect thereto, which
authority may be general or confined to specific instances, upon some other
person or officer. Any person authorized to vote securities shall have the power
to appoint proxies, with general power of substitution.
Section 8. Inspection of Books and Records. The Board of Directors
shall have power from time to time to determine to what extent and at what times
and places and under what conditions and regulations the accounts and books of
the Corporation, or any of them, shall be open to the inspection of the
stockholders; and no stockholder shall have any right to inspect any account or
book or document of the Corporation, except as conferred by the laws of the
State of Delaware, unless and until authorized so to do by resolution of the
Board of Directors or of the stockholders of the Corporation.
Section 9. Section Headings. Section headings in these By-laws are for
convenience of reference only and shall not be given any substantive effect in
limiting or otherwise construing any provision herein.
Section 10. Inconsistent Provisions. In the event that any provision of
these By-laws is or becomes inconsistent with any provision of the Restated
Certificate of Incorporation, the General Corporation Law of the State of
Delaware or any other applicable law, the provision of these By-laws shall not
be given any effect to the extent of such inconsistency but shall otherwise be
given full force and effect.
ARTICLE VII
AMENDMENTS
In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors of the Corporation is expressly authorized to
make, alter, amend, change, add to or repeal these By-laws by the affirmative
vote of a majority of the total number of Directors then in office. Any
alteration or repeal of these By-laws by the stockholders of the Corporation
shall require the affirmative vote of a majority of the outstanding shares of
the Corporation entitled to vote on such alteration or repeal; provided,
however, that Section 11 of ARTICLE II and Sections 2, 3, 4 and 5 of ARTICLE III
and this ARTICLE VII of these By-laws shall not be altered, amended or repealed
and no provision inconsistent therewith shall be adopted without the affirmative
vote of the holders of at least 662/3% of the outstanding shares of the
Corporation entitled to vote on such alteration or repeal.
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<PAGE> 1
EXHIBIT 4.1
================================================================================
ALLEGIANCE TELECOM, INC.,
as Issuer
and
THE BANK OF NEW YORK
-------------------------
Indenture
Dated as of [ ], 1998
-------------------------
[ ]% Senior Notes due 2008
================================================================================
<PAGE> 2
CROSS-REFERENCE TABLE
<TABLE>
<CAPTION>
TIA Sections Indenture Sections
- ------------ ------------------
<S> <C>
Section 310(a)(1) . . . . . . . . . . . . . . . . . . . . . . 7.10
(a)(2) . . . . . . . . . . . . . . . . . . . . . . 7.10
(b) . . . . . . . . . . . . . . . . . . . . . . . 7.08
Section 313(c) . . . . . . . . . . . . . . . . . . . . . . . . 7.06; 10.02
Section 314(a) . . . . . . . . . . . . . . . . . . . . . . . . 4.17; 10.02
(a)(4). . . . . . . . . . . . . . . . . . . . . . . 4.16; 10.02
(c)(1). . . . . . . . . . . . . . . . . . . . . . . 10.03
(c)(2). . . . . . . . . . . . . . . . . . . . . . . 10.03
(e) . . . . . . . . . . . . . . . . . . . . . . . . 10.04
Section 315(b) . . . . . . . . . . . . . . . . . . . . . . . . 7.05; 10.02
Section 316(a)(1)(A) . . . . . . . . . . . . . . . . . . . . . 6.05
(a)(1)(B) . . . . . . . . . . . . . . . . . . . . . 6.04
(b) . . . . . . . . . . . . . . . . . . . . . . . . 6.07
Section 317(a)(1). . . . . . . . . . . . . . . . . . . . . . . 6.08
(a)(2). . . . . . . . . . . . . . . . . . . . . . . 6.09
Section 318(a) . . . . . . . . . . . . . . . . . . . . . . . . 10.01
(c) . . . . . . . . . . . . . . . . . . . . . . . 10.01
</TABLE>
Note: The Cross-Reference Table shall not for any purpose be deemed to be a
part of the Indenture.
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RECITALS OF THE COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE ONE
DEFINITIONS AND INCORPORATION BY REFERENCE
SECTION 1.01. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
SECTION 1.02. Incorporation by Reference of Trust Indenture Act . . . . . . . . . . . . . . . . . . . . . . . . 20
SECTION 1.03. Rules of Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
ARTICLE TWO
THE NOTES
SECTION 2.01. Form and Dating . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
SECTION 2.02. Execution, Authentication and Denominations . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
SECTION 2.03. Registrar and Paying Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
SECTION 2.04. Paying Agent to Hold Money in Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
SECTION 2.05. Transfer and Exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
SECTION 2.06. Book-Entry Provisions for Global Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
SECTION 2.07. Replacement Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
SECTION 2.08. Outstanding Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
SECTION 2.09. Temporary Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
SECTION 2.10. Cancellation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
SECTION 2.11. CUSIP Numbers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
SECTION 2.12. Defaulted Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
SECTION 2.13. Issuance of Additional Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
ARTICLE THREE
REDEMPTION
SECTION 3.01. Right of Redemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
SECTION 3.02. Notices to Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
SECTION 3.03. Selection of Notes to Be Redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
SECTION 3.04. Notice of Redemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
SECTION 3.05. Effect of Notice of Redemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
SECTION 3.06. Deposit of Redemption Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
SECTION 3.07. Payment of Notes Called for Redemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
SECTION 3.08. Notes Redeemed in Part . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
</TABLE>
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Note: The Table of Contents shall not for any purposes be deemed to be a
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ARTICLE FOUR
COVENANTS
SECTION 4.01. Payment of Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
SECTION 4.02. Maintenance of Office or Agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
SECTION 4.03. Limitation on Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
SECTION 4.04. Limitation on Restricted Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
SECTION 4.05. Limitation on Dividend and Other Payment Restrictions Affecting
Restricted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
SECTION 4.06. Limitation on the Issuance and Sale of Capital Stock of Restricted . . . . . . . . . . . . . . . 39
SECTION 4.07. Limitation on Issuances of Guarantees by Restricted Subsidiaries . . . . . . . . . . . . . . . . . 40
SECTION 4.08. Limitation on Transactions with Shareholders and Affiliates . . . . . . . . . . . . . . . . . . . 40
SECTION 4.09. Limitation on Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
SECTION 4.10. Limitation on Asset Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
SECTION 4.11. Repurchase of Notes upon a Change of Control . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
SECTION 4.12. Existence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
SECTION 4.13. Payment of Taxes and Other Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
SECTION 4.14. Maintenance of Properties and Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
SECTION 4.15. Notice of Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
SECTION 4.16. Compliance Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
SECTION 4.17. Commission Reports and Reports to Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
SECTION 4.18. Waiver of Stay, Extension or Usury Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
SECTION 4.19. Limitation on Sale-Leaseback Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
ARTICLE FIVE
SUCCESSOR CORPORATION
SECTION 5.01. When Company May Merge, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
SECTION 5.02. Successor Substituted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
ARTICLE SIX
DEFAULT AND REMEDIES
SECTION 6.01. Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
SECTION 6.02. Acceleration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
SECTION 6.03. Other Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
SECTION 6.04. Waiver of Past Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
SECTION 6.05. Control by Majority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
SECTION 6.06. Limitation on Suits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
SECTION 6.07. Rights of Holders to Receive Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
SECTION 6.08. Collection Suit by Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
SECTION 6.09. Trustee May File Proofs of Claim . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
</TABLE>
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SECTION 6.10. Priorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
SECTION 6.11. Undertaking for Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
SECTION 6.12. Restoration of Rights and Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
SECTION 6.13. Rights and Remedies Cumulative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
SECTION 6.14. Delay or Omission Not Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
ARTICLE SEVEN
TRUSTEE
SECTION 7.01. General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
SECTION 7.02. Certain Rights of Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
SECTION 7.03. Individual Rights of Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
SECTION 7.04. Trustee's Disclaimer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
SECTION 7.05. Notice of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
SECTION 7.06. Reports by Trustee to Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
SECTION 7.07. Compensation and Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
SECTION 7.08. Replacement of Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
SECTION 7.09. Successor Trustee by Merger, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
SECTION 7.10. Eligibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
SECTION 7.11. Money Held in Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
SECTION 7.12. Withholding Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
ARTICLE EIGHT
DISCHARGE OF INDENTURE
SECTION 8.01. Termination of Company's Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
SECTION 8.02. Defeasance and Discharge of Indenture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
SECTION 8.03. Defeasance of Certain Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
SECTION 8.04. Application of Trust Money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
SECTION 8.05. Repayment to Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
SECTION 8.06. Reinstatement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
ARTICLE NINE
AMENDMENTS, SUPPLEMENTS AND WAIVERS
SECTION 9.01. Without Consent of Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
SECTION 9.02. With Consent of Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
SECTION 9.03. Revocation and Effect of Consent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
SECTION 9.04. Notation on or Exchange of Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
SECTION 9.05. Trustee to Sign Amendments, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
SECTION 9.06. Conformity with Trust Indenture Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
</TABLE>
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ARTICLE TEN
SECURITY
SECTION 10.01 Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
ARTICLE ELEVEN
MISCELLANEOUS
SECTION 11.01. Trust Indenture Act of 1939 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
SECTION 11.02. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
SECTION 11.03. Certificate and Opinion as to Conditions Precedent . . . . . . . . . . . . . . . . . . . . . . . 68
SECTION 11.04. Statements Required in Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
SECTION 11.05. Rules by Trustee, Paying Agent or Registrar . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
SECTION 11.06. Payment Date Other Than a Business Day . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
SECTION 11.07. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
SECTION 11.08. No Adverse Interpretation of Other Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . 69
SECTION 11.09. No Recourse Against Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
SECTION 11.10. Successors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
SECTION 11.11. Duplicate Originals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
SECTION 11.12. Separability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
SECTION 11.13. Table of Contents, Headings, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
</TABLE>
<PAGE> 7
INDENTURE, dated as of [ ], 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
$200,000,000 aggregate principal amount of the Company's [ ]% Senior Notes
due 2008 (the "Notes") issuable as provided in this Indenture. All things
necessary to make this Indenture a valid agreement of the Company, in
accordance with its terms, have been done, and the Company has done all things
necessary to make the Notes, when executed by the Company and authenticated and
delivered by the Trustee hereunder and duly issued by the Company, the valid
obligations of the Company as hereinafter provided.
This Indenture is subject to, and shall be governed by,
the provisions of the Trust Indenture Act of 1939, as amended, that are
required to be a part of and to govern indentures qualified under the Trust
Indenture Act of 1939, as amended.
AND THIS INDENTURE FURTHER WITNESSETH
For and in consideration of the premises and the
purchase of the Notes by the Holders thereof, it is mutually covenanted and
agreed, for the equal and proportionate benefit of all Holders, as follows.
ARTICLE ONE
DEFINITIONS AND INCORPORATION BY REFERENCE
SECTION 1.01. Definitions.
"Acquired Indebtedness" means Indebtedness of a Person existing at the
time such Person becomes a Restricted Subsidiary or assumed in connection with
an Asset Acquisition by a Restricted Subsidiary and not Incurred in connection
with, or in anticipation of, such Person becoming a Restricted Subsidiary or
such Asset Acquisition.
"Adjusted Consolidated Net Income" means, for any period, the
aggregate net income (or loss) of the Company and its Restricted Subsidiaries
for such period determined in conformity with GAAP; provided that the following
items shall be excluded in computing Adjusted Consolidated Net Income (without
duplication): (i) the net income (or loss) of any Person that is not a
Restricted Subsidiary, except (x) with respect to net income, to the extent of
the amount of dividends or other distributions actually paid to the Company or
any of its Restricted Subsidiaries by such Person during such period and (y)
with respect to net losses, to the extent of the amount of Investments made by
the Company or any Restricted Subsidiary in such Person during such
<PAGE> 8
2
period; (ii) solely for the purposes of calculating the amount of Restricted
Payments that may be made pursuant to clause (C) of the first paragraph of
Section 4.04 (and in such case, except to the extent includable pursuant to
clause (i) above), the net income (or loss) of any Person accrued prior to the
date it becomes a Restricted Subsidiary or is merged into or consolidated with
the Company or any of its Restricted Subsidiaries or all or substantially all
of the property and assets of such Person are acquired by the Company or any of
its Restricted Subsidiaries; (iii) the net income of any Restricted Subsidiary
to the extent that the declaration or payment of dividends or similar
distributions by such Restricted Subsidiary of such net income is not at the
time permitted by the operation of the terms of its charter or any agreement,
instrument, judgment, decree, order, statute, rule or governmental regulation
applicable to such Restricted Subsidiary; (iv) any gains or losses (on an
after-tax basis) attributable to Asset Sales; (v) except for purposes of
calculating the amount of Restricted Payments that may be made pursuant to
clause (C) of the first paragraph of Section 4.04, any amount paid or accrued
as dividends on Preferred Stock of the Company or any Restricted Subsidiary
owned by Persons other than the Company and any of its Restricted Subsidiaries;
(vi) all extraordinary gains and extraordinary losses; and (vii) any
compensation expense paid or payable solely with Capital Stock (other than
Disqualified Stock) of the Company or any options, warrants or other rights to
acquire Capital Stock (other than Disqualified Stock) of the Company.
"Adjusted Consolidated Net Tangible Assets" means the total amount of
assets of the Company and its Restricted Subsidiaries (less applicable
depreciation, amortization and other valuation reserves), except to the extent
resulting from write-ups of capital assets (excluding write-ups in connection
with accounting for acquisitions in conformity with GAAP), after deducting
therefrom (i) all current liabilities of the Company and its Restricted
Subsidiaries (excluding intercompany items) and (ii) all goodwill, trade names,
trademarks, patents, unamortized debt discount and expense and other like
intangibles, all as set forth on the most recent quarterly or annual
consolidated balance sheet of the Company and its Restricted Subsidiaries,
prepared in conformity with GAAP and filed with the Commission or provided to
the Trustee pursuant to Section 4.17.
"Affiliate" means, as applied to any Person, any other Person directly
or indirectly controlling, controlled by, or under direct or indirect common
control with, such Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as applied to any Person, means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities, by contract or otherwise.
"Agent" means any Registrar, Paying Agent, authenticating agent or
co-Registrar.
"Agent Members" has the meaning provided in Section 2.06(a).
<PAGE> 9
3
"Asset Acquisition" means (i) an investment by the Company or any of
its Restricted Subsidiaries in any other Person pursuant to which such Person
shall become a Restricted Subsidiary or shall be merged into or consolidated
with the Company or any of its Restricted Subsidiaries; provided that such
Person's primary business is related, ancillary or complementary to the
businesses of the Company and its Restricted Subsidiaries on the date of such
investment or (ii) an acquisition by the Company or any of its Restricted
Subsidiaries of the property and assets of any Person other than the Company or
any of its Restricted Subsidiaries that constitute substantially all of a
division or line of business of such Person; provided that the property and
assets acquired are related, ancillary or complementary to the businesses of
the Company and its Restricted Subsidiaries on the date of such acquisition.
"Asset Disposition" means the sale or other disposition by the Company
or any of its Restricted Subsidiaries (other than to the Company or another
Restricted Subsidiary) of (i) all or substantially all of the Capital Stock of
any Restricted Subsidiary or (ii) all or substantially all of the assets that
constitute a division or line of business of the Company or any of its
Restricted Subsidiaries.
"Asset Sale" means any sale, transfer or other disposition (including
by way of merger, consolidation or sale- leaseback transaction) in one
transaction or a series of related transactions by the Company or any of its
Restricted Subsidiaries to any Person other than the Company or any of its
Restricted Subsidiaries of (i) all or any of the Capital Stock of any
Restricted Subsidiary, (ii) all or substantially all of the property and assets
of an operating unit or business of the Company or any of its Restricted
Subsidiaries or (iii) any other property and assets (other than the Capital
Stock or other Investment in an Unrestricted Subsidiary) of the Company or any
of its Restricted Subsidiaries outside the ordinary course of business of the
Company or such Restricted Subsidiary and, in each case, that is not governed
by the provisions of Article Five; provided that "Asset Sale" shall not include
(a) sales or other dispositions of inventory, receivables and other current
assets, (b) sales, transfers or other dispositions of assets constituting a
Restricted Payment permitted to be made under Section 4.04, (c) sales,
transfers or other dispositions of assets with a fair market value (as
certified in an Officers' Certificate) not in excess of $1 million in any
transaction or series of related transactions, or (d) sales or other
dispositions of assets for consideration at least equal to the fair market
value of the assets sold or disposed of, to the extent that the consideration
received would constitute property or assets of the kind described in clause
(B) of Section 4.10.
"Average Life" means, at any date of determination with respect to any
debt security, the quotient obtained by dividing (i) the sum of the products of
(a) the number of years from such date of determination to the dates of each
successive scheduled principal payment of such debt security and (b) the amount
of such principal payment by (ii) the sum of all such principal payments.
<PAGE> 10
4
"Board of Directors" means the Board of Directors of the Company or
any committee of such Board of Directors duly authorized to act under this
Indenture.
"Board Resolution" means a copy of a resolution, certified by the
Secretary of the Company to have been duly adopted by the Board of Directors
and to be in full force and effect on the date of such certification, and
delivered to the Trustee.
"Business Day" means any day except a Saturday, Sunday or other day on
which commercial banks in The City of New York, or in the city of the Corporate
Trust Office of the Trustee, are authorized by law to close.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) in equity of such Person, whether outstanding on the
Closing Date or issued thereafter, including, without limitation, all Common
Stock and Preferred Stock.
"Capitalized Lease" means, as applied to any Person, any lease of any
property (whether real, personal or mixed) of which the discounted present
value of the rental obligations of such Person as lessee, in conformity with
GAAP, is required to be capitalized on the balance sheet of such Person.
"Capitalized Lease Obligations" means the discounted present value of
the rental obligations under a Capitalized Lease.
"Change of Control" means such time as (i) a "person" or "group"
(within the meaning of Sections 13(d) and 14(d)(2) of the Exchange Act) becomes
the ultimate "beneficial owner" (as defined in Rule 13d-3 under the Exchange
Act) of more than 35% of the total voting power of the Voting Stock of the
Company on a fully diluted basis and such ownership represents a greater
percentage of the total voting power of the Voting Stock of the Company, on a
fully diluted basis, than is held by the Existing Stockholders on such date; or
(ii) individuals who on the Closing Date constitute the Board of Directors
(together with any new directors whose election by the Board of Directors or
whose nomination by the Board of Directors for election by the Company's
stockholders was approved by a vote of at least two- thirds of the members of
the Board of Directors then in office who either were members of the Board of
Directors on the Closing Date or whose election or nomination for election was
previously so approved) cease for any reason to constitute a majority of the
members of the Board of Directors then in office.
"Closing Date" means the date on which the Notes are originally issued
under this Indenture.
"Commission" means the Securities and Exchange Commission, as from
time to time constituted, created under the Exchange Act or, if at any time
after the execution of this
<PAGE> 11
5
instrument such Commission is not existing and performing the duties now
assigned to it under the TIA, then the body performing such duties at such
time.
"Common Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) of such Person's common stock, whether now outstanding or
issued after the date of this Indenture, including, without limitation, all
series and classes of such common stock.
"Company" means the party named as such in the first paragraph of this
Indenture until a successor replaces it pursuant to Article Five of this
Indenture and thereafter means the successor.
"Company Order" means a written request or order signed in the name of
the Company (i) by its Chairman, a Vice Chairman, its President or a Vice
President and (ii) by its Treasurer, an Assistant Treasurer, its Secretary or
an Assistant Secretary and delivered to the Trustee; provided, however, that
such written request or order may be signed by any two of the officers or
directors listed in clause (i) above in lieu of being signed by one of such
officers or directors listed in such clause (i) and one of the officers listed
in clause (ii) above.
"Consolidated EBITDA" means, for any period, Adjusted Consolidated Net
Income for such period plus, to the extent such amount was deducted in
calculating such Adjusted Consolidated Net Income, (i) Consolidated Interest
Expense, (ii) income taxes (other than income taxes (either positive or
negative) attributable to extraordinary and non-recurring gains or losses or
sales of assets), (iii) depreciation expense, (iv) amortization expense and (v)
all other non-cash items reducing Adjusted Consolidated Net Income (other than
items that will require cash payments and for which an accrual or reserve is,
or is required by GAAP to be, made), less all non-cash items increasing
Adjusted Consolidated Net Income, all as determined on a consolidated basis for
the Company and its Restricted Subsidiaries in conformity with GAAP; provided
that, if any Restricted Subsidiary is not a Wholly Owned Restricted Subsidiary,
Consolidated EBITDA shall be reduced (to the extent not otherwise reduced in
accordance with GAAP) by an amount equal to (A) the amount of the Adjusted
Consolidated Net Income attributable to such Restricted Subsidiary multiplied
by (B) the percentage ownership interest in the income of such Restricted
Subsidiary not owned on the last day of such period by the Company or any of
its Restricted Subsidiaries.
"Consolidated Interest Expense" means, for any period, the aggregate
amount of interest in respect of Indebtedness (including, without limitation,
amortization of original issue discount on any Indebtedness and the interest
portion of any deferred payment obligation, calculated in accordance with the
effective interest method of accounting; all commissions, discounts and other
fees and charges owed with respect to letters of credit and bankers' acceptance
financing; the net costs associated with Interest Rate Agreements; and
Indebtedness that is Guaranteed or secured by the Company or any of its
Restricted Subsidiaries) and all but the principal
<PAGE> 12
6
component of rentals in respect of Capitalized Lease Obligations paid, accrued
or scheduled to be paid or to be accrued by the Company and its Restricted
Subsidiaries during such period; excluding, however, (i) any amount of such
interest of any Restricted Subsidiary if the net income of such Restricted
Subsidiary is excluded in the calculation of Adjusted Consolidated Net Income
pursuant to clause (iii) of the definition thereof (but only in the same
proportion as the net income of such Restricted Subsidiary is excluded from the
calculation of Adjusted Consolidated Net Income pursuant to clause (iii) of the
definition thereof) and (ii) any premiums, fees and expenses (and any
amortization thereof) payable in connection with the offering of the Notes and
the concurrent offering of common stock, par value $.01 per share, of the
Company, all as determined on a consolidated basis (without taking into account
Unrestricted Subsidiaries) in conformity with GAAP.
"Consolidated Leverage Ratio" means, on any Transaction Date, the
ratio of (i) the aggregate amount of Indebtedness of the Company and its
Restricted Subsidiaries on a consolidated basis outstanding on such Transaction
Date to (ii) the aggregate amount of Consolidated EBITDA for the then most
recent four fiscal quarters for which financial statements of the Company have
been filed with the Commission or provided to the Trustee pursuant to Section
4.17 (such four fiscal quarter period being the "Four Quarter Period");
provided that, in making the foregoing calculation, (A) pro forma effect shall
be given to any Indebtedness to be Incurred or repaid on the Transaction Date;
(B) pro forma effect shall be given to Asset Dispositions and Asset
Acquisitions (including giving pro forma effect to the application of proceeds
of any Asset Disposition) that occur from the beginning of the Four Quarter
Period through the Transaction Date (the "Reference Period"), as if they had
occurred and such proceeds had been applied on the first day of such Reference
Period; (C) pro forma effect shall be given to asset dispositions and asset
acquisitions (including giving pro forma effect to the application of proceeds
of any asset disposition) that have been made by any Person that has become a
Restricted Subsidiary or has been merged with or into the Company or any
Restricted Subsidiary during such Reference Period and that would have
constituted Asset Dispositions or Asset Acquisitions had such transactions
occurred when such Person was a Restricted Subsidiary as if such asset
dispositions or asset acquisitions were Asset Dispositions or Asset
Acquisitions that occurred on the first day of such Reference Period; provided
that to the extent that clause (B) or (C) of this sentence requires that pro
forma effect be given to an Asset Acquisition or Asset Disposition, such pro
forma calculation shall be based upon the four full fiscal quarters immediately
preceding the Transaction Date of the Person, or division or line of business
of the Person, that is acquired or disposed of for which financial information
is available; and (D) the aggregate amount of Indebtedness outstanding as of
the end of the Reference Period will be deemed to include the total amount of
funds outstanding and/or available on the Transaction Date under any revolving
credit or similar facilities of the Company or its Restricted Subsidiaries.
"Consolidated Net Worth" means, at any date of determination,
stockholders' equity as set forth on the most recently available quarterly or
annual consolidated balance sheet of the Company and its Restricted
Subsidiaries (which shall be as of a date not more than 90 days prior
<PAGE> 13
7
to the date of such computation, and which shall not take into account
Unrestricted Subsidiaries), less any amounts attributable to Disqualified Stock
or any equity security convertible into or exchangeable for Indebtedness, the
cost of treasury stock and the principal amount of any promissory notes
receivable from the sale of the Capital Stock of the Company or any of its
Restricted Subsidiaries, each item to be determined in conformity with GAAP
(excluding the effects of foreign currency exchange adjustments under Financial
Accounting Standards Board Statement of Financial Accounting Standards No. 52).
"Corporate Trust Office" means the office of the Trustee at which the
corporate trust business of the Trustee shall, at any particular time, be
principally administered, which office is, at the date of this Indenture,
located at 101 Barclay Street, 21 West, New York, New York 10286, Attention:
Corporate Trust Administration.
"Currency Agreement" means any foreign exchange contract, currency
swap agreement or other similar agreement or arrangement.
"Default" means any event that is, or after notice or passage of time
or both would be, an Event of Default.
"Depositary" means The Depository Trust Company, its nominees, and
their respective successors.
"Disqualified Stock" means any class or series of Capital Stock of any
Person that by its terms or otherwise is (i) required to be redeemed prior to
the Stated Maturity of the Notes, (ii) redeemable at the option of the holder
of such class or series of Capital Stock at any time prior to the Stated
Maturity of the Notes or (iii) convertible into or exchangeable for Capital
Stock referred to in clause (i) or (ii) above or Indebtedness having a
scheduled maturity prior to the Stated Maturity of the Notes; provided that any
Capital Stock that would not constitute Disqualified Stock but for provisions
thereof giving holders thereof the right to require such Person to repurchase
or redeem such Capital Stock upon the occurrence of an "asset sale" or "change
of control" occurring prior to the Stated Maturity of the Notes shall not
constitute Disqualified Stock if the "asset sale" or "change of control"
provisions applicable to such Capital Stock are no more favorable to the
holders of such Capital Stock than the provisions contained in Section 4.10 and
Section 4.11 and such Capital Stock, or the agreements or instruments governing
the redemption rights thereof, specifically provides that such Person will not
repurchase or redeem any such stock pursuant to such provision prior to the
Company's repurchase of such Notes as are required to be repurchased pursuant
to Section 4.10 and Section 4.11.
"Event of Default" has the meaning provided in Section 6.01.
"Excess Proceeds" has the meaning provided in Section 4.10.
<PAGE> 14
8
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Existing Stockholders" means Madison Dearborn Partners, Inc., Morgan
Stanley Capital Partners III, Inc., Frontenac Company, Battery Partners IV,
L.P. and Battery Investment Partners IV, LLC and their respective Affiliates.
"fair market value" means the price that would be paid in an
arm's-length transaction between an informed and willing seller under no
compulsion to sell and an informed and willing buyer under no compulsion to
buy, as determined in good faith by the Board of Directors, whose determination
shall be conclusive if evidenced by a Board Resolution; provided that for
purposes of clause (viii) of the second paragraph of Section 4.03, (x) the fair
market value of any security registered under the Exchange Act shall be the
average of the closing prices, regular way, of such security for the 20
consecutive trading days immediately preceding the sale of Capital Stock and
(y) in the event the aggregate fair market value of any other property (other
than cash or cash equivalents) received by the Company exceeds $10 million, the
fair market value of such property shall be determined by a nationally
recognized investment banking firm and set forth in their written opinion which
shall be delivered to the Trustee.
"Fund Investors" has the meaning specified in the definition of
"Existing Stockholders."
"GAAP" means generally accepted accounting principles in the United
States of America as in effect as of the Closing Date, including, without
limitation, those set forth in the opinions and pronouncements of the
Accounting Principles Board of the American Institute of Certified Public
Accountants and statements and pronouncements of the Financial Accounting
Standards Board or in such other statements by such other entity as approved by
a significant segment of the accounting profession. All ratios and computations
contained or referred to in this Indenture shall be computed in conformity with
GAAP applied on a consistent basis, except that calculations made for purposes
of determining compliance with the terms of the covenants and with other
provisions of this Indenture shall be made without giving effect to (i) the
amortization of any expenses incurred in connection with the offering of the
Notes and the concurrent offering of common stock, par value $.01 per share, of
the Company and (ii) except as otherwise provided, the amortization of any
amounts required or permitted by Accounting Principles Board Opinion Nos. 16
and 17.
"Global Notes" has the meaning provided in Section 2.01.
"Guarantee" means any obligation, contingent or otherwise, of any
Person directly or indirectly guaranteeing any Indebtedness of any other Person
and, without limiting the generality of the foregoing, any obligation, direct
or indirect, contingent or otherwise, of such Person (i) to purchase or pay (or
advance or supply funds for the purchase or payment of) such Indebtedness of
such other Person (whether arising by virtue of partnership arrangements, or by
agreements to keep-well, to purchase assets, goods, securities or services
(unless such purchase arrangements
<PAGE> 15
9
are on arm's-length terms and are entered into in the ordinary course of
business), to take-or-pay, or to maintain financial statement conditions or
otherwise) or (ii) entered into for purposes of assuring in any other manner
the obligee of such Indebtedness of the payment thereof or to protect such
obligee against loss in respect thereof (in whole or in part); provided that
the term "Guarantee" shall not include endorsements for collection or deposit
in the ordinary course of business. The term "Guarantee" used as a verb has a
corresponding meaning.
"Guaranteed Indebtedness" has the meaning provided in Section 4.07.
"Holder" or "Noteholder" means the registered holder of any Note.
"Incur" means, with respect to any Indebtedness, to incur, create,
issue, assume, Guarantee or otherwise become liable for or with respect to, or
become responsible for, the payment of, contingently or otherwise, such
Indebtedness, including an "Incurrence" of Acquired Indebtedness; provided that
neither the accrual of interest nor the accretion of original issue discount
shall be considered an Incurrence of Indebtedness.
"Indebtedness" means, with respect to any Person at any date of
determination (without duplication), (i) all indebtedness of such Person for
borrowed money, (ii) all obligations of such Person evidenced by bonds,
debentures, notes or other similar instruments, (iii) all obligations of such
Person in respect of letters of credit or other similar instruments (including
reimbursement obligations with respect thereto, but excluding obligations with
respect to letters of credit (including trade letters of credit) securing
obligations (other than obligations described in (i) or (ii) above or (v), (vi)
or (vii) below) entered into in the ordinary course of business of such Person
to the extent such letters of credit are not drawn upon or, if drawn upon, to
the extent such drawing is reimbursed no later than the third Business Day
following receipt by such Person of a demand for reimbursement), (iv) all
obligations of such Person to pay the deferred and unpaid purchase price of
property or services, which purchase price is due more than six months after
the date of placing such property in service or taking delivery and title
thereto or the completion of such services, except Trade Payables, (v) all
Capitalized Lease Obligations of such Person, (vi) all Indebtedness of other
Persons secured by a Lien on any asset of such Person, whether or not such
Indebtedness is assumed by such Person; provided that the amount of such
Indebtedness shall be the lesser of (A) the fair market value of such asset at
such date of determination and (B) the amount of such Indebtedness, (vii) all
Indebtedness of other Persons Guaranteed by such Person to the extent such
Indebtedness is Guaranteed by such Person and (viii) to the extent not
otherwise included in this definition, obligations under Currency Agreements
and Interest Rate Agreements. The amount of Indebtedness of any Person at any
date shall be the outstanding balance at such date (or, in the case of a
revolving credit or other similar facility, the total amount of funds
outstanding and/or available on the date of determination) of all unconditional
obligations as described above and, with respect to contingent obligations, the
maximum liability upon the occurrence of the contingency giving rise to the
obligation, provided (A) that the amount outstanding at any time of any
Indebtedness issued with original issue discount is the
<PAGE> 16
10
face amount of such Indebtedness less the remaining unamortized portion of the
original issue discount of such Indebtedness at the time of its issuance as
determined in conformity with GAAP, (B) that money borrowed and set aside at
the time of the Incurrence of any Indebtedness in order to prefund the payment
of the interest on such Indebtedness shall not be deemed to be "Indebtedness"
so long as such money is held to secure the payment of such interest and (C)
that Indebtedness shall not include any liability for federal, state, local or
other taxes.
"Indenture" means this Indenture as originally executed or as it may
be amended or supplemented from time to time by one or more indentures
supplemental to this Indenture entered into pursuant to the applicable
provisions of this Indenture.
"Interest Payment Date" means each semiannual interest payment date on
May 15 and November 15, of each year, commencing November 15, 1998.
"Interest Rate Agreement" means any interest rate protection
agreement, interest rate future agreement, interest rate option agreement,
interest rate swap agreement, interest rate cap agreement, interest rate collar
agreement, interest rate hedge agreement, option or future contract or other
similar agreement or arrangement.
"Investment" in any Person means any direct or indirect advance, loan
or other extension of credit (including, without limitation, by way of
Guarantee or similar arrangement; but excluding advances to customers in the
ordinary course of business that are, in conformity with GAAP, recorded as
accounts receivable on the balance sheet of the Company or its Restricted
Subsidiaries) or capital contribution to (by means of any transfer of cash or
other property to others or any payment for property or services for the
account or use of others), or any purchase or acquisition of Capital Stock,
bonds, notes, debentures or other similar instruments issued by, such Person
and shall include (i) the designation of a Restricted Subsidiary as an
Unrestricted Subsidiary and (ii) the fair market value of the Capital Stock (or
any other Investment), held by the Company or any of its Restricted
Subsidiaries, of (or in) any Person that has ceased to be a Restricted
Subsidiary, including without limitation, by reason of any transaction
permitted by clause (iii) of Section 4.06; provided that the fair market value
of the Investment remaining in any Person that has ceased to be a Restricted
Subsidiary shall not exceed the aggregate amount of Investments previously made
in such Person valued at the time such Investments were made less the net
reduction of such Investments. For purposes of the definition of "Unrestricted
Subsidiary" and Section 4.04, (i) "Investment" shall include the fair market
value of the assets (net of liabilities (other than liabilities to the Company
or any of its Restricted Subsidiaries)) of any Restricted Subsidiary at the
time that such Restricted Subsidiary is designated an Unrestricted Subsidiary,
(ii) the fair market value of the assets (net of liabilities (other than
liabilities to the Company or any of its Restricted Subsidiaries)) of any
Unrestricted Subsidiary at the time that such Unrestricted Subsidiary is
designated a Restricted Subsidiary shall be considered a reduction in
outstanding Investments and (iii) any property transferred to or from an
Unrestricted Subsidiary shall be valued at its fair market value at the time of
such transfer.
<PAGE> 17
11
"Lien" means any mortgage, pledge, security interest, encumbrance,
lien or charge of any kind (including, without limitation, any conditional sale
or other title retention agreement or lease in the nature thereof or any
agreement to give any security interest).
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Net Cash Proceeds" means, (a) with respect to any Asset Sale, the
proceeds of such Asset Sale in the form of cash or cash equivalents, including
payments in respect of deferred payment obligations (to the extent
corresponding to the principal, but not interest, component thereof) when
received in the form of cash or cash equivalents (except to the extent such
obligations are financed or sold with recourse to the Company or any Restricted
Subsidiary) and proceeds from the conversion of other property received when
converted to cash or cash equivalents, net of (i) brokerage commissions and
other fees and expenses (including fees and expenses of counsel and investment
bankers) related to such Asset Sale, (ii) provisions for all taxes (whether or
not such taxes will actually be paid or are payable) as a result of such Asset
Sale without regard to the consolidated results of operations of the Company
and its Restricted Subsidiaries, taken as a whole, (iii) payments made to repay
Indebtedness or any other obligation outstanding at the time of such Asset Sale
that either (A) is secured by a Lien on the property or assets sold or (B) is
required to be paid as a result of such sale and (iv) appropriate amounts to be
provided by the Company or any Restricted Subsidiary as a reserve against any
liabilities associated with such Asset Sale, including, without limitation,
pension and other post-employment benefit liabilities, liabilities related to
environmental matters and liabilities under any indemnification obligations
associated with such Asset Sale, all as determined in conformity with GAAP and
(b) with respect to any issuance or sale of Capital Stock, the proceeds of such
issuance or sale in the form of cash or cash equivalents, including payments in
respect of deferred payment obligations (to the extent corresponding to the
principal, but not interest, component thereof) when received in the form of
cash or cash equivalents (except to the extent such obligations are financed or
sold with recourse to the Company or any Restricted Subsidiary) and proceeds
from the conversion of other property received when converted to cash or cash
equivalents, net of attorney's fees, accountants' fees, underwriters' or
placement agents' fees, discounts or commissions and brokerage, consultant and
other fees incurred in connection with such issuance or sale and net of taxes
paid or payable as a result thereof.
"Notes" means any of the securities, as defined in the first paragraph
of the recitals hereof, that are authenticated and delivered under this
Indenture. For all purposes of this Indenture, the term "Notes" shall include
the Notes initially issued on the Closing Date and any other Notes issued after
the Closing Date under this Indenture. For purposes of this Indenture, all
Notes shall vote together as one series of Notes under this Indenture.
"Offer to Purchase" means an offer to purchase Notes by the Company
from the Holders commenced by mailing a notice to the Trustee and each Holder
stating: (i) the covenant pursuant to which the offer is being made and that
all Notes validly tendered will be accepted for payment
<PAGE> 18
12
on a pro rata basis; (ii) the purchase price and the date of purchase (which
shall be a Business Day no earlier than 30 days nor later than 60 days from the
date such notice is mailed) (the "Payment Date"); (iii) that any Note not
tendered will continue to accrue interest pursuant to its terms; (iv) that,
unless the Company defaults in the payment of the purchase price, any Note
accepted for payment pursuant to the Offer to Purchase shall cease to accrue
interest on and after the Payment Date; (v) that Holders electing to have a
Note purchased pursuant to the Offer to Purchase will be required to surrender
the Note, together with the form entitled "Option of the Holder to Elect
Purchase" on the reverse side of the Note completed, to the Paying Agent at the
address specified in the notice prior to the close of business on the Business
Day immediately preceding the Payment Date; (vi) that Holders will be entitled
to withdraw their election if the Paying Agent receives, not later than the
close of business on the third Business Day immediately preceding the Payment
Date, a telegram, facsimile transmission or letter setting forth the name of
such Holder, the principal amount of Notes delivered for purchase and a
statement that such Holder is withdrawing his election to have such Notes
purchased; and (vii) that Holders whose Notes are being purchased only in part
will be issued new Notes equal in principal amount to the unpurchased portion
of the Notes surrendered; provided that each Note purchased and each new Note
issued shall be in a principal amount of $1,000 or an integral multiple
thereof. On the Payment Date, the Company shall (i) accept for payment on a pro
rata basis Notes or portions thereof tendered pursuant to an Offer to Purchase;
(ii) deposit with the Paying Agent money sufficient to pay the purchase price
of all Notes or portions thereof so accepted; and (iii) deliver, or cause to be
delivered, to the Trustee all Notes or portions thereof so accepted together
with an Officers' Certificate specifying the Notes or portions thereof accepted
for payment by the Company. The Paying Agent shall promptly mail to the Holders
of Notes so accepted payment in an amount equal to the purchase price, and the
Trustee shall promptly authenticate and mail to such Holders a new Note equal
in principal amount to any unpurchased portion of the Note surrendered;
provided that each Note purchased and each new Note issued shall be in a
principal amount of $1,000 or an integral multiple thereof. The Company will
publicly announce the results of an Offer to Purchase as soon as practicable
after the Payment Date. The Trustee shall act as the Paying Agent for an Offer
to Purchase. The Company will comply with Rule 14e-1 under the Exchange Act and
any other securities laws and regulations thereunder to the extent such laws
and regulations are applicable, in the event that the Company is required to
repurchase Notes pursuant to an Offer to Purchase.
"Officer" means, with respect to the Company, (i) the Chairman of the
Board, the President, any Vice President, the Chief Financial Officer, and (ii)
the Treasurer or any Assistant Treasurer, or the Secretary or any Assistant
Secretary.
"Officers' Certificate" means a certificate signed by one Officer
listed in clause (i) of the definition thereof and one Officer listed in clause
(ii) of the definition thereof. Each Officers' Certificate (other than
certificates provided pursuant to TIA Section 314(a)(4)) shall include the
statements provided for in TIA Section 314(e).
<PAGE> 19
13
"Opinion of Counsel" means a written opinion signed by legal counsel
who may be an employee of or counsel to the Company. Each such Opinion of
Counsel shall include the statements provided for in TIA Section 314(e) to the
extent required by law.
"Paying Agent" has the meaning provided in Section 2.03, except that,
for the purposes of Article Eight, the Paying Agent shall not be the Company or
a Subsidiary of the Company or an Affiliate of any of them. The term "Paying
Agent" includes any additional Paying Agent.
"Payment Date" has the meaning specified in the definition of "Offer to
Purchase."
"Permitted Investment" means (i) an Investment in the Company or a
Restricted Subsidiary or a Person which will, upon the making of such
Investment, become a Restricted Subsidiary or be merged or consolidated with or
into or transfer or convey all or substantially all its assets to, the Company
or a Restricted Subsidiary; provided that such person's primary business is
related, ancillary or complementary to the businesses of the Company and its
Restricted Subsidiaries on the date of such Investment; (ii) Temporary Cash
Investments; (iii) payroll, travel and similar advances to cover matters that
are expected at the time of such advances ultimately to be treated as expenses
in accordance with GAAP; (iv) stock, obligations or securities received in
satisfaction of judgments; (v) Investments in prepaid expenses, negotiable
instruments held for collection and lease, utility and worker's compensation,
performance and other similar deposits; (vi) Interest Rate Agreements and
Currency Agreements designed solely to protect the Company or its Restricted
Subsidiaries against fluctuations in interest rates or foreign currency
exchange rates; and (vii) loans or advances to officers or employees of the
Company or any Restricted Subsidiary that do not in the aggregate exceed $2
million at any time outstanding.
"Permitted Liens" means (i) Liens for taxes, assessments, governmental
charges or claims that are being contested in good faith by appropriate legal
proceedings promptly instituted and diligently conducted and for which a
reserve or other appropriate provision, if any, as shall be required in
conformity with GAAP shall have been made; (ii) statutory and common law Liens
of landlords and carriers, warehousemen, mechanics, suppliers, materialmen,
repairmen or other similar Liens arising in the ordinary course of business and
with respect to amounts not yet delinquent or being contested in good faith by
appropriate legal proceedings promptly instituted and diligently conducted and
for which a reserve or other appropriate provision, if any, as shall be
required in conformity with GAAP shall have been made; (iii) Liens incurred or
deposits made in the ordinary course of business in connection with workers'
compensation, unemployment insurance and other types of social security; (iv)
Liens incurred or deposits made to secure the performance of tenders, bids,
leases, statutory or regulatory obligations, bankers' acceptances, surety and
appeal bonds, government contracts, performance and return-of-money bonds and
other obligations of a similar nature incurred in the ordinary course of
business (exclusive of obligations for the payment of borrowed money); (v)
easements, rights-of- way, municipal and zoning ordinances and similar charges,
encumbrances, title defects or other
<PAGE> 20
14
irregularities that do not materially interfere with the ordinary course of
business of the Company or any of its Restricted Subsidiaries; (vi) Liens
(including extensions and renewals thereof) upon real or personal property
acquired after the Closing Date; provided that (a) such Lien is created solely
for the purpose of securing Indebtedness Incurred, in accordance with Section
4.03, to finance the cost (including the cost of design, development,
acquisition, construction, installation, improvement, transportation or
integration) of the item of property or assets subject thereto and such Lien is
created prior to, at the time of or within six months after the later of the
acquisition, the completion of construction or the commencement of full
operation of such property, (b) the principal amount of the Indebtedness
secured by such Lien does not exceed 100% of such cost and (c) any such Lien
shall not extend to or cover any property or assets other than such item of
property or assets and any improvements on such item; (vii) leases or subleases
granted to others that do not materially interfere with the ordinary course of
business of the Company and its Restricted Subsidiaries, taken as a whole;
(viii) Liens encumbering property or assets under construction arising from
progress or partial payments by a customer of the Company or its Restricted
Subsidiaries relating to such property or assets; (ix) any interest or title of
a lessor in the property subject to any Capitalized Lease or operating lease;
(x) Liens arising from filing Uniform Commercial Code financing statements
regarding leases; (xi) Liens on property of, or on shares of Capital Stock or
Indebtedness of, any Person existing at the time such Person becomes, or
becomes a part of, any Restricted Subsidiary; provided that such Liens do not
extend to or cover any property or assets of the Company or any Restricted
Subsidiary other than the property or assets acquired; (xii) Liens in favor of
the Company or any Restricted Subsidiary; (xiii) Liens arising from the
rendering of a final judgment or order against the Company or any Restricted
Subsidiary that does not give rise to an Event of Default; (xiv) Liens securing
reimbursement obligations with respect to letters of credit that encumber
documents and other property relating to such letters of credit and the
products and proceeds thereof; (xv) Liens in favor of customs and revenue
authorities arising as a matter of law to secure payment of customs duties in
connection with the importation of goods; (xvi) Liens encumbering customary
initial deposits and margin deposits, and other Liens that are within the
general parameters customary in the industry and incurred in the ordinary
course of business, in each case, securing Indebtedness under Interest Rate
Agreements and Currency Agreements and forward contracts, options, future
contracts, futures options or similar agreements or arrangements designed
solely to protect the Company or any of its Restricted Subsidiaries from
fluctuations in interest rates, currencies or the price of commodities; (xvii)
Liens arising out of conditional sale, title retention, consignment or similar
arrangements for the sale of goods entered into by the Company or any of its
Restricted Subsidiaries in the ordinary course of business in accordance with
the past practices of the Company and its Restricted Subsidiaries prior to the
Closing Date; (xviii) Liens on or sales of receivables; and (xix) Liens that
secure Indebtedness with an aggregate principal amount not in excess of $5
million at any time outstanding.
"Person" means an individual, a corporation, a partnership, a limited
liability company, an association, a trust or any other entity or organization,
including a government or political subdivision or an agency or instrumentality
thereof.
<PAGE> 21
15
"Physical Notes" has the meaning provided in Section 2.06.
"Pledge Account" means an account established with the Trustee
pursuant to the terms of the Pledge Agreement for the deposit of the Pledged
Securities to be purchased by the Company with the net proceeds from the sale
of the Notes.
"Pledge Agreement" means the Collateral Pledge and Security Agreement,
dated as of the Closing Date, made by the Company in favor of the Trustee,
governing the disbursement of funds from the Pledge Account, as such agreement
may be amended, restated, supplemented or otherwise modified from time to time.
"Pledged Securities" means the U.S. government securities to be
purchased by the Company and held in the Pledge Account in accordance with the
Pledge Agreement
"Preferred Stock" means, with respect to any Person, any and all
shares, interests, participations or other equivalents (however designated,
whether voting or non-voting) of such Person's preferred or preference stock,
whether now outstanding or issued after the date of this Indenture, including,
without limitation, all series and classes of such preferred or preference
stock.
"principal" of a debt security, including the Notes, means the
principal amount due on the Stated Maturity as shown on such debt security.
"Public Equity Offering" means an underwritten primary public offering
of Common Stock of the Company pursuant to an effective registration statement
under the Securities Act.
A "Public Market" shall be deemed to exist if (i) a Public Equity
Offering has been consummated and (ii) at least 15% of the total issued and
outstanding Common Stock of the Company immediately prior to the consummation
of such Public Equity Offering has been distributed by means of an effective
registration statement under the Securities Act or sales pursuant to Rule 144
under the Securities Act.
"Redemption Date", when used with respect to any Note to be redeemed,
means the date fixed for such redemption by or pursuant to this Indenture.
"Redemption Price", when used with respect to any Note to be redeemed,
means the price at which such Note is to be redeemed pursuant to this
Indenture.
"Registrar" has the meaning provided in Section 2.03.
<PAGE> 22
16
"Regular Record Date" for the interest payable on any Interest Payment
Date means the May 1 or November 1 (whether or not a Business Day), as the case
may be, next preceding such Interest Payment Date.
"Repurchase Offer" has the meaning provided in the Warrant Agreement,
dated as of February 3, 1998, between the Company and The Bank of New York, as
warrant agent.
"Responsible Officer", when used with respect to the Trustee, means
the chairman or any vice chairman of the board of directors, the chairman or
any vice chairman of the executive committee of the board of directors, the
chairman of the trust committee, the president, any vice president, any
assistant vice president, the secretary, any assistant secretary, the
treasurer, any assistant treasurer, the cashier, any assistant cashier, any
trust officer or assistant trust officer, the controller or any assistant
controller or any other officer of the Trustee customarily performing functions
similar to those performed by any of the above designated officers and also
means, with respect to a particular corporate trust matter, any other officer
to whom such matter is referred because of his or her knowledge of and
familiarity with the particular subject.
"Restricted Payments" has the meaning provided in Section 4.04.
"Restricted Subsidiary" means any Subsidiary of the Company other than
an Unrestricted Subsidiary.
"Security Register" has the meaning provided in Section 2.03.
"Securities Act" means the Securities Act of 1933, as amended.
"Significant Subsidiary" means, at any date of determination, any
Restricted Subsidiary that, together with its Subsidiaries, (i) for the most
recent fiscal year of the Company, accounted for more than 10% of the
consolidated revenues of the Company and its Restricted Subsidiaries or (ii) as
of the end of such fiscal year, was the owner of more than 10% of the
consolidated assets of the Company and its Restricted Subsidiaries, all as set
forth on the most recently available consolidated financial statements of the
Company for such fiscal year.
"S&P" means Standard & Poor's Ratings Services and its successors.
"Stated Maturity" means, (i) with respect to any debt security, the
date specified in such debt security as the fixed date on which the final
installment of principal of such debt security is due and payable and (ii) with
respect to any scheduled installment of principal of or interest on any debt
security, the date specified in such debt security as the fixed date on which
such installment is due and payable.
<PAGE> 23
17
"Strategic Subordinated Indebtedness" means Indebtedness of the
Company Incurred to finance the acquisition of a Person engaged in a business
that is related, ancillary or complementary to the business conducted by the
Company or any of its Restricted Subsidiaries, which Indebtedness by its terms,
or by the terms of any agreement or instrument pursuant to which such
Indebtedness is Incurred, (i) is expressly made subordinate in right of payment
to the Notes and (ii) provides that no payment of principal, premium or
interest on, or any other payment with respect to, such Indebtedness may be
made prior to the payment in full of all of the Company's obligations under the
Notes; provided that such Indebtedness may provide for and be repaid at any
time from the proceeds of a capital contribution or the sale of Capital Stock
(other than Disqualified Stock) of the Company after the Incurrence of such
Indebtedness.
"Subsidiary" means, with respect to any Person, any corporation,
association or other business entity of which more than 50% of the voting power
of the outstanding Voting Stock is owned, directly or indirectly, by such
Person and one or more other Subsidiaries of such Person.
"Temporary Cash Investment" means any of the following: (i) direct
obligations of the United States of America or any agency thereof or
obligations fully and unconditionally guaranteed by the United States of
America or any agency thereof, (ii) time deposit accounts, certificates of
deposit and money market deposits maturing within one year of the date of
acquisition thereof issued by a bank or trust company which is organized under
the laws of the United States of America, any state thereof or any foreign
country recognized by the United States of America, and which bank or trust
company has capital, surplus and undivided profits aggregating in excess of $50
million (or the foreign currency equivalent thereof) and has outstanding debt
which is rated "A" (or such similar equivalent rating) or higher by at least
one nationally recognized statistical rating organization (as defined in Rule
436 under the Securities Act) or any money-market fund sponsored by a
registered broker dealer or mutual fund distributor, (iii) repurchase
obligations with a term of not more than 30 days for underlying securities of
the types described in clause (i) above entered into with a bank meeting the
qualifications described in clause (ii) above, (iv) commercial paper, maturing
not more than one year after the date of acquisition, issued by a corporation
(other than an Affiliate of the Company) organized and in existence under the
laws of the United States of America, any state thereof or any foreign country
recognized by the United States of America with a rating at the time as of
which any investment therein is made of "P-1" (or higher) according to Moody's
or "A-1" (or higher) according to S&P, and (v) securities with maturities of
six months or less from the date of acquisition issued or fully and
unconditionally guaranteed by any state, commonwealth or territory of the
United States of America, or by any political subdivision or taxing authority
thereof, and rated at least "A" by S&P or Moody's.
"TIA" or "Trust Indenture Act" means the Trust Indenture Act of 1939,
as amended (15 U.S. Code Sections 77aaa- 77bbb), as in effect on the date this
Indenture was executed, except as provided in Section 9.06.
<PAGE> 24
18
"Trade Payables" means, with respect to any Person, any accounts
payable or any other indebtedness or monetary obligation to trade creditors
created, assumed or Guaranteed by such Person or any of its Subsidiaries
arising in the ordinary course of business in connection with the acquisition
of goods or services.
"Transaction Date" means, with respect to the Incurrence of any
Indebtedness by the Company or any of its Restricted Subsidiaries, the date
such Indebtedness is to be Incurred and, with respect to any Restricted
Payment, the date such Restricted Payment is to be made.
"Trustee" means the party named as such in the first paragraph of this
Indenture until a successor replaces it in accordance with the provisions of
Article Seven of this Indenture and thereafter means such successor.
"United States Bankruptcy Code" means the Bankruptcy Reform Act of
1978, as amended and as codified in Title 11 of the United States Code, as
amended from time to time hereafter, or any successor federal bankruptcy law.
"U.S. Government Obligations" means securities that are (i) direct
obligations of the United States of America for the payment of which its full
faith and credit is pledged or (ii) obligations of a Person controlled or
supervised by and acting as an agency or instrumentality of the United States
of America the payment of which is unconditionally guaranteed as a full faith
and credit obligation by the United States of America, which, in either case,
are not callable or redeemable at the option of the issuer thereof at any time
prior to the Stated Maturity of the Notes, and shall also include a depository
receipt issued by a bank or trust company as custodian with respect to any such
U.S. Government Obligation or a specific payment of interest on or principal
of any such U.S. Government Obligation held by such custodian for the account
of the holder of a depository receipt; provided that (except as required by
law) such custodian is not authorized to make any deduction from the amount
payable to the holder of such depository receipt from any amount received by
the custodian in respect of the U.S. Government Obligation or the specific
payment of interest on or principal of the U.S. Government Obligation evidenced
by such depository receipt.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that
at the time of determination shall be designated an Unrestricted Subsidiary by
the Board of Directors in the manner provided below; and (ii) any Subsidiary of
an Unrestricted Subsidiary. The Board of Directors may designate any Restricted
Subsidiary (including any newly acquired or newly formed Subsidiary of the
Company) to be an Unrestricted Subsidiary unless such Subsidiary owns any
Capital Stock of, or owns or holds any Lien on any property of, the Company or
any Restricted Subsidiary; provided that (A) any Guarantee by the Company or
any Restricted Subsidiary of any Indebtedness of the Subsidiary being so
designated shall be deemed an "Incurrence" of such Indebtedness and an
"Investment" by the Company or such Restricted Subsidiary (or both, if
applicable) at the time of such designation; (B) either (I) the Subsidiary to
<PAGE> 25
19
be so designated has total assets of $1,000 or less or (II) if such Subsidiary
has assets greater than $1,000, such designation would be permitted under
Section 4.04 and (C) if applicable, the Incurrence of Indebtedness and the
Investment referred to in clause (A) of this proviso would be permitted under
Section 4.03 and Section 4.04. The Board of Directors may designate any
Unrestricted Subsidiary to be a Restricted Subsidiary; provided that (i) no
Default or Event of Default shall have occurred and be continuing at the time
of or after giving effect to such designation and (ii) all Liens and
Indebtedness of such Unrestricted Subsidiary outstanding immediately after such
designation would, if Incurred at such time, have been permitted to be Incurred
(and shall be deemed to have been Incurred) for all purposes of this Indenture.
Any such designation by the Board of Directors shall be evidenced to the
Trustee by promptly filing with the Trustee a copy of the Board Resolution
giving effect to such designation and an Officers' Certificate certifying that
such designation complied with the foregoing provisions.
"Voting Stock" means with respect to any Person, Capital Stock of any
class or kind ordinarily having the power to vote for the election of
directors, managers or other voting members of the governing body of such
Person.
"Warrants" means the warrants to purchase Common Stock of the Company
issued pursuant to a Warrant Agreement, dated as of February 3, 1998, between
the Company and The Bank of New York, as warrant agent.
"Wholly Owned" means, with respect to any Subsidiary of any Person,
the ownership of all of the outstanding Capital Stock of such Subsidiary (other
than any director's qualifying shares or Investments by foreign nationals
mandated by applicable law) by such Person or one or more Wholly Owned
Subsidiaries of such Person.
SECTION 1.02. Incorporation by Reference of Trust Indenture
Act. Whenever this Indenture refers to a provision of the TIA, the provision
is incorporated by reference in and made a part of this Indenture. The
following TIA terms used in this Indenture have the following meanings:
"indenture notes" means the Notes;
"indenture note holder" means a Holder or a Noteholder;
"indenture to be qualified" means this Indenture;
"indenture trustee" or "institutional trustee" means the
Trustee; and
"obligor" on the indenture securities means the Company or any
other obligor on the Notes.
<PAGE> 26
20
All other TIA terms used in this Indenture that are defined by
the TIA, defined by TIA reference to another statute or defined by a rule of
the Commission and not otherwise defined herein have the meanings assigned to
them therein.
SECTION 1.03. Rules of Construction. Unless the context
otherwise requires:
(i) a term has the meaning assigned to it;
(ii) an accounting term not otherwise defined has the
meaning assigned to it in accordance with GAAP;
(iii) "or" is not exclusive;
(iv) words in the singular include the plural, and words
in the plural include the singular;
(v) provisions apply to successive events and
transactions;
(vi) "herein," "hereof" and other words of similar import
refer to this Indenture as a whole and not to any particular Article,
Section or other subdivision;
(vii) all ratios and computations based on GAAP contained
in this Indenture shall be computed in accordance with the definition
of GAAP set forth in Section 1.01; and
(viii) all references to Sections or Articles refer to
Sections or Articles of this Indenture unless otherwise indicated.
ARTICLE TWO
THE NOTES
SECTION 2.01. Form and Dating. The Notes and the Trustee's
certificate of authentication shall be substantially in the form annexed hereto
as Exhibit A with such appropriate insertions, omissions, substitutions and
other variations as are required or permitted by this Indenture. The Notes may
have notations, legends or endorsements required by law, stock exchange
agreements to which the Company is subject or usage. The Company shall approve
the form of the Notes and any notation, legend or endorsement on the Notes.
Each Note shall be dated the date of its authentication.
The terms and provisions contained in the form of the Notes
annexed hereto as Exhibit A shall constitute, and are hereby expressly made, a
part of this Indenture. To the extent
<PAGE> 27
21
applicable, the Company and the Trustee, by their execution and delivery of
this Indenture, expressly agree to such terms and provisions and to be bound
thereby.
The Notes shall be issued initially in the form of one or more
global Notes in registered form, substantially in the form set forth in Exhibit
A (the "Global Notes"), deposited with the Trustee, as custodian for the
Depositary, duly executed by the Company and authenticated by the Trustee as
hereinafter provided. Each Global Note shall bear such legends as may be
required or reasonably requested by the Depositary.
The definitive Notes shall be typed, printed, lithographed or
engraved or produced by any combination of these methods or may be produced in
any other manner permitted by the rules of any securities exchange on which the
Notes may be listed, all as determined by the Officers executing such Notes, as
evidenced by their execution of such Notes.
Each Global Note shall also bear the following legend on the
face thereof:
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE
OF THE DEPOSITORY TRUST COMPANY, TO THE COMPANY OR ITS AGENT FOR
REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE
ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR TO SUCH OTHER ENTITY
AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY
TRUST COMPANY OR SUCH OTHER REPRESENTATIVE OF THE DEPOSITORY TRUST
COMPANY OR SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY (AND ANY PAYMENT HEREON
IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN
AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY), ANY
TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO
ANY PERSON IS WRONGFUL SINCE THE REGISTERED OWNER HEREOF, CEDE & CO.,
HAS AN INTEREST HEREIN.
TRANSFERS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS IN WHOLE,
BUT NOT IN PART, TO NOMINEES OF CEDE & CO. OR TO A SUCCESSOR THEREOF
OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL
NOTE SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE
PROVISIONS OF SECTION 2.06 OF THE INDENTURE.
SECTION 2.02. Execution, Authentication and Denominations.
Subject to Article Four, the aggregate principal amount of Notes which may be
authenticated and delivered under this Indenture is unlimited. The Notes shall
be executed by two Officers of the Company.
<PAGE> 28
22
The signature of any of these Officers on the Notes may be by facsimile or
manual signature in the name and on behalf of the Company.
If an Officer whose signature is on a Note no longer holds
that office at the time the Trustee or authenticating agent authenticates the
Note, the Note shall be valid nevertheless.
A Note shall not be valid until the Trustee or authenticating
agent manually signs the certificate of authentication on the Note. The
signature shall be conclusive evidence that the Note has been authenticated
under this Indenture.
At any time and from time to time after the execution of this
Indenture, the Trustee or an authenticating agent shall upon receipt of a
Company Order authenticate for original issue Notes in the aggregate principal
amount specified in such Company Order; provided that the Trustee shall be
entitled to receive an Officers' Certificate and an Opinion of Counsel of the
Company in connection with such authentication of Notes. Such Company Order
shall specify the amount of Notes to be authenticated and the date on which the
original issue of Notes is to be authenticated and in case of an issuance of
Notes pursuant to Section 2.13, shall certify that such issuance is in
compliance with Article Four.
The Trustee may appoint an authenticating agent to
authenticate Notes. An authenticating agent may authenticate Notes whenever
the Trustee may do so. Each reference in this Indenture to authentication by
the Trustee includes authentication by such authenticating agent. An
authenticating agent has the same rights as an Agent to deal with the Company
or an Affiliate of the Company.
The Notes shall be issuable only in registered form without
coupons and only in denominations of $1,000 in principal amount and any
integral multiple of $1,000 in excess thereof.
SECTION 2.03. Registrar and Paying Agent. The Company shall
maintain an office or agency where Notes may be presented for registration of
transfer or for exchange (the "Registrar"), an office or agency where Notes may
be presented for payment (the "Paying Agent") and an office or agency where
notices and demands to or upon the Company in respect of the Notes and this
Indenture may be served, which shall be in the Borough of Manhattan, The City
of New York. The Company shall cause the Registrar to keep a register of the
Notes and of their transfer and exchange (the "Security Register"). The
Company may have one or more co-Registrars and one or more additional Paying
Agents.
The Company shall enter into an appropriate agency agreement
with any Agent not a party to this Indenture. The agreement shall implement
the provisions of this Indenture that relate to such Agent. The Company shall
give prompt written notice to the Trustee of the name and address of any such
Agent and any change in the address of such Agent. If the Company
<PAGE> 29
23
fails to maintain a Registrar, Paying Agent and/or agent for service of notices
and demands, the Trustee shall act as such Registrar, Paying Agent and/or agent
for service of notices and demands. The Company may remove any Agent upon
written notice to such Agent and the Trustee; provided that no such removal
shall become effective until (i) the acceptance of an appointment by a
successor Agent to such Agent as evidenced by an appropriate agency agreement
entered into by the Company and such successor Agent and delivered to the
Trustee or (ii) notification to the Trustee that the Trustee shall serve as
such Agent until the appointment of a successor Agent in accordance with clause
(i) of this proviso. The Company, any Subsidiary of the Company, or any
Affiliate of any of them may act as Paying Agent, Registrar or co-Registrar,
and/or agent for service of notice and demands.
The Company initially appoints the Trustee as Registrar,
Paying Agent, authenticating agent and agent for service of notice and demands.
If, at any time, the Trustee is not the Registrar, the Registrar shall make
available to the Trustee on or before each Interest Payment Date and at such
other times as the Trustee may reasonably request, the names and addresses of
the Holders as they appear in the Security Register.
SECTION 2.04. Paying Agent to Hold Money in Trust. Not later
than each due date of the principal, premium, if any, and interest on any
Notes, the Company shall deposit with the Paying Agent money in immediately
available funds sufficient to pay such principal, premium, if any, and interest
so becoming due. The Company shall require each Paying Agent other than the
Trustee to agree in writing that such Paying Agent shall hold in trust for the
benefit of the Holders or the Trustee all money held by the Paying Agent for
the payment of principal of, premium, if any, and interest on the Notes
(whether such money has been paid to it by the Company or any other obligor on
the Notes), and such Paying Agent shall promptly notify the Trustee of any
default by the Company (or any other obligor on the Notes) in making any such
payment. The Company at any time may require a Paying Agent to pay all money
held by it to the Trustee and account for any funds disbursed, and the Trustee
may at any time during the continuance of any payment default, upon written
request to a Paying Agent, require such Paying Agent to pay all money held by
it to the Trustee and to account for any funds disbursed. Upon doing so, the
Paying Agent shall have no further liability for the money so paid over to the
Trustee. If the Company or any Subsidiary of the Company or any Affiliate of
any of them acts as Paying Agent, it will, on or before each due date of any
principal of, premium, if any, or interest on the Notes, segregate and hold in
a separate trust fund for the benefit of the Holders a sum of money sufficient
to pay such principal, premium, if any, or interest so becoming due until such
sum of money shall be paid to such Holders or otherwise disposed of as provided
in this Indenture, and will promptly notify the Trustee of its action or
failure to act.
SECTION 2.05. Transfer and Exchange. A Holder may transfer a
Note only by written application to the Registrar stating the name of the
proposed transferee and otherwise complying with the terms of this Indenture.
No such transfer shall be effected until, and such transferee shall succeed to
the rights of a Holder only upon, final acceptance and registration of
<PAGE> 30
24
the transfer by the Registrar in the Security Register. Prior to the
registration of any transfer by a Holder as provided herein, the Company, the
Trustee, and any agent of the Company shall treat the person in whose name the
Note is registered as the owner thereof for all purposes whether or not the
Note shall be overdue, and neither the Company, the Trustee, nor any such agent
shall be affected by notice to the contrary. Furthermore, any Holder of a
Global Note shall, by acceptance of such Global Note, agree that transfers of
beneficial interests in such Global Note may be effected only through a book
entry system maintained by the Holder of such Global Note (or its agent) and
that ownership of a beneficial interest in the Note shall be required to be
reflected in a book entry. When Notes are presented to the Registrar or a
co-Registrar with a request to register the transfer or to exchange them for an
equal principal amount of Notes of other authorized denominations, the
Registrar shall register the transfer or make the exchange as requested if its
requirements for such transactions are met. To permit registrations of
transfers and exchanges, the Company shall execute and the Trustee shall
authenticate Notes at the Registrar's request. No service charge shall be made
for any registration of transfer or exchange or redemption of the Notes, but
the Company may require payment of a sum sufficient to cover any transfer tax
or similar governmental charge payable in connection therewith (other than any
such transfer taxes or other similar governmental charge payable upon exchanges
pursuant to Section 2.09, 3.08 or 9.04).
The Registrar shall not be required (i) to issue, register the
transfer of or exchange any Note during a period beginning at the opening of
business 15 days before the day of the mailing of a notice of redemption of
Notes selected for redemption under Section 3.03 and ending at the close of
business on the day of such mailing, or (ii) to register the transfer of or
exchange any Note so selected for redemption in whole or in part, except the
unredeemed portion of any Note being redeemed in part.
SECTION 2.06. Book-Entry Provisions for Global Notes. (a)
The Global Notes shall (i) be registered in the name of the Depositary for such
Global Notes or the nominee of such Depositary and (ii) be delivered to the
Trustee as custodian for such Depositary.
Members of, or participants in, the Depositary ("Agent
Members") shall have no rights under this Indenture with respect to any Global
Note held on their behalf by the Depositary, or the Trustee as its custodian,
or under the Global Note, and the Depositary may be treated by the Company, the
Trustee and any agent of the Company or the Trustee as the absolute owner of
such Global Note for all purposes whatsoever. Notwithstanding the foregoing,
nothing herein shall prevent the Company, the Trustee or any agent of the
Company or the Trustee, from giving effect to any written certification, proxy
or other authorization furnished by the Depositary or impair, as between the
Depositary and its Agent Members, the operation of customary practices
governing the exercise of the rights of a holder of any Note.
(b) Transfers of a Global Note shall be limited to
transfers of such Global Note in whole, but not in part, to the Depositary, its
successors or their respective nominees.
<PAGE> 31
25
Interests of beneficial owners in a Global Note may be transferred in
accordance with the rules and procedures of the Depositary. Permanent
certificated Notes in registered form in substantially the form set forth in
Exhibit A ("Physical Notes") shall be transferred to all beneficial owners in
exchange for their beneficial interests in the Global Notes (i) if the
Depositary notifies the Company that it is unwilling or unable to continue as
Depositary for the Global Notes and a successor depositary is not appointed by
the Company within 90 days of such notice, (ii) if an Event of Default has
occurred and is continuing and the Registrar has received a request therefor
from the Depositary or (iii) in accordance with the rules and procedures of the
Depositary. In addition, the Company may at any time and in its sole
discretion determine that the Notes shall no longer be represented by Global
Notes.
(c) In connection with any transfer of a portion of the
beneficial interests in the Global Notes to beneficial owners pursuant to
paragraph (b) of this Section 2.06, the Registrar shall reflect on its books
and records the date and a decrease in the principal amount of the Global Notes
in an amount equal to the principal amount of the beneficial interest in the
Global Notes to be exchanged for Physical Notes, and the Company shall execute,
and the Trustee shall authenticate and deliver, one or more Physical Notes of
like tenor and amount.
(d) In connection with the transfer of all Notes
represented by Global Notes to beneficial owners pursuant to paragraph (b) of
this Section 2.06, the Global Notes shall be deemed to be surrendered to the
Trustee for cancellation, and the Company shall execute, and the Trustee shall
authenticate and deliver, to each beneficial owner identified by the Depositary
in exchange for its beneficial interest in the Global Notes an equal aggregate
principal amount of Physical Notes of authorized denominations.
(e) The registered holder of a Global Note may grant
proxies and otherwise authorize any person, including Agent Members and persons
that may hold interests through Agent Members, to take any action which a
Holder is entitled to take under this Indenture or the Notes.
SECTION 2.07. Replacement Notes. If a mutilated Note is
surrendered to the Trustee or if the Holder claims that the Note has been lost,
destroyed or wrongfully taken, the Company shall issue and the Trustee shall
authenticate a replacement Note of like tenor and amount and bearing a number
not contemporaneously outstanding; provided that the requirements of this
Section 2.07 are met. If required by the Trustee or the Company, an indemnity
bond must be furnished that is sufficient in the judgment of both the Trustee
and the Company to protect the Company, the Trustee or any Agent from any loss
that any of them may suffer if a Note is replaced. The Company may charge such
Holder for its expenses and the expenses of the Trustee in replacing a Note.
In case any such mutilated, lost, destroyed or wrongfully taken Note has become
or is about to become due and payable, the Company in its discretion may pay
such Note instead of issuing a new Note in replacement thereof.
<PAGE> 32
26
Every replacement Note is an additional obligation of the
Company and shall be entitled to the benefits of this Indenture.
SECTION 2.08. Outstanding Notes. Notes outstanding at any
time are all Notes that have been authenticated by the Trustee except for those
cancelled by it, those delivered to it for cancellation and those described in
this Section 2.08 as not outstanding.
If a Note is replaced pursuant to Section 2.07, it ceases to
be outstanding unless and until the Trustee and the Company receive proof
satisfactory to them that the replaced Note is held by a bona fide purchaser.
If the Paying Agent (other than the Company or an Affiliate of
the Company) holds on the maturity date money sufficient to pay Notes payable
on that date, then on and after that date such Notes cease to be outstanding
and interest on them shall cease to accrue.
A Note does not cease to be outstanding because the Company or
one of its Affiliates holds such Note, provided, however, that, in determining
whether the Holders of the requisite principal amount of the outstanding Notes
have given any request, demand, authorization, direction, notice, consent or
waiver hereunder, Notes owned by the Company or any other obligor upon the
Notes or any Affiliate of the Company or of such other obligor shall be
disregarded and deemed not to be outstanding, except that, in determining
whether the Trustee shall be protected in relying upon any such request,
demand, authorization, direction, notice, consent or waiver, only Notes which a
Responsible Officer of the Trustee actually knows to be so owned shall be so
disregarded. Notes so owned which have been pledged in good faith may be
regarded as outstanding if the pledgee establishes to the satisfaction of the
Trustee the pledgee's right so to act with respect to such Notes and that the
pledgee is not the Company or any other obligor upon the Notes or any Affiliate
of the Company or of such other obligor.
SECTION 2.09. Temporary Notes. Until definitive Notes are
ready for delivery, the Company may prepare and the Trustee shall authenticate
temporary Notes. Temporary Notes shall be substantially in the form of
definitive Notes but may have insertions, substitutions, omissions and other
variations determined to be appropriate by the Officers executing the temporary
Notes, as evidenced by their execution of such temporary Notes. If temporary
Notes are issued, the Company will cause definitive Notes to be prepared
without unreasonable delay. After the preparation of definitive Notes, the
temporary Notes shall be exchangeable for definitive Notes upon surrender of
the temporary Notes at the office or agency of the Company designated for such
purpose pursuant to Section 4.02, without charge to the Holder. Upon surrender
for cancellation of any one or more temporary Notes the Company shall execute
and the Trustee shall authenticate and make available for delivery in exchange
therefor a like principal amount of definitive Notes of authorized
denominations. Until so exchanged, the temporary Notes shall be entitled to
the same benefits under this Indenture as definitive Notes.
<PAGE> 33
27
SECTION 2.10. Cancellation. The Company at any time may
deliver to the Trustee for cancellation any Notes previously authenticated and
delivered hereunder which the Company may have acquired in any manner
whatsoever, and may deliver to the Trustee for cancellation any Notes
previously authenticated hereunder which the Company has not issued and sold.
The Registrar and the Paying Agent shall forward to the Trustee any Notes
surrendered to them for transfer, exchange or payment. The Trustee shall
cancel all Notes surrendered for transfer, exchange, payment or cancellation in
accordance with its normal procedure.
SECTION 2.11. CUSIP Numbers. The Company in issuing the
Notes may use "CUSIP," "CINS" or "ISIN" numbers (if then generally in use), and
the Trustee shall use CUSIP, CINS or ISIN numbers, as the case may be, in
notices of redemption or exchange as a convenience to Holders; provided that
any such notice shall state that no representation is made as to the
correctness of such numbers either as printed on the Notes or as contained in
any notice of redemption or exchange and that reliance may be placed only on
the other identification numbers printed on the Notes, and any such redemption
shall not be affected by any defect or omission of such numbers. The Company
will promptly notify the Trustee of any change in the "CUSIP," "CINS" or "ISIN"
numbers.
SECTION 2.12. Defaulted Interest. If the Company defaults in
a payment of interest on the Notes, it shall pay, or shall deposit with the
Paying Agent money in immediately available funds sufficient to pay the
defaulted interest, plus (to the extent lawful) any interest payable on the
defaulted interest, to the Persons who are Holders on a subsequent special
record date. A special record date, as used in this Section 2.12 with respect
to the payment of any defaulted interest, shall mean the 15th day next
preceding the date fixed by the Company for the payment of defaulted interest,
whether or not such day is a Business Day. At least 15 days before the
subsequent special record date, the Company shall mail to each Holder and to a
Responsible Officer of the Trustee a notice that states the subsequent special
record date, the payment date and the amount of defaulted interest to be paid.
SECTION 2.13. Issuance of Additional Notes. The Company may,
subject to Article Four of this Indenture, issue additional Notes under this
Indenture. The Notes issued on the Closing Date and any additional Notes
subsequently issued shall be treated as a single class for all purposes under
this Indenture.
ARTICLE THREE
REDEMPTION
SECTION 3.01. Right of Redemption. (a) The Notes may be
redeemed, at the Company's option, in whole or in part, at any time or from
time to time, on or after May 15, 2003 and prior to maturity, upon not less
than 30 nor more than 60 days' prior notice mailed by first class mail to each
Holder's last address as it appears in the Security Register, at
<PAGE> 34
28
the Redemption Prices (expressed in percentages of principal amount) set forth
below, plus accrued and unpaid interest to the Redemption Date (subject to the
right of Holders of record on the relevant Regular Record Date that is on or
prior to the Redemption Date to receive interest due on an Interest Payment
Date), if redeemed during the 12-month period commencing May 15 of the years
set forth below:
<TABLE>
<CAPTION>
Redemption
Year Price
---- ----------
<S> <C>
2003 [ ]%
2004 [ ]%
2005 [ ]%
2006 and thereafter 100.000%
</TABLE>
(b) In addition, at any time prior to May 15, 2001, the
Company may redeem up to 35% of the principal amount of the Notes originally
issued with the proceeds of one or more Public Equity Offerings following which
there is a Public Market, at any time or from time to time in part, at a
Redemption Price (expressed as a percentage principal amount) of [
]% plus accrued and unpaid interest to the Redemption Date (subject to the
right of Holders of record on the relevant Regular Record Date that is on or
prior to the Redemption Date to receive interest due on an Interest Payment
Date); provided that at least 65% of the aggregate principal amount of Notes
originally issued remains outstanding after each such redemption and notice of
any such redemption is mailed within 60 days after the related Public Equity
Offering.
SECTION 3.02. Notices to Trustee. If the Company elects to
redeem Notes pursuant to Section 3.01(a) or 3.01(b), it shall notify the
Trustee in writing of the Redemption Date and the principal amount of Notes to
be redeemed.
The Company shall give each notice provided for in this
Section 3.02 in an Officers' Certificate at least 45 days before the Redemption
Date (unless a shorter period shall be satisfactory to the Trustee).
SECTION 3.03. Selection of Notes to Be Redeemed. If less
than all of the Notes are to be redeemed at any time, the Trustee shall select
the Notes to be redeemed in compliance with the requirements, as certified to
it by the Company, of the principal national securities exchange, if any, on
which the Notes are listed or, if the Notes are not listed on a national
securities exchange, by lot or by such other method as the Trustee in its sole
discretion shall deem fair and appropriate; provided that no Notes of $1,000 in
principal amount or less shall be redeemed in part.
The Trustee shall make the selection from the Notes
outstanding and not previously called for redemption. Notes in denominations
of $1,000 in principal amount may only be redeemed in whole. The Trustee may
select for redemption portions (equal to $1,000 in
<PAGE> 35
29
principal amount or any integral multiple thereof) of Notes that have
denominations larger than $1,000 in principal amount. Provisions of this
Indenture that apply to Notes called for redemption also apply to portions of
Notes called for redemption. The Trustee shall notify the Company and the
Registrar promptly in writing of the Notes or portions of Notes to be called
for redemption.
SECTION 3.04. Notice of Redemption. With respect to any
redemption of Notes pursuant to Section 3.01(a) or 3.01(b), at least 30 days
but not more than 60 days before a Redemption Date, the Company shall mail a
notice of redemption by first class mail to each Holder whose Notes are to be
redeemed.
The notice shall identify the Notes (including CUSIP, CINS or
ISIN numbers) to be redeemed and shall state:
(i) the Redemption Date;
(ii) the Redemption Price;
(iii) the name and address of the Paying Agent;
(iv) that Notes called for redemption must be surrendered
to the Paying Agent in order to collect the Redemption Price;
(v) that, unless the Company defaults in making the
redemption payment, interest on Notes called for redemption ceases to
accrue on and after the Redemption Date and the only remaining right
of the Holders is to receive payment of the Redemption Price plus
accrued interest to the Redemption Date upon surrender of the Notes to
the Paying Agent;
(vi) that, if any Note is being redeemed in part, the
portion of the principal amount (equal to $1,000 in principal amount
or any integral multiple thereof) of such Note to be redeemed and
that, on and after the Redemption Date, upon surrender of such Note, a
new Note or Notes in principal amount equal to the unredeemed portion
thereof will be reissued; and
(vii) that, if any Note contains a CUSIP, CINS or ISIN
number as provided in Section 2.11, no representation is being made as
to the correctness of the CUSIP, CINS or ISIN number either as printed
on the Notes or as contained in the notice of redemption and that
reliance may be placed only on the other identification numbers
printed on the Notes.
<PAGE> 36
30
At the Company's request (which request may be revoked by the
Company at any time prior to the time at which the Trustee shall have given
such notice to the Holders), made in writing to the Trustee at least 30 days
(or such shorter period as shall be satisfactory to the Trustee) before a
Redemption Date, the Trustee shall give the notice of redemption in the name
and at the expense of the Company. If, however, the Company gives such notice
to the Holders, the Company shall concurrently deliver to the Trustee an
Officers' Certificate stating that such notice has been given.
SECTION 3.05. Effect of Notice of Redemption. Once notice of
redemption is mailed, Notes called for redemption become due and payable on the
Redemption Date and at the Redemption Price. Upon surrender of any Notes to
the Paying Agent, such Notes shall be paid at the Redemption Price, plus
accrued interest, if any, to the Redemption Date.
Notice of redemption shall be deemed to be given when mailed,
whether or not the Holder receives the notice. In any event, failure to give
such notice, or any defect therein, shall not affect the validity of the
proceedings for the redemption of Notes held by Holders to whom such notice was
properly given.
SECTION 3.06. Deposit of Redemption Price. On or prior to
any Redemption Date, the Company shall deposit with the Paying Agent (or, if
the Company is acting as its own Paying Agent, shall segregate and hold in
trust as provided in Section 2.04) money sufficient to pay the Redemption Price
of and accrued interest on all Notes to be redeemed on that date other than
Notes or portions thereof called for redemption on that date that have been
delivered by the Company to the Trustee for cancellation.
SECTION 3.07. Payment of Notes Called for Redemption. If
notice of redemption has been given in the manner provided above, the Notes or
portion of Notes specified in such notice to be redeemed shall become due and
payable on the Redemption Date at the Redemption Price stated therein, together
with accrued interest to such Redemption Date, and on and after such date
(unless the Company shall default in the payment of such Notes at the
Redemption Price and accrued interest to the Redemption Date, in which case the
principal, until paid, shall bear interest from the Redemption Date at the rate
prescribed in the Notes), such Notes shall cease to accrue interest. Upon
surrender of any Note for redemption in accordance with a notice of redemption,
such Note shall be paid and redeemed by the Company at the Redemption Price,
together with accrued interest, if any, to the Redemption Date; provided that
installments of interest whose Stated Maturity is on or prior to the Redemption
Date shall be payable to the Holders registered as such at the close of
business on the relevant Regular Record Date.
SECTION 3.08. Notes Redeemed in Part. Upon surrender of any
Note that is redeemed in part, the Company shall execute and the Trustee shall
authenticate and deliver to the
<PAGE> 37
31
Holder a new Note equal in principal amount to the unredeemed portion of such
surrendered Note.
ARTICLE FOUR
COVENANTS
SECTION 4.01. Payment of Notes. The Company shall pay the
principal of, premium, if any, and interest on the Notes on the dates and in
the manner provided in the Notes and this Indenture. An installment of
principal, premium, if any, or interest shall be considered paid on the date
due if the Trustee or Paying Agent (other than the Company, a Subsidiary of the
Company, or any Affiliate of any of them) holds on that date money designated
for and sufficient to pay the installment. If the Company or any Subsidiary of
the Company or any Affiliate of any of them, acts as Paying Agent, an
installment of principal, premium, if any, or interest shall be considered paid
on the due date if the entity acting as Paying Agent complies with the last
sentence of Section 2.04. As provided in Section 6.09, upon any bankruptcy or
reorganization procedure relative to the Company, the Trustee shall serve as
the Paying Agent and conversion agent, if any, for the Notes.
The Company shall pay interest on overdue principal, premium,
if any, and interest on overdue installments of interest, to the extent lawful,
at the rate per annum specified in the Notes.
SECTION 4.02. Maintenance of Office or Agency. The Company
will maintain in the Borough of Manhattan, The City of New York an office or
agency where Notes may be surrendered for registration of transfer or exchange
or for presentation for payment and where notices and demands to or upon the
Company in respect of the Notes and this Indenture may be served. The Company
will give prompt written notice to the Trustee of the location, and any change
in the location, of such office or agency. If at any time the Company shall
fail to maintain any such required office or agency or shall fail to furnish
the Trustee with the address thereof, such presentations, surrenders, notices
and demands may be made or served at the address of the Trustee set forth in
Section 11.02.
The Company may also from time to time designate one or more
other offices or agencies where the Notes may be presented or surrendered for
any or all such purposes and may from time to time rescind such designations;
provided that no such designation or rescission shall in any manner relieve the
Company of its obligation to maintain an office or agency in the Borough of
Manhattan, The City of New York for such purposes. The Company will give
prompt written notice to the Trustee of any such designation or rescission and
of any change in the location of any such other office or agency.
<PAGE> 38
32
The Company hereby initially designates the Corporate Trust
Office of the Trustee, located in the Borough of Manhattan, The City of New
York, as such office of the Company in accordance with Section 2.03.
SECTION 4.03. Limitation on Indebtedness. (a) The Company
will not, and will not permit any of its Restricted Subsidiaries to, Incur any
Indebtedness (other than the Notes and Indebtedness existing on the Closing
Date); provided that the Company may Incur Indebtedness if, after giving effect
to the Incurrence of such Indebtedness and the receipt and application of the
proceeds therefrom, the Consolidated Leverage Ratio would be greater than zero
and less than 6:1.
Notwithstanding the foregoing, the Company and any Restricted
Subsidiary (except as specified below) may Incur each and all of the following:
(i) Indebtedness outstanding at any time in an aggregate
principal amount not to exceed $100 million, less any amount of such
Indebtedness permanently repaid as provided under Section 4.10;
(ii) Indebtedness owed (A) to the Company evidenced by a
promissory note or (B) to any Restricted Subsidiary; provided that any
event which results in any such Restricted Subsidiary ceasing to be a
Restricted Subsidiary or any subsequent transfer of such Indebtedness
(other than to the Company or another Restricted Subsidiary) shall be
deemed, in each case, to constitute an Incurrence of such Indebtedness
not permitted by this clause (ii);
(iii) Indebtedness issued in exchange for, or the net
proceeds of which are used to refinance or refund, then outstanding
Indebtedness (other than Indebtedness Incurred under clause (i), (ii),
(iv), (vi), (viii) or (ix) of this paragraph of this Section 4.03) and
any refinancings thereof in an amount not to exceed the amount so
refinanced or refunded (plus premiums, accrued interest, fees and
expenses); provided that Indebtedness the proceeds of which are used
to refinance or refund the Notes or Indebtedness that is pari passu
with, or subordinated in right of payment to, the Notes shall only be
permitted under this clause (iii) if (A) in case the Notes are
refinanced in part or the Indebtedness to be refinanced is pari passu
with the Notes, such new Indebtedness, by its terms or by the terms of
any agreement or instrument pursuant to which such new Indebtedness is
outstanding, is expressly made pari passu with, or subordinate in
right of payment to, the remaining Notes, (B) in case the Indebtedness
to be refinanced is subordinated in right of payment to the Notes,
such new Indebtedness, by its terms or by the terms of any agreement
or instrument pursuant to which such new Indebtedness is issued or
remains outstanding, is expressly made subordinate in right of payment
to the Notes at least to the extent that the Indebtedness to be
refinanced is subordinated to the Notes and (C) such new Indebtedness,
determined as of the date of Incurrence of such new Indebtedness,
<PAGE> 39
33
does not mature prior to the Stated Maturity of the Indebtedness to be
refinanced or refunded, and the Average Life of such new Indebtedness
is at least equal to the remaining Average Life of the Indebtedness to
be refinanced or refunded; and provided further that in no event may
Indebtedness of the Company be refinanced by means of any Indebtedness
of any Restricted Subsidiary pursuant to this clause (iii);
(iv) Indebtedness (A) in respect of performance, surety or
appeal bonds provided in the ordinary course of business, (B) under
Currency Agreements and Interest Rate Agreements; provided that such
agreements (a) are designed solely to protect the Company or its
Restricted Subsidiaries against fluctuations in foreign currency
exchange rates or interest rates and (b) do not increase the
Indebtedness of the obligor outstanding at any time other than as a
result of fluctuations in foreign currency exchange rates or interest
rates or by reason of fees, indemnities and compensation payable
thereunder; and (C) arising from agreements providing for
indemnification, adjustment of purchase price or similar obligations,
or from Guarantees or letters of credit, surety bonds or performance
bonds securing any obligations of the Company or any of its Restricted
Subsidiaries pursuant to such agreements, in any case Incurred in
connection with the disposition of any business, assets or Restricted
Subsidiary (other than Guarantees of Indebtedness Incurred by any
Person acquiring all or any portion of such business, assets or
Restricted Subsidiary for the purpose of financing such acquisition),
in a principal amount not to exceed the gross proceeds actually
received by the Company or any Restricted Subsidiary in connection
with such disposition;
(v) Indebtedness of the Company, to the extent the net
proceeds thereof are promptly (A) used to purchase Notes tendered in
an Offer to Purchase made as a result of a Change in Control or (B)
deposited to defease the Notes as set forth in Article Eight;
(vi) Guarantees of the Notes and Guarantees of
Indebtedness of the Company by any Restricted Subsidiary provided the
Guarantee of such Indebtedness is permitted by and made in accordance
with Section 4.07;
(vii) Indebtedness (including Guarantees) Incurred to
finance the cost (including the cost of design, development,
acquisition, construction, installation, improvement, transportation
or integration) to acquire equipment, inventory or network assets
(including acquisitions by way of Capitalized Lease and acquisitions
of the Capital Stock of a Person that becomes a Restricted Subsidiary
to the extent of the fair market value of the equipment, inventory or
network assets so acquired) by the Company or a Restricted Subsidiary
after the Closing Date;
(viii) Indebtedness of the Company not to exceed, at any one
time outstanding, two times (A) the Net Cash Proceeds received by the
Company after February 3, 1998 as a capital contribution or from the
issuance and sale of its Capital Stock (other than
<PAGE> 40
34
Disqualified Stock) to a Person that is not a Subsidiary of the
Company, to the extent (I) such capital contribution or Net Cash
Proceeds have not been used pursuant to clause (C)(2) of the first
paragraph or clause (iii), (iv), (vi), (vii) or (viii) of the second
paragraph of Section 4.04 to make a Restricted Payment and (II) if
such capital contribution or Net Cash Proceeds are used to consummate
a transaction pursuant to which the Company Incurs Acquired
Indebtedness, the amount of such Net Cash Proceeds exceeds one-half of
the amount of Acquired Indebtedness so Incurred and (B) 80% of the
fair market value of property (other than cash and cash equivalents)
received by the Company after February 3, 1998 from the sale of its
Capital Stock (other than Disqualified Stock) to a Person that is not
a Subsidiary of the Company, to the extent (I) such capital
contribution or sale of Capital Stock has not been used pursuant to
clause (iii), (iv), (vi) or (vii) of the second paragraph of Section
4.04 to make a Restricted Payment and (II) if such capital
contribution or Capital Stock is used to consummate a transaction
pursuant to which the Company Incurs Acquired Indebtedness, 80% of the
fair market value of the property received exceeds one-half of the
amount of Acquired Indebtedness so Incurred provided that such
Indebtedness does not mature prior to the Stated Maturity of the Notes
and has an Average Life longer than the Notes;
(ix) Acquired Indebtedness;
(x) Strategic Subordinated Indebtedness; and
(xi) subordinated Indebtedness of the Company (in addition
to Indebtedness permitted under clauses (i) through (x) above) in an
aggregate principal amount outstanding at any time not to exceed $100
million, less any amount of such Indebtedness permanently repaid as
provided under Section 4.10.
(b) Notwithstanding any other provision of this Section
4.03, the maximum amount of Indebtedness that the Company or a Restricted
Subsidiary may Incur pursuant to this Section 4.03 shall not be deemed to be
exceeded, with respect to any outstanding Indebtedness due solely to the result
of fluctuations in the exchange rates of currencies.
(c) For purposes of determining any particular amount of
Indebtedness under this Section 4.03, (1) Guarantees, Liens or obligations with
respect to letters of credit supporting Indebtedness otherwise included in the
determination of such particular amount shall not be included and (2) any Liens
granted pursuant to the equal and ratable provisions referred to in Section
4.09 shall not be treated as Indebtedness. For purposes of determining
compliance with this Section 4.03, in the event that an item of Indebtedness
meets the criteria of more than one of the types of Indebtedness described in
the above clauses, the Company, in its sole discretion, shall classify, and
from time to time may reclassify, such item of Indebtedness and only be
required to include the amount and type of such Indebtedness in one of such
clauses.
<PAGE> 41
35
SECTION 4.04. Limitation on Restricted Payments. The Company
will not, and will not permit any Restricted Subsidiary to, directly or
indirectly, (i) declare or pay any dividend or make any distribution on or with
respect to its Capital Stock (other than (x) dividends or distributions payable
solely in shares of its Capital Stock (other than Disqualified Stock) or in
options, warrants or other rights to acquire shares of such Capital Stock and
(y) pro rata dividends or distributions on Common Stock of Restricted
Subsidiaries held by minority stockholders) held by Persons other than the
Company or any of its Restricted Subsidiaries, (ii) purchase, redeem, retire or
otherwise acquire for value any shares of Capital Stock of (A) the Company or
an Unrestricted Subsidiary (including options, warrants or other rights to
acquire such shares of Capital Stock) held by any Person or (B) a Restricted
Subsidiary (including options, warrants or other rights to acquire such shares
of Capital Stock) held by any Affiliate of the Company (other than a Wholly
Owned Restricted Subsidiary) or any holder (or any Affiliate of such holder) of
5% or more of the Capital Stock of the Company, (iii) make any voluntary or
optional principal payment, or voluntary or optional redemption, repurchase,
defeasance, or other acquisition or retirement for value, of Indebtedness of
the Company that is subordinated in right of payment to the Notes or (iv) make
any Investment, other than a Permitted Investment, in any Person (such payments
or any other actions described in clauses (i) through (iv) above being
collectively "Restricted Payments") if, at the time of, and after giving effect
to, the proposed Restricted Payment: (A) a Default or Event of Default shall
have occurred and be continuing, (B) the Company could not Incur at least $1.00
of Indebtedness under the first paragraph of Section 4.03 or (C) the aggregate
amount of all Restricted Payments (the amount, if other than in cash, to be
determined in good faith by the Board of Directors, whose determination shall
be conclusive and evidenced by a Board Resolution) made after the Closing Date
shall exceed the sum of (1) 50% of the aggregate amount of the Adjusted
Consolidated Net Income (or, if the Adjusted Consolidated Net Income is a loss,
minus 100% of the amount of such loss) (determined by excluding income
resulting from transfers of assets by the Company or a Restricted Subsidiary to
an Unrestricted Subsidiary) accrued on a cumulative basis during the period
(taken as one accounting period) beginning on April 1, 1998 and ending on the
last day of the last fiscal quarter preceding the Transaction Date for which
reports have been filed with the Commission or provided to the Trustee pursuant
to Section 4.17 plus (2) the aggregate Net Cash Proceeds received by the
Company after February 3, 1998 as a capital contribution or from the issuance
and sale permitted by this Indenture of its Capital Stock (other than
Disqualified Stock) to a Person who is not a Subsidiary of the Company,
including an issuance or sale permitted by this Indenture of Indebtedness of
the Company for cash subsequent to February 3, 1998 upon the conversion of such
Indebtedness into Capital Stock (other than Disqualified Stock) of the Company,
or from the issuance to a Person who is not a Subsidiary of the Company of any
options, warrants or other rights to acquire Capital Stock of the Company (in
each case, exclusive of any Disqualified Stock or any options, warrants or
other rights that are redeemable at the option of the holder, or are required
to be redeemed, prior to the Stated Maturity of the Notes), in each case except
to the extent such Net Cash Proceeds are used to Incur Indebtedness pursuant to
clause (viii) of the second paragraph under Section 4.03, plus (3) an amount
equal to the net reduction in Investments (other than reductions in Permitted
Investments) in any Person resulting
<PAGE> 42
36
from payments of interest on Indebtedness, dividends, repayments of loans or
advances, or other transfers of assets, in each case to the Company or any
Restricted Subsidiary or from the Net Cash Proceeds from the sale of any such
Investment (except, in each case, to the extent any such payment or proceeds
are included in the calculation of Adjusted Consolidated Net Income), or from
redesignations of Unrestricted Subsidiaries as Restricted Subsidiaries (valued
in each case as provided in the definition of "Investments"), not to exceed, in
each case, the amount of Investments previously made by the Company or any
Restricted Subsidiary in such Person or Unrestricted Subsidiary.
The foregoing provision shall not be violated by reason of:
(i) the payment of any dividend within 60 days after the
date of declaration thereof if, at said date of declaration, such
payment would comply with the foregoing paragraph;
(ii) the redemption, repurchase, defeasance or other
acquisition or retirement for value of Indebtedness that is
subordinated in right of payment to the Notes including premium, if
any, and accrued and unpaid interest, with the proceeds of, or in
exchange for, Indebtedness Incurred under clause (iii) of the second
paragraph of Section 4.03(a);
(iii) the repurchase, redemption or other acquisition of
Capital Stock of the Company or an Unrestricted Subsidiary (or
options, warrants or other rights to acquire such Capital Stock) in
exchange for, or out of the proceeds of a capital contribution or a
substantially concurrent offering of, shares of Capital Stock (other
than Disqualified Stock) of the Company (or options, warrants or other
rights to acquire such Capital Stock);
(iv) the making of any principal payment or the
repurchase, redemption, retirement, defeasance or other acquisition
for value of Indebtedness of the Company which is subordinated in
right of payment to the Notes in exchange for, or out of the proceeds
of a capital contribution or a substantially concurrent offering of,
shares of the Capital Stock (other than Disqualified Stock) of the
Company (or options, warrants or other rights to acquire such Capital
Stock);
(v) payments or distributions, to dissenting stockholders
pursuant to applicable law, pursuant to or in connection with a
consolidation, merger or transfer of assets that complies with the
provisions of Article Five;
(vi) Investments in any Person the primary business of
which is related, ancillary or complementary to the business of the
Company and its Restricted Subsidiaries on the date of such
Investments; provided that the aggregate amount of Investments made
pursuant to this clause (vi) does not exceed the sum of (a) $20
million
<PAGE> 43
37
and (b) the amount of Net Cash Proceeds received by the Company after
February 3, 1998 as a capital contribution or from the sale of its
Capital Stock (other than Disqualified Stock) to a Person who is not a
Subsidiary of the Company, except to the extent such Net Cash Proceeds
are used to Incur Indebtedness pursuant to clause (viii) of the second
paragraph of Section 4.03(a) or to make Restricted Payments pursuant
to clause (C)(2) of the first paragraph, or clauses (iii), (iv) or
(viii) of this paragraph, of this Section 4.04, plus (z) the net
reduction in Investments made pursuant to this clause (vi) resulting
from distributions on or repayments of such Investments or from the
Net Cash Proceeds from the sale of any such Investment (except in each
case to the extent any such payment or proceeds is included in the
calculation of Adjusted Consolidated Net Income) or from such Person
becoming a Restricted Subsidiary (valued in each case as provided in
the definition of "Investments"), provided that the net reduction in
any Investment shall not exceed the amount of such Investment;
(vii) Investments acquired in exchange for Capital Stock
(other than Disqualified Stock) of the Company;
(viii) the declaration or payment of dividends on Capital
Stock (other than Disqualified Stock) of the Company in an aggregate
annual amount not to exceed 6% of the Net Cash Proceeds received by
the Company from the sale of such Capital Stock after the Closing
Date;
(ix) repurchases of Warrants pursuant to a Repurchase
Offer;
(x) any purchase of any fractional shares of Common Stock
(or other Capital Stock of the Company issuable upon exercise of the
Warrants) in connection with an exercise of the Warrants; and
(xi) other Restricted Payments in an aggregate amount not
to exceed $2 million;
provided that, except in the case of clauses (i) and (iii), no Default or Event
of Default shall have occurred and be continuing or occur as a consequence of
the actions or payments set forth therein.
Each Restricted Payment permitted pursuant to the preceding
paragraph (other than the Restricted Payment referred to in clause (ii)
thereof, an exchange of Capital Stock for Capital Stock or Indebtedness
referred to in clause (iii) or (iv) thereof and an Investment referred to in
clause (vi) thereof), and the Net Cash Proceeds from any capital contribution
or any issuance of Capital Stock referred to in clauses (iii), (iv) and (vi),
shall be included in calculating whether the conditions of clause (C) of the
first paragraph of this Section 4.04 have been met with respect to any
subsequent Restricted Payments. In the event the proceeds of an issuance of
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38
Capital Stock of the Company are used for the redemption, repurchase or other
acquisition of the Notes, or Indebtedness that is pari passu with the Notes,
then the Net Cash Proceeds of such issuance shall be included in clause (C) of
the first paragraph of this Section 4.04 only to the extent such proceeds are
not used for such redemption, repurchase or other acquisition of Indebtedness.
SECTION 4.05. Limitation on Dividend and Other Payment
Restrictions Affecting Restricted Subsidiaries. The Company will not, and will
not permit any Restricted Subsidiary to, create or otherwise cause or suffer to
exist or become effective any consensual encumbrance or restriction of any kind
on the ability of any Restricted Subsidiary to (i) pay dividends or make any
other distributions permitted by applicable law on any Capital Stock of such
Restricted Subsidiary owned by the Company or any other Restricted Subsidiary,
(ii) pay any Indebtedness owed to the Company or any other Restricted
Subsidiary, (iii) make loans or advances to the Company or any other Restricted
Subsidiary or (iv) transfer any of its property or assets to the Company or any
other Restricted Subsidiary.
The foregoing provisions shall not restrict any encumbrances
or restrictions:
(i) existing on the Closing Date in this Indenture or any
other agreements in effect on the Closing Date, and any extensions,
refinancings, renewals or replacements of such agreements; provided
that the encumbrances and restrictions in any such extensions,
refinancings, renewals or replacements are no less favorable in any
material respect to the Holders than those encumbrances or
restrictions that are then in effect and that are being extended,
refinanced, renewed or replaced;
(ii) existing under or by reason of applicable law;
(iii) existing with respect to any Person or the property
or assets of such Person acquired by the Company or any Restricted
Subsidiary, existing at the time of such acquisition and not incurred
in contemplation thereof, which encumbrances or restrictions are not
applicable to any Person or the property or assets of any Person other
than such Person or the property or assets of such Person so acquired;
(iv) in the case of clause (iv) of the first paragraph of
this Section 4.05, (A) that restrict in a customary manner the
subletting, assignment or transfer of any property or asset that is a
lease, license, conveyance or contract or similar property or asset,
(B) existing by virtue of any transfer of, agreement to transfer,
option or right with respect to, or Lien on, any property or assets of
the Company or any Restricted Subsidiary not otherwise prohibited by
this Indenture or (C) arising or agreed to in the ordinary course of
business, not relating to any Indebtedness, and that do not,
individually or in the aggregate, detract from the value of property
or assets of the Company or any Restricted Subsidiary in any manner
material to the Company or any Restricted Subsidiary;
<PAGE> 45
39
(v) with respect to a Restricted Subsidiary and imposed
pursuant to an agreement that has been entered into for the sale or
disposition of all or substantially all of the Capital Stock of, or
property and assets of, such Restricted Subsidiary; or
(vi) contained in the terms of any Indebtedness or any
agreement pursuant to which such Indebtedness was issued if (A) the
encumbrance or restriction applies only in the event of a payment
default or a default with respect to a financial covenant contained in
such Indebtedness or agreement, (B) the encumbrance or restriction is
not materially more disadvantageous to the Holders of the Notes than
is customary in comparable financings (as determined by the Company)
and (C) the Company determines that any such encumbrance or
restriction will not materially affect the Company's ability to make
principal or interest payments on the Notes.
Nothing contained in this Section 4.05 shall prevent the Company or any
Restricted Subsidiary from (1) creating, incurring, assuming or suffering to
exist any Liens otherwise permitted in Section 4.09 or (2) restricting the sale
or other disposition of property or assets of the Company or any of its
Restricted Subsidiaries that secure Indebtedness of the Company or any of its
Restricted Subsidiaries.
SECTION 4.06. Limitation on the Issuance and Sale of Capital
Stock of Restricted Subsidiaries. The Company will not sell, and will not
permit any Restricted Subsidiary, directly or indirectly, to issue or sell, any
shares of Capital Stock of a Restricted Subsidiary (including options, warrants
or other rights to purchase shares of such Capital Stock) except (i) to the
Company or a Wholly Owned Restricted Subsidiary; (ii) issuances of director's
qualifying shares or sales to foreign nationals of shares of Capital Stock of
foreign Restricted Subsidiaries, to the extent required by applicable law;
(iii) if, immediately after giving effect to such issuance or sale, such
Restricted Subsidiary would no longer constitute a Restricted Subsidiary and
any Investment in such Person remaining after giving effect to such issuance or
sale would have been permitted to be made under Section 4.04 if made on the
date of such issuance or sale; or (iv) issuances or sales of Common Stock of a
Restricted Subsidiary, provided that the Company or such Restricted Subsidiary
applies the Net Cash Proceeds, if any, of any such sale in accordance with
clause (A) or (B) of Section 4.10.
SECTION 4.07. Limitation on Issuances of Guarantees by
Restricted Subsidiaries. The Company will not permit any Restricted
Subsidiary, directly or indirectly, to Guarantee any Indebtedness of the
Company which is pari passu with or subordinate in right of payment to the
Notes ("Guaranteed Indebtedness"), unless (i) such Restricted Subsidiary
simultaneously executes and delivers a supplemental indenture to this Indenture
providing for a Guarantee (a "Subsidiary Guarantee") of payment of the Notes by
such Restricted Subsidiary and (ii) such Restricted Subsidiary waives and will
not in any manner whatsoever claim or take the benefit or advantage of, any
rights of reimbursement, indemnity or subrogation or any other rights against
the Company or any other Restricted Subsidiary as a result of any payment by
such
<PAGE> 46
40
Restricted Subsidiary under its Subsidiary Guarantee; provided that this
paragraph shall not be applicable to any Guarantee of any Restricted Subsidiary
that existed at the time such Person became a Restricted Subsidiary and was not
Incurred in connection with, or in contemplation of, such Person becoming a
Restricted Subsidiary. If the Guaranteed Indebtedness is (A) pari passu with
the Notes, then the Guarantee of such Guaranteed Indebtedness shall be pari
passu with, or subordinated to, the Subsidiary Guarantee or (B) subordinated to
the Notes, then the Guarantee of such Guaranteed Indebtedness shall be
subordinated to the Subsidiary Guarantee at least to the extent that the
Guaranteed Indebtedness is subordinated to the Notes.
Notwithstanding the foregoing, any Subsidiary Guarantee by a
Restricted Subsidiary may provide by its terms that it shall be automatically
and unconditionally released and discharged upon (i) any sale, exchange or
transfer, to any Person not an Affiliate of the Company, of all of the
Company's and each Restricted Subsidiary's Capital Stock in, or all or
substantially all the assets of, such Restricted Subsidiary (which sale,
exchange or transfer is not prohibited by this Indenture) or (ii) the release
or discharge of the Guarantee which resulted in the creation of such Subsidiary
Guarantee, except a discharge or release by or as a result of payment under
such Guarantee.
SECTION 4.08. Limitation on Transactions with Shareholders
and Affiliates. The Company will not, and will not permit any Restricted
Subsidiary to, directly or indirectly, enter into, renew or extend any
transaction (including, without limitation, the purchase, sale, lease or
exchange of property or assets, or the rendering of any service) with any
holder (or any Affiliate of such holder) of 5% or more of any class of Capital
Stock of the Company or with any Affiliate of the Company or any Restricted
Subsidiary, except upon fair and reasonable terms no less favorable to the
Company or such Restricted Subsidiary than could be obtained, at the time of
such transaction or, if such transaction is pursuant to a written agreement, at
the time of the execution of the agreement providing therefor, in a comparable
arm's-length transaction with a Person that is not such a holder or an
Affiliate.
The foregoing limitation does not limit, and shall not apply
to:
(i) transactions (A) approved by a majority of the
disinterested members of the Board of Directors or (B) for which the
Company or a Restricted Subsidiary delivers to the Trustee a written
opinion of a nationally recognized investment banking firm stating
that the transaction is fair to the Company or such Restricted
Subsidiary from a financial point of view;
(ii) any transaction solely between the Company and any of
its Wholly Owned Restricted Subsidiaries or solely between Wholly
Owned Restricted Subsidiaries;
(iii) the payment of reasonable and customary regular fees
to directors of the Company who are not employees of the Company;
<PAGE> 47
41
(iv) any payments or other transactions pursuant to any
tax-sharing agreement between the Company and any other Person with
which the Company files a consolidated tax return or with which the
Company is part of a consolidated group for tax purposes; or
(v) any Restricted Payments not prohibited by Section
4.04.
Notwithstanding the foregoing, any transaction or series of related
transactions covered by the first paragraph of this Section 4.08 and not
covered by clauses (ii) through (v) of this paragraph, the aggregate amount of
which exceeds $1 million in value, must be approved or determined to be fair in
the manner provided for in clause (i)(A) or (B) above.
SECTION 4.09. Limitation on Liens. The Company will not, and
will not permit any Restricted Subsidiary to, create, incur, assume or suffer
to exist any Lien on any of its assets or properties of any character
(including, without limitation, licenses), or any shares of Capital Stock or
Indebtedness of any Restricted Subsidiary, without making effective provision
for all of the Notes and all other amounts due under this Indenture to be
directly secured equally and ratably with (or, if the obligation or liability
to be secured by such Lien is subordinated in right of payment to the Notes,
prior to) the obligation or liability secured by such Lien.
The foregoing limitation does not apply to:
(i) Liens existing on the Closing Date;
(ii) Liens granted after the Closing Date on any assets or
Capital Stock of the Company or its Restricted Subsidiaries created in
favor of the Holders;
(iii) Liens with respect to the assets of a Restricted
Subsidiary granted by such Restricted Subsidiary to the Company or a
Wholly Owned Restricted Subsidiary to secure Indebtedness owing to the
Company or such other Restricted Subsidiary;
(iv) Liens securing Indebtedness which is Incurred to
refinance secured Indebtedness which is permitted to be Incurred under
clause (iii) of the second paragraph of Section 4.03(a); provided that
such Liens do not extend to or cover any property or assets of the
Company or any Restricted Subsidiary other than the property or assets
securing the Indebtedness being refinanced;
(v) Liens on the Capital Stock of, or any property or
assets of, a Restricted Subsidiary securing Indebtedness of such
Restricted Subsidiary permitted under Section 4.03;
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42
(vi) Liens on the Capital Stock of Restricted Subsidiaries
securing up to $100.0 million of Indebtedness Incurred under clause
(vii) of the second paragraph of Section 4.03(a); or
(vii) Permitted Liens.
SECTION 4.10. Limitation on Asset Sales. The Company will
not, and will not permit any Restricted Subsidiary to, consummate any Asset
Sale, unless (i) the consideration received by the Company or such Restricted
Subsidiary is at least equal to the fair market value of the assets sold or
disposed of and (ii) at least 75% of the consideration received consists of
cash or Temporary Cash Investments; provided, however, that this clause (ii)
shall not apply to long-term assignments in capacity in a telecommunications
network. In the event and to the extent that the Net Cash Proceeds received by
the Company or any of its Restricted Subsidiaries from one or more Asset Sales
occurring on or after the Closing Date in any period of 12 consecutive months
exceed 10% of Adjusted Consolidated Net Tangible Assets (determined as of the
date closest to the commencement of such 12-month period for which a
consolidated balance sheet of the Company and its Subsidiaries has been filed
with the Commission pursuant to Section 4.17), then the Company shall or shall
cause the relevant Restricted Subsidiary to (i) within 12 months after the date
Net Cash Proceeds so received exceed 10% of Adjusted Consolidated Net Tangible
Assets (A) apply an amount equal to such excess Net Cash Proceeds to
permanently repay unsubordinated Indebtedness of the Company, or any Restricted
Subsidiary providing a Subsidiary Guarantee pursuant to Section 4.07 or
Indebtedness of any other Restricted Subsidiary, in each case owing to a Person
other than the Company or any of its Restricted Subsidiaries or (B) invest an
equal amount, or the amount not so applied pursuant to clause (A) (or enter
into a definitive agreement committing to so invest within 12 months after the
date of such agreement), in property or assets (other than current assets) of a
nature or type or that are used in a business (or in a company having property
and assets of a nature or type, or engaged in a business) similar or related to
the nature or type of the property and assets of, or the business of, the
Company and its Restricted Subsidiaries existing on the date of such investment
(as determined in good faith by the Board of Directors, whose determination
shall be conclusive and evidenced by a Board Resolution) and (ii) apply (no
later than the end of the 12-month period referred to in clause (i)) such
excess Net Cash Proceeds (to the extent not applied pursuant to clause (i)) as
provided in the following paragraph of this Section 4.10. The amount of such
excess Net Cash Proceeds required to be applied (or to be committed to be
applied) during such 12-month period as set forth in clause (i) of the
preceding sentence and not applied as so required by the end of such period
shall constitute "Excess Proceeds."
If, as of the first day of any calendar month, the aggregate
amount of Excess Proceeds not theretofore subject to an Offer to Purchase
pursuant to this Section 4.10 totals at least $5 million, the Company must
commence, not later than the fifteenth Business Day of such month, and
consummate an Offer to Purchase from the Holders on a pro rata basis an
aggregate principal amount of Notes equal to the Excess Proceeds on such date,
at a purchase price equal to
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43
100% of the principal amount of the Notes, plus, in each case, accrued interest
to the Payment Date.
SECTION 4.11. Repurchase of Notes upon a Change of Control.
The Company must commence, within 30 days of the occurrence of a Change of
Control, and consummate an Offer to Purchase for all Notes then outstanding, at
a purchase price equal to 101% of the principal amount thereof, plus accrued
interest to the Payment Date.
SECTION 4.12. Existence. Subject to Articles Four and Five
of this Indenture, the Company will do or cause to be done all things necessary
to preserve and keep in full force and effect its existence and the existence
of each Restricted Subsidiary in accordance with the respective organizational
documents of the Company and each Restricted Subsidiary and the rights (whether
pursuant to charter, partnership certificate, agreement, statute or otherwise),
material licenses and franchises of the Company and each Restricted Subsidiary;
provided that the Company shall not be required to preserve any such right,
license or franchise, or the existence of any Restricted Subsidiary, if the
maintenance or preservation thereof is no longer desirable in the conduct of
the business of the Company and its Restricted Subsidiaries taken as a whole.
SECTION 4.13. Payment of Taxes and Other Claims. The Company
will pay or discharge and shall cause each of its Restricted Subsidiaries to
pay or discharge, or cause to be paid or discharged, before the same shall
become delinquent (i) all material taxes, assessments and governmental charges
levied or imposed upon (a) the Company or any such Restricted Subsidiary, (b)
the income or profits of any such Restricted Subsidiary which is a corporation
or (c) the property of the Company or any such Restricted Subsidiaries and (ii)
all material lawful claims for labor, materials and supplies that, if unpaid,
might by law become a lien upon the property of the Company or any such
Restricted Subsidiary; provided that the Company shall not be required to pay
or discharge, or cause to be paid or discharged, any such tax, assessment,
charge or claim the amount, applicability or validity of which is being
contested in good faith by appropriate proceedings and for which adequate
reserves have been established.
SECTION 4.14. Maintenance of Properties and Insurance. The
Company will cause all properties used or useful in the conduct of its business
or the business of any of its Restricted Subsidiaries, to be maintained and
kept in good condition, repair and working order and supplied with all
necessary equipment and will cause to be made all necessary repairs, renewals,
replacements, betterments and improvements thereof, all as in the judgment of
the Company may be necessary so that the business carried on in connection
therewith may be properly conducted at all times; provided that nothing in this
Section 4.14 shall prevent the Company or any such Restricted Subsidiary from
discontinuing the use, operation or maintenance of any of such properties or
disposing of any of them, if such discontinuance or disposal is, in the
judgment of the Company, desirable in the conduct of the business of the
Company or such Restricted Subsidiary.
<PAGE> 50
44
The Company will provide or cause to be provided, for itself
and its Restricted Subsidiaries, insurance (including appropriate
self-insurance) against loss or damage of the kinds customarily insured against
by corporations similarly situated and owning like properties, with reputable
insurers or with the government of the United States of America, or an agency
or instrumentality thereof, in such amounts, with such deductibles and by such
methods as shall be customary for corporations similarly situated in the
industry in which the Company or such Restricted Subsidiary, as the case may
be, is then conducting business.
SECTION 4.15. Notice of Defaults. In the event that the
Company becomes aware of any Default or Event of Default the Company, promptly
after it becomes aware thereof, will give written notice thereof to the
Trustee.
SECTION 4.16. Compliance Certificates. (a) The Company
shall deliver to the Trustee, within 45 days after the end of each fiscal
quarter (90 days after the end of the last fiscal quarter of each year), an
Officers' Certificate stating whether or not the signers know of any Default or
Event of Default that occurred during such fiscal quarter. In the case of the
Officers' Certificate delivered within 90 days of the end of the Company's
fiscal year, such certificate shall contain a certification from the principal
executive officer, principal financial officer or principal accounting officer
that a review has been conducted of the activities of the Company and its
Restricted Subsidiaries and the Company's and its Restricted Subsidiaries'
performance under this Indenture and that, to the knowledge of such Officers,
the Company has complied with all conditions and covenants under this
Indenture. For purposes of this Section 4.16, such compliance shall be
determined without regard to any period of grace or requirement of notice
provided under this Indenture. If they do know of such a Default or Event of
Default, the certificate shall describe any such Default or Event of Default
and its status. The first certificate to be delivered pursuant to this Section
4.16(a) shall be for the first fiscal quarter beginning after the execution of
this Indenture.
(b) So long as (and to the extent) not prohibited by the
then current recommendations of the American Institute of Certified Public
Accountants, the Company shall deliver to the Trustee, within 90 days after the
end of the Company's fiscal year, a certificate signed by the Company's
independent certified public accountants stating (i) that their audit
examination has included a review of the terms of this Indenture and the Notes
as they relate to accounting matters, (ii) that they have read the most recent
Officers' Certificate delivered to the Trustee pursuant to paragraph (a) of
this Section 4.16 and (iii) whether, in connection with their audit
examination, anything came to their attention that caused them to believe that
the Company was not in compliance with any of the terms, covenants, provisions
or conditions of Article Four and Section 5.01 of this Indenture as they
pertain to accounting matters and, if any Default or Event of Default has come
to their attention, specifying the nature and period of existence thereof;
provided that such independent certified public accountants shall not be liable
in respect of such statement by reason of any failure to obtain knowledge of
any such Default or Event of Default that would not come to the attention of
such accountants in the course of an audit
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45
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. The
Company shall file with the Commission the annual, quarterly and other reports
and other information required by Sections 13(a) or 15(d) under the Securities
Exchange Act of 1934, regardless of whether such Sections of the Exchange Act
are applicable to the Company. The Company shall supply the Trustee and each
Holder or shall supply to the Trustee for forwarding to each such Holder,
without cost to such Holder, copies of such reports and other information.
Delivery of such reports, information and documents to the Trustee is for
informational purposes only and the Trustee's receipt of such shall not
constitute constructive notice of any information contained therein or
determinable from information (including mathematical calculations) contained
therein, including the Company's compliance with any of its covenants hereunder
(as to which the Trustee is entitled to rely exclusively on Officers'
Certificates). The Company also shall comply with the other provisions of TIA
Section 314(a).
SECTION 4.18. Waiver of Stay, Extension or Usury Laws. The
Company covenants (to the extent that it may lawfully do so) that it will not
at any time insist upon, or plead, or in any manner whatsoever claim or take
the benefit or advantage of, any stay or extension law or any usury law or
other law that would prohibit or forgive the Company from paying all or any
portion of the principal of, premium, if any, or interest on the Notes as
contemplated herein, wherever enacted, now or at any time hereafter in force,
or that may affect the covenants or the performance of this Indenture; and (to
the extent that it may lawfully do so) the Company hereby expressly waives all
benefit or advantage of any such law and covenants that it will not hinder,
delay or impede the execution of any power herein granted to the Trustee, but
will suffer and permit the execution of every such power as though no such law
had been enacted.
SECTION 4.19. Limitation on Sale-Leaseback Transactions. The
Company will not, and will not permit any Restricted Subsidiary to, enter into
any sale-leaseback transaction involving any of its assets or properties
whether now owned or hereafter acquired, whereby the Company or a Restricted
Subsidiary sells or transfers such assets or properties and then or thereafter
leases such assets or properties or any part thereof or any other assets or
properties which the Company or such Restricted Subsidiary, as the case may be,
intends to use for substantially the same purpose or purposes as the assets or
properties sold or transferred.
The foregoing restriction does not apply to any sale-leaseback
transaction if:
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46
(i) the lease is for a period, including renewal rights,
of not in excess of three years;
(ii) the lease secures or relates to industrial revenue or
pollution control bonds;
(iii) the transaction is solely between the Company and any
Wholly Owned Restricted Subsidiary or solely between Wholly Owned
Restricted Subsidiaries; or
(iv) the Company or such Restricted Subsidiary, within 12
months after the sale or transfer of any assets or properties is
completed, applies an amount not less than the net proceeds received
from such sale in accordance with clause (A) or (B) of the first
paragraph of Section 4.10.
ARTICLE FIVE
SUCCESSOR CORPORATION
SECTION 5.01. When Company May Merge, Etc. The Company shall
not consolidate with, merge with or into, or sell, convey, transfer, lease or
otherwise dispose of all or substantially all of its property and assets (as an
entirety or substantially an entirety in one transaction or a series of related
transactions) to, any Person or permit any Person to merge with or into the
Company unless:
(i) the Company shall be the continuing Person, or the
Person (if other than the Company) formed by such consolidation or
into which the Company is merged or that acquired or leased such
property and assets of the Company shall be a corporation organized
and validly existing under the laws of the United States of America or
any jurisdiction thereof and shall expressly assume, by a supplemental
indenture, executed and delivered to the Trustee, all of the
obligations of the Company on all of the Notes and under this
Indenture;
(ii) immediately after giving effect to such transaction,
no Default or Event of Default shall have occurred and be continuing;
(iii) immediately after giving effect to such transaction
on a pro forma basis, the Company or any Person becoming the successor
obligor of the Notes shall have a Consolidated Net Worth equal to or
greater than the Consolidated Net Worth of the Company immediately
prior to such transaction;
(iv) immediately after giving effect to such transaction
on a pro forma basis the Company, or any Person becoming the successor
obligor of the Notes, as the case may be, could Incur at least $1.00
of Indebtedness under the first paragraph of Section 4.03;
<PAGE> 53
47
provided that this clause (iv) shall not apply to (x) a consolidation,
merger or sale of all (but not less than all) of the assets of the
Company if all Liens and Indebtedness of the Company or any Person
becoming the successor obligor on the Notes, as the case may be, and
its Restricted Subsidiaries outstanding immediately after such
transaction would, if Incurred at such time, have been permitted to be
Incurred (and all such Liens and Indebtedness, other than Liens and
Indebtedness of the Company and its Restricted Subsidiaries
outstanding immediately prior to the transaction, shall be deemed to
have been Incurred) for all purposes of this Indenture or (y) a
consolidation, merger or sale of all or substantially all of the
assets of the Company if immediately after giving effect to such
transaction on a pro forma basis, the Company or any Person becoming
the successor obligor of the Notes shall have a Consolidated Leverage
Ratio equal to or less than the Consolidated Leverage Ratio of the
Company immediately prior to such transaction; and
(v) the Company delivers to the Trustee an Officers'
Certificate (attaching the arithmetic computations to demonstrate
compliance with clauses (iii) and (iv) above) and Opinion of Counsel,
in each case stating that such consolidation, merger or transfer and
such supplemental indenture complies with this provision and that all
conditions precedent provided for herein relating to such transaction
have been complied with;
provided, however, that clauses (iii) and (iv) above do not apply if, in the
good faith determination of the Board of Directors of the Company, whose
determination shall be evidenced by a Board Resolution, the principal purpose
of such transaction is to change the state of incorporation of the Company; and
provided further that any such transaction shall not have as one of its
purposes the evasion of the foregoing limitations.
SECTION 5.02. Successor Substituted. Upon any consolidation
or merger, or any sale, conveyance, transfer, lease or other disposition of all
or substantially all of the property and assets of the Company in accordance
with Section 5.01 of this Indenture, the successor Person formed by such
consolidation or into which the Company is merged or to which such sale,
conveyance, transfer, lease or other disposition is made shall succeed to, and
be substituted for, and may exercise every right and power of, the Company
under this Indenture with the same effect as if such successor Person had been
named as the Company herein and thereafter the predecessor corporation shall be
relieved of all obligations and covenants under this Indenture and the Notes;
provided that the Company shall not be released from its obligation to pay the
principal of, premium, if any, or interest on the Notes in the case of a lease
of all or substantially all of its property and assets.
<PAGE> 54
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ARTICLE SIX
DEFAULT AND REMEDIES
SECTION 6.01. Events of Default. An "Event of Default" shall
occur with respect to the Notes if:
(a) the Company defaults in the payment of principal of
(or premium, if any, on) any Note when the same becomes due and
payable at maturity, upon acceleration, redemption or otherwise;
(b) the Company defaults in the payment of interest on
any Note when the same becomes due and payable, and such default
continues for a period of 30 days; provided that a failure to make any
of the first six scheduled interest payments on the Notes on the
applicable Interest Payment Date will constitute an Event of Default
with no grace or cure period;
(c) the Company defaults in the performance, or breaches
the provisions of Article Five or the fails to make or consummate an
Offer to Purchase in accordance with Section 4.10 or Section 4.11;
(d) the Company defaults in the performance of or
breaches any other covenant or agreement of the Company in this
Indenture or under the Notes (other than a default specified in clause
(a), (b) or (c) above) and such default or breach continues for a
period of 30 consecutive days after written notice by the Trustee or
the Holders of 25% or more in aggregate principal amount of the Notes,
(e) there occurs with respect to any issue or issues of
Indebtedness of the Company or any Significant Subsidiary having an
outstanding principal amount of $5 million or more in the aggregate
for all such issues of all such Persons, whether such Indebtedness now
exists or shall hereafter be created, (I) an event of default that has
caused the holder thereof to declare such Indebtedness to be due and
payable prior to its Stated Maturity and such Indebtedness has not
been discharged in full or such acceleration has not been rescinded or
annulled within 30 days of such acceleration and/or (II) the failure
to make a principal payment at the final (but not any interim) fixed
maturity and such defaulted payment shall not have been made, waived
or extended within 30 days of such payment default;
(f) any final judgment or order (not covered by
insurance) for the payment of money in excess of $5 million in the
aggregate for all such final judgments or orders against all such
Persons (treating any deductibles, self-insurance or retention as not
so covered) shall be rendered against the Company or any Significant
Subsidiary and shall not be paid or discharged, and there shall be any
period of 30 consecutive days following
<PAGE> 55
49
entry of the final judgment or order that causes the aggregate amount
for all such final judgments or orders outstanding and not paid or
discharged against all such Persons to exceed $5 million during which
a stay of enforcement of such final judgment or order, by reason of a
pending appeal or otherwise, shall not be in effect;
(g) a court having jurisdiction in the premises enters a
decree or order for (A) relief in respect of the Company or any
Significant Subsidiary in an involuntary case under any applicable
bankruptcy, insolvency or other similar law now or hereafter in
effect, (B) appointment of a receiver, liquidator, assignee,
custodian, trustee, sequestrator or similar official of the Company or
any Significant Subsidiary or for all or substantially all of the
property and assets of the Company or any Significant Subsidiary or
(C) the winding up or liquidation of the affairs of the Company or any
Significant Subsidiary and, in each case, such decree or order shall
remain unstayed and in effect for a period of 30 consecutive days;
(h) the Company or any Significant Subsidiary (A)
commences a voluntary case under any applicable bankruptcy, insolvency
or other similar law now or hereafter in effect, or consents to the
entry of an order for relief in an involuntary case under any such
law, (B) consents to the appointment of or taking possession by a
receiver, liquidator, assignee, custodian, trustee, sequestrator or
similar official of the Company or any Significant Subsidiary or for
all or substantially all of the property and assets of the Company or
any Significant Subsidiary or (C) effects any general assignment for
the benefit of creditors; or
(i) the Pledge Agreement shall cease to be in full force
and effect or enforceable in accordance with its terms, other than in
accordance with its terms.
SECTION 6.02. Acceleration. If an Event of Default (other
than an Event of Default specified in clause (g) or (h) of Section 6.01 that
occurs with respect to the Company) occurs and is continuing under this
Indenture, the Trustee or the Holders of at least 25% in aggregate principal
amount of the Notes, then outstanding, by written notice to the Company (and to
the Trustee if such notice is given by the Holders), may, and the Trustee at
the request of such Holders shall, declare the principal of, premium, if any,
and accrued interest on the Notes to be immediately due and payable. Upon a
declaration of acceleration, such principal of, premium, if any, and accrued
interest shall be immediately due and payable. In the event of a declaration of
acceleration because an Event of Default set forth in clause (e) of Section
6.01 has occurred and is continuing, such declaration of acceleration shall be
automatically rescinded and annulled if the event of default triggering such
Event of Default pursuant to clause (e) shall be remedied or cured by the
Company or the relevant Significant Subsidiary or waived by the holders of the
relevant Indebtedness within 60 days after the declaration of acceleration with
respect thereto. If an Event of Default specified in clause (g) or (h) of
Section 6.01 occurs with respect to the Company, the principal of, premium, if
any, and accrued interest on the Notes then outstanding
<PAGE> 56
50
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.
SECTION 6.04. Waiver of Past Defaults. Subject to Sections
6.02, 6.07 and 9.02, the Holders of at least a majority in principal amount of
the outstanding Notes, by notice to the Trustee, may waive an existing Default
or Event of Default and its consequences, except a Default in the payment of
principal of, premium, if any, or interest on any Note as specified in clause
(a) or (b) of Section 6.01 or in respect of a covenant or provision of this
Indenture which cannot be modified or amended without the consent of the holder
of each outstanding Note affected. Upon any such waiver, such Default shall
cease to exist, and any Event of Default arising therefrom shall be deemed to
have been cured, for every purpose of this Indenture; but no such waiver shall
extend to any subsequent or other Default or Event of Default or impair any
right consequent thereto.
SECTION 6.05. Control by Majority. The Holders of at least a
majority in aggregate principal amount of the outstanding Notes may direct the
time, method and place of conducting any proceeding for any remedy available to
the Trustee or exercising any trust or power conferred on the Trustee. However,
the Trustee may refuse to follow any direction that conflicts with law or this
Indenture, that may involve the Trustee in personal liability, or that the
Trustee determines in good faith may be unduly prejudicial to the rights of
Holders of Notes not joining in the giving of such direction and may take any
other action it deems proper that is not inconsistent with any such direction
received from Holders of Notes.
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SECTION 6.06. Limitation on Suits. A Holder may not
institute any proceeding, judicial or otherwise, with respect to this Indenture
or the Notes, or for the appointment of a receiver or trustee, or for any other
remedy hereunder unless:
(i) the Holder gives the Trustee written notice of a
continuing Event of Default;
(ii) the Holders of at least 25% in aggregate principal
amount of outstanding Notes make a written request to the Trustee to
pursue the remedy;
(iii) such Holder or Holders offer the Trustee indemnity
satisfactory to the Trustee against any costs, liability or expense;
(iv) the Trustee does not comply with the request within
60 days after receipt of the request and the offer of indemnity; and
(v) during such 60-day period, the Holders of a majority
in aggregate principal amount of the outstanding Notes do not give the
Trustee a direction that is inconsistent with the request.
For purposes of Section 6.05 of this Indenture and this
Section 6.06, the Trustee shall comply with TIA Section 316(a) in making any
determination of whether the Holders of the required aggregate principal amount
of outstanding Notes have concurred in any request or direction of the Trustee
to pursue any remedy available to the Trustee or the Holders with respect to
this Indenture or the Notes or otherwise under the law.
A Holder may not use this Indenture to prejudice the rights of
another Holder or to obtain a preference or priority over such other Holder.
SECTION 6.07. Rights of Holders to Receive Payment.
Notwithstanding any other provision of this Indenture, the right of any Holder
of a Note to receive payment of the principal of, premium, if any, or interest
on, such Note or to bring suit for the enforcement of any such payment, on or
after the due date expressed in the Notes, shall not be impaired or affected
without the consent of such Holder.
SECTION 6.08. Collection Suit by Trustee. If an Event of
Default in payment of principal, premium or interest specified in clause (a),
(b) or (c) of Section 6.01 occurs and is continuing, the Trustee may recover
judgment in its own name and as trustee of an express trust against the Company
or any other obligor of the Notes for the whole amount of principal, premium,
if any, and accrued interest remaining unpaid, together with interest on
overdue principal, premium, if any, and, to the extent that payment of such
interest is lawful, interest on overdue installments of interest, in each case
at the rate specified in the Notes, and such further
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52
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 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
<PAGE> 59
53
omitted by it as Trustee, a court may require any party litigant in such suit
to file an undertaking to pay the costs of the suit, and the court may assess
reasonable costs, including reasonable attorneys' fees and expenses, against
any party litigant in the suit having due regard to the merits and good faith
of the claims or defenses made by the party litigant. This Section 6.11 does
not apply to a suit by the Trustee, a suit by a Holder pursuant to Section 6.07
of this Indenture, or a suit by Holders of more than 10% in principal amount of
the outstanding Notes.
SECTION 6.12. Restoration of Rights and Remedies. If the
Trustee or any Holder has instituted any proceeding to enforce any right or
remedy under this Indenture and such proceeding has been discontinued or
abandoned for any reason, or has been determined adversely to the Trustee or to
such Holder, then, and in every such case, subject to any determination in such
proceeding, the Company, the Trustee and the Holders shall be restored
severally and respectively to their former positions hereunder and thereafter
all rights and remedies of the Company, Trustee and the Holders shall continue
as though no such proceeding had been instituted.
SECTION 6.13. Rights and Remedies Cumulative. Except as
otherwise provided with respect to the replacement or payment of mutilated,
destroyed, lost or wrongfully taken Notes in Section 2.07, no right or remedy
herein conferred upon or reserved to the Trustee or to the Holders is intended
to be exclusive of any other right or remedy, and every right and remedy shall,
to the extent permitted by law, be cumulative and in addition to every other
right and remedy given hereunder or now or hereafter existing at law or in
equity or otherwise. The assertion or employment of any right or remedy
hereunder, or otherwise, shall not prevent the concurrent assertion or
employment of any other appropriate right or remedy.
SECTION 6.14. Delay or Omission Not Waiver. No delay or
omission of the Trustee or of any Holder to exercise any right or remedy
accruing upon any Event of Default shall impair any such right or remedy or
constitute a waiver of any such Event of Default or an acquiescence therein.
Every right and remedy given by this Article Six or by law to the Trustee or to
the Holders may be exercised from time to time, and as often as may be deemed
expedient, by the Trustee or by the Holders, as the case may be.
ARTICLE SEVEN
TRUSTEE
SECTION 7.01. General. The duties and responsibilities of
the Trustee shall be as provided by the TIA and as set forth herein.
Notwithstanding the foregoing, no provision of this Indenture shall require the
Trustee to expend or risk its own funds or otherwise incur any financial
liability in the performance of any of its duties hereunder, or in the exercise
of any of its rights or powers, if it shall have reasonable grounds for
believing that repayment of such funds or adequate indemnity against such risk
or liability is not reasonably assured to it. Whether or not
<PAGE> 60
54
therein expressly so provided, every provision of this Indenture relating to
the conduct or affecting the liability of or affording protection to the
Trustee shall be subject to the provisions of this Article Seven.
SECTION 7.02. Certain Rights of Trustee. Subject to TIA
Sections 315(a) through (d):
(i) the Trustee may conclusively rely and shall be
protected in acting or refraining from acting upon any resolution,
certificate, statement, instrument, opinion, report, notice, request,
direction, consent, order, bond, debenture, note, other evidence of
indebtedness or other paper or document (whether in its original or
facsimile form) believed by it to be genuine and to have been signed
or presented by the proper person. The Trustee need not investigate
any fact or matter stated in the document;
(ii) before the Trustee acts or refrains from acting, it
may require an Officers' Certificate and/or an Opinion of Counsel,
which shall conform to Section 11.03 or Section 11.04, as the case may
be. The Trustee shall not be liable for any action it takes or omits
to take in good faith in reliance on such certificate or opinion;
(iii) the Trustee may act through attorneys and agents of
its selection and the advice of such attorneys and agents shall be
full and complete authorization and protection in respect of any
action taken, suffered or omitted by it hereunder in good faith and in
reliance thereon. The Trustee shall not be responsible for the
misconduct or negligence of any agent appointed with due care;
(iv) the Trustee shall be under no obligation to exercise
any of the rights or powers vested in it by this Indenture at the
request or direction of any of the Holders, unless such Holders shall
have offered to the Trustee reasonable security or indemnity against
the costs, expenses and liabilities that might be incurred by it in
compliance with such request or direction;
(v) the Trustee shall not be liable for any action it
takes or omits to take in good faith that it believes to be authorized
or within its rights or powers or for any action it takes or omits to
take in accordance with the direction of the Holders of a majority in
principal amount of the outstanding Notes relating to the time, method
and place of conducting any proceeding for any remedy available to the
Trustee, or exercising any trust or power conferred upon the Trustee,
under this Indenture; provided that the Trustee's conduct does not
constitute gross negligence or bad faith;
(vi) whenever in the administration of this Indenture the
Trustee shall deem it desirable that a making be proved or established
prior to taking, suffering or omitting any action hereunder, the
Trustee (unless other evidence be herein specifically prescribed)
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may, in the absence of bad faith on its part, conclusively rely upon
an Officer's Certificate; and
(vii) the Trustee shall not be bound to make any
investigation into the facts or matters stated in any resolution,
certificate, statement, instrument, opinion, report, notice, request,
direction, consent, order, bond, debenture, note, other evidence of
indebtedness or other paper or document, but the Trustee, in its
discretion, may make such further inquiry or investigation into such
facts or matters as it may see fit, and, if the Trustee shall
determine to make such further inquiry or investigation, it shall be
entitled to examine the books, records and premises of the Company
personally or by agent or attorney at the sole cost of the Company and
shall incur no liability or additional liability of any kind by reason
of such inquiry or investigation.
SECTION 7.03. Individual Rights of Trustee. The Trustee, in
its individual or any other capacity, may become the owner or pledgee of Notes
and may otherwise deal with the Company or its Affiliates with the same rights
it would have if it were not the Trustee. Any Agent may do the same with like
rights. However, the Trustee is subject to TIA Sections 310(b) and 311.
SECTION 7.04. Trustee's Disclaimer. The Trustee (i) makes no
representation as to the validity or adequacy of this Indenture or the Notes,
(ii) shall not be accountable for the Company's use or application of the
proceeds from the Notes and (iii) shall not be responsible for any statement in
the Notes other than its certificate of authentication.
SECTION 7.05. Notice of Default. If any Default or any Event
of Default occurs and is continuing and if such Default or Event of Default is
actually known to a Responsible Officer of the Trustee, the Trustee shall mail
to each Holder in the manner and to the extent provided in TIA Section 313(c)
notice of the Default or Event of Default within 45 days after it occurs,
unless such Default or Event of Default has been cured; provided, however,
that, except in the case of a default in the payment of the principal of,
premium, if any, or interest on any Note, the Trustee shall be protected in
withholding such notice if and so long as the board of directors, the executive
committee or a trust committee of directors and/or Responsible Officers of the
Trustee in good faith determine that the withholding of such notice is in the
interest of the Holders.
SECTION 7.06. Reports by Trustee to Holders. Within 60 days
after each May 15, beginning with May 15, 1999, the Trustee shall mail to each
Holder as provided in TIA Section 313(c) a brief report dated as of such May
15, if required by TIA Section 313(a).
SECTION 7.07. Compensation and Indemnity. The Company shall
pay to the Trustee such compensation as shall be agreed upon in writing for its
services. The compensation of the Trustee shall not be limited by any law on
compensation of a trustee of an express trust.
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The Company shall reimburse the Trustee upon request for all reasonable
out-of-pocket expenses and advances incurred or made by the Trustee. Such
expenses shall include the reasonable compensation and expenses of the
Trustee's agents and counsel.
The Company shall indemnify each of the Trustee and any
predecessor Trustee for, and hold it harmless against, any and all claim,
damage, loss or liability or expense, including taxes (other than taxes based
upon, measured by or determined by the income of the Trustee) incurred by it
without negligence or bad faith on its part in connection with the acceptance
or administration of this Indenture and its duties under this Indenture and the
Notes, including the costs and expenses of defending itself against any claim
or liability and of complying with any process served upon it or any of its
officers in connection with the exercise or performance of any of its powers or
duties under this Indenture and the Notes.
To secure the Company's payment obligations in this Section
7.07, the Trustee shall have a lien prior to the Notes on all money or property
held or collected by the Trustee, in its capacity as Trustee, except money or
property held in trust pursuant to the Pledge Agreement and money or property
held in trust to pay principal of, premium, if any, and interest on particular
Notes.
If the Trustee incurs expenses or renders services after the
occurrence of an Event of Default specified in clause (g) or (h) of Section
6.01, the expenses and the compensation for the services will be intended to
constitute expenses of administration under Title 11 of the United States
Bankruptcy Code or any applicable federal or state law for the relief of
debtors.
The provisions of this Section 7.07 shall survive the
termination of this Indenture.
SECTION 7.08. Replacement of Trustee. A resignation or
removal of the Trustee and appointment of a successor Trustee shall become
effective only upon the successor Trustee's acceptance of appointment as
provided in this Section 7.08.
The Trustee may resign at any time by so notifying the Company
in writing at least 30 days prior to the date of the proposed resignation. The
Holders of a majority in principal amount of the outstanding Notes may remove
the Trustee by so notifying the Trustee in writing and may appoint a successor
Trustee with the consent of the Company. The Company may remove the Trustee
if: (i) the Trustee is no longer eligible under Section 7.10; (ii) the Trustee
is adjudged a bankrupt or an insolvent; (iii) a receiver or other public
officer takes charge of the Trustee or its property; or (iv) the Trustee
becomes incapable of acting.
If the Trustee resigns or is removed, or if a vacancy exists
in the office of Trustee for any reason, the Company shall promptly appoint a
successor Trustee. Within one year after the successor Trustee takes office,
the Holders of a majority in principal amount of the outstanding Notes may
appoint a successor Trustee to replace the successor Trustee appointed by
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the Company. If the successor Trustee does not deliver its written acceptance
required by the next succeeding paragraph of this Section 7.08 within 30 days
after the retiring Trustee resigns or is removed, the retiring Trustee, the
Company or the Holders of a majority in principal amount of the outstanding
Notes may, at the expense of the Company, petition any court of competent
jurisdiction for the appointment of a successor Trustee.
A successor Trustee shall deliver a written acceptance of its
appointment to the retiring Trustee and to the Company. Immediately after the
delivery of such written acceptance, subject to the lien provided in Section
7.07, (i) the retiring Trustee shall transfer all property held by it as
Trustee to the successor Trustee, (ii) the resignation or removal of the
retiring Trustee shall become effective and (iii) the successor Trustee shall
have all the rights, powers and duties of the Trustee under this Indenture. A
successor Trustee shall mail notice of its succession to each Holder.
If the Trustee is no longer eligible under Section 7.10, any
Holder who satisfies the requirements of TIA Section 310(b) may petition any
court of competent jurisdiction for the removal of the Trustee and the
appointment of a successor Trustee.
The Company shall give notice of any resignation and any
removal of the Trustee and each appointment of a successor Trustee to all
Holders. Each notice shall include the name of the successor Trustee and the
address of its Corporate Trust Office.
Notwithstanding replacement of the Trustee pursuant to this
Section 7.08, the Company's obligation under Section 7.07 shall continue for
the benefit of the retiring Trustee.
SECTION 7.09. Successor Trustee by Merger, Etc. If the
Trustee consolidates with, merges or converts into, or transfers all or
substantially all of its corporate trust business to, another corporation or
national banking association, the resulting, surviving or transferee
corporation or national banking association without any further act shall be
the successor Trustee with the same effect as if the successor Trustee had been
named as the Trustee herein.
SECTION 7.10. Eligibility. This Indenture shall always have
a Trustee who satisfies the requirements of TIA Section 310(a)(1). The Trustee
shall have a combined capital and surplus of at least $25,000,000 as set forth
in its most recent published annual report of condition.
SECTION 7.11. Money Held in Trust. The Trustee shall not be
liable for interest on any money received by it except as the Trustee may agree
with the Company. Money held in trust by the Trustee need not be segregated
from other funds except to the extent required by law and except for money held
in trust pursuant to the Pledge Agreement and under Article Eight of this
Indenture.
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SECTION 7.12. Withholding Taxes. The Trustee, as agent for
the Company, shall exclude and withhold from each payment of principal and
interest and other amounts due hereunder or under the Notes any and all
withholding taxes applicable thereto as required by law. The Trustee agrees to
act as such withholding agent and, in connection therewith, whenever any
present or future taxes or similar charges are required to be withheld with
respect to any amounts payable in respect of the Notes, to withhold such
amounts and timely pay the same to the appropriate authority in the name of and
on behalf of the holders of the Notes, that it will file any necessary
withholding tax returns or statements when due. The Company or the Trustee
shall, as promptly as possible after the payment of the taxes described above,
deliver to each holder of a Note appropriate documentation showing the payment
thereof, together with such additional documentary evidence as such holders may
reasonably request from time to time.
ARTICLE EIGHT
DISCHARGE OF INDENTURE
SECTION 8.01. Termination of Company's Obligations. Except
as otherwise provided in this Section 8.01, the Company may terminate its
obligations under the Notes and this Indenture if:
(i) all Notes previously authenticated and delivered
(other than destroyed, lost or stolen Notes that have been replaced or
Notes that are paid pursuant to Section 4.01 or Notes for whose
payment money or securities have theretofore been held in trust and
thereafter repaid to the Company, as provided in Section 8.05) have
been delivered to the Trustee for cancellation and the Company has
paid all sums payable by it hereunder; or
(ii) (A) the Notes mature within one year or all of them
are to be called for redemption within one year under arrangements
satisfactory to the Trustee for giving the notice of redemption, (B)
the Company irrevocably deposits in trust with the Trustee during such
one-year period, under the terms of an irrevocable trust agreement in
form and substance satisfactory to the Trustee, as trust funds solely
for the benefit of the Holders for that purpose, money or U.S.
Government Obligations sufficient (in the opinion of a nationally
recognized firm of independent public accountants expressed in a
written certification thereof delivered to the Trustee), without
consideration of any reinvestment of any interest thereon, to pay
principal, premium, if, any, and interest on the Notes to maturity or
redemption, as the case may be, and to pay all other sums payable by
it hereunder, (C) no Default or Event of Default with respect to the
Notes shall have occurred and be continuing on the date of such
deposit, (D) such deposit will not result in a breach or violation of,
or constitute a default under, this Indenture or any other agreement
or instrument to which the Company is a party or by which it is bound
and (E) the Company has delivered to the Trustee an Officers'
Certificate and an Opinion of
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Counsel, in each case stating that all conditions precedent provided
for herein relating to the satisfaction and discharge of this
Indenture have been complied with.
With respect to the foregoing clause (i), the Company's
obligations under Section 7.07 shall survive. With respect to the foregoing
clause (ii), the Company's obligations in Sections 2.02, 2.03, 2.04, 2.05,
2.06, 2.07, 2.12, 4.01, 4.02, 7.07, 7.08, 8.04, 8.05 and 8.06 shall survive
until the Notes are no longer outstanding. Thereafter, only the Company's
obligations in Sections 7.07, 8.05 and 8.06 shall survive. After any such
irrevocable deposit, the Trustee upon request shall acknowledge in writing the
discharge of the Company's obligations under the Notes and this Indenture
except for those surviving obligations specified above.
SECTION 8.02. Defeasance and Discharge of Indenture. The
Company will be deemed to have paid and will be discharged from any and all
obligations in respect of the Notes on the 123rd day after the date of the
deposit referred to in clause (A) of this Section 8.02, and the provisions of
this Indenture will no longer be in effect with respect to the Notes, and the
Trustee, at the expense of the Company, shall execute proper instruments
acknowledging the same, except as to (i) rights of registration of transfer and
exchange, (ii) substitution of apparently mutilated, defaced, destroyed, lost
or stolen Notes, (iii) rights of Holders to receive payments of principal
thereof and interest thereon, (iv) the Company's obligations under Section
4.02, (v) the rights, obligations and immunities of the Trustee hereunder and
(vi) the rights of the Holders as beneficiaries of this Indenture with respect
to the property so deposited with the Trustee payable to all or any of them;
provided that the following conditions shall have been satisfied:
(A) with reference to this Section 8.02, the Company has
irrevocably deposited or caused to be irrevocably deposited with the
Trustee (or another trustee satisfying the requirements of Section
7.10 of this Indenture) and conveyed all right, title and interest for
the benefit of the Holders, under the terms of an irrevocable trust
agreement in form and substance satisfactory to the Trustee as trust
funds in trust, specifically pledged to the Trustee for the benefit of
the Holders as security for payment of the principal of, premium, if
any, and interest, if any, on the Notes, and dedicated solely to, the
benefit of the Holders, in and to (1) money in an amount, (2) U.S.
Government Obligations that, through the payment of interest, premium,
if any, and principal in respect thereof in accordance with their
terms, will provide, not later than one day before the due date of any
payment referred to in this clause (A), money in an amount or (3) a
combination thereof in an amount sufficient, in the opinion of a
nationally recognized firm of independent public accountants expressed
in a written certification thereof delivered to the Trustee, to pay
and discharge, without consideration of the reinvestment of such
interest and after payment of all federal, state and local taxes or
other charges and assessments in respect thereof payable by the
Trustee, the principal of, premium, if any, and accrued interest on
the outstanding Notes at the Stated Maturity of such principal or
interest; provided that the Trustee shall have been irrevocably
instructed to apply such
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money or the proceeds of such U.S. Government Obligations to the
payment of such principal, premium, if any, and interest with respect
to the Notes;
(B) such deposit will not result in a breach or violation
of, or constitute a default under, this Indenture or any other
agreement or instrument to which the Company is a party or by which it
is bound;
(C) immediately after giving effect to such deposit on a
pro forma basis, no Default or Event of Default shall have occurred
and be continuing on the date of such deposit or during the period
ending on the 123rd day after such date of deposit;
(D) the Company shall have delivered to the Trustee (1)
either (x) a ruling directed to the Trustee received from the Internal
Revenue Service to the effect that the Holders will not recognize
income, gain or loss for federal income tax purposes as a result of
the Company's exercise of its option under this Section 8.02 and will
be subject to federal income tax on the same amount and in the same
manner and at the same times as would have been the case if such
option had not been exercised or (y) an Opinion of Counsel to the same
effect as the ruling described in clause (x) above accompanied by a
ruling to that effect published by the Internal Revenue Service,
unless there has been a change in the applicable federal income tax
law since the date of this Indenture such that a ruling from the
Internal Revenue Service is no longer required and (2) an Opinion of
Counsel to the effect that (x) the creation of the defeasance trust
does not violate the Investment Company Act of 1940 and (y) after the
passage of 123 days following the deposit (except, with respect to any
trust funds for the account of any Holder who may be deemed to be an
"insider" for purposes of the United States Bankruptcy Code, after one
year following the deposit), the trust funds will not be subject to
the effect of Section 547 of the United States Bankruptcy Code or
Section 15 of the New York Debtor and Creditor Law in a case commenced
by or against the Company under either such statute, and either (I)
the trust funds will no longer remain the property of the Company (and
therefore will not be subject to the effect of any applicable
bankruptcy, insolvency, reorganization or similar laws affecting
creditors' rights generally) or (II) if a court were to rule under any
such law in any case or proceeding that the trust funds remained
property of the Company, (a) assuming such trust funds remained in the
possession of the Trustee prior to such court ruling to the extent not
paid to the Holders, the Trustee will hold, for the benefit of the
Holders, a valid and perfected security interest in such trust funds
that is not avoidable in bankruptcy or otherwise except for the effect
of Section 552(b) of the United States Bankruptcy Code on interest on
the trust funds accruing after the commencement of a case under such
statute and (b) the Holders will be entitled to receive adequate
protection of their interests in such trust funds if such trust funds
are used in such case or proceeding;
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(E) if the Notes are then listed on a national securities
exchange, the Company shall have delivered to the Trustee an Opinion
of Counsel to the effect that such deposit defeasance and discharge
will not cause the Notes to be delisted; and
(F) the Company has delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, in each case stating that all
conditions precedent provided for herein relating to the defeasance
contemplated by this Section 8.02 have been complied with.
Notwithstanding the foregoing, prior to the end of the 123-day
(or one year) period referred to in clause (D)(2)(y) of this Section 8.02, none
of the Company's obligations under this Indenture shall be discharged.
Subsequent to the end of such 123-day (or one year) period with respect to this
Section 8.02, the Company's obligations in Sections 2.02, 2.03, 2.04, 2.05,
2.06, 2.07, 2.12, 4.01, 4.02, 7.07, 7.08, 8.05 and 8.06 shall survive until the
Notes are no longer outstanding. Thereafter, only the Company's obligations in
Sections 7.07, 8.05 and 8.06 shall survive. If and when a ruling from the
Internal Revenue Service or an Opinion of Counsel referred to in clause (D)(1)
of this Section 8.02 is able to be provided specifically without regard to, and
not in reliance upon, the continuance of the Company's obligations under
Section 4.01, then the Company's obligations under such Section 4.01 shall
cease upon delivery to the Trustee of such ruling or Opinion of Counsel and
compliance with the other conditions precedent provided for herein relating to
the defeasance contemplated by this Section 8.02.
After any such irrevocable deposit, the Trustee upon request
shall acknowledge in writing the discharge of the Company's obligations under
the Notes and this Indenture except for those surviving obligations in the
immediately preceding paragraph.
SECTION 8.03. Defeasance of Certain Obligations. The Company
may omit to comply with any term, provision or condition set forth in clauses
(iii) and (iv) under Section 5.01 and Sections 4.03 through 4.10 and Section
4.19, clause (c) under Section 6.01 with respect to such clauses (iii) and (iv)
under Section 5.01, clause (d) under Section 6.01 with respect to Sections
4.01, 4.02, 4.11 through 4.18 and 4.20 and clauses (e) and (f) under Section
6.01 shall be deemed not to be Events of Default, in each case with respect to
the outstanding Notes if:
(i) with reference to this Section 8.03, the Company has
irrevocably deposited or caused to be irrevocably deposited with the
Trustee (or another trustee satisfying the requirements of Section
7.10) and conveyed all right, title and interest to the Trustee for
the benefit of the Holders, under the terms of an irrevocable trust
agreement in form and substance satisfactory to the Trustee as trust
funds in trust, specifically pledged to the Trustee for the benefit of
the Holders as security for payment of the principal of, premium, if
any, and interest, if any, on the Notes, and dedicated solely to, the
benefit of the Holders, in and to (A) money in an amount, (B) U.S.
Government Obligations that, through the payment of interest and
principal in respect thereof in accordance with their terms, will
provide, not later than one day before the due date of any payment
referred to
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in this clause (i), money in an amount or (C) a combination thereof in
an amount sufficient, in the opinion of a nationally recognized firm
of independent public accountants expressed in a written certification
thereof delivered to the Trustee, to pay and discharge, without
consideration of the reinvestment of such interest and after payment
of all federal, state and local taxes or other charges and assessments
in respect thereof payable by the Trustee, the principal of, premium,
if any, and interest on the outstanding Notes on the Stated Maturity
of such principal or interest; provided that the Trustee shall have
been irrevocably instructed to apply such money or the proceeds of
such U.S. Government Obligations to the payment of such principal,
premium, if any, and interest with respect to the Notes;
(ii) such deposit will not result in a breach or violation
of, or constitute a default under, this Indenture or any other
agreement or instrument to which the Company is a party or by which it
is bound;
(iii) no Default or Event of Default shall have occurred
and be continuing on the date of such deposit;
(iv) the Company has delivered to the Trustee an Opinion
of Counsel to the effect that (A) the creation of the defeasance trust
does not violate the Investment Company Act of 1940, (B) the Holders
have a valid first-priority security interest in the trust funds, (C)
the Holders will not recognize income, gain or loss for federal income
tax purposes as a result of such deposit and defeasance of certain
obligations and will be subject to federal income tax on the same
amount and in the same manner and at the same times as would have been
the case if such deposit and defeasance had not occurred and (D) after
the passage of 123 days following the deposit (except, with respect to
any trust funds for the account of any Holder who may be deemed to be
an "insider" for purposes of the United States Bankruptcy Code, after
one year following the deposit), the trust funds will not be subject
to the effect of Section 547 of the United States Bankruptcy Code or
Section 15 of the New York Debtor and Creditor Law in a case commenced
by or against the Company under either such statute, and either (1)
the trust funds will no longer remain the property of the Company (and
therefore will not be subject to the effect of any applicable
bankruptcy, insolvency, reorganization or similar laws affecting
creditors' rights generally) or (2) if a court were to rule under any
such law in any case or proceeding that the trust funds remained
property of the Company, (x) assuming such trust funds remained in the
possession of the Trustee prior to such court ruling to the extent not
paid to the Holders, the Trustee will hold, for the benefit of the
Holders, a valid and perfected security interest in such trust funds
that is not avoidable in bankruptcy or otherwise (except for the
effect of Section 552(b) of the United States Bankruptcy Code on
interest on the trust funds accruing after the commencement of a case
under such statute), (y) the Holders will be entitled to receive
adequate protection of their interests in such trust funds if such
trust funds are used in such case or proceeding and (z) no
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63
property, rights in property or other interests granted to the Trustee
or the Holders in exchange for, or with respect to, such trust funds
will be subject to any prior rights of holders of other Indebtedness
of the Company or any of its Subsidiaries;
(v) if the Notes are then listed on a national securities
exchange, the Company shall have delivered to the Trustee an Opinion
of Counsel to the effect that such deposit defeasance and discharge
will not cause the Notes to be delisted; and
(vi) the Company has delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, in each case stating that all
conditions precedent provided for herein relating to the defeasance
contemplated by this Section 8.03 have been complied with.
SECTION 8.04. Application of Trust Money. Subject to Section
8.06, the Trustee or Paying Agent shall hold in trust money or U.S. Government
Obligations deposited with it pursuant to Section 8.01, 8.02 or 8.03, as the
case may be, and shall apply the deposited money and the money from U.S.
Government Obligations in accordance with the Notes and this Indenture to the
payment of principal of, premium, if any, and interest on the Notes; but such
money need not be segregated from other funds except to the extent required by
law.
SECTION 8.05. Repayment to Company. Subject to Sections
7.07, 8.01, 8.02 and 8.03, the Trustee and the Paying Agent shall promptly pay
to the Company upon request set forth in an Officers' Certificate any excess
money held by them at any time and thereupon shall be relieved from all
liability with respect to such money. The Trustee and the Paying Agent shall
pay to the Company upon request any money held by them for the payment of
principal, premium, if any, or interest that remains unclaimed for two years;
provided that the Trustee or such Paying Agent before being required to make
any payment may cause to be published at the expense of the Company once in a
newspaper of general circulation in the City of New York or mail to each Holder
entitled to such money at such Holder's address (as set forth in the Security
Register) notice that such money remains unclaimed and that after a date
specified therein (which shall be at least 30 days from the date of such
publication or mailing) any unclaimed balance of such money then remaining will
be repaid to the Company. After payment to the Company, Holders entitled to
such money must look to the Company for payment as general creditors unless an
applicable law designates another Person, and all liability of the Trustee and
such Paying Agent with respect to such money shall cease.
SECTION 8.06. Reinstatement. If the Trustee or Paying Agent
is unable to apply any money or U.S. Government Obligations in accordance with
Section 8.01, 8.02 or 8.03, as the case may be, by reason of any legal
proceeding or by reason of any order or judgment of any court or governmental
authority enjoining, restraining or otherwise prohibiting such application, the
Company's obligations under this Indenture and the Notes shall be revived and
reinstated as though no deposit had occurred pursuant to Section 8.01, 8.02 or
8.03, as the case may be, until such time as the Trustee or Paying Agent is
permitted to apply all such money or U.S.
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Government Obligations in accordance with Section 8.01, 8.02 or 8.03, as the
case may be; provided that, if the Company has made any payment of principal
of, premium, if any, or interest on any Notes because of the reinstatement of
its obligations, the Company shall be subrogated to the rights of the Holders
of such Notes to receive such payment from the money or U.S. Government
Obligations held by the Trustee or Paying Agent.
ARTICLE NINE
AMENDMENTS, SUPPLEMENTS AND WAIVERS
SECTION 9.01. Without Consent of Holders. The Company, when
authorized by a resolution of its Board of Directors, and the Trustee may amend
or supplement this Indenture or the Notes without notice to or the consent of
any Holder:
(1) to cure any ambiguity, defect or inconsistency in
this Indenture; provided that such amendments or supplements shall not
adversely affect the interests of the Holders in any material respect;
(2) to comply with Article Five;
(3) to comply with any requirements of the Commission in
connection with the qualification of this Indenture under the TIA;
(4) to evidence and provide for the acceptance of
appointment hereunder by a successor Trustee; or
(5) to make any change that, in the good faith opinion of
the Board of Directors as evidenced by a Board Resolution, does not
materially and adversely affect the rights of any Holder.
SECTION 9.02. With Consent of Holders. Subject to Sections
6.04 and 6.07 and without prior notice to the Holders, the Company, when
authorized by its Board of Directors (as evidenced by a Board Resolution), and
the Trustee may amend this Indenture, the Pledge Agreement and the Notes with
the written consent of the Holders of a majority in aggregate principal amount
of the Notes then outstanding, and the Holders of a majority in aggregate
principal amount of the Notes then outstanding by written notice to the Trustee
may waive future compliance by the Company with any provision of this
Indenture, the Notes or the Pledge Agreement.
Notwithstanding the provisions of this Section 9.02, without
the consent of each Holder affected, an amendment or waiver, including a waiver
pursuant to Section 6.04, may not:
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(i) change the Stated Maturity of the principal of, or
any installment of interest on, any Note,
(ii) reduce the principal of, or premium, if any, or
interest on, any Note,
(iii) change the place or currency of payment of principal
of, or premium, if any, or interest on, any Note or adversely affect
any right of repayment at the option of any Holder of any Note,
(iv) impair the right to institute suit for the
enforcement of any payment on or after the Stated Maturity (or, in the
case of a redemption, on or after the Redemption Date) of any Note,
(v) reduce the above-stated percentage of outstanding
Notes the consent of whose Holders is necessary to modify or amend
this Indenture,
(vi) waive a Default in the payment of principal of,
premium, if any, or interest on the Notes,
(vii) modify any of the provisions of this Section 9.02,
except to increase any such percentage or to provide that certain
other provisions of this Indenture cannot be modified or waived
without the consent of the Holder of each outstanding Note affected
thereby,
(viii) reduce the percentage or aggregate principal amount
of outstanding Notes the consent of whose Holders is necessary for
waiver of compliance with certain provisions of this Indenture or for
waiver of certain defaults, or
(ix) modify Article Ten or the Pledge Agreement in a
manner that adversely affects the right of any Holder in any material
respect.
It shall not be necessary for the consent of the Holders under
this Section 9.02 to approve the particular form of any proposed amendment,
supplement or waiver, but it shall be sufficient if such consent approves the
substance thereof.
After an amendment, supplement or waiver under this Section
9.02 becomes effective, the Company shall mail to the Holders affected thereby
a notice briefly describing the amendment, supplement or waiver. The Company
will mail supplemental indentures to Holders upon request. Any failure of the
Company to mail such notice, or any defect therein, shall not, however, in any
way impair or affect the validity of any such supplemental indenture or waiver.
<PAGE> 72
66
SECTION 9.03. Revocation and Effect of Consent. Until an
amendment or waiver becomes effective, a consent to it by a Holder is a
continuing consent by the Holder and every subsequent Holder of a Note or
portion of a Note that evidences the same debt as the Note of the consenting
Holder, even if notation of the consent is not made on any Note. However, any
such Holder or subsequent Holder may revoke the consent as to its Note or
portion of its Note. Such revocation shall be effective only if the Trustee
receives the notice of revocation before the date the amendment, supplement or
waiver becomes effective. An amendment, supplement or waiver shall become
effective on receipt by the Trustee of written consents from the Holders of the
requisite percentage in principal amount of the outstanding Notes.
The Company may, but shall not be obligated to, fix a record
date for the purpose of determining the Holders entitled to consent to any
amendment, supplement or waiver. If a record date is fixed, then,
notwithstanding the last two sentences of the immediately preceding paragraph,
those persons who were Holders at such record date (or their duly designated
proxies) and only those persons shall be entitled to consent to such amendment,
supplement or waiver or to revoke any consent previously given, whether or not
such persons continue to be Holders after such record date. No such consent
shall be valid or effective for more than 90 days after such record date.
After an amendment, supplement or waiver becomes effective, it
shall bind every Holder unless it is of the type described in any of clauses
(i) through (viii) of Section 9.02. In case of an amendment or waiver of the
type described in clauses (i) through (viii) of Section 9.02, the amendment or
waiver shall bind each Holder who has consented to it and every subsequent
Holder of a Note that evidences the same indebtedness as the Note of the
consenting Holder.
SECTION 9.04. Notation on or Exchange of Notes. If an
amendment, supplement or waiver changes the terms of a Note, the Trustee may
require the Holder to deliver it to the Trustee. The Trustee may place an
appropriate notation on the Note about the changed terms and return it to the
Holder and the Trustee may place an appropriate notation on any Note thereafter
authenticated. Alternatively, if the Company or the Trustee so determines, the
Company in exchange for the Note shall issue and the Trustee shall authenticate
a new Note that reflects the changed terms.
SECTION 9.05. Trustee to Sign Amendments, Etc. The Trustee
shall be entitled to receive, and shall be fully protected in relying upon, an
Opinion of Counsel stating that the execution of any amendment, supplement or
waiver authorized pursuant to this Article Nine is authorized or permitted by
this Indenture. Subject to the preceding sentence, the Trustee shall sign such
amendment, supplement or waiver if the same does not adversely affect the
rights of the Trustee. The Trustee may, but shall not be obligated to, execute
any such amendment, supplement or waiver that affects the Trustee's own rights,
duties or immunities under this Indenture or otherwise.
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SECTION 9.06. Conformity with Trust Indenture Act. Every
supplemental indenture executed pursuant to this Article Nine shall conform to
the requirements of the TIA as then in effect.
ARTICLE TEN
SECURITY
SECTION 10.01. Security. (a) On the Closing Date, the
Company shall (i) enter into the Pledge Agreement and comply with the terms and
provisions thereof and (ii) purchase the Pledged Securities to be pledged to
the Trustee for the benefit of the Holders in such amount as will be sufficient
upon receipt of scheduled interest and/or principal payments of such Pledged
Securities, in the opinion of a nationally recognized firm of independent
public accountants selected by the Company, to provide for payment in full of
the first six scheduled interest payments due on the Notes. The Pledged
Securities shall be pledged by the Company to the Trustee for the benefit of
the Holders and shall be held by the Trustee in the Pledge Account pending
disposition pursuant to the Pledge Agreement.
(b) Each Holder, by its acceptance of a Note, consents
and agrees to the terms of the Pledge Agreement (including, without limitation,
the provisions providing for foreclosure and release of the Pledged Securities)
as the same may be in effect or may be amended from time to time in accordance
with its terms, and authorizes and directs the Trustee to enter into the Pledge
Agreement and to perform its respective obligations and exercise its respective
rights thereunder in accordance therewith. The Company will do or cause to be
done all such acts and things as may be necessary or proper, or as may be
required by the provisions of the Pledge Agreement, to assure and confirm to
the Trustee the security interest in the Pledged Securities contemplated
hereby, by the Pledge Agreement or any part thereof, as from time to time
constituted, so as to render the same available for the security and benefit of
this Indenture and of the Notes secured hereby, according to the intent and
purposes herein expressed. The Company shall take, or shall cause to be taken,
upon request of the Trustee, any and all actions reasonably required to cause
the Pledge Agreement to create and maintain, as security for the obligations of
the Company under this Indenture and the Notes, valid and enforceable first
priority liens in and on all the Pledged Securities, in favor of the Trustee,
superior to and prior to the rights of third Persons and subject to no other
Liens.
(c) The release of any Pledged Securities pursuant to the
Pledge Agreement will not be deemed to impair the security under this Indenture
in contravention of the provisions hereof if and to the extent the Pledged
Securities are released pursuant to this Indenture and the Pledge Agreement.
To the extent applicable, the Company shall cause TIA Section 314(d) relating
to the release of property or securities from the Lien and security interest of
the Pledge Agreement and relating to the substitution therefor of any property
or securities to be subjected to the Lien and security interest of the Pledge
Agreement to be complied with. Any certificate or
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opinion required by TIA Section 314(d) may be made by an officer of the
Company, except in cases where TIA Section 314(d) requires that such
certificate or opinion be made by an independent Person, which Person shall be
an independent engineer, appraiser or other expert selected by the Company.
(d) The Company shall cause TIA Section 314(b), relating
to opinions of counsel regarding the Lien under the Pledge Agreement, to be
complied with. The Trustee may, to the extent permitted by Sections 7.01 and
7.02 hereof, accept as conclusive evidence of compliance with the foregoing
provisions the appropriate statements contained in such instruments.
(e) The Trustee may, in its sole discretion and without
the consent of the Holders, on behalf of the Holders, take all actions it deems
necessary or appropriate in order to (i) enforce any of the terms of the Pledge
Agreement and (ii) collect and receive any and all amounts payable in respect
of the obligations of the Company thereunder. The Trustee shall have power to
institute and to maintain such suits and proceedings as the Trustee may deem
expedient to preserve or protect its interests and the interests of the Holders
in the Pledged Securities (including power to institute and maintain suits or
proceedings to restrain the enforcement of or compliance with any legislative
or other governmental enactment, rule or order that may be unconstitutional or
otherwise invalid if the enforcement of, or compliance with, such enactment,
rule or order would impair the security interest hereunder or be prejudicial to
the interests of the Holders or of the Trustee).
ARTICLE ELEVEN
MISCELLANEOUS
SECTION 11.01. Trust Indenture Act of 1939. This Indenture
is subject to the provisions of the TIA that are required to be a part of this
Indenture and shall, to the extent applicable, be governed by such provisions.
SECTION 11.02. Notices. Any notice or communication shall be
sufficiently given if in writing and delivered in person or mailed by first
class mail addressed as follows:
if to the Company:
Allegiance Telecom, Inc.
1950 Stemmons Frwy., Suite 3026
Dallas, Texas 75207
Attention: Chief Financial Officer
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if to the Trustee:
The Bank of New York
101 Barclay Street
Floor 21 West
New York, New York 10286
Attention: Corporate Trust Administration
The Company or the Trustee by notice to the other may
designate additional or different addresses for subsequent notices or
communications.
Any notice or communication mailed to a Holder shall be mailed
to him at his address as it appears on the Security Register by first class
mail and shall be sufficiently given to him if so mailed within the time
prescribed. Copies of any such communication or notice to a Holder shall also
be mailed to the Trustee and each Agent at the same time.
Failure to mail a notice or communication to a Holder or any
defect in it shall not affect its sufficiency with respect to other Holders.
Except for a notice to the Trustee, which is deemed given only when received,
and except as otherwise provided in this Indenture, if a notice or
communication is mailed in the manner provided in this Section 11.02, it is
duly given, whether or not the addressee receives it.
Where this Indenture provides for notice in any manner, such
notice may be waived in writing by the Person entitled to receive such notice,
either before or after the event, and such waiver shall be the equivalent of
such notice. Waivers of notice by Holders shall be filed with the Trustee, but
such filing shall not be a condition precedent to the validity of any action
taken in reliance upon such waiver.
In case by reason of the suspension of regular mail service or
by reason of any other cause it shall be impracticable to give such notice by
mail, then such notification as shall be made with the approval of the Trustee
shall constitute a sufficient notification for every purpose hereunder.
SECTION 11.03. Certificate and Opinion as to Conditions
Precedent. Upon any request or application by the Company to the Trustee to
take any action under this Indenture, the Company shall furnish to the Trustee:
(i) an Officers' Certificate stating that, in the opinion
of the signers, all conditions precedent, if any, provided for in this
Indenture relating to the proposed action have been complied with; and
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(ii) an Opinion of Counsel in form and substance
reasonably satisfactory to the Trustee stating that, in the opinion of
such Counsel, all such conditions precedent have been complied with;
provided, however, that, with respect to matters of fact, an Opinion
of Counsel may rely on an Officers' Certificate or certificates of
public officials.
SECTION 11.04. Statements Required in Certificate. Each
certificate with respect to compliance with a condition or covenant provided
for in this Indenture shall include:
(i) a statement that each person signing such certificate
has read such covenant or condition and the definitions herein
relating thereto;
(ii) a brief statement as to the nature and scope of the
examination or investigation upon which the statements contained in
such certificate are based;
(iii) a statement that, in the opinion of each such person,
he has made such examination or investigation as is necessary to
enable him to express an informed opinion as to whether or not such
covenant or condition has been complied with; and
(iv) a statement as to whether or not, in the opinion of
each such person, such condition or covenant has been complied with.
SECTION 11.05. Rules by Trustee, Paying Agent or Registrar.
The Trustee may make reasonable rules for action by or at a meeting of Holders.
The Paying Agent or Registrar may make reasonable rules for its functions.
SECTION 11.06. Payment Date Other Than a Business Day. If an
Interest Payment Date, Redemption Date, Payment Date, Stated Maturity or date
of maturity of any Note shall not be a Business Day, then payment of principal
of, premium, if any, or interest on such Note, as the case may be, need not be
made on such date, but may be made on the next succeeding Business Day with the
same force and effect as if made on the Interest Payment Date, Payment Date, or
Redemption Date, or at the Stated Maturity or date of maturity of such Note;
provided that no interest shall accrue for the period from and after such
Interest Payment Date, Payment Date, Redemption Date, Stated Maturity or date
of maturity, as the case may be.
SECTION 11.07. Governing Law. The laws of the State of New
York shall govern this Indenture and the Notes. The Trustee, the Company and
the Holders agree to submit to the jurisdiction of the courts of the State of
New York in any action or proceeding arising out of or relating to this
Indenture or the Notes.
SECTION 11.08. No Adverse Interpretation of Other Agreements.
This Indenture may not be used to interpret another indenture, loan or debt
agreement of the Company
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or any Subsidiary of the Company. Any such indenture, loan or debt agreement
may not be used to interpret this Indenture.
SECTION 11.09. No Recourse Against Others. No recourse for
the payment of the principal of, premium, if any, or interest on any of the
Notes, or for any claim based thereon or otherwise in respect thereof, and no
recourse under or upon any obligation, covenant or agreement of the Company
contained in this Indenture, or in any of the Notes, or because of the creation
of any Indebtedness represented thereby, shall be had against any incorporator
or against any past, present or future partner, shareholder, other
equityholder, officer, director, employee or controlling person, as such, of
the Company or of any successor Person, either directly or through the Company
or any successor Person, whether by virtue of any constitution, statute or rule
of law, or by the enforcement of any assessment or penalty or otherwise; it
being expressly understood that all such liability is hereby expressly waived
and released as a condition of, and as a consideration for, the execution of
this Indenture and the issue of the Notes.
SECTION 11.10. Successors. All agreements of the Company in
this Indenture and the Notes shall bind its successors. All agreements of the
Trustee in this Indenture shall bind its successor.
SECTION 11.11. Duplicate Originals. The parties may sign any
number of copies of this Indenture. Each signed copy shall be an original, but
all of them together represent the same agreement.
SECTION 11.12. Separability. In case any provision in this
Indenture or in the Notes shall be invalid, illegal or unenforceable, the
validity, legality and enforceability of the remaining provisions shall not in
any way be affected or impaired thereby.
SECTION 11.13. Table of Contents, Headings, Etc. The Table
of Contents, Cross-Reference Table and headings of the Articles and Sections of
this Indenture have been inserted for convenience of reference only, are not to
be considered a part hereof and shall in no way modify or restrict any of the
terms and provisions hereof.
<PAGE> 78
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:
-------------------------------
Name:
Title:
THE BANK OF NEW YORK
By:
-------------------------------
Name:
Title:
<PAGE> 79
EXHIBIT A
[FACE OF NOTE]
ALLEGIANCE TELECOM, INC.
[ ]% Senior Note Due 2008
CUSIP __________
No. $_________
ALLEGIANCE TELECOM, INC., a Delaware corporation (the
"Company", which term includes any successor under the Indenture hereinafter
referred to), for value received, promises to pay to ________________, or its
registered assigns, the principal sum of ___________________ ($______) on May
15, 2008.
Interest Payment Dates: May 15 and November 15, commencing
November 15, 1998.
Regular Record Dates: May 1 and November 1.
Reference is hereby made to the further provisions of this Note
set forth on the reverse hereof, which further provisions shall for all
purposes have the same effect as if set forth at this place.
<PAGE> 80
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 [ ]% Senior Notes due 2008 described
in the within-mentioned Indenture.
Date: THE BANK OF NEW YORK,
as Trustee
By:
------------------------------
Authorized Signatory
<PAGE> 81
A-3
[REVERSE SIDE OF NOTE]
ALLEGIANCE TELECOM, INC.
[ ]% Senior Note due 2008
1. Principal and Interest.
The Company will pay the principal of this Note on May 15,
2008.
The Company promises to pay interest on the principal amount
of this Note on each Interest Payment Date, as set forth below, at the rate per
annum shown above.
Interest will be payable semiannually (to the holders of
record of the Notes at the close of business on the May 1 or November 1
immediately preceding the Interest Payment Date) on each Interest Payment Date,
commencing November 15, 1998.
Interest on the Notes will accrue from the most recent date to
which interest has been paid or, if no interest has been paid, from [
], 1998; provided that, if there is no existing default in the payment of
interest and this Note is authenticated between a Regular Record Date referred
to on the face hereof and the next succeeding Interest Payment Date, interest
shall accrue from such Interest Payment Date. Interest will be computed on the
basis of a 360-day year of twelve 30-day months.
The Company shall pay interest on overdue principal and
premium, if any, and interest on overdue installments of interest, to the
extent lawful, at a rate per annum that is 2% in excess of the rate otherwise
payable.
2. Method of Payment.
The Company will pay interest (except defaulted interest) on
the principal amount of the Notes as provided above on each May 15 and November
15 to the persons who are Holders (as reflected in the Security Register at the
close of business on such May 1 and November 1 immediately preceding the
Interest Payment Date), in each case, even if the Note is cancelled on
registration of transfer or registration of exchange after such record date;
provided that, with respect to the payment of principal, the Company will make
payment to the Holder that surrenders this Note to a Paying Agent on or after
May 15, 2008.
The Company will pay principal, premium, if any, and as
provided above, interest in money of the United States that at the time of
payment is legal tender for payment of public and
<PAGE> 82
A-4
private debts. However, the Company may pay principal, premium, if any, and
interest by its check payable in such money. It may mail an interest check to
a Holder's registered address (as reflected in the Security Register). If a
payment date is a date other than a Business Day at a place of payment, payment
may be made at that place on the next succeeding day that is a Business Day and
no interest shall accrue for the intervening period.
3. Paying Agent and Registrar.
Initially, the Trustee will act as authenticating agent,
Paying Agent and Registrar. The Company may change any authenticating agent,
Paying Agent or Registrar without notice. The Company, any Subsidiary or any
Affiliate of any of them may act as Paying Agent, Registrar or co-Registrar.
4. Indenture; Limitations.
The Company issued the Notes under an Indenture dated as of [
], 1998 (the "Indenture"), between the Company and The Bank of New York (the
"Trustee"). Capitalized terms herein are used as defined in the Indenture
unless otherwise indicated. The terms of the Notes include those stated in the
Indenture and those made part of the Indenture by reference to the Trust
Indenture Act. The Notes are subject to all such terms, and Holders are
referred to the Indenture and the Trust Indenture Act for a statement of all
such terms. To the extent permitted by applicable law, in the event of any
inconsistency between the terms of this Note and the terms of the Indenture,
the terms of the Indenture shall control.
The Notes are general unsecured obligations of the Company.
The Company may, subject to Article Four of the Indenture and
applicable law, issue additional Notes under the Indenture.
5. Redemption.
The Notes may be redeemed, at the Company's option, in whole
or in part, at any time or from time to time, on or after May 15, 2003 and
prior to maturity, upon not less than 30 nor more than 60 days' prior notice
mailed by first class mail to each Holder's last address as it appears in the
Security Register, at the Redemption Prices (expressed in percentages of
principal amount) set forth below, plus accrued and unpaid interest to the
Redemption Date (subject to the right of Holders of record on the relevant
Regular Record Date that is on or prior to the
<PAGE> 83
A-5
Redemption Date to receive interest due on an Interest Payment Date), if
redeemed during the 12-month period commencing May 15 of the years set forth
below:
<TABLE>
<CAPTION>
Redemption
Year Price
---- ----------
<S> <C>
2003 [ ]%
2004 [ ]%
2005 [ ]%
2006 and thereafter 100.000%
</TABLE>
In addition, at any time prior to May 15, 2001, the Company
may redeem up to 35% of the principal amount of the Notes originally issued
with the proceeds of one or more Public Equity Offerings following which there
is a Public Market, at any time or from time to time in part, at a Redemption
Price (expressed as a percentage of principal amount) of [ ]% plus
accrued and unpaid interest to the Redemption Date (subject to the right of
Holders of record on the relevant Regular Record Date that is on or prior to
the Redemption Date to receive interest due on an Interest Payment Date);
provided that at least 65% of the aggregate principal amount of Notes
originally issued remains outstanding after each such redemption and notice of
any such redemption is mailed within 60 days after the related Public Equity
Offering.
Notice of any optional redemption will be mailed at least 30
days but not more than 60 days before the Redemption Date to each Holder of
Notes to be redeemed at his last address as it appears in the Security
Register. Notes in original denominations larger than $1,000 may be redeemed
in part. On and after the Redemption Date, interest ceases to accrue on Notes
or portions of Notes called for redemption, unless the Company defaults in the
payment of the Redemption Price.
6. Repurchase upon Change in Control.
Upon the occurrence of any Change of Control, each Holder
shall have the right to require the repurchase of its Notes by the Company in
cash pursuant to the offer described in the Indenture at a purchase price equal
to 101% of the principal amount thereof plus accrued interest, if any, to the
date of purchase (the "Change of Control Payment").
A notice of such Change of Control will be mailed within 30
days after any Change of Control occurs to each Holder at his last address as
it appears in the Security Register. Notes in original denominations larger
than $1,000 may be sold to the Company in part. On and after the Change of
Control Payment Date, interest ceases to accrue on Notes or portions of Notes
surrendered for purchase by the Company, unless the Company defaults in the
payment of the Change of Control Payment.
<PAGE> 84
A-6
7. Denominations; Transfer; Exchange.
The Notes are in registered form without coupons in
denominations of $1,000 of principal amount and multiples of $1,000 in excess
thereof. A Holder may register the transfer or exchange of Notes in accordance
with the Indenture. The Registrar may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents and to pay any taxes
and fees required by law or permitted by the Indenture. The Registrar need not
register the transfer or exchange of any Notes selected for redemption. Also,
it need not register the transfer or exchange of any Notes for a period of 15
days before a selection of Notes to be redeemed is made.
8. Persons Deemed Owners.
A Holder shall be treated as the owner of a Note for all
purposes.
9. Unclaimed Money.
If money for the payment of principal, premium, if any, or
interest remains unclaimed for two years, the Trustee and the Paying Agent will
pay the money back to the Company at its request. After that, Holders entitled
to the money must look to the Company for payment, unless an abandoned property
law designates another Person, and all liability of the Trustee and such Paying
Agent with respect to such money shall cease.
10. Discharge Prior to Redemption or Maturity.
If the Company deposits with the Trustee money or U.S.
Government Obligations sufficient to pay the then outstanding principal of,
premium, if any, and accrued interest on the Notes (a) to redemption or
maturity, the Company will be discharged from the Indenture and the Notes,
except in certain circumstances for certain sections thereof, and (b) to the
Stated Maturity, the Company will be discharged from certain covenants set
forth in the Indenture.
11. Amendment; Supplement; Waiver.
Subject to certain exceptions, the Indenture, the Pledge
Agreement or the Notes may be amended or supplemented with the consent of the
Holders of at least a majority in principal amount of the Notes then
outstanding, and any existing default or compliance with any provision may be
waived with the consent of the Holders of at least a majority in principal
amount of the Notes then outstanding. Without notice to or the consent of any
Holder, the parties thereto may amend or supplement the Indenture or the Notes
to, among other things, cure any ambiguity, defect or inconsistency and make
any change that does not materially and adversely affect the rights of any
Holder.
<PAGE> 85
A-7
12. Restrictive Covenants.
The Indenture imposes certain limitations on the ability of
the Company and its Restricted Subsidiaries, among other things, to Incur
additional Indebtedness, make Restricted Payments, use the proceeds from Asset
Sales, engage in transactions with Affiliates or merge, consolidate or transfer
substantially all of its assets. Within 45 days after the end of each fiscal
quarter (90 days after the end of the last fiscal quarter of each year), the
Company must report to the Trustee on compliance with such limitations.
13. Successor Persons.
When a successor person or other entity assumes all the
obligations of its predecessor under the Notes and the Indenture, the
predecessor person will be released from those obligations.
14. Defaults and Remedies.
The following events constitute "Events of Default" under the
Indenture: (a) default in the payment of principal of (or premium, if any, on)
any Note when the same becomes due and payable, upon acceleration, redemption
or otherwise; (b) default in the payment of interest on any Note when the same
becomes due and payable, and such default continues for a period of 30 days;
provided that a failure to make any of the first six scheduled interest
payments on the Notes on the applicable Interest Payment Date will constitute
an Event of Default with no grace or cure period; (c) default in the
performance, or breach of the provisions of Article Five or the failure to make
or consummate an Offer to Purchase in accordance with Section 4.10 or Section
4.11; (d) default in the performance of or breach of any other covenant or
agreement of the Company in the Indenture or under the Notes (other than a
default specified in clause (a), (b) or (c) above) and such default or breach
continues for a period of 30 consecutive days after written notice by the
Trustee or the Holders of 25% or more in aggregate principal amount of the
Notes, (e) there occurs with respect to any issue or issues of Indebtedness of
the Company or any Significant Subsidiary having an outstanding principal
amount of $5 million or more in the aggregate for all such issues of all such
Persons, whether such Indebtedness now exists or shall hereafter be created,
(I) an event of default that has caused the holder thereof to declare such
Indebtedness to be due and payable prior to its Stated Maturity and such
Indebtedness has not been discharged in full or such acceleration has not been
rescinded or annulled within 30 days of such acceleration and/or (II) the
failure to make a principal payment at the final (but not any interim) fixed
maturity and such defaulted payment shall not have been made, waived or
extended within 30 days of such payment default; (f) any final judgment or
order (not covered by insurance) for the payment of money in excess of $5
million in the aggregate for all such final judgments or orders against all
such Persons (treating any deductibles, self-insurance or retention as not so
covered) shall be rendered against the Company or any Significant Subsidiary
and shall not be paid or discharged, and there shall be any period of 30
consecutive days following entry of the final 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
<PAGE> 86
A-8
a stay of enforcement of such final judgment or order, by reason of a pending
appeal or otherwise, shall not be in effect; (g) a court having jurisdiction in
the premises enters a decree or order for (A) relief in respect of the Company
or any Significant Subsidiary in an involuntary case under any applicable
bankruptcy, insolvency or other similar law now or hereafter in effect, (B)
appointment of a receiver, liquidator, assignee, custodian, trustee,
sequestrator or similar official of the Company or any Significant Subsidiary
or for all or substantially all of the property and assets of the Company or
any Significant Subsidiary or (C) the winding up or liquidation of the affairs
of the Company or any Significant Subsidiary and, in each case, such decree or
order shall remain unstayed and in effect for a period of 30 consecutive days;
(h) the Company or any Significant Subsidiary (A) commences a voluntary case
under any applicable bankruptcy, insolvency or other similar law now or
hereafter in effect, or consents to the entry of an order for relief in an
involuntary case under any such law, (B) consents to the appointment of or
taking possession by a receiver, liquidator, assignee, custodian, trustee,
sequestrator or similar official of the Company or any Significant Subsidiary
or for all or substantially all of the property and assets of the Company or
any Significant Subsidiary or (C) effects any general assignment for the
benefit of creditors; or (i) the Pledge agreement shall cease to be in full
force and effect or enforceable in accordance with its terms, other than in
accordance with its terms.
If an Event of Default (other than an Event of Default
specified in clauses (g) or (h) of Section 6.01 of the Indenture that occur
with respect to the Company) occurs and is continuing, the Trustee or the
Holders of at least 25% in principal amount of the Notes may declare all the
Notes to be due and payable. If a bankruptcy or insolvency default with
respect to the Company occurs and is continuing, the Notes automatically become
due and payable. Holders may not enforce the Indenture or the Notes except as
provided in the Indenture. The Trustee may require indemnity satisfactory to
it before it enforces the Indenture or the Notes. Subject to certain
limitations, Holders of at least a majority in principal amount of the Notes
then outstanding may direct the Trustee in its exercise of any trust or power.
15. Security.
The Company has entered into the Pledge Agreement and purchased and
pledged to the Trustee for the benefit of the Holders Pledged Securities in an
amount sufficient upon receipt of scheduled interest and principal payments on
such securities to provide for payment in full of the first six scheduled
interest payments due on the Notes. The Pledged Securities will be pledged by
the Company to the Trustee for the benefit of the Holders and will be held by
the Trustee in the Pledge Account pending disbursement pursuant to the Pledge
Agreement.
16. Trustee Dealings with Company.
The Trustee under the Indenture, in its individual or any
other capacity, may make loans to, accept deposits from and perform services
for the Company or its Affiliates and may otherwise deal with the Company or
its Affiliates as if it were not the Trustee.
<PAGE> 87
A-9
17. No Recourse Against Others.
No incorporator or any past, present or future partner,
shareholder, other equity holder, officer, director, employee or controlling
person as such, of the Company or of any successor Person shall have any
liability for any obligations of the Company under the Notes or the Indenture
or for any claim based on, in respect of or by reason of, such obligations or
their creation. Each Holder by accepting a Note waives and releases all such
liability. The waiver and release are part of the consideration for the
issuance of the Notes.
18. Authentication.
This Note shall not be valid until the Trustee or
authenticating agent signs the certificate of authentication on the other side
of this Note.
19. Abbreviations.
Customary abbreviations may be used in the name of a Holder or
an assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by the
entireties), JT TEN (= joint tenants with right of survivorship and not as
tenants in common), CUST (= Custodian) and U/G/M/A (= Uniform Gifts to Minors
Act).
The Company will furnish to any Holder upon written request
and without charge a copy of the Indenture. Requests may be made to Allegiance
Telecom, Inc., 1950 Stemmons Frwy., Suite 3026, Dallas, Texas 75207, Attention:
Chief Financial Officer.
<PAGE> 88
A-10
[FORM OF TRANSFER NOTICE]
FOR VALUE RECEIVED the undersigned registered holder hereby
sell(s), assign(s) and transfer(s) unto
Insert Taxpayer Identification No.
- --------------------------------------------------------------------------------
Please print or typewrite name and address including zip code of assignee
- --------------------------------------------------------------------------------
the within Note and all rights thereunder, hereby irrevocably constituting and
appointing _______________________________ attorney to transfer said Note on the
books of the Company with full power of substitution in the premises.
<PAGE> 89
A-11
OPTION OF HOLDER TO ELECT PURCHASE
If you wish to have this Note purchased by the Company
pursuant to Section 4.10 or Section 4.11 of the Indenture, check the Box: [ ]
If you wish to have a portion of this Note purchased by the
Company pursuant to Section 4.10 or Section 4.11 of the Indenture, state the
amount (in principal amount): $___________________.
Date:
---------------
Your Signature:
----------------------------------------------------------------
(Sign exactly as your name appears on the other side
of this Note)
Signature Guarantee:
---------------------
<PAGE> 1
EXHIBIT 4.4
COLLATERAL PLEDGE AND SECURITY AGREEMENT
This COLLATERAL PLEDGE AND SECURITY AGREEMENT (this "Pledge
Agreement") is made and entered into as of [ ], 1998 by ALLEGIANCE
TELECOM, INC., a Delaware corporation (the "Pledgor"), having its principal
office at 1950 Stemmons Freeway, Suite 3026, Dallas, Texas 75207, in favor of
THE BANK OF NEW YORK, a New York banking corporation, having an office at 101
Barclay Street, 21 West, New York, New York, 10286, as trustee (the "Trustee")
for the holders (the "Holders") of the Notes (as defined herein) issued by the
Pledgor under the Indenture referred to below. Capitalized terms used herein
and not otherwise defined herein shall have the meanings given to such terms in
the Indenture.
W I T N E S S E T H
WHEREAS, the Pledgor and The Bank of New York, as Trustee, have
entered into that certain indenture dated as of the date hereof (as amended,
restated, supplemented or otherwise modified from time to time, the
"Indenture"), pursuant to which the Pledgor is issuing on the date hereof
$200,000,000 in aggregate principal amount of [ ]% Senior Notes due 2008
(the "Notes"); and
WHEREAS, the Pledgor has agreed, pursuant to the Indenture, to
(i) purchase or cause the purchase of Pledged Securities (as defined herein) in
an amount that will be sufficient upon receipt of scheduled interest and
principal payments in respect thereof to provide for the payment of the first
six scheduled interest payments due on the Notes and (ii) place such Pledged
Securities (as defined herein) (or cause them to be placed) in an account held
by the Trustee for the benefit of Holders of the Notes; and
WHEREAS, to secure the obligations of the Pledgor under the
Indenture and the Notes to pay in full each of the first six scheduled interest
payments on the Notes and to secure repayment of the principal, premium (if
any) and interest on the Notes in the event that the Notes become due and
payable prior to such time as the first six scheduled interest payments thereon
shall have been paid in full (collectively, the "Obligations"), the Pledgor has
agreed (i) to pledge to the Trustee for its benefit and the ratable benefit of
the Holders of the Notes, a security interest in the Pledged Securities (as
defined herein) and related collateral and (ii) to execute and deliver this
Pledge Agreement in order to secure the payment and performance by the Pledgor
of all the Obligations; and
WHEREAS, it is a condition precedent to the initial purchase of
the Notes by the initial Holders thereof that the Pledgor shall have granted
the security interest and made the pledge contemplated by this Pledge
Agreement; and
<PAGE> 2
2
WHEREAS, unless otherwise defined herein or in the Indenture,
terms used in Articles 8 or 9 of the Uniform Commercial Code ("UCC") as in
effect in the State of New York are used herein as therein defined.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual promises herein
contained, and in order to induce the Holders of the Notes to purchase the
Notes, the Pledgor hereby agrees with the Trustee, for the benefit of the
Trustee and for the ratable benefit of the Holders of the Notes, as follows:
SECTION 1. Pledge and Grant of Security Interest. The Pledgor
hereby pledges to the Trustee for its benefit and for the ratable benefit of
the Holders of the Notes, and hereby grants to the Trustee for its benefit and
for the ratable benefit of the Holders of the Notes, a continuing first
priority security interest in and to all of the Pledgor's right, title and
interest in, to and under the following (hereinafter collectively referred to
as the "Collateral"), whether characterized as investment property, general
intangibles or otherwise: (a) the United States Treasury securities identified
by CUSIP No. in Annex 1 to Exhibit A to this Pledge Agreement (the "Pledged
Securities"), (b) any and all applicable security entitlements to the Pledged
Securities, (c) The Bank of New York account in the name of "[ ] (the
"Pledge Account") established and maintained by the Trustee pursuant to this
Pledge Agreement, (d) any and all related securities accounts in which security
entitlements to the Pledged Securities are carried, (e) all notes, certificates
of deposit, deposit accounts, checks and other instruments from time to time
hereafter delivered to or otherwise possessed by the Trustee for or on behalf
of the Pledgor in substitution for or in addition to any or all the then
existing Collateral, (f) all interest, dividends, cash, instruments and other
property from time to time received, receivable or otherwise distributed in
respect of or in exchange for any or all of the then existing Collateral, and
(g) all proceeds of any and all of the foregoing Collateral (including, without
limitation, proceeds that constitute property of the types described in clauses
(a) - (f) of this Section 1) and, to the extent not otherwise included, all
cash in the Pledge Account.
SECTION 2. Security for Obligation. This Pledge Agreement and
the grant of a security interest in the Pledged Securities and the Pledge
Account hereunder secures the prompt and complete payment and performance when
due (whether at stated maturity, by acceleration or otherwise) of all the
Obligations. Without limiting the generality of the foregoing, this Pledge
Agreement and the grant of a security interest in the Pledged Securities and
the Pledge Account hereunder secures the payment of all amounts that constitute
part of the Obligations and would be owed by the Pledgor to the Trustee or the
Holders under the Notes or the Indenture but for the fact that they are
unenforceable or not allowable due to the existence of a bankruptcy,
reorganization or similar proceeding involving the Pledgor.
<PAGE> 3
3
SECTION 3. Maintaining the Pledge Account. So long as any
Obligation shall remain outstanding:
(a) The Pledgor will maintain separately the Pledge Account
with The Bank of New York.
(b) It shall be a term and condition of the Pledge Account,
notwithstanding any term or condition to the contrary in any other
agreement relating to the Pledge Account, and except as otherwise
provided by the provisions of Section 5 and Section 15.9, that no amount
shall be paid or released to or for the account of, or withdrawn by or
for the account of, the Pledgor or any other Person from the Pledge
Account.
The Pledge Account shall be subject to such applicable laws, and
such applicable regulations of the Board of Governors of the Federal Reserve
System and of any other appropriate banking or governmental authority, as may
now or hereafter be in effect.
SECTION 4. Delivery of Collateral; Pledge Account; Interest.
(a) The Pledged Securities shall be pledged and transferred to the Trustee and
the Trustee shall become the holder of a security entitlement to the Pledged
Securities, through action by the Federal Reserve Bank of New York ("FRBNY"),
The Bank of New York or another securities intermediary, as confirmed (in
writing or electronically or otherwise in accordance with standard industry
practice) to the Trustee by FRBNY, The Bank of New York or such other
securities intermediary (i) indicating by book-entry that the Pledged
Securities or a security entitlement thereto has been credited to the Trustee's
account, or (ii) acquiring the Pledged Securities or a security entitlement
thereto for the Trustee and accepting the same for credit to a securities
account of the Trustee.
(b) With respect to any Collateral that constitutes a security
and is not represented or evidenced by a certificate or an instrument,
the Pledgor shall cause the issuer thereof either (i) to register the
Trustee as the registered owner of such security or (ii) to agree in
writing with the Pledgor and the Trustee that such issuer will comply
with instructions with respect to such security originated by the
Trustee without further consent of the Pledgor, such agreement to be in
form and substance reasonably satisfactory to the Trustee.
(c) With respect to any Collateral that constitutes a security
entitlement, the Pledgor shall cause the securities intermediary with
respect to such security entitlement either (i) to identify in its
records the Trustee as having such security entitlement against such
securities intermediary or (ii) to agree in writing with the Pledgor and
the Trustee that such securities intermediary will comply with
entitlement orders (that is, notifications communicated to such
securities intermediary directing transfer or
<PAGE> 4
4
redemption of the financial asset to which the Pledgor has a security
entitlement) originated by the Trustee without further consent of the
Pledgor, such agreement to be in form and substance reasonably
satisfactory to the Trustee.
(d) With respect to any Collateral that constitutes a
securities account, the Pledgor will comply with subsection (c) of this
Section 4 with respect to all security entitlements carried in such
securities account.
(e) Prior to or concurrently with the execution and delivery
hereof and prior to the transfer to the Trustee of the Pledged
Securities (or acquisition by the Trustee of any security entitlement
thereto), as provided in subsection (a) of this Section 4, the Trustee
shall establish the Pledge Account on its books as an account segregated
from all other custodial or collateral accounts at its office at 101
Barclay Street, 21 West, New York, New York, 10286, Attention: [ ],
Corporate Trust Administration. Upon transfer of the Pledged Securities
to the Trustee (or the Trustee's acquisition of a security entitlement
thereto), as confirmed to the Trustee by FRBNY, The Bank of New York or
another securities intermediary, the Trustee shall make appropriate book
entries indicating that the Pledged Securities and/or such security
entitlements have been credited to and are held in the Pledge Account.
Subject to the other terms and conditions of this Pledge Agreement, all
funds or other property held by the Trustee pursuant to this Pledge
Agreement shall be held in the Pledge Account subject (except as
expressly provided in Sections 5(a), (b), (c), (d) and (e) hereof) to
the exclusive dominion and control of the Trustee and exclusively for
the benefit of the Trustee and for the ratable benefit of the Holders of
the Notes and segregated from all other funds or other property
otherwise held by the Trustee.
(f) All Collateral shall be retained in the Pledge Account
pending disbursement pursuant to the terms hereof.
(g) Concurrently with the execution and delivery of this
Pledge Agreement, the Trustee is delivering to the Pledgor and Morgan
Stanley & Co. Incorporated a duly executed Notification and Control
Agreement ("Control Agreement"), in the form of Exhibit A hereto,
executed by an officer of the Trustee, confirming the Trustee's
establishment and separate maintenance of the Pledge Account, its
receipt and holding of the Pledged Securities or any security
entitlement thereto and the crediting of the Pledged Securities or such
security entitlements to the Pledge Account, all in accordance with this
Pledge Agreement.
(h) Concurrently with the execution and delivery of this
Pledge Agreement, the Pledgor is delivering to the Trustee
acknowledgment copies or stamped receipt copies of proper financing
statements, duly filed on or before the Closing Date under the UCC of
<PAGE> 5
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the States of New York and Texas, covering the Collateral described in
this Pledge Agreement.
SECTION 5. Disbursements. (a) Three business days prior to
the due date of any of the first six scheduled interest payments on the Notes,
the Pledgor may, pursuant to written instructions given by the Pledgor to the
Trustee (an "Issuer Order"), direct the Trustee to release from the Pledge
Account and pay to the Holders of the Notes proceeds sufficient to provide for
payment in full of such interest then due on the Notes. Upon receipt of an
Issuer Order, the Trustee will release funds in an amount sufficient to provide
for the payment of the interest on the Notes in accordance with such Issuer
Order and the payment provisions of the Indenture to the Holders of the Notes
from (and to the extent of) proceeds of the Pledged Securities in the Pledge
Account. If no such Issuer Order is issued by the Pledgor, the Trustee will
act in accordance with Section 5(e). Nothing in this Section 5 shall affect
the Trustee's rights to apply the Collateral to the payments of amounts due on
the Notes upon acceleration thereof.
(b) If the Pledgor makes any interest payment or portion of an
interest payment for which the Collateral is security from a source of
funds other than the Pledge Account ("Pledgor Funds"), the Pledgor may,
after payment in full of such interest payment, direct the Trustee
pursuant to an Issuer Order to release to the Pledgor or to another
party at the direction of the Pledgor (the "Pledgor's Designee")
proceeds from the Pledge Account in an amount less than or equal to the
amount of Pledgor Funds applied to such interest payment. Upon receipt
by the Trustee of such Issuer Order and provided the Trustee has
received such interest payment, the Trustee shall pay over to the
Pledgor or the Pledgor's Designee, as the case may be, the requested
amount from proceeds in the Pledge Account as soon as practicable.
(c) If at any time the principal of and interest on the
Pledged Securities exceeds 100% of the amount sufficient, in the written
opinion of a nationally recognized firm of independent accountants
selected by the Pledgor and delivered to the Trustee, to provide for
payment in full of the remaining first six scheduled interest payments
due on the Notes, the Pledgor may direct the Trustee to release any such
excess amount to the Pledgor or to the Pledgor's Designee. Upon receipt
of an Issuer Order (which shall include a certificate from such
nationally recognized firm of independent accountants stating the amount
by which the Pledged Securities exceeds the amount required to be held
in the Pledge Account) the Trustee shall pay over to the Pledgor or the
Pledgor's Designee, as the case may be, any such excess amount.
(d) Upon payment in full of the first six scheduled interest
payments on the Notes, the security interest in the Collateral evidenced
by this Pledge Agreement will automatically terminate and be of no
further force and effect and the Collateral shall promptly be paid over
and transferred to the Pledgor. Furthermore, upon the release of
<PAGE> 6
6
any Collateral from the Pledge Account in accordance with the terms of
this Pledge Agreement, whether upon release of Collateral to Holders as
payment of interest or otherwise, the security interest evidenced by
this Pledge Agreement in such released Collateral will automatically
terminate and be of no further force and effect and the Trustee shall
deliver such documents as may be necessary to discharge any security
interest with respect to the Collateral under the UCC..
(e) At least three Business Days prior to the due date of each
of the first six scheduled interest payments on the Notes, the Pledgor
may give the Trustee notice (by Issuer Order) as to whether such
interest payment will be made pursuant to Section 5(a) or 5(b) above and
the respective amounts of interest that will be paid from the Pledge
Account and from Pledgor Funds. Any Pledgor Funds to be used to make
any interest payment shall be delivered to the Trustee, in immediately
available funds, at or prior to 10:00 a.m. (New York City time) on such
interest payment date. If no such Issuer Order is given or such Pledgor
Funds have not been so delivered, the Trustee will act pursuant to
Section 5(a) above as if it had received an Issuer Order pursuant
thereto for the payment in full of the interest then due from the Pledge
Account.
(f) The Trustee shall liquidate Collateral in the Pledge
Account (pursuant to written instructions from Pledgor) in order to make
any scheduled payment of interest unless there are sufficient funds in
the Pledge Account on such interest payment date.
(g) Nothing contained in this Pledge Agreement shall (i)
afford the Pledgor any right to issue entitlement orders with respect to
any security entitlement to the Pledged Securities or any securities
account in which any such security entitlement may be carried, or
otherwise afford the Pledgor control of any such security entitlement or
(ii) otherwise give rise to any rights of the Pledgor with respect to
the Pledged Securities, any security entitlement thereto or any
securities account in which any such security entitlement may be
carried, other than the Pledgor's rights under this Pledge Agreement as
the beneficial owner of collateral pledged to and subject to the
exclusive dominion and control (except as expressly provided in Sections
5(a), (b) and (c) hereof) of the Trustee in its capacity as such (and
not as a securities intermediary). The Pledgor acknowledges, confirms
and agrees that the Trustee holds a security to the Pledged Securities
solely as Trustee for the Holders of the Notes and not as a securities
intermediary.
<PAGE> 7
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SECTION 6. Representations and Warranties. The Pledgor hereby
represents and warrants that:
(a) The execution and delivery by the Pledgor of, and the
performance by the Pledgor of its obligations under, this Pledge
Agreement will not contravene any provision of applicable law or the
certificate of incorporation of the Pledgor or any agreement or other
instrument binding upon the Pledgor or any of its subsidiaries that is
material to the Company and its subsidiaries, taken as a whole, or any
judgment, order or decree of any governmental body, agency or court
having jurisdiction over the Pledgor or any of its subsidiaries, or
result in the creation or imposition of any Lien on any assets of the
Pledgor, except for the security interests granted under this Pledge
Agreement.
(b) No consent of any other person and no approval,
authorization, order of, action by or qualification with, any
governmental authority, regulatory body, agency or other third party is
required, other than such consents, approvals, authorizations, orders,
actions or qualifications that have been received, (i) for the
execution, delivery or performance by the Pledgor of its obligations
under this Pledge Agreement, (ii) for the grant by the Pledgor of the
security interest created hereby, for the pledge by the Pledgor of the
Collateral pursuant to this Pledge Agreement or (iii) except for any
such consents, approvals, authorizations or orders required to be
obtained by the Trustee (or the Holders) for reasons other than the
consummation of this transaction, for the exercise by the Trustee of the
rights provided for in this Pledge Agreement or the remedies in respect
of the Collateral pursuant to this Pledge Agreement.
(c) The Pledgor is the beneficial owner of the Collateral,
free and clear of any Lien or claims of any person or entity (except for
the security interests created by this Pledge Agreement). No financing
statement or instrument similar in effect covering all or any part of
the Pledgor's interest in the Pledged Securities is on file in any
public or recording office, other than the financing statements filed
pursuant to this Pledge Agreement. The Pledgor has no trade names.
(d) This Pledge Agreement has been duly authorized, validly
executed and delivered by the Pledgor and constitutes a valid and
binding agreement of the Pledgor, enforceable against the Pledgor in
accordance with its terms, except as (i) the enforceability hereof may
be limited by bankruptcy, insolvency, fraudulent conveyance, preference,
reorganization, moratorium or similar laws now or hereafter in effect
relating to or affecting creditors' rights or remedies generally, (ii)
the availability of equitable remedies may be limited by equitable
principles of general applicability, (iii) the exculpation provisions
and rights to indemnification hereunder may be limited by U.S. federal
and state securities laws and public policy considerations and (iv) the
waiver of rights and defenses contained in Section 12(d), Section 15.11
and Section 15.15 hereof may be limited by applicable law.
<PAGE> 8
8
(e) Upon the delivery to the securities intermediary of the
certificates, if any, representing the Pledged Securities, any filing of
financing statements required by the UCC and notation on the records of
the securities intermediary that it holds the Pledged Securities as
pledgee, the pledge and grant of a security interest in the Collateral
pursuant to this Pledge Agreement for the benefit of the Trustee and the
Holders of the Notes creates a valid and perfected first priority
security interest in such Collateral, securing the payment of the
Obligations enforceable as such against all creditors of the Pledgor
(and any persons purporting to purchase any of the Collateral from the
Pledgor).
(f) There are no legal or governmental proceedings pending or,
to the best of the Pledgor's knowledge, threatened to which the Pledgor
or any of its subsidiaries is a party or to which any of the properties
of the Pledgor or any such subsidiary is subject that would materially
adversely affect the power or ability of the Pledgor to perform its
obligations under this Pledge Agreement or to consummate the
transactions contemplated hereby.
(g) The pledge of the Collateral pursuant to this Pledge
Agreement is not prohibited by law or governmental regulation
(including, without limitation, Regulations G, T, U and X of the Board
of Governors of the Federal Reserve System) applicable to the Pledgor.
(h) No Event of Default (as defined herein) exists.
SECTION 7. Further Assurances. (a) The Pledgor agrees that
from time to time, at the expense of the Pledgor, the Pledgor will, promptly
upon request by the Trustee, execute and deliver or cause to be executed and
delivered, or use its reasonable best efforts to procure, all assignments,
instruments and other documents, all in form and substance satisfactory to the
Trustee, deliver any instruments to the Trustee and take any other actions that
may be necessary or, in the reasonable opinion of the Trustee, desirable to
perfect, continue the perfection of, or protect the first priority of the
Trustee's security interest in and to the Collateral, to protect the Collateral
against the rights, claims, or interests of third persons (other than any such
rights, claims or interests created by or arising through the Trustee) or to
effect the purposes of this Pledge Agreement.
(b) The Pledgor hereby authorizes the Trustee to file any
financing or continuation statements in the United States with respect
to the Collateral without the signature of the Pledgor (to the extent
permitted by applicable law). A photocopy or other reproduction of this
Pledge Agreement or any financing statement covering the Collateral or
any part thereof shall be sufficient as a financing statement where
permitted by law.
<PAGE> 9
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(c) The Pledgor will promptly pay all costs incurred in
connection with any of the foregoing within 45 days of receipt of an
invoice therefor. The Pledgor also agrees, whether or not requested by
the Trustee, to take all actions that are necessary to perfect or
continue the perfection of, or to protect the first priority of, the
Trustee's security interest in and to the Collateral, including the
filing of all necessary financing and continuation statements, and to
protect the Collateral against the rights, claims or interests of third
persons (other than any such rights, claims or interests created by or
arising through the Trustee).
SECTION 8. Covenants. The Pledgor covenants and agrees with the
Trustee and the Holders of the Notes that from and after the date of this
Pledge Agreement until the earlier of payment in full in cash of (x) each of
the first six scheduled interest payments due on the Notes under the terms of
the Indenture or (y) all obligations due and owing under the Indenture and the
Notes in the event such obligations become due and payable prior to the payment
in full of the first six scheduled interest payments on the Notes:
(a) that (i) it will not (and will not purport to) sell or
otherwise dispose of, or grant any option or warrant with respect to,
any of the Collateral or its beneficial interest therein, and (ii) it
will not create or permit to exist any Lien or other adverse interest in
or with respect to its beneficial interest in any of the Collateral
(except for the security interests granted under this Pledge Agreement
and any Lien created by or arising through the Trustee); and
(b) that it will not (i) enter into any agreement or
understanding that restricts or inhibits or purports to restrict or
inhibit the Trustee's rights or remedies hereunder, including, without
limitation, the Trustee's right to sell or otherwise dispose of the
Collateral or (ii) fail to pay or discharge any tax, assessment or levy
of any nature with respect to its beneficial interest in the Collateral
not later than five days prior to the date of any proposed sale under
any judgment, writ or warrant of attachment with respect to such
beneficial interest.
SECTION 9. Power of Attorney. In addition to all of the
powers granted to the Trustee pursuant to the Indenture, the Pledgor hereby
appoints and constitutes the Trustee as the Pledgor's attorney-in-fact (with
full power of substitution), with full authority in the place and stead of the
Pledgor and in the name of the Pledgor or otherwise, from time to time in the
Trustee's discretion to take any action and to execute any instrument that the
Trustee may deem necessary or advisable to accomplish the purposes of this
Pledge Agreement, including, without limitation:
(a) to ask for, demand, collect, sue for, recover, compromise,
receive and give acquittance and receipts for moneys due and to become
due under or in respect of any of the Collateral,
<PAGE> 10
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(b) to receive, indorse and collect any drafts or other
instruments, documents and chattel paper, in connection with clause (a)
above,
(c) to file any claims or take any action or institute any
proceedings that the Trustee may deem necessary or desirable for the
collection of any of the Collateral or otherwise to enforce the rights
of the Trustee with respect to any of the Collateral, and
(d) to pay or discharge taxes or Liens levied or placed upon
the Collateral, the legality or validity thereof and the amounts
necessary to discharge the same to be determined by the Trustee in its
sole reasonable discretion, and such payments made by the Trustee to
become part of the Obligations of the Pledgor to the Trustee, due and
payable immediately upon demand;
provided, however, that the Trustee shall have no obligation to perform any of
the foregoing actions. The Trustee's authority under this Section 9 shall
include, without limitation, the authority to endorse and negotiate any checks
or instruments representing proceeds of Collateral in the name of the Pledgor,
execute and give receipt for any certificate of ownership or any document
constituting Collateral, transfer title to any item of Collateral, sign the
Pledgor's name on all financing statements (to the extent permitted by
applicable law) or any other documents deemed necessary or appropriate by the
Trustee to preserve, protect or perfect the security interest in the Collateral
and to file the same, prepare, file and sign the Pledgor's name on any notice
of Lien, and to take any other reasonable actions arising from or incident to
the powers granted to the Trustee in this Pledge Agreement. This power of
attorney is coupled with an interest and is irrevocable by the Pledgor.
SECTION 10. No Assumption of Duties; Reasonable Care. The
rights and powers conferred on the Trustee hereunder are solely to preserve and
protect the security interest of the Trustee and the Holders of the Notes in
and to the Collateral granted hereby and shall not be interpreted to, and shall
not impose any duties on the Trustee in connection therewith other than those
expressly provided herein or imposed under applicable law. Except as provided
by applicable law or by the Indenture, the Trustee shall be deemed to have
exercised reasonable care in the custody and preservation of the Collateral in
its possession if the Collateral is accorded treatment substantially equal to
that which the Trustee accords similar property held by the Trustee for its own
account, it being understood that the Trustee in its capacity as such shall not
have any responsibility for (a) ascertaining or taking action with respect to
calls, conversions, exchanges, maturities or other matters relative to any
Collateral, whether or not the Trustee has or is deemed to have knowledge of
such matters, (b) taking any necessary steps to preserve rights against any
parties with respect to any Collateral or (c) investing or reinvesting any of
the Collateral or any loss on any investment.
SECTION 11. Indemnity. The Pledgor shall indemnify, hold
harmless and defend the Trustee and its directors, officers, agents and
employees, from and against any and all
<PAGE> 11
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claims, actions, obligations, liabilities and expenses, including reasonable
defense costs, reasonable investigative fees and costs, and reasonable legal
fees and damages arising from the Trustee's performance as Trustee under this
Pledge Agreement, except to the extent that such claim, action, obligation,
liability or expense is directly attributable to the bad faith, negligence or
wilful misconduct of such indemnified person. The obligations of the Pledgor
under this Section 11 shall survive the termination of this Agreement.
SECTION 12. Remedies Upon Event of Default. If any Event of
Default under the Indenture or default hereunder (any such Event of Default or
default being referred to in this Pledge Agreement as an "Event of Default")
shall have occurred and be continuing:
(a) The Trustee and the Holders of the Notes may exercise, in
addition to all other rights given by law or by this Pledge Agreement or
the Indenture, all of the rights and remedies with respect to the
Collateral of a secured party under the UCC in effect in the State of
New York at that time or to exercise any other remedy given to it under
the Indenture, may hire investment advisers or other experts, and may
cause the sale of the Collateral or any part thereof in one or more
parcels at any broker's board or at public or private sale, in one or
more sales or lots, at any of the Trustee's offices or elsewhere, for
cash, on credit or for future delivery, at such price or prices as the
Trustee or any such investment adviser or other expert reasonably may
deem best, and upon such other terms as the Trustee or any such
investment adviser or other expert may deem commercially reasonable.
Unless any of the Collateral threatens, in the reasonable judgment of
the Trustee or any such investment adviser or other expert, to decline
speedily in value or is or becomes of a type sold in a recognized
market, which shall be deemed to include the Pledged Securities, the
Trustee will give at least ten business days' notice to the Pledgor in
accordance with Section 15.1 of the time and place of any public sale or
the time after which any private sale is to be made. The Trustee shall
not be obligated to cause any sale of Collateral regardless of notice of
sale having been given. The Trustee may adjourn any public or private
sale from time to time by announcement at the time and place fixed
therefor, and such sale may, without further notice, be made at the time
and place to which it was so adjourned. The purchaser of any or all
Collateral so sold shall thereafter hold the same absolutely, free from
any claim, encumbrance or right of any kind whatsoever created by or
through the Pledgor. Any sale of the Collateral conducted in conformity
with reasonable commercial practices of banks, insurance companies,
commercial finance companies, or other financial institutions disposing
of property similar to the Collateral shall be deemed to be commercially
reasonable. The Trustee or any Holder of Notes may, in its own name or
in the name of a designee or nominee, buy any of the Collateral at any
public sale and, if permitted by applicable law, at any private sale.
All reasonable expenses (including court costs and reasonable attorneys'
fees, expenses and
<PAGE> 12
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disbursements) of, or incident to, the enforcement of any of the
provisions hereof shall be recoverable from the proceeds of the sale or
other disposition of the Collateral.
(b) All cash proceeds received by the Trustee in respect of
any sale of, collection from, or other realization upon all or any part
of the Collateral may, in the reasonable discretion of the Trustee, be
held by the Trustee as collateral for, and/or then or at any time
thereafter applied (after payment of any amounts payable to the Trustee
pursuant to Section 13) in whole or in part by the Trustee for the
ratable benefit of the Holders of the Notes against, all or any part of
the Obligations in such order as the Trustee shall elect. Any surplus
of such cash or cash proceeds held by the Trustee and remaining after
payment in full of all the Obligations shall promptly be paid over to
the Pledgor or to whomsoever may be entitled to receive such surplus as
ordered by a court of competent jurisdiction.
(c) The Trustee may, without notice to the Pledgor except as
required by law and at any time or from time to time, charge, set-off
and otherwise apply all or any part of the Obligations against the
Pledge Account or any part thereof.
(d) The Pledgor further agrees to use its reasonable best
efforts to do or cause to be done all such other acts as may be
reasonably necessary to make such sale or sales of all or any portion of
the Collateral pursuant to this Section 12 valid and binding and in
compliance with any and all other applicable requirements of law. The
Pledgor further agrees that a breach of any of the covenants contained
in this Section 12 will cause irreparable injury to the Trustee and the
Holders of the Notes, that the Trustee and the Holders of the Notes have
no adequate remedy at law in respect of such breach and, as a
consequence, that each and every covenant contained in this Section 12
shall be specifically enforceable against the Pledgor, and the Pledgor
hereby waives and agrees not to assert any defenses against an action
for specific performance of such covenants except for a defense that no
Event of Default has occurred.
SECTION 13. Expenses. The Pledgor will upon demand pay to the
Trustee the amount of any and all reasonable expenses, including, without
limitation, the reasonable fees, expenses and disbursements of its counsel,
experts and agents retained by the Trustee, that the Trustee may incur in
connection with (a) the review, negotiation and administration of this Pledge
Agreement, (b) the custody or preservation of, or the sale of, collection from,
or other realization upon, any of the Collateral, (c) the exercise or
enforcement of any of the rights of the Trustee and the Holders of the Notes
hereunder or (d) the failure by the Pledgor to perform or observe any of the
provisions hereof.
SECTION 14. Security Interest Absolute. All rights of the
Trustee and the Holders of the Notes and security interests hereunder, and all
obligations of the Pledgor hereunder, shall be absolute and unconditional
irrespective of:
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(a) any lack of validity or enforceability of the Indenture or
Notes or any other agreement or instrument relating thereto;
(b) any change in the time, manner or place of payment of, or
in any other term of, all or any of the Obligations, or any other
amendment or waiver of or any consent to any departure from the
Indenture;
(c) any taking, exchange, surrender, release or non-perfection
of any Liens on any other collateral for all or any of the Obligations;
(d) any manner of application of collateral, or proceeds
thereof, to all or any of the Obligations, or any manner of sale or
other disposition of any collateral for all or any of the Obligations or
any other assets of the Pledgor;
(e) any change, restructuring or termination of the corporate
structure or existence of the Pledgor; or
(f) to the extent permitted by applicable law, any other
circumstance which might otherwise constitute a defense available to, or
a discharge of, the Pledgor in respect of the Obligations or of this
Pledge Agreement.
SECTION 15. Miscellaneous Provisions.
Section 15.1. Notices. Any notice or communication given
hereunder shall be sufficiently given if in writing and delivered in person or
mailed by first class mail, commercial courier service or telecopier
communication, addressed as follows:
if to the Pledgor:
Allegiance Telecom, Inc.
1950 Stemmons Freeway
Suite 3026
Dallas, Texas 75207
Fax: (214) 853-7110
Attention: Chief Financial Officer
if to the Trustee:
The Bank of New York
101 Barclay Street
21 West
New York, New York 10286
Fax: (212) 815-5915
Attention: [ ], Corporate Trust Administration
<PAGE> 14
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All such notices and other communications shall, when mailed, delivered or
telecopied, respectively, be effective three business days after deposit in the
mails, when delivered or telecopied, respectively, addressed as aforesaid.
Section 15.2. No Adverse Interpretation of Other Agreements.
This Pledge Agreement may not be used to interpret another pledge, security or
debt agreement of the Pledgor or any subsidiary thereof. No such pledge,
security or debt agreement (other than the Indenture) may be used to interpret
this Pledge Agreement.
Section 15.3. Severability. The provisions of this Pledge
Agreement are severable, and if any clause or provision shall be held invalid,
illegal or unenforceable in whole or in part in any jurisdiction, then such
invalidity or unenforceability shall affect in that jurisdiction only such
clause or provision, or part thereof, and shall not in any manner affect such
clause or provision in any other jurisdiction or any other clause or provision
of this Pledge Agreement in any jurisdiction.
Section 15.4. Headings. The headings in this Pledge Agreement
have been inserted for convenience of reference only, are not to be considered
a part hereof and shall in no way modify or restrict any of the terms or
provisions hereof.
Section 15.5. Counterpart Originals. This Pledge Agreement may
be signed in two or more counterparts, each of which shall be deemed an
original, but all of which shall together constitute one and the same
agreement.
Section 15.6. Benefits of Pledge Agreement. Nothing in this
Pledge Agreement, express or implied, shall give to any person, other than the
parties hereto and their successors hereunder, and the Holders of the Notes,
any benefit or any legal or equitable right, remedy or claim under this Pledge
Agreement.
Section 15.7. Amendments, Waivers and Consents. Any amendment
or waiver of any provision of this Pledge Agreement and any consent to any
departure by the Pledgor from any provision of this Pledge Agreement shall be
effective only if made or duly given in compliance with all of the terms and
provisions of the Indenture, and then such waiver or consent shall be effective
only in the specific instance and for the specific purpose for which given.
Neither the Trustee nor any Holder of Notes shall be deemed, by any act, delay,
indulgence, omission or otherwise, to have waived any right or remedy hereunder
or to have acquiesced in any Default or Event of Default or in any breach of
any of the terms and conditions hereof. Failure of the Trustee or any Holder
of Notes to exercise, or delay in exercising, any right, power or privilege
hereunder shall not preclude any other or further exercise thereof or the
exercise of
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any other right, power or privilege. A waiver by the Trustee or any Holder of
Notes of any right or remedy hereunder on any one occasion shall not be
construed as a bar to any right or remedy that the Trustee or such Holder of
Notes would otherwise have on any future occasion. The rights and remedies
herein provided are cumulative, may be exercised singly or concurrently and are
not exclusive of any rights or remedies provided by law.
Section 15.8. Interpretation of Agreement. To the extent a term
or provision of this Pledge Agreement conflicts with the Indenture, the
Indenture shall control with respect to the subject matter of such term or
provision. Acceptance of or acquiescence in a course of performance rendered
under this Pledge Agreement shall not be relevant to determine the meaning of
this Pledge Agreement even though the accepting or acquiescing party had
knowledge of the nature of the performance and opportunity for objection.
Section 15.9. Continuing Security Interest; Termination. (a)
This Pledge Agreement shall create a continuing security interest in and to the
Collateral and shall, unless otherwise provided in this Pledge Agreement,
remain in full force and effect until the payment in full in cash of the
Obligations. This Pledge Agreement shall be binding upon the Pledgor, its
transferees, successors and assigns, and shall inure, together with the rights
and remedies of the Trustee hereunder, to the benefit of the Trustee, the
Holders of the Notes and their respective successors, transferees and assigns.
(b) This Pledge Agreement (other than Pledgor's obligations
under Sections 11 and 13) shall terminate upon the payment in full in
cash of the Obligations. At such time, the Trustee shall, pursuant to
an Issuer Order, reassign and redeliver to the Pledgor all of the
Collateral hereunder that has not been sold, disposed of, retained or
applied by the Trustee in accordance with the terms of this Pledge
Agreement and the Indenture and take all actions that are necessary to
release the security interest created by this Pledge Agreement in and to
the Collateral, including the execution and delivery of all termination
statements necessary to terminate any financing or continuation
statements filed with respect to the Collateral. Such reassignment and
redelivery shall be without warranty by or recourse to the Trustee in
its capacity as such, except as to the absence of any Liens on the
Collateral created by or arising through the Trustee, and shall be at
the reasonable expense of the Pledgor.
Section 15.10. Survival of Representations and Covenants. All
representations, warranties and covenants of the Pledgor contained herein shall
survive the execution and delivery of this Pledge Agreement, and shall
terminate only upon the termination of this Pledge Agreement.
Section 15.11. Waivers. The Pledgor waives presentment and
demand for payment of any of the Obligations, protest and notice of dishonor or
default with respect to any
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of the Obligations, and all other notices to which the Pledgor might otherwise
be entitled, except as otherwise expressly provided herein or in the Indenture.
Section 15.12. Authority of the Trustee. (a) The Trustee shall
have and be entitled to exercise all powers hereunder that are specifically
granted to the Trustee by the terms hereof, together with such powers as are
reasonably incident thereto. The Trustee may perform any of its duties
hereunder or in connection with the Collateral by or through agents or
employees and shall be entitled to retain counsel and to act in reliance upon
the advice of counsel concerning all such matters. Except as otherwise
expressly provided in this Pledge Agreement or the Indenture, neither the
Trustee nor any director, officer, employee, attorney or agent of the Trustee
shall be liable to the Pledgor for any action taken or omitted to be taken by
the Trustee, in its capacity as Trustee, hereunder, except for its own bad
faith, negligence or willful misconduct, and the Trustee shall not be
responsible for the validity, effectiveness or sufficiency hereof or of any
document or security furnished pursuant hereto. The Trustee and its directors,
officers, employees, attorneys and agents shall be entitled to rely on any
communication, instrument or document believed by it or them to be genuine and
correct and to have been signed or sent by the proper person or persons.
(b) The Pledgor acknowledges that the rights, privileges,
immunities, protections and responsibilities of the Trustee under this
Pledge Agreement with respect to any action taken by the Trustee or the
exercise or non-exercise by the Trustee of any option, right, request,
judgment or other right or remedy provided for herein or resulting or
arising out of this Pledge Agreement shall, as between the Trustee and
the Holders of the Notes, be governed by the Indenture and by such other
agreements with respect thereto as may exist from time to time among
them, but, as between the Trustee and the Pledgor, the Trustee shall be
conclusively presumed to be acting as agent for the Holders of the Notes
with full and valid authority so to act or refrain from acting, and the
Pledgor shall not be obligated or entitled to make any inquiry
respecting such authority.
Section 15.13 Final Expression. This Pledge Agreement, together
with the Indenture and any other agreement executed in connection herewith, is
intended by the parties as a final expression of this Pledge Agreement and is
intended as a complete and exclusive statement of the terms and conditions
thereof. In the event of a conflict between this Agreement and the Indenture,
the terms of the Indenture shall control.
Section 15.14. Rights of Holders of the Notes. No Holder of
Notes shall have any independent rights hereunder other than those rights
granted to individual Holders of the Notes pursuant to Section 6.07 of the
Indenture; provided that nothing in this subsection shall limit any rights
granted to the Trustee under the Notes or the Indenture.
Section 15.15. GOVERNING LAW; SUBMISSION TO JURISDICTION; WAIVER
OF JURY TRIAL; WAIVER OF DAMAGES. (a) THIS PLEDGE AGREEMENT
<PAGE> 17
17
SHALL BE GOVERNED BY AND INTERPRETED UNDER THE LAWS OF THE STATE OF NEW YORK,
AND ANY DISPUTE ARISING OUT OF, CONNECTED WITH, RELATED TO, OR INCIDENTAL TO
THE RELATIONSHIP ESTABLISHED BETWEEN THE PLEDGOR, THE TRUSTEE AND THE HOLDERS
OF THE NOTES IN CONNECTION WITH THIS PLEDGE AGREEMENT, AND WHETHER ARISING IN
CONTRACT, TORT, EQUITY OR OTHERWISE, SHALL BE RESOLVED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF NEW YORK.
(b) THE PLEDGOR HEREBY APPOINTS LOEB & LOEB LLP, 345 PARK
AVENUE, NEW YORK, NY 10154 AS ITS AGENT FOR SERVICE OF PROCESS IN ANY SUIT,
ACTION OR PROCEEDING WITH RESPECT TO THIS PLEDGE AGREEMENT AND FOR ACTIONS
BROUGHT UNDER U.S. FEDERAL OR STATE SECURITIES LAWS BROUGHT IN ANY FEDERAL OR
STATE COURT LOCATED IN THE CITY OF NEW YORK AND AGREES TO SUBMIT TO THE
JURISDICTION OF ANY SUCH COURT.
(c) THE PLEDGOR AGREES THAT THE TRUSTEE SHALL, IN ITS CAPACITY
AS TRUSTEE OR IN THE NAME AND ON BEHALF OF ANY HOLDER OF NOTES, HAVE THE RIGHT,
TO THE EXTENT PERMITTED BY APPLICABLE LAW, TO PROCEED AGAINST THE PLEDGOR OR
THE COLLATERAL IN A COURT IN ANY LOCATION REASONABLY SELECTED IN GOOD FAITH
(AND HAVING PERSONAL OR IN REM JURISDICTION OVER THE PLEDGOR OR THE COLLATERAL,
AS THE CASE MAY BE) TO ENABLE THE TRUSTEE TO REALIZE ON SUCH COLLATERAL, OR TO
ENFORCE A JUDGMENT OR OTHER COURT ORDER ENTERED IN FAVOR OF THE TRUSTEE. THE
PLEDGOR AGREES THAT IT WILL NOT ASSERT ANY COUNTERCLAIMS, SETOFFS OR
CROSSCLAIMS IN ANY PROCEEDING BROUGHT BY THE TRUSTEE TO REALIZE ON SUCH
PROPERTY OR TO ENFORCE A JUDGMENT OR OTHER COURT ORDER IN FAVOR OF THE TRUSTEE,
EXCEPT FOR SUCH COUNTERCLAIMS, SETOFFS OR CROSSCLAIMS WHICH, IF NOT ASSERTED IN
ANY SUCH PROCEEDING, COULD NOT OTHERWISE BE BROUGHT OR ASSERTED. THE PLEDGOR
WAIVES ANY OBJECTION THAT IT MAY HAVE TO THE LOCATION OF THE COURT IN THE CITY
OF NEW YORK ONCE THE TRUSTEE HAS COMMENCED A PROCEEDING DESCRIBED IN THIS
PARAGRAPH INCLUDING, WITHOUT LIMITATION, ANY OBJECTION TO THE LAYING OF VENUE
OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS.
(d) THE PLEDGOR AGREES THAT NEITHER ANY HOLDER OF NOTES NOR
(EXCEPT AS OTHERWISE PROVIDED IN THIS PLEDGE AGREEMENT OR THE INDENTURE) THE
TRUSTEE IN ITS CAPACITY AS TRUSTEE SHALL HAVE ANY LIABILITY TO THE PLEDGOR
(WHETHER ARISING IN TORT, CONTRACT OR OTHERWISE) FOR LOSSES SUFFERED BY THE
PLEDGOR IN CONNECTION WITH, ARISING OUT OF, OR IN ANY WAY RELATED TO, THE
TRANSACTIONS CONTEMPLATED AND THE RELATIONSHIP ESTABLISHED BY THIS PLEDGE
<PAGE> 18
18
AGREEMENT, OR ANY ACT, OMISSION OR EVENT OCCURRING IN CONNECTION THEREWITH,
UNLESS IT IS DETERMINED BY A FINAL AND NONAPPEALABLE JUDGMENT OF A COURT THAT
IS BINDING ON THE TRUSTEE OR SUCH HOLDER OF NOTES, AS THE CASE MAY BE, THAT
SUCH LOSSES WERE THE RESULT OF ACTS OR OMISSIONS ON THE PART OF THE TRUSTEE OR
SUCH HOLDERS OF NOTES, AS THE CASE MAY BE, CONSTITUTING BAD FAITH, NEGLIGENCE
OR WILLFUL MISCONDUCT.
(e) TO THE EXTENT PERMITTED BY APPLICABLE LAW, THE PLEDGOR
WAIVES THE POSTING OF ANY BOND OTHERWISE REQUIRED OF THE TRUSTEE OR ANY HOLDER
OF NOTES IN CONNECTION WITH ANY JUDICIAL PROCESS OR PROCEEDING TO ENFORCE ANY
JUDGMENT OR OTHER COURT ORDER PERTAINING TO THIS PLEDGE AGREEMENT OR ANY
RELATED AGREEMENT OR DOCUMENT ENTERED IN FAVOR OF THE TRUSTEE OR ANY HOLDER OF
NOTES, OR TO ENFORCE BY SPECIFIC PERFORMANCE, TEMPORARY RESTRAINING ORDER OR
PRELIMINARY OR PERMANENT INJUNCTION, THIS PLEDGE AGREEMENT OR ANY RELATED
AGREEMENT OR DOCUMENT BETWEEN THE PLEDGOR ON THE ONE HAND AND THE TRUSTEE
AND/OR THE HOLDERS OF THE NOTES ON THE OTHER HAND.
<PAGE> 19
IN WITNESS WHEREOF, the Pledgor and the Trustee have each caused
this Pledge Agreement to be duly executed and delivered as of the date first
above written.
Pledgor:
ALLEGIANCE TELECOM, INC.
By:
--------------------------
Name:
Title:
Trustee:
THE BANK OF NEW YORK
By:
--------------------------
Name:
Title:
<PAGE> 20
EXHIBIT A
NOTIFICATION AND CONTROL AGREEMENT
THIS NOTIFICATION AND CONTROL AGREEMENT (the "Agreement") dated
as of [ ], 1998 between Allegiance Telecom, Inc. (the "Pledgor") and The
Bank of New York, a New York banking corporation, in its capacity as trustee
(the "Trustee") and in its capacity as a bank (the "Bank") at which the Pledgor
maintains the Pledge Account (as defined herein).
A. The Pledgor has granted to the Trustee a security interest
in certain U.S. Treasury securities and security entitlements related thereto
(the "Pledged Securities") maintained by the Pledgor with the Bank and carried
in an account in the name of "[ ]" (the "Pledge Account") and all
additions thereto and substitutions and proceeds thereof (collectively, the
"Collateral"), pursuant to, and as more particularly described in, a Collateral
Pledge and Security Agreement dated as of [ ], 1998 between the
Pledgor and the Trustee (as the same may hereafter be amended, supplemented or
otherwise modified from time to time, the "Pledge Agreement"; terms defined in
the Pledge Agreement and not otherwise defined herein are used herein as
therein defined).
B. Terms defined in Articles 8 or 9 of the Uniform Commercial
Code as in effect in the State of New York (the "UCC") are used in this
Agreement (including, without limitation, paragraph A above) as defined in
Articles 8 or 9, respectively, of the UCC.
C. Pursuant to the Pledge Agreement, the Trustee has required
the execution and delivery of this Agreement.
NOW, THEREFORE, for valuable consideration and intending to be
legally bound, the parties hereto agree and acknowledge as follows:
1. NOTICE OF SECURITY INTEREST. The Pledgor and Trustee are
entering into this Agreement to perfect, and confirm the first priority lien
of, the Trustee's security interest in the Collateral. The Bank agrees to
promptly make all necessary entries or notations in its books and records to
reflect the Trustee's security interest in the Collateral and to apply any
value distributed on account of any Pledged Securities as directed by the
Trustee without further consent from the Pledgor. The Bank acknowledges that
the Trustee has control over the Pledge Account and all Pledged Securities
contained therein from time to time.
2. SEPARATE PLEDGE ACCOUNT; TRUSTEE REPRESENTATIONS AND
WARRANTIES. (a) The Trustee hereby instructs the Bank, and the Bank hereby
confirms and agrees that, unless the Trustee shall otherwise direct the Bank in
writing, (i) the Pledge Account is to be
<PAGE> 21
2
maintained separately at all times and (ii) the Pledged Securities shall be
carried only in the Pledge Account.
(b) The Trustee hereby represents and warrants that it has
acquired its security interest in, and security entitlement to, the Collateral
for value and without notice of any adverse claim thereto. Without limiting
the generality of the foregoing, the Collateral is not, to the Trustee's
knowledge, subject to any Lien granted by the Trustee in favor of any
securities intermediary (including, without limitation, the Bank or the Federal
Reserve Bank of New York) and the Trustee has not caused or permitted the
Collateral to become subject to any Lien created by or arising through the
Bank.
3. CONTROL. The Bank hereby agrees, upon written direction
from the Trustee and without further consent from the Pledgor, (a) to comply
with all instructions, entitlement orders and directions of any kind originated
by the Trustee concerning the Collateral, to liquidate or otherwise dispose of
the Collateral as and to the extent directed by the Trustee and pay over to the
Trustee all proceeds and other value therefrom or otherwise distributed with
respect thereto without any set off or deduction, and (b) except as otherwise
directed by the Trustee, not to comply with the instructions or directions of
the Pledgor or any other person.
4. OTHER AGREEMENTS; TERMINATION; SUCCESSOR TRUSTEES. The
Bank shall simultaneously send to the Trustee copies of all notices given and
statements rendered pursuant to the Pledge Account. So long as the Pledge
Agreement remains in effect, neither the Pledgor nor the Bank shall terminate
the Pledge Account without thirty (30) days' prior written notice to the other
party and the Trustee. In the event of any conflict between the provisions of
this Agreement and any other agreement governing the Pledge Account, the
provisions hereof shall control. In the event the Trustee no longer serves as
Trustee for the Collateral, the Pledge Account and Pledged Securities carried
therein shall be transferred to a successor trustee satisfactory to the
Trustee, provided that prior to such transfer, such successor trustee executes
an agreement that is in all material respects the same as this Agreement or is
otherwise in form and substance satisfactory to the Trustee.
5. INDEMNITY. The Pledgor shall indemnify and hold the
Trustee and the Bank harmless from any and all losses, claims, damages,
liabilities, expenses and fees, including reasonable counsel fees, resulting
from the execution of or performance under this Agreement and delivery by the
Trustee of all or any part of the Collateral to the Bank pursuant to this
Agreement, except claims, losses or liabilities resulting from the Trustee's or
the Bank's negligence, bad faith or willful misconduct as determined by a final
judgment of a court of competent jurisdiction. This indemnification shall
survive the termination of this Agreement.
<PAGE> 22
3
6. PROTECTION OF BANK. Except as required by Paragraph 3
hereof, the Bank shall have no duty to determine that the amount and form of
assets constituting Collateral comply with any applicable requirements. The
Bank may rely and shall be protected in acting upon any notice, instruction, or
other communication which it reasonably believes to be genuine and authorized.
7. TERMINATION/RELEASE OF COLLATERAL. This Agreement shall
terminate automatically upon receipt by the Bank of written notice executed by
two officers of the Trustee holding titles of Vice President or higher that (a)
all of the obligations secured by the Collateral have been satisfied, or (b)
all of the Collateral has been released, whichever is sooner, and the Bank
shall thereafter be relieved of all duties and obligations hereunder.
8. WAIVER AND SUBORDINATION OF RIGHTS. The Bank hereby
waives its right to set off any obligations of the Pledgor to the Bank against
any or all assets held by the Trustee as Collateral, and hereby agrees that any
and all liens, encumbrances, claims or security interests which the Bank may
have against the Collateral, either now or in the future are and shall be
subordinate and junior to the prior payment in full of all obligations of the
Pledgor now or hereafter existing under the Indenture, Notes and all other
documents related thereto whether for principal, interest (including, without
limitation, interest, as provided in the Notes, whether or not such interest
accrues after the filing of such petition for purposes of the Bankruptcy Code
or is an allowed claim in such proceeding), indemnities, fees, premiums,
expenses or otherwise. The Bank will not agree with any third party that the
Bank will comply with any instructions or directions of any kind concerning the
Collateral originated by such third party without the prior written consent of
the Trustee. Except for the claims and interests of the Trustee and the
Pledgor in the Collateral, the Bank does not know of any claim to or security
interest or other interest in the Collateral.
9. EXPENSES. The Pledgor shall pay all fees, costs and
expenses (including reasonable fees and expenses of counsel) of enforcing the
Bank's rights and remedies upon any breach (by the Trustee or the Pledgor) of
any of the provisions of this Agreement.
10. NOTICES. All notices, demands, requests, consents,
approvals and other communications required or permitted hereunder must be in
writing and will be effective upon receipt if delivered personally, or if sent
by facsimile transmission with confirmation of delivery, or by nationally
recognized overnight courier service, to the Pledgor's and the Trustee's
addresses as set forth in the Pledge Agreement, and to the Bank's address as
set forth below, or to such other address as any party may give to the others
in writing for such purpose.
11. CHANGES IN WRITING. No modification, amendment or waiver
of any provision of this Agreement nor consent to any departure by any party
therefrom will be
<PAGE> 23
4
effective unless made in writing signed by the parties hereto, and then such
waiver or consent shall be effective only in the specific instance and for the
purpose for which given.
12. ENTIRE AGREEMENT. This Agreement (including the documents
and instruments referred to herein) constitutes the entire agreement and
supersedes all other prior agreements and understandings, both written and
oral, among the parties with respect to the subject matter hereof.
13. COUNTERPARTS. This Agreement may be signed in any number
of counterpart copies and by the parties hereto on separate counterparts
(including by facsimile transmission), but all such copies shall constitute one
and the same instrument.
14. SUCCESSORS AND ASSIGNS. This Agreement will be binding
upon and inure to the benefit of the parties hereto and their respective heirs,
executors, administrators, successors and assigns.
15. GOVERNING LAW AND JURISDICTION. This Agreement has been
delivered to and accepted by the Trustee and will be deemed to be made in the
State of New York. THIS AGREEMENT WILL BE INTERPRETED AND THE RIGHTS AND
LIABILITIES OF THE PARTIES HERETO DETERMINED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF NEW YORK. Each of the parties hereby irrevocably submits for itself
and its property in any legal action or proceeding relating to this Agreement,
or for recognition and enforcement of any judgment in respect thereof, to the
non-exclusive general jurisdiction and venue of the courts of the State of New
York, the courts of the United States of America in New York, and appellate
courts from any thereof.
16. WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO
IRREVOCABLY WAIVES ANY AND ALL RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY
ACTION, PROCEEDING OR CLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) OF
ANY NATURE RELATING TO THIS AGREEMENT, ANY DOCUMENTS EXECUTED IN CONNECTION
WITH THIS
<PAGE> 24
5
AGREEMENT OR ANY TRANSACTION CONTEMPLATED IN ANY OF SUCH DOCUMENTS. EACH
PARTY HERETO ACKNOWLEDGES THAT THE FOREGOING WAIVER IS KNOWING AND VOLUNTARY.
<PAGE> 25
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be executed by their respective officers thereunto duly authorized, as of
the date first above written.
PLEDGOR:
ALLEGIANCE TELECOM, INC.
By:
----------------------------
Name:
--------------------------
Title:
-------------------------
TRUSTEE:
THE BANK OF NEW YORK, as Trustee
By:
----------------------------
Name:
--------------------------
Title:
-------------------------
BANK'S ADDRESS FOR BANK:
NOTICES:
THE BANK OF NEW YORK
101 Barclay Street By:
21 West -------------------------------
New York, NY 10286
Name:
-----------------------------
Attention: Van Brown, Title:
Corporate Trust Administration ----------------------------
Facsimile Number: (212) 815-5917
<PAGE> 26
ANNEX 1
Pledged Securities
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Security CUSIP No. Coupon (%) Maturity Amount
-------- --------- ---------- -------- ------
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------
United States
Treasury
- ------------------------------------------------------------------------------
United States
Treasury
- ------------------------------------------------------------------------------
United States
Treasury
- ------------------------------------------------------------------------------
United States
Treasury
- ------------------------------------------------------------------------------
United States
Treasury
- ------------------------------------------------------------------------------
United States
Treasury
- ------------------------------------------------------------------------------
</TABLE>
<PAGE> 1
EXHIBIT 5.1
[Kirkland & Ellis Letterhead]
June 29, 1998
Allegiance Telecom, Inc.
1950 Stemmons Freeway, Suite 3026
Dallas, Texas 75207
Re: Allegiance Telecom, Inc.
Registration Statement on Form S-1
Ladies and Gentlemen:
We are acting as special counsel to Allegiance Telecom, Inc., a
Delaware corporation (the "Company"), in connection with the proposed
registration by the Company of its Senior Notes due 2008 (the "Notes") pursuant
to a Registration Statement on Form S-1 (Registration No. 333-53479), filed with
the Securities and Exchange Commission (the "Commission") under the Securities
Act of 1933, as amended (the "Act") (such Registration Statement, as amended or
supplemented, is hereinafter referred to as the "Registration Statement"). The
Notes are to be sold pursuant to an underwriting agreement (the "Underwriting
Agreement") among the Company, Morgan Stanley & Co. Incorporated, Salomon
Brothers Inc., Donaldson, Lufkin & Jenrette Securities Corporation and Goldman,
Sachs & Co., as representatives of the several Underwriters. The Notes are to be
issued pursuant to an indenture (the "Indenture") between the Company and The
Bank of New York, as trustee.
In that connection, we have examined such corporate proceedings,
documents, records and matters of law as we have deemed necessary to enable us
to render this opinion.
For purposes of this opinion, we have assumed the authenticity of all
documents submitted to us as originals, the conformity to the originals of all
documents submitted to us as copies and the authenticity of the originals of all
documents submitted to us as copies. We have also assumed the legal capacity of
all natural persons, the genuineness of the signatures of persons signing all
documents in connection with which this opinion is rendered, the authority of
such persons signing on behalf of the parties thereto other than the Company and
the due authorization, execution and delivery of all documents by the parties
thereto other than the Company. As to any facts material to the opinions
expressed herein, we have relied upon the statements and representations of
officers and other representations of the Company and others. For purposes of
numbered paragraph 1, we have relied exclusively upon certificates issued by
governmental authorities in the relevant
<PAGE> 2
Allegiance Telecom, Inc.
June 29, 1998
Page 2
jurisdiction and such opinion is not intended to provide any conclusion or
assurance beyond that conveyed by such certificates.
Our opinion expressed below is subject to the qualifications that we
express no opinion as to the applicability of, compliance with, or effect of (i)
any bankruptcy, insolvency, reorganization, fraudulent transfer, fraudulent
conveyance, moratorium or other similar law affecting the enforcement of
creditors' rights generally, (ii) general principles of equity (regardless of
whether enforcement is considered in a proceeding in equity or at law), (iii)
public policy considerations which may limit the rights of parties to obtain
certain remedies and (iv) any laws except the internal laws of the State of New
York, the General Corporation Law of the State of Delaware and the federal law
of the United States of America.
Based upon and subject to the foregoing qualifications, assumptions and
limitations and the further limitations set forth below, we hereby advise you
that in our opinion:
(1) The Company is a corporation existing and in good standing under
the laws of the State of Delaware.
(2) Upon the effectiveness of the Restated Certificate of Incorporation
of the Company and when (i) the Registration Statement becomes effective under
the Act and the Indenture is qualified under the Trust Indenture Act of 1939, as
amended, (ii) the Board of Directors of the Company has taken all necessary
action to fix and approve the terms of the Notes and approve the issuance and
sale of the Notes, (iii) the Notes have been issued in accordance with the terms
of the Underwriting Agreement, upon receipt of the consideration contemplated
thereby, and (iv) certificates representing the Notes have been duly executed
and authenticated in accordance with the provisions of the Indenture, the Notes
will be legally issued, fully paid and nonassessable and will constitute valid
and binding obligations of the Company.
We hereby consent to the filing of this opinion with the Commission as
Exhibit 5.1 to the Registration Statement. We also consent to the reference to
our firm under the heading "Legal Matters" in the Registration Statement. In
giving this consent, we do not hereby admit that we are in the category of
persons whose consent is required under Section 7 of the Act or the rules and
regulations of the Commission. This opinion and consent may be incorporated by
reference in a subsequent registration statement on Form S-1 filed pursuant to
Rule 462(b) under the Act with respect to the registration of additional
securities for sale in the offering contemplated by the Registration Statement.
<PAGE> 3
Allegiance Telecom, Inc.
June 29, 1998
Page 3
We do not find it necessary for the purposes of this opinion, and
accordingly we do not purport to cover herein, the application of the securities
or "Blue Sky" laws of the various states to the issuance and sale of the Notes.
This opinion is limited to the specific issues addressed herein, and no
opinion may be inferred or implied beyond that expressly stated herein. We
assume no obligation to revise or supplement this opinion should the present
laws of the State of New York, the General Corporation Law of the State of
Delaware or the federal law of the United States be changed by legislative
action, judicial decision or otherwise.
Very truly yours,
/s/ Kirkland & Ellis
KIRKLAND & ELLIS
<PAGE> 1
EXHIBIT 10.6
ALLEGIANCE TELECOM, INC.
1998 STOCK INCENTIVE PLAN
1. Purpose.
This plan shall be known as the Allegiance Telecom, Inc. 1998 Stock
Incentive Plan (the "Plan"). The purpose of the Plan shall be to promote the
long-term growth and profitability of Allegiance Telecom, Inc., a Delaware
corporation (the "Company") and its Subsidiaries by (i) providing certain
directors, officers and key employees of, and certain other key individuals who
perform services for, the Company and its Subsidiaries with incentives to
maximize stockholder value and otherwise contribute to the success of the
Company and (ii) enabling the Company to attract, retain and reward the best
available persons for positions of substantial responsibility. Grants of
incentive or nonqualified stock options, stock appreciation rights ("SARs"),
either alone or in tandem with options, restricted stock, performance awards,
or any combination of the foregoing may be made under the Plan.
2. Definitions.
(a) "Board of Directors" and "Board" mean the board of directors
of the Company.
(b) "Change in Control" means the occurrence of one of the
following events:
(i) if any "person" or "group" as those terms are used in
Sections 13(d) and 14(d) of the Exchange Act, other than an Exempt Person, is
or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange
Act), directly or indirectly, of securities of the Company representing 50% or
more of the combined voting power of the Company's then outstanding securities;
or
(ii) during any period of two consecutive years,
individuals who at the beginning of such period constitute the Board and any
new directors whose election by the Board or nomination for election by the
Company's stockholders was approved by at least two-thirds of the directors
then still in office who either were directors at the beginning of the period
or whose election was previously so approved, cease for any reason to
constitute a majority thereof; or
(iii) the stockholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than a merger or
consolidation (A) which would result in all or a portion of the voting
securities of the Company outstanding immediately prior thereto
<PAGE> 2
continuing to represent (either by remaining outstanding or by being converted
into voting securities of the surviving entity) more than 50% of the combined
voting power of the voting securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation or (B) by which the
corporate existence of the Company is not affected and following which the
Company's chief executive officer and directors retain their positions with the
Company (and constitute at least a majority of the Board); or
(iv) the stockholders of the Company approve a plan of
complete liquidation of the Company or an agreement for the sale or disposition
by the Company of all or substantially all the Company's assets, other than a
sale to an Exempt Person.
(c) "Code" means the Internal Revenue Code of 1986, as amended.
(d) "Committee" means the Compensation Committee of the Board.
The membership of the Committee shall be constituted so as to comply at all
times with the applicable requirements of Rule 16b-3 under the Exchange Act and
Section 162(m) of the Code.
(e) "Common Stock" means the Common Stock, par value $.01 per
share, of the Company, and any other shares into which such stock may be
changed by reason of a recapitalization, reorganization, merger, consolidation
or any other change in the corporate structure or capital stock of the Company.
(f) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(g) "Exempt Person" means any employee benefit plan of the Company
or a trustee or other administrator or fiduciary holding securities under an
employee benefit plan of the Company.
(h) "Fair Market Value" of a share of Common Stock of the Company
means, as of the date in question, the officially-quoted closing selling price
of the stock (or if no selling price is quoted, the bid price) on the principal
securities exchange on which the Common Stock is then listed for trading
(including for this purpose the Nasdaq National Market) (the "Market") for the
date in question or, if the Common Stock is not then listed or quoted in the
Market, the Fair Market Value shall be the fair value of the Common Stock
determined in good faith by the Board; provided, however, that when shares
received upon exercise of an option are immediately sold in the open market,
the net sale price received may be used to determine the Fair Market Value of
any shares used to pay the exercise price or withholding taxes and to compute
the withholding taxes.
(i) "Incentive Stock Option" means an option conforming to the
requirements of Section 422 of the Code and any successor thereto.
(j) "Non-Employee Director" has the meaning given to such term in
Rule 16b-3 under the Exchange Act.
- 2 -
<PAGE> 3
(k) "Nonqualified Stock Option" means any stock option other than
an Incentive Stock Option.
(l) "Other Company Securities" mean securities of the Company
other than Common Stock, which may include, without limitation, unbundled stock
units or components thereof, debentures, preferred stock, warrants and
securities convertible into or exchangeable for Common Stock or other property.
(m) "Subsidiary" means a corporation or other entity of which
outstanding shares or ownership interests representing 50% or more of the
combined voting power of such corporation or other entity entitled to elect the
management thereof, or such lesser percentage as may be approved by the
Committee, are owned directly or indirectly by the Company.
3. Administration.
The Plan shall be administered by the Committee; provided that the
Board may, in its discretion, at any time and from time to time, resolve to
administer the Plan, in which case the term "Committee" shall be deemed to mean
the Board for all purposes herein. The Committee shall consist of at least two
directors. Subject to the provisions of the Plan, the Committee shall be
authorized to (i) select persons to participate in the Plan, (ii) determine the
form and substance of grants made under the Plan to each participant, and the
conditions and restrictions, if any, subject to which such grants will be made,
(iii) modify the terms of grants made under the Plan, (iv) interpret the Plan
and grants made thereunder, (v) make any adjustments necessary or desirable in
connection with grants made under the Plan to eligible participants located
outside the United States and (vi) adopt, amend, or rescind such rules and
regulations, and make such other determinations, for carrying out the Plan as
it may deem appropriate. Decisions of the Committee on all matters relating to
the Plan shall be in the Committee's sole discretion and shall be conclusive
and binding on all parties. The validity, construction, and effect of the Plan
and any rules and regulations relating to the Plan shall be determined in
accordance with applicable federal and state laws and rules and regulations
promulgated pursuant thereto. No member of the Committee and no officer of the
Company shall be liable for any action taken or omitted to be taken by such
member, by any other member of the Committee or by any officer of the Company
in connection with the performance of duties under the Plan, except for such
person's own willful misconduct or as expressly provided by statute.
The expenses of the Plan shall be borne by the Company. The Plan
shall not be required to establish any special or separate fund or make any
other segregation of assets to assume the payment of any award under the Plan,
and rights to the payment of such awards shall be no greater than the rights of
the Company's general creditors.
4. Shares Available for the Plan.
Subject to adjustments as provided in Section 15, an aggregate of
3,806,658 shares of Common Stock (the "Shares") may be issued pursuant to the
Plan. Such Shares may be in whole or in part authorized and unissued, or
shares which are held by the Company as treasury shares. If any grant under
the Plan expires or terminates unexercised, becomes unexercisable or is
forfeited as
- 3 -
<PAGE> 4
to any Shares, such unpurchased or forfeited Shares shall thereafter be
available for further grants under the Plan unless, in the case of options
granted under the Plan, related SARs are exercised.
5. Participation.
Participation in the Plan shall be limited to those directors
(including Non-Employee Directors), officers (including non-employee officers)
and key employees of, and other key individuals performing services for, the
Company and its Subsidiaries selected by the Committee (including participants
located outside the United States). Nothing in the Plan or in any grant
thereunder shall confer any right on a participant to continue in the employ of
or the performance of services for the Company or shall interfere in any way
with the right of the Company to terminate the employment or performance of
services of a participant at any time. By accepting any award under the Plan,
each participant and each person claiming under or through him or her shall be
conclusively deemed to have indicated his or her acceptance and ratification
of, and consent to, any action taken under the Plan by the Company, the Board
or the Committee.
Incentive Stock Options or Nonqualified Stock Options, SARs, alone or
in tandem with options, restricted stock awards, performance awards, or any
combination thereof, may be granted to such persons and for such number of
Shares as the Committee shall determine (such individuals to whom grants are
made being sometimes herein called "optionees" or "grantees," as the case may
be). Determinations made by the Committee under the Plan need not be uniform
and may be made selectively among eligible individuals under the Plan, whether
or not such individuals are similarly situated. A grant of any type made
hereunder in any one year to an eligible participant shall neither guarantee
nor preclude a further grant of that or any other type to such participant in
that year or subsequent years.
6. Incentive and Nonqualified Options.
The Committee may from time to time grant to eligible participants
Incentive Stock Options, Nonqualified Stock Options, or any combination
thereof; provided that the Committee may grant Incentive Stock Options only to
eligible employees of the Company or its subsidiaries (as defined for this
purpose in Section 424(f) of the Code). Subject to adjustments as provided for
in Section 15, in any one calendar year, the Committee shall not grant to any
one participant, options or SARs to purchase a number of shares of Common Stock
in excess of 500,000. The options granted shall take such form as the
Committee shall determine, subject to the following terms and conditions.
It is the Company's intent that Nonqualified Stock Options granted
under the Plan not be classified as Incentive Stock Options, that Incentive
Stock Options be consistent with and contain or be deemed to contain all
provisions required under Section 422 of the Code and any successor thereto,
and that any ambiguities in construction be interpreted in order to effectuate
such intent. If an Incentive Stock Option granted under the Plan does not
qualify as such for any reason, then to the extent of such nonqualification,
the stock option represented thereby shall be regarded as a Nonqualified Stock
Option duly granted under the Plan, provided that such stock option otherwise
meets the Plan's requirements for Nonqualified Stock Options.
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<PAGE> 5
(a) Price. The price per Share deliverable upon the exercise of
each option ("exercise price") shall be established by the Committee, except
that in the case of the grant of any Incentive Stock Option, the exercise price
may not be less than 100% of the Fair Market Value of a share of Common Stock
as of the date of grant of the option, and in the case of the grant of any
Incentive Stock Option to an employee who, at the time of the grant, owns more
than 10% of the total combined voting power of all classes of stock of the
Company or any of its Subsidiaries, the exercise price may not be less that
110% of the Fair Market Value of a share of Common Stock as of the date of
grant of the option, in each case unless otherwise permitted by Section 422 of
the Code.
(b) Payment. Options may be exercised, in whole or in part, upon
payment of the exercise price of the Shares to be acquired. Unless otherwise
determined by the Committee, payment shall be made (i) in cash (including
check, bank draft or money order), (ii) by delivery of outstanding shares of
Common Stock with a Fair Market Value on the date of exercise equal to the
aggregate exercise price payable with respect to the options so exercised,
(iii) by simultaneous sale through a broker reasonably acceptable to the
Committee of Shares acquired on exercise, as permitted under Regulation T of
the Federal Reserve Board, (iv) by authorizing the Company to withhold from
issuance a number of Shares issuable upon exercise of the options which, when
multiplied by the Fair Market Value of a share of Common Stock on the date of
exercise is equal to the aggregate exercise price payable with respect to the
options so exercised or (v) by any combination of the foregoing. Options may
also be exercised upon payment of the exercise price of the Shares to be
acquired by delivery of the optionee's promissory note, but only to the extent
specifically approved by and in accordance with the policies of the Committee.
In the event a grantee elects to pay the exercise price payable with
respect to an option pursuant to clause (ii) above, (A) only a whole number of
share(s) of Common Stock (and not fractional shares of Common Stock) may be
tendered in payment, (B) such grantee must present evidence acceptable to the
Company that he or she has owned any such shares of Common Stock tendered in
payment of the exercise price (and that such tendered shares of Common Stock
have not been subject to any substantial risk of forfeiture) for at least six
months prior to the date of exercise, and (C) Common Stock must be delivered to
the Company. Delivery for this purpose may, at the election of the grantee, be
made either by (A) physical delivery of the certificate(s) for all such shares
of Common Stock tendered in payment of the price, accompanied by duly executed
instruments of transfer in a form acceptable to the Company, or (B) direction
to the grantee's broker to transfer, by book entry, such shares of Common Stock
from a brokerage account of the grantee to a brokerage account specified by the
Company. When payment of the exercise price is made by delivery of Common
Stock, the difference, if any, between the aggregate exercise price payable
with respect to the option being exercised and the Fair Market Value of the
share(s) of Common Stock tendered in payment (plus any applicable taxes) shall
be paid in cash. No grantee may tender shares of Common Stock having a Fair
Market Value exceeding the aggregate exercise price payable with respect to the
option being exercised (plus any applicable taxes).
In the event a grantee elects to pay the exercise price payable with
respect to an option pursuant to clause (iv) above, (A) only a whole number of
Share(s) (and not fractional Shares) may be withheld in payment and (B) such
grantee must present evidence acceptable to the Company that
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<PAGE> 6
he or she has owned a number of shares of Common Stock at least equal to the
number of Shares to be withheld in payment of the exercise price (and that such
owned shares of Common Stock have not been subject to any substantial risk of
forfeiture) for at least six months prior to the date of exercise. When
payment of the exercise price is made by withholding of Shares, the difference,
if any, between the aggregate exercise price payable with respect to the
option being exercised and the Fair Market Value of the Share(s) withheld in
payment (plus any applicable taxes) shall be paid in cash. No grantee may
authorize the withholding of Shares having a Fair Market Value exceeding the
aggregate exercise price payable with respect to the option being exercised
(plus any applicable taxes). Any withheld Shares shall no longer be issuable
under such option.
(c) Terms of Options. The term during which each option may be
exercised shall be determined by the Committee, but, except as otherwise
provided herein, in no event shall an option be exercisable in whole or in
part, in the case of a Nonqualified Stock Option or an Incentive Stock Option
(other than as described below), more than ten years from the date it is
granted or, in the case of an Incentive Stock Option granted to an employee who
at the time of the grant owns more than 10% of the total combined voting power
of all classes of stock of the Company or any of its Subsidiaries, if required
by the Code, more than five years from the date it is granted. All rights to
purchase Shares pursuant to an option shall, unless sooner terminated, expire
at the date designated by the Committee. The Committee shall determine the
date on which each option shall become exercisable and may provide that an
option shall become exercisable in installments. The Shares constituting each
installment may be purchased in whole or in part at any time after such
installment becomes exercisable, subject to such minimum exercise requirements
as may be designated by the Committee. Unless otherwise provided herein or in
the terms of the related grant, an optionee may exercise an option only if he
or she is, and has continuously since the date the option was granted, been a
director, officer or employee of or performed other services for the Company or
a Subsidiary. Prior to the exercise of an option and delivery of the Shares
represented thereby, the optionee shall have no rights as a stockholder with
respect to any Shares covered by such outstanding option (including any
dividend or voting rights).
(d) Limitations on Grants. If required by the Code, the aggregate
Fair Market Value (determined as of the grant date) of Shares for which any
single Incentive Stock Option is exercisable for the first time during any
calendar year under all equity incentive plans of the Company and its
Subsidiaries (as defined in Section 422 of the Code) may not exceed $100,000.
(e) Grant of Reload Options. The Committee may provide (either at
the time of grant or exercise of an option), in its discretion, for the grant
to a grantee who exercises all or any portion of an option ("Exercised
Options") and who pays all or part of such exercise price with shares of Common
Stock, of an additional option (a "Reload Option") for a number of shares of
Common Stock equal to the sum (the "Reload Number") of the number of shares of
Common Stock tendered or withheld in payment of such exercise price for the
Exercised Options plus, if so provided by the Committee, the number of shares
of Common Stock, if any, tendered or withheld by the grantee or withheld by the
Company in connection with the exercise of the Exercised Options to satisfy
any federal, state or local tax withholding requirements. The terms of each
Reload Option, including the date of its expiration and the terms and
conditions of its exercisability and transferability, shall be the same as the
terms of the Exercised Option to which it relates, except that (i) the grant
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<PAGE> 7
date for each Reload Option shall be the date of exercise of the Exercised
Option to which it relates and (ii) the exercise price for each Reload Option
shall be the Fair Market Value of the Common Stock on the grant date of the
Reload Option.
7. Stock Appreciation Rights.
The Committee shall have the authority to grant SARs under this Plan,
either alone or to any optionee in tandem with options (either at the time of
grant of the related option or thereafter by amendment to an outstanding
option). SARs shall be subject to such terms and conditions as the Committee
may specify.
No SAR may be exercised unless the Fair Market Value of a share of
Common Stock of the Company on the date of exercise exceeds the exercise price
of the SAR or, in the case of SARs granted in tandem with options, any options
to which the SARs correspond. Prior to the exercise of the SAR and delivery of
the cash and/or Shares represented thereby, the participant shall have no
rights as a stockholder with respect to Shares covered by such outstanding SAR
(including any dividend or voting rights).
SARs granted in tandem with options shall be exercisable only when, to
the extent and on the conditions that any related option is exercisable. The
exercise of an option shall result in an immediate forfeiture of any related
SAR to the extent the option is exercised, and the exercise of an SAR shall
cause an immediate forfeiture of any related option to the extent the SAR is
exercised.
Upon the exercise of an SAR, the participant shall be entitled to a
distribution in an amount equal to the difference between the Fair Market Value
of a share of Common Stock on the date of exercise and the exercise price of
the SAR or, in the case of SARs granted in tandem with options, any option to
which the SAR is related, multiplied by the number of Shares as to which the
SAR is exercised. The Committee shall decide whether such distribution shall
be in cash, in Shares having a Fair Market Value equal to such amount, in Other
Company Securities having a Fair Market Value equal to such amount or in a
combination thereof.
All SARs will be exercised automatically on the last day prior to the
expiration date of the SAR or, in the case of SARs granted in tandem with
options, any related option, so long as the Fair Market Value of a share of
Common Stock on that date exceeds the exercise price of the SAR or any related
option, as applicable. An SAR granted in tandem with options shall expire at
the same time as any related option expires and shall be transferable only
when, and under the same conditions as, any related option is transferable.
8. Restricted Stock.
The Committee may at any time and from time to time grant Shares of
restricted stock under the Plan to such participants and in such amounts as it
determines. Each grant of restricted stock shall specify the applicable
restrictions on such Shares, the duration of such restrictions (which shall be
at least six months except as otherwise provided by the Committee), and the
time or times
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<PAGE> 8
at which such restrictions shall lapse with respect to all or a specified
number of Shares that are part of the grant.
The participant will be required to pay the Company the aggregate par
value of any Shares of restricted stock (or such larger amount as the Board may
determine to constitute capital under Section 154 of the Delaware General
Corporation Law, as amended) within ten days of the date of grant, unless such
Shares of restricted stock are treasury shares. Unless otherwise determined by
the Committee, certificates representing Shares of restricted stock granted
under the Plan will be held in escrow by the Company on the participant's
behalf during any period of restriction thereon and will bear an appropriate
legend specifying or referring to the applicable restrictions thereon, and the
participant will be required to execute a blank stock power therefor. Except
as otherwise provided by the Committee, during such period of restriction the
participant shall have all of the rights of a holder of Common Stock, including
but not limited to the rights to receive dividends and to vote, and any stock
or other securities received as a distribution with respect to such
participant's restricted stock shall be subject to the same restrictions as
then in effect for the restricted stock.
9. Performance Awards.
Performance awards may be granted to participants at any time and from
time to time as determined by the Committee. The Committee shall have complete
discretion in determining the size and composition of performance awards so
granted to a participant and the appropriate period over which performance is
to be measured (a "performance cycle"). Performance awards may include (i)
specific dollar-value target awards (ii) performance units, the value of each
such unit being determined by the Committee at the time of issuance, and/or
(iii) performance Shares, the value of each such Share being equal to the Fair
Market Value of a share of Common Stock.
The value of each performance award may be fixed or it may be
permitted to fluctuate based on a performance factor (e.g., return on equity)
selected by the Committee.
The Committee shall establish performance goals and objectives for
each performance cycle on the basis of such criteria and objectives as the
Committee may select from time to time, including, without limitation, the
performance of the participant, the Company, one or more of its Subsidiaries or
divisions or any combination of the foregoing. During any performance cycle,
the Committee shall have the authority to adjust the performance goals and
objectives for such cycle for such reasons as it deems equitable.
The Committee shall determine the portion of each performance award
that is earned by a participant on the basis of the Company's performance over
the performance cycle in relation to the performance goals for such cycle. The
earned portion of a performance award may be paid out in Shares, cash, Other
Company Securities, or any combination thereof, as the Committee may determine.
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<PAGE> 9
10. Withholding Taxes.
(a) Participant Election. Unless otherwise determined by the
Committee, a participant may elect to deliver shares of Common Stock (or have
the Company withhold shares acquired upon exercise of an option or SAR or
deliverable upon grant or vesting of restricted stock, as the case may be) to
satisfy, in whole or in part, the amount the Company is required to withhold
for taxes in connection with the exercise of an option or SAR or the delivery
of restricted stock upon grant or vesting, as the case may be. Such election
must be made on or before the date the amount of tax to be withheld is
determined. Once made, the election shall be irrevocable. The fair market
value of the shares to be withheld or delivered will be the Fair Market Value
as of the date the amount of tax to be withheld is determined. In the event a
participant elects to deliver shares of Common Stock pursuant to this Section
10(a), such delivery must be made subject to the conditions and pursuant to the
procedures set forth in Section 6(b) with respect to the delivery of Common
Stock in payment of the exercise price of options.
(b) Company Requirement. The Company may require, as a condition
to any grant or exercise under the Plan or to the delivery of certificates for
Shares issued hereunder, that the grantee make provision for the payment to the
Company, either pursuant to Section 10(a) or this Section 10(b), of any
federal, state or local taxes of any kind required by law to be withheld with
respect to any grant or any delivery of Shares. The Company, to the extent
permitted or required by law, shall have the right to deduct from any payment
of any kind (including salary or bonus) otherwise due to a grantee, an amount
equal to any federal, state or local taxes of any kind required by law to be
withheld with respect to any grant or to the delivery of Shares under the Plan,
or to retain or sell without notice a sufficient number of the Shares to be
issued to such grantee to cover any such taxes, the payment of which has not
otherwise been provided for in accordance with the terms of the Plan, provided
that the Company shall not sell any such Shares if such sale would be
considered a sale by such grantee for purposes of Section 16 of the Exchange
Act that is not exempt from matching thereunder.
11. Written Agreement; Vesting.
Each participant to whom a grant is made under the Plan shall enter
into a written agreement with the Company that shall contain such provisions,
including without limitation, vesting requirements, consistent with the
provisions of the Plan, as may be approved by the Committee. Unless the
Committee determines otherwise, no grant under this Plan may be exercised, and
no restrictions relating thereto may lapse, within six months of the date such
grant is made.
12. Transferability.
Unless the Committee determines otherwise, no option, SAR, performance
award, or restricted stock granted under the Plan shall be transferable by a
participant otherwise than by will or the laws of descent and distribution or
pursuant to a qualified domestic relations order as defined by the Code.
Unless the Committee determines otherwise, an option, SAR, or performance award
may be exercised only by the optionee or grantee thereof or his guardian or
legal representative;
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<PAGE> 10
provided that Incentive Stock Options may be exercised by such guardian or
legal representative only if permitted by the Code and any regulations
promulgated thereunder.
13. Listing, Registration and Qualification.
If the Committee determines that the listing, registration or
qualification upon any securities exchange or under any law of Shares subject
to any option, SAR, performance award or restricted stock grant is necessary or
desirable as a condition of, or in connection with, the granting of same or the
issue or purchase of Shares thereunder, no such option or SAR may be exercised
in whole or in part, no such performance award may be paid out and no Shares
may be issued unless such listing, registration or qualification is effected
free of any conditions not acceptable to the Committee.
It is the intent of the Company that the Plan comply in all respects
with Section 162(m) of the Code, that awards made hereunder comply in all
respects with Rule 16b-3 under the Exchange Act, that any ambiguities or
inconsistencies in construction of the Plan be interpreted to give effect to
such intention and that if any provision of the Plan is found not to be in
compliance with Section 162(m), such provision shall be deemed null and void to
the extent required to permit the Plan to comply with Section 162(m), as the
case may be.
14. Transfer of Employee.
The transfer of an employee from the Company to a Subsidiary, from a
Subsidiary to the Company, or from one Subsidiary to another shall not be
considered a termination of employment; nor shall it be considered a
termination of employment if an employee is placed on military or sick leave or
such other leave of absence which is considered by the Committee as continuing
intact the employment relationship.
15. Adjustments.
In the event of a reorganization, recapitalization, stock split, stock
dividend, combination of shares, merger, consolidation, distribution of assets,
or any other change in the corporate structure or shares of the Company, the
Committee shall make such adjustment as it deems appropriate in the number and
kind of Shares or other property reserved for issuance under the Plan, in the
number and kind of Shares or other property covered by grants previously made
under the Plan, in the exercise price of outstanding options and SARs and in
any limitations or other provisions in the Plan expressed in terms of a number
of shares. Any such adjustment shall be final, conclusive and binding for all
purposes of the Plan. In the event of any merger, consolidation or other
reorganization in which the Company is not the surviving or continuing
corporation or in which a Change in Control is to occur, all of the Company's
obligations regarding options, SARs performance awards, and restricted stock
that were granted hereunder and that are outstanding on the date of such event
shall, on such terms as may be approved by the Committee prior to such event,
be assumed by the surviving or continuing corporation or canceled in exchange
for property (including cash).
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<PAGE> 11
Without limitation of the foregoing, in connection with any
transaction of the type specified by clause (iii) of the definition of a Change
in Control in Section 2(b), the Committee may, in its discretion, (i) cancel
any or all outstanding options under the Plan in consideration for payment to
the holders thereof of an amount equal to the portion of the consideration that
would have been payable to such holders pursuant to such transaction if their
options had been fully exercised immediately prior to such transaction, less
the aggregate exercise price that would have been payable therefor, or (ii) if
the amount that would have been payable to the option holders pursuant to such
transaction if their options had been fully exercised immediately prior thereto
would be less than the aggregate exercise price that would have been payable
therefor, cancel any or all such options for no consideration or payment of any
kind. Payment of any amount payable pursuant to the preceding sentence may be
made in cash or, in the event that the consideration to be received in such
transaction includes securities or other property, in cash and/or securities or
other property in the Committee's discretion.
16. Termination and Modification of the Plan.
The Board of Directors or the Committee, without approval of the
stockholders, may modify or terminate the Plan, except that no modification
shall become effective without prior approval of the stockholders of the
Company if stockholder approval would be required for continued compliance with
the performance-based compensation exception of Section 162(m) of the Code or
any listing requirement of the principal stock exchange on which the Common
Stock is then listed.
17. Amendment or Substitution of Awards under the Plan.
The terms of any outstanding award under the Plan may be amended from
time to time by the Committee in its discretion in any manner that it deems
appropriate (including, but not limited to, acceleration of the date of
exercise of any award and/or payments thereunder or of the date of lapse of
restrictions on Shares); provided that, except as otherwise provided in Section
15, no such amendment shall adversely affect in a material manner any right of
a participant under the award without his or her written consent. The
Committee may, in its discretion, permit holders of awards under the Plan to
surrender outstanding awards in order to exercise or realize rights under other
awards, or in exchange for the grant of new awards, or require holders of
awards to surrender outstanding awards as a condition precedent to the grant of
new awards under the Plan.
18. Commencement Date; Termination Date.
The date of commencement of the Plan shall be June __, 1998, subject
to approval by the shareholders of the Company. Unless previously terminated
upon the adoption of a resolution of the Board terminating the Plan, the Plan
shall terminate at the close of business on June __, 2008; provided that the
Board may, prior to such termination, extend the term of the Plan for up to
five years for the grant of awards other than Incentive Stock Options. No
termination of the Plan shall materially and adversely affect any of the rights
or obligations of any person, without his or her consent, under any grant of
options or other incentives theretofore granted under the Plan.
19. Governing Law.
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<PAGE> 12
The Plan shall be governed by the corporate laws of the State of
Delaware, without giving effect to any choice of law provisions.
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<PAGE> 1
EXHIBIT 10.13
INDEMNIFICATION AGREEMENT
This Agreement, dated as of ________ ___, 1998, is made by and between
Allegiance Telecom, Inc., a Delaware corporation (the "Company"), and
[_____________] who is currently serving as an officer and/or director of the
Company (the "Indemnitee").
WHEREAS, the Indemnitee is currently serving in the capacity or
capacities described above;
WHEREAS, the Company wishes the Indemnitee to continue to serve in
such capacity or capacities and the Indemnitee is willing, under certain
circumstances, to continue in such capacity or capacities;
WHEREAS, damages sought and sometimes paid in many claims made against
corporate directors and officers and the expenses required to defend such
claims, whether or not the allegations are meritorious, may not bear a
reasonable relationship to the amount of compensation received by and may be
beyond the financial resources of the Indemnitee;
WHEREAS, the Indemnitee is currently entitled to indemnification under
the Delaware General Corporation Law (the "DGCL") and the Company's charter,
which may not provide adequate protection against the risks associated with
his/her service to or at the request of the Company;
WHEREAS, the Indemnitee and the Company have concluded that the
exposure to risk of personal liability and payment of damages out of the
Indemnitee's personal assets may result in overly conservative direction and
supervision of the Company's affairs, which could be detrimental to the best
interests of the Company and its stockholders; and
WHEREAS, the Company has concluded that additional protection is
necessary for its directors and elected officers.
NOW, THEREFORE, the parties hereto, intending to be legally bound,
hereby agree as follows:
1. Definitions.
(a) Agent. For the purposes of this Agreement, "agent" of the
Company means any person who is or was a director, officer, employee, agent or
fiduciary of the Company or a subsidiary of the Company, or is or was serving
at the request of, for the convenience of, or to represent the interests of the
Company or a subsidiary of the Company as a director, officer, employee, agent
or fiduciary of another corporation, partnership, joint venture, trust or other
enterprise or entity, including service with respect to an employee benefit
plan.
(b) Disinterested Director. For purposes of this Agreement,
"Disinterested Director" of the Company means a director of the Company who is
not and was not a party to the proceeding for which indemnification is being
sought by the claimant.
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<PAGE> 2
(c) Expenses. For purposes of this Agreement, "expenses" includes
all direct and indirect costs of any type or nature whatsoever (including,
without limitation, all attorneys' fees and related disbursements, other
out-of-pocket costs and reasonable compensation for time spent by the
Indemnitee for which he/she is not otherwise compensated by the Company or any
third party) actually and reasonably incurred by the Indemnitee in connection
with either the investigation, defense or appeal of a proceeding or
establishing or enforcing a right to indemnification under this Agreement,
Section 145 of the DGCL or otherwise; provided, however, that expenses shall
not include any judgments, fines, excise taxes or penalties under the Employee
Retirement Income Security Act of 1974 ("ERISA"), or amounts paid in settlement
of a proceeding.
(d) Independent Legal Counsel. For purposes of this Agreement,
"Independent Legal Counsel" means a law firm, a member of a law firm, or an
independent practitioner, that is experienced in matters of corporation law and
shall include any person who, under the applicable standards of professional
conduct then prevailing, would not have a conflict of interest in representing
either the Company or the Indemnitee in an action to determine the Indemnitee's
rights under this Agreement.
(e) Proceeding. For the purposes of this Agreement, "proceeding"
means any threatened, pending, or completed action, suit or other proceeding,
whether civil, criminal, administrative, investigative or any other type
whatsoever.
(f) Subsidiary. For purposes of this Agreement, "subsidiary"
means any corporation, partnership, joint venture or other enterprise, a
majority of whose equity interests are owned by the Company, directly or
through one or more other subsidiaries.
2. Agreement to Serve. The Indemnitee agrees to serve as an
agent of the Company, at its will (or under separate agreement, if such
agreement exists), in the capacity Indemnitee currently serves as an agent of
the Company, so long as he/she is duly appointed or elected and qualified in
accordance with the applicable provisions of the by-laws of the Company or any
subsidiary of the Company or until such time as he/she tenders his/her
resignation in writing; provided, however, that nothing contained in this
Agreement is intended to create any right to continued employment of the
Indemnitee.
3. Mandatory Indemnification. Subject to the limitations set
forth in Section 7, if the Indemnitee is a person who was or is a party or is
threatened to be made a party to or is involved, including involvement as a
witness, in any proceeding, including any action by or in the right of the
Company, by reason of the fact that he/she is or was or has agreed to become an
agent, or by reason of any action alleged to have been taken or omitted by
him/her in any such capacity, the Company shall indemnify the Indemnitee
against all expense, liability and loss (including but not limited to
judgments, fines, ERISA excise taxes or penalties and amounts paid or to be
paid in settlement), actually and reasonably incurred by him/her in connection
with the investigation, defense, settlement or appeal of such proceeding;
provided, however, that except as provided in Section 7(c) of this Agreement
with respect to proceedings seeking to enforce rights to indemnification, the
Company shall indemnify the Indemnitee in connection with a proceeding (or part
thereof) initiated by the Indemnitee only if such proceeding (or part thereof)
was authorized by the Board of Directors of the Company.
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<PAGE> 3
4. Mandatory Advancement of Expenses. The Company shall advance
all expenses incurred by the Indemnitee in connection with the investigation,
defense, settlement or appeal of any proceeding referred to in Section 3 to
which the Indemnitee is a party or is threatened to be made a party or with
respect to which the Indemnitee is otherwise involved (including involvement as
a witness) as an agent of the Company. The Indemnitee hereby undertakes to
repay such amounts advanced if, but only if and to the extent that, it shall
ultimately be determined pursuant to the provisions hereof that the Indemnitee
is not entitled to be indemnified by the Company as authorized hereby. The
advances to be made hereunder shall be paid by the Company to the Indemnitee
within twenty (20) days following delivery of a written request therefor by the
Indemnitee to the Company; provided, however, that, if and to the extent that
the DGCL requires, an advancement of expenses incurred by the Indemnitee in
his/her capacity as a director or officer shall be made only upon delivery of
an undertaking by or on behalf of the Indemnitee to repay all amounts so
advanced if it shall ultimately be determined by final judicial decision from
which there is no further right to appeal that the Indemnitee is not entitled
to be indemnified for such expenses under this Agreement or otherwise.
5. Maintenance of D&O Insurance.
(a) So long as the Indemnitee shall continue to serve in any
capacity described in Section 2 and thereafter so long as there is any
reasonable possibility that the Indemnitee shall be subject to any proceeding
by reason of the fact that the indemnitee served in any of such capacities, the
Company will use reasonable efforts to purchase and maintain in effect for the
benefit of the Indemnitee one or more valid, binding and enforceable policies
of directors' and officers' liability insurance ("D&O Insurance") providing, in
all respects, coverage and amounts as reasonably determined by the Board of
Directors.
(b) Notwithstanding Section 5(a), the Company shall not be
required to maintain D&O Insurance if such is not reasonably available or if,
in the reasonable business judgment of the Board of Directors of the Company as
it may exist from time to time, either (i) the premium cost for such insurance
is substantially disproportionate to the amount of insurance or (ii) the
coverage is so limited by exclusions that there is insufficient benefit
provided by such insurance compared with the cost thereof.
6. Notice and Other Indemnification Procedures.
(a) Promptly after receipt by the Indemnitee of notice of the
commencement of or the threat of commencement of any proceeding, the Indemnitee
shall, if the Indemnitee believes that the indemnification with respect thereto
properly may be sought from the Company under this Agreement, notify the
Company of the commencement or threat of commencement thereof. The failure to
notify or promptly notify the Company shall not relieve the Company from any
liability which it may have to the Indemnitee otherwise than under this
Agreement, and shall relieve the Company from liability hereunder only to the
extent the Company has been prejudiced.
(b) If, at the time of the receipt of a notice of the commencement
of a proceeding pursuant to Section 6(a), the Company has D&O Insurance in
effect, the Company shall give prompt notice of the commencement of such
proceeding to the insurers in accordance with the procedures
- 3 -
<PAGE> 4
set forth in the D&O Insurance policy. The Company shall thereafter take all
necessary or desirable action to cause such insurers to pay, to or on behalf of
the Indemnitee, all amounts payable as a result of such proceeding in
accordance with the terms of such policy.
(c) In the event the Company shall be obligated to pay the
expenses of the Indemnitee in connection with any proceeding, the Company shall
be entitled to assume the defense of such proceeding, with counsel approved by
the Indemnitee, upon the delivery to the Indemnitee of written notice of its
election to do so. After delivery of such notice, approval of such counsel by
the Indemnitee and the retention of such counsel by the Company, the Company
will not be liable to the Indemnitee under this Agreement for any fees of
counsel or other expenses subsequently incurred by the Indemnitee with respect
to the same proceeding; provided that (i) the Indemnitee shall have the right
to employ his/her own counsel in any such proceeding at the Indemnitee's
expense and (ii) if (A) the employment of counsel by the Indemnitee has been
previously authorized by the Company, or (B) the Indemnitee shall have
reasonably concluded that there is a conflict of interest between the Company
and the Indemnitee in the conduct of any such defense, or (C) the Company shall
not, in fact, have employed counsel to assume the defense of such proceeding,
the fees and expenses of the Indemnitee's counsel shall be paid by the Company;
and provided further that the Company shall not be required to pay the expenses
of more than one such separate counsel for persons it is indemnifying in any
one proceeding.
7. Determination of Right to Indemnification.
(a) To the extent the Indemnitee has been successful on the merits
or otherwise in defense of any proceeding referred to in Section 3 or in the
defense of any claim, issue or matter described therein, the Company shall
indemnify the Indemnitee pursuant to Section 3 against expenses actually and
reasonably incurred by him/her in connection with the investigation, defense,
or appeal of such proceeding. If the Indemnitee has not been successful on the
merits or otherwise in any such defense, the Company also shall indemnify the
Indemnitee pursuant to Section 3 unless, and only to the extent that, the
Indemnitee has not met the applicable standard of conduct under the Company's
charter and under the DGCL required to entitle the Indemnitee to such
indemnification.
(b) Subject to the provisions of Section 8 relating to a Change in
Control (as defined therein), the determination as to whether the Indemnitee is
entitled to indemnification shall be made as follows: (1) if requested by the
Indemnitee, by Independent Legal Counsel selected by the Indemnitee with the
consent of the Company (which consent shall not be unreasonably withheld) or
(2) if no request is made by the Indemnitee for a determination by Independent
Legal Counsel, (i) by a quorum of the Board of Directors consisting of
Disinterested Directors or (ii) if such quorum is not obtainable or, even if
obtainable, if a quorum of Disinterested Directors so directs, by Independent
Legal Counsel in a written opinion. If Independent Legal Counsel shall make
such determination, the Company agrees to pay the reasonable fees of such
counsel and to indemnify such counsel fully against any and all expenses
(including attorneys' fees), claims, liabilities and damages arising out of or
relating to this Agreement or counsel's engagement pursuant hereto.
(c) Notwithstanding a determination that the Indemnitee is not
entitled to indemnification with respect to a specific proceeding, the
Indemnitee shall have the right to apply to the court of Chancery of Delaware,
the court in which that proceeding is or was pending or any other court of
- 4 -
<PAGE> 5
competent jurisdiction, for the purpose of enforcing the Indemnitee's right to
indemnification or the advance payment of expenses pursuant to this Agreement.
The burden of proof shall be on the Company in any such suit to demonstrate by
the weight of the evidence that the Indemnitee is not entitled to
indemnification or advance payment of expenses. The Indemnitee's expenses
incurred in successfully establishing his/her right to indemnification or
advancement of expenses, in whole or in part, in any such action (or settlement
thereof) shall be paid by the Company.
(d) Notwithstanding anything in Sections 3 or 4 to the contrary,
the Company shall not be liable under this Agreement to make any indemnity
payment or advancement of expenses in connection with any proceeding (i) to the
extent that payment is actually made to or on behalf of the Indemnitee under an
insurance policy, except in respect of any amount in excess of the limits of
liability of such policy or any applicable deductible under such policy; (ii)
to the extent that payment has been or will be made to the Indemnitee by the
Company otherwise than pursuant to this Agreement; or (iii) to the extent that
there was a final adjudication by a court of competent jurisdiction that the
Indemnitee has not met the applicable standard of conduct required to entitle
the Indemnitee to indemnification under the DGCL as it now exists or may
hereafter be amended (but, in the case of any such amendment, only to the
extent that such amendment permits the Company to provide broader
indemnification rights than said law permitted the Company to provide prior to
such amendment).
8. Change In Control.
(a) The Company agrees that if there is a Change in Control, as
defined below, of the Company (other than a Change in Control which has been
approved by a majority of the members of the Board of Directors who were
directors immediately prior to such Change in Control), then with respect to
all matters thereafter arising concerning the rights of the Indemnitee to
indemnity payments and advance payments of expenses under this Agreement the
Company shall seek legal advice only from Independent Legal Counsel selected by
the Indemnitee with the consent of the Company (which shall not be unreasonably
withheld). Such counsel, among other things, shall render a written opinion to
the Company and the Indemnitee as to whether and to what extent the Indemnitee
would be permitted to be indemnified under this Agreement and applicable law.
The Company agrees to pay the reasonable fees of the Independent Legal Counsel
and to indemnify such counsel fully against any and all expenses (including
attorneys' fees), claims, liabilities and damages arising out of or relating to
this Agreement or counsel's engagement pursuant hereto.
(b) Alternatively, the Indemnitee may choose to submit all matters
arising concerning his/her rights to indemnity payments and advance payments of
expenses under this Agreement to a panel of three arbitrators, one of whom is
selected by the Company, another of whom is selected by the Indemnitee and the
third of whom is selected by the first two arbitrators so selected. Any such
submission shall be governed by the Commercial Arbitration Rules of the
American Arbitration Association and shall be deemed to be a submission within
the meaning of the Federal Arbitration Act or any statutory modification or re-
enactments thereof. Arbitration proceedings shall take place in Chicago,
Illinois, unless otherwise agreed to by the parties.
(c) "Change in Control" for purposes of this Agreement shall be
deemed to have occurred if (a) any "person" (as such term is used in Section
13(d) and 14(d) of the Securities Exchange Act
- 5 -
<PAGE> 6
of 1934, as amended, and the rules and regulations thereunder), other than a
trustee or other fiduciary holding securities under an employee benefit plan of
the Company, or a corporation owned directly or indirectly by the stockholders
of the Company in substantially the same proportions as their ownership of
stock of the Company, is or becomes the "beneficial owner" (as defined in Rule
13d-3 under said Act), directly or indirectly, of securities of the Company
representing 20% or more of the total voting power represented by the Company's
then outstanding voting securities, except that a person who as of the date of
this Agreement owns 20% or more of the total voting power represented by the
Company's outstanding voting securities shall not be deemed to have caused a
Change in Control, or (b) during any period of two consecutive years,
individuals who at the beginning of such period constitute the Board of
Directors and any new director whose election by the Board of Directors or
nomination for election by the Company's stockholders was approved by a vote of
at least two-third (2/3) of the directors then still in office who either were
directors at the beginning of the period or whose election or nomination for
election was previously so approved, cease for any reason to constitute a
majority thereof, or (c) the stockholders of the Company approve a merger, plan
of complete liquidation of the Company, an agreement for the sale or
disposition by the Company of all or any substantial part of the Company's
assets, or other business combination of the Company with any other
corporation, other than a business combination which would result in the voting
securities of the Company outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being converted into voting
securities of the surviving entity) at least 80% of the total voting power
represented by the voting securities of the Company or such surviving entity
outstanding immediately after such business combination.
9. Limitation of Actions and Release of Claims. No proceeding
shall be brought and no cause of action shall be asserted by the Company or any
subsidiary or by any stockholder on behalf of the Company or any subsidiary
against the Indemnitee, his/her spouse, heirs, estate, executors or
administrators after the expiration of one year from the act or omission of the
Indemnitee upon which such proceeding is based; provided, however, that in the
event that the Indemnitee has fraudulently concealed the facts underlying such
cause of action, no proceeding shall be brought and no cause of action shall be
asserted after the expiration of one year from the earlier of (i) the date the
Company or any subsidiary of the Company discovers such facts or (ii) the date
the Company or any subsidiary of the Company could have discovered such facts
by the exercise of reasonable diligence. Any claim or cause of action of the
Company or any subsidiary of the Company, including claims predicated upon the
negligent act or omission of the Indemnitee, shall be extinguished and deemed
released unless asserted by filing of a legal action within such period. This
Section 9 shall not apply to any cause of action which has accrued on the date
hereof and of which the Indemnitee is aware on the date hereof but as to which
the Company has no actual knowledge apart from the Indemnitee's knowledge.
10. Non-exclusivity. The provisions for indemnification and
advancement of expenses set forth in this Agreement shall not be deemed
exclusive of any other rights which the Indemnitee may have under any provision
of law, the Company's charter or by-laws, the vote of the Company's
stockholders or Disinterested Directors, other agreements, or otherwise, both
as to action in his/her official capacity and to action in another capacity
while occupying his/her position as an agent of the Company, and the
Indemnitee's rights hereunder shall continue after the Indemnitee has ceased
acting as an agent of the Company and shall inure to the benefit of the heirs,
executors and administrators of the Indemnitee.
- 6 -
<PAGE> 7
11. Settlement. The Company shall not be liable to indemnify the
Indemnitee under this Agreement for any amounts paid in settlement of any
proceeding without the Company's written consent, which consent shall not be
unreasonably withheld. The Company shall not settle any proceeding which would
impose any penalty or limitation on the Indemnitee without the Indemnitee's
written consent, which consent shall not be unreasonably withheld. In the
event that consent is not given and the parties hereto are unable to agree on a
proposed settlement, Independent Legal Counsel shall be retained by the
Company, at its expense, with the consent of the Indemnitee, which consent
shall not be unreasonably withheld, for the purpose of determining whether or
not the proposed settlement is reasonable under all the circumstances; and if
Independent Legal Counsel determines the proposed settlement is reasonable
under all the circumstances, the settlement may be consummated without the
consent of the other party.
12. Subrogation Rights. In the event of any payment under this
Agreement, the Company shall be subrogated to the extent of such payment to all
of the rights of recovery of the Indemnitee against any person or organization
and the Indemnitee shall execute all papers required and shall do everything
that may be reasonably necessary to secure such rights.
13. Interpretation of Agreement. It is understood that the
parties hereto intend this Agreement to be interpreted and enforced so as to
provide indemnification to the Indemnitee to the full extent now or hereafter
not prohibited by law. Indemnitee's rights hereunder shall apply to claims
made against Indemnitee arising out of acts or omissions which occurred prior
to the date hereof as well as those which occur after the date hereof.
14. Severability. If any provision or provisions of this
Agreement shall be held to be invalid, illegal or unenforceable for any reason
whatsoever, (i) the validity, legality and enforceability of the remaining
provisions of this Agreement (including, without limitation, all portions of
any paragraph of this Agreement containing any such provision held to be
invalid, illegal or unenforceable, that are not themselves invalid, illegal or
unenforceable) shall not in any way be affected or impaired thereby and (ii) to
the fullest extent possible, the provisions of this Agreement (including,
without limitation, all portions of any paragraph of this Agreement containing
any such provision held to be invalid, illegal or unenforceable) shall be
construed so as to give effect to the intent manifested by the provision held
invalid, illegal or unenforceable and to give effect to Section 13.
15. Modification and Waiver. No supplement, modification or
amendment of this Agreement shall be binding unless executed in writing by both
of the parties hereto. No waiver of any of the provisions of this agreement
shall be deemed or shall constitute a waiver of any other provision hereof
(whether or not similar) nor shall such waiver constitute a continuing waiver.
16. Successors and Assigns. The terms of this Agreement shall
bind, and shall inure to the benefit of, the successors and assigns of the
parties hereto.
17. Notices. All notices, requests, demands and other
communications under this Agreement shall be in writing and shall be deemed
duly given (i) on the date of delivery if delivered by hand or (ii) on the
second business day after being deposited in the U.S. mail (registered or
express), postage prepaid. Addresses for notice to either party are as shown on
the signature page
- 7 -
<PAGE> 8
of this Agreement, or as subsequently modified by written notice. Each party
agrees to receipt for any notice received promptly upon request.
18. Governing Law. This Agreement shall be governed exclusively
by and construed according to the laws of the State of Delaware, as applied to
contracts between Delaware residents entered into and to be performed entirely
within Delaware.
19. Consent to Jurisdiction. The Company and the Indemnitee each
hereby irrevocably consents to the jurisdiction of the courts of the State of
Delaware and the Company irrevocably consents to the jurisdiction of any court
in which an Indemnitee brings action pursuant to Section 7(c), for all purposes
in connection with any proceeding which arises out of or relates to this
Agreement. The Company agrees not to initiate any such action or proceeding in
any state other than Delaware.
* * * * *
- 8 -
<PAGE> 9
IN WITNESS WHEREOF, the parties hereto have entered into this
Indemnification Agreement effective as of the date first above written.
ALLEGIANCE TELECOM, INC.
1950 Stemmons Freeway
Suite 3026
Dallas, Texas 75207
By:
-----------------------------
Name:
-----------------------------
Its:
-----------------------------
INDEMNITEE:
-------------------------------------
Name:
-----------------------------
Title:
-----------------------------
Address:
-------------------------
- 9 -
<PAGE> 1
EXHIBIT 11.1
ALLEGIANCE TELECOM, INC.
COMPUTATION OF PRO FORMA PER SHARE EARNINGS (LOSS)
Three Months Ended March 31, 1998
<TABLE>
<CAPTION>
PRO FORMA NET LOSS PER SHARE, BASIC
-----------------------------------------------------------
Number of Shares Percent Outstanding Equivalent Shares
---------------- ------------------- -----------------
<S> <C> <C> <C>
COMMON STOCK
1997 Common Stock Offering 426 100.00% 426
1998 Common Stock Offering 12,000,000 100.00% 12,000,000
Preferred Stock Converted to Common Stock 40,341,128 100.00% 40,341,128
-------------- --------------
52,341,554 52,341,554
WEIGHTED AVERAGE SHARES OUTSTANDING 52,341,554
NET LOSS APPLICABLE TO COMMON STOCK $ (202,977,171)
NET LOSS PER SHARE, BASIC $ (3.88)
==============
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA NET LOSS PER SHARE, DILUTED
---------------------------------------------------------
Number of Shares Percent Outstanding Equivalent Shares
---------------- ------------------- -----------------
<S> <C> <C> <C>
COMMON STOCK
1997 Common Stock Offering 426 100.00% 426
1998 Common Stock Offering 12,000,000 100.00% 12,000,000
Preferred Stock Converted to Common Stock 40,341,128 100.00% 40,341,128
Stock Options Outstanding 267,287 100.00% 267,287
Common Stock Warrants 649,249 100.00% 649,249
-------------- --------------
53,258,090 53,258,090
WEIGHTED AVERAGE SHARES OUTSTANDING 53,258,090
NET LOSS APPLICABLE TO COMMON STOCK $ (202,977,171)
NET LOSS PER SHARE, DILUTED $ (3.81)
==============
</TABLE>
<PAGE> 1
EXHIBIT 11.2
ALLEGIANCE TELECOM, INC.
COMPUTATION OF PRO FORMA PER SHARE EARNINGS (LOSS)
Period From Inception (April 22, 1997) Through December 31, 1997
<TABLE>
<CAPTION>
PRO FORMA NET LOSS PER SHARE, BASIC
---------------------------------------------------------
Number of Shares Percent Outstanding Equivalent Shares
---------------- ------------------- -----------------
<S> <C> <C> <C>
COMMON STOCK
1997 Common Stock Offering 426 100.00% 426
1998 Common Stock Offering 12,000,000 100.00% 12,000,000
Preferred Stock Converted to Common Stock 40,067,766 100.00% 40,067,766
-------------- --------------
52,068,192 52,068,192
WEIGHTED AVERAGE SHARES OUTSTANDING 52,068,192
NET LOSS APPLICABLE TO COMMON STOCK $ (253,740,292)
NET LOSS PER SHARE, BASIC $ (4.87)
==============
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA NET LOSS PER SHARE, DILUTED
---------------------------------------------------------
Number of Shares Percent Outstanding Equivalent Shares
---------------- ------------------- -----------------
<S> <C> <C> <C>
COMMON STOCK
1997 Common Stock Offering 426 100.00% 426
1998 Common Stock Offering 12,000,000 100.00% 12,000,000
Preferred Stock Converted to Common Stock 40,067,766 100.00% 40,067,766
Stock Options Outstanding 189,276 100.00% 189,276
Common Stock Warrants 649,249 100.00% 649,249
-------------- --------------
52,906,717 52,906,717
WEIGHTED AVERAGE SHARES OUTSTANDING 52,906,717
NET LOSS APPLICABLE TO COMMON STOCK $(253,740,292)
NET LOSS PER SHARE, DILUTED $ (4.80)
=============
</TABLE>
<PAGE> 1
EXHIBIT 12.1
ALLEGIANCE TELECOM, INC.
COMPUTATION OF RATIO OF EARNINGS (LOSS) TO FIXED CHARGES
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION
THREE MONTHS ENDED (APRIL 22, 1997)
MARCH 31, 1998 THROUGH DECEMBER 31, 1997
----------------------------- -----------------------------
PRO FORMA PRO FORMA
AS ADJUSTED FOR AS ADJUSTED FOR
THE EQUITY AND THE EQUITY AND
ACTUAL DEBT OFFERINGS ACTUAL DEBT OFFERINGS
----------- --------------- ----------- ---------------
<S> <C> <C> <C> <C>
Earnings:
Net loss........................... $(8,395,214) $(197,705,052) $(3,687,960) $(249,637,534)
Add: Fixed charges................. 4,669,079 14,308,531 -- 40,856,994
----------- ------------- ----------- -------------
(3,726,135) (183,396,521) (3,687,960) (208,780,540)
Fixed charges:
Interest in indebtedness........... 4,951,366 14,285,784 -- 39,501,440
Amortization of debt discount and
debt issuance costs............. 185,247 490,281 -- 1,355,554
Interest portion of rental and
lease expense................... -- -- -- --
----------- ------------- ----------- -------------
5,136,613 14,776,065 -- 40,856,994
Deficiency of earnings available to
cover fixed charges................ $(8,862,748) $(198,172,586) $(3,687,960) $(249,637,534)
=========== ============= =========== =============
</TABLE>
<PAGE> 1
EXHIBIT 21.1
Subsidiaries of the Company
Allegiance Telecom International, Inc. Delaware
Allegiance Telecom of District of Columbia, Inc. Delaware
Allegiance Telecom of California, Inc. Delaware
Allegiance Telecom of Florida, Inc. Delaware
Allegiance Telecom of Georgia, Inc. Delaware
Allegiance Telecom of Illinois, Inc. Delaware
Allegiance Telecom of Maryland, Inc. Delaware
Allegiance Telecom of Massachusetts, Inc. Delaware
Allegiance Telecom of Michigan, Inc. Delaware
Allegiance Telecom of New Jersey, Inc. Delaware
Allegiance Telecom of New York, Inc. Delaware
Allegiance Telecom of Pennsylvania, Inc. Delaware
Allegiance Telecom of Texas, Inc. Delaware
Allegiance Telecom of Virginia, Inc. Virginia
Allegiance Telecom of Washington, Inc. Delaware
Allegiance Telecom Service Corporation Delaware
<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 April 24, 1998
(except for the matters in Note 10 for which the date is June 5, 1998), for
the three months ended March 31, 1998, and for the period from inception (April
22, 1997) through December 31, 1997, and to all references to our Firm included
in this Amendment No. 2 to the Registration Statement on Form S-1.
ARTHUR ANDERSEN LLP
Dallas, Texas
June 29, 1998
<PAGE> 1
EXHIBIT 25.1
=============================================================================
FORM T-1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF A
CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE
ELIGIBILITY OF A TRUSTEE PURSUANT TO
SECTION 305(b)(2) |__|
--------------------------
THE BANK OF NEW YORK
(Exact name of trustee as specified in its charter)
--------------------------
New York 13-5160382
(State of incorporation (I.R.S. employer
if not a U.S. national bank) identification no.)
48 Wall Street, New York, N.Y. 10286
(Address of principal executive offices) (Zip code)
--------------------------
Allegiance Telecom, Inc.
(Exact name of obligor as specified in its charter)
Delaware 75-2721491
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
1950 Stemmons Freeway
Suite 3026
Dallas, Texas 75207
(Address of principal executive offices) (Zip code)
--------------------------
Senior Notes due 2008
(Title of the indenture securities)
============================================================================
<PAGE> 2
1. GENERAL INFORMATION. FURNISH THE FOLLOWING INFORMATION AS TO THE
TRUSTEE:
(a) NAME AND ADDRESS OF EACH EXAMINING OR SUPERVISING AUTHORITY TO
WHICH IT IS SUBJECT.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
Name Address
- ----------------------------------------------------------------------------------------------
<S> <C>
Superintendent of Banks of the State of 2 Rector Street, New York,
New York N.Y. 10006, and Albany, N.Y. 12203
Federal Reserve Bank of New York 33 Liberty Plaza, New York,
N.Y. 10045
Federal Deposit Insurance Corporation Washington, D.C. 20429
New York Clearing House Association New York, New York 10005
</TABLE>
(b) WHETHER IT IS AUTHORIZED TO EXERCISE CORPORATE TRUST POWERS.
Yes.
2. AFFILIATIONS WITH OBLIGOR.
IF THE OBLIGOR IS AN AFFILIATE OF THE TRUSTEE, DESCRIBE EACH SUCH
AFFILIATION.
None.
16. LIST OF EXHIBITS.
EXHIBITS IDENTIFIED IN PARENTHESES BELOW, ON FILE WITH THE COMMISSION,
ARE INCORPORATED HEREIN BY REFERENCE AS AN EXHIBIT HERETO, PURSUANT TO
RULE 7A-29 UNDER THE TRUST INDENTURE ACT OF 1939 (THE "ACT") AND 17
C.F.R. 229.10(d).
1. A copy of the Organization Certificate of The Bank of New York
(formerly Irving Trust Company) as now in effect, which
contains the authority to commence business and a grant of
powers to exercise corporate trust powers. (Exhibit 1 to
Amendment No. 1 to Form T-1 filed with Registration Statement
No. 33-6215, Exhibits 1a and 1b to Form T-1 filed with
Registration Statement No. 33-21672 and Exhibit 1 to Form T-1
filed with Registration Statement No. 33-29637.)
4. A copy of the existing By-laws of the Trustee. (Exhibit 4 to
Form T-1 filed with Registration Statement No. 33-31019.)
6. The consent of the Trustee required by Section 321(b) of the
Act. (Exhibit 6 to Form T-1 filed with Registration Statement
No. 33-44051.)
7. A copy of the latest report of condition of the Trustee
published pursuant to law or to the requirements of its
supervising or examining authority.
-2-
<PAGE> 3
SIGNATURE
Pursuant to the requirements of the Act, the Trustee, The Bank of New
York, a corporation organized and existing under the laws of the State of New
York, has duly caused this statement of eligibility to be signed on its behalf
by the undersigned, thereunto duly authorized, all in The City of New York, and
State of New York, on the 16th day of June, 1998.
THE BANK OF NEW YORK
By: /s/ JAMES W.P. HALL
--------------------------------
Name: JAMES W.P. HALL
Title: Vice President
<PAGE> 4
EXHIBIT 7
Consolidated Report of Condition of
THE BANK OF NEW YORK
of 48 Wall Street, New York, N.Y. 10286
And Foreign and Domestic Subsidiaries,
a member of the Federal Reserve System, at the close of business December 31,
1997, published in accordance with a call made by the Federal Reserve Bank of
this District pursuant to the provisions of the Federal Reserve Act.
<TABLE>
<CAPTION>
Dollar Amounts
ASSETS in Thousands
<S> <C>
Cash and balances due from depos-
itory institutions:
Noninterest-bearing balances and
currency and coin .................................. $ 5,742,986
Interest-bearing balances ........................... 1,342,769
Securities:
Held-to-maturity securities ......................... 1,099,736
Available-for-sale securities ....................... 3,882,686
Federal funds sold and Securities pur-
chased under agreements to resell ................... 2,568,530
Loans and lease financing
receivables:
Loans and leases, net of unearned
income ............................................ 35,019,608
LESS: Allowance for loan and
lease losses ...................................... 627,350
LESS: Allocated transfer risk
reserve ........................................... 0
Loans and leases, net of unearned
income, allowance, and reserve .................... 34,392,258
Assets held in trading accounts ....................... 2,521,451
Premises and fixed assets (including
capitalized leases) ................................. 659,209
Other real estate owned ............................... 11,992
Investments in unconsolidated
subsidiaries and associated
companies ........................................... 226,263
Customers' liability to this bank on
acceptances outstanding ............................. 1,187,449
Intangible assets ..................................... 781,684
Other assets .......................................... 1,736,574
------------
Total assets .......................................... $ 56,153,587
============
LIABILITIES
Deposits:
In domestic offices ................................. $ 27,031,362
Noninterest-bearing ................................. 11,899,507
Interest-bearing .................................... 15,131,855
In foreign offices, Edge and
Agreement subsidiaries, and IBFs .................... 13,794,449
Noninterest-bearing ................................. 590,999
Interest-bearing .................................... 13,203,450
Federal funds purchased and Securities
sold under agreements to repurchase ................. 2,338,881
Demand notes issued to the U.S. .......................
Treasury ............................................ 173,851
Trading liabilities ................................... 1,695,216
Other borrowed money:
With remaining maturity of one year
or less ........................................... 1,905,330
With remaining maturity of more than
one year through three years ...................... 0
With remaining maturity of more than
three years ....................................... 25,664
Bank's liability on acceptances exe-
cuted and outstanding ............................... 1,195,923
Subordinated notes and debentures ..................... 1,012,940
Other liabilities ..................................... 2,018,960
------------
Total liabilities ..................................... 51,192,576
------------
EQUITY CAPITAL
Common stock .......................................... 1,135,284
Surplus ............................................... 731,319
Undivided profits and capital
reserves ............................................ 3,093,726
Net unrealized holding gains
(losses) on available-for-sale
securities .......................................... 36,866
Cumulative foreign currency transla-
tion adjustments .................................... (36,184)
------------
Total equity capital .................................. 4,961,011
------------
Total liabilities and equity
capital ............................................. $ 56,153,587
============
</TABLE>
I, Robert E. Keilman, Senior Vice President and Comptroller of the
above-named bank do hereby declare that this Report of Condition has been
prepared in conformance with the instructions issued by the Board of Governors
of the Federal Reserve System and is true to the best of my knowledge and
belief.
Robert E. Keilman
We, the undersigned directors, attest to the correctness of this Report of
Condition and declare that it has been examined by us and to the best of our
knowledge and belief has been prepared in conformance with the instructions
issued by the Board of Governors of the Federal Reserve System and is true and
correct.
Thomas A. Renyi )
Alan R. Griffith ) Directors
J. Carter Bacot )
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