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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 9, 1999
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
RHYTHMS NETCONNECTIONS INC.
(Exact name of Registrant as specified in its charter)
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<S> <C> <C>
DELAWARE 4813 33-0747515
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
incorporation or organization) No.)
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6933 SOUTH REVERE PARKWAY
ENGLEWOOD, COLORADO 80112
(303) 476-4200
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)
--------------------------
CATHERINE HAPKA
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
RHYTHMS NETCONNECTIONS INC.
6933 SOUTH REVERE PARKWAY
ENGLEWOOD, COLORADO 80112
(303) 476-4200
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------------------
COPIES OF ALL COMMUNICATIONS, INCLUDING ALL COMMUNICATIONS SENT TO THE AGENT FOR
SERVICE, SHOULD BE SENT TO:
JOHN A. DENNISTON
KIRT SHULDBERG
BROBECK, PHLEGER & HARRISON LLP
550 WEST "C" STREET, SUITE 1300
SAN DIEGO, CALIFORNIA 92101
(619) 234-1966
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
--------------------------
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statament for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
--------------------------
CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED PER UNIT(1) OFFERING PRICE(1) REGISTRATION FEE
<S> <C> <C> <C> <C>
12 3/4% Senior Notes due 2009.............. $325,000,000 100% $325,000,000 $90,350
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(1) Estimated solely for the purpose of calculating the registration fee.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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PROSPECTUS CONFIDENTIAL
RHYTHMS NETCONNECTIONS INC.
OFFER TO EXCHANGE ALL OUTSTANDING 12 3/4% SENIOR NOTES DUE 2009 FOR
12 3/4% SENIOR NOTES DUE 2009, WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME
ON , 1999 UNLESS WE EXTEND THE DEADLINE.
------------------------
TERMS OF THE NEW NOTES
- The terms of the new notes are substantially identical to those of the old
notes, except for certain transfer restrictions and registration rights
relating to the old notes.
- The new notes will bear interest at a fixed annual rate of 12 3/4%.
Interest on the new notes will be paid every six months on April 15 and
October 15, beginning October 15, 1999.
- We used approximately $113.7 million of the net proceeds from the offering
of the old notes to purchase a portfolio of government securities to
secure the payment of the first six scheduled interest payments on the new
notes.
- The new notes will mature on April 15, 2009.
- The new notes will be our unsecured senior obligations, except for the
security for the first six scheduled interest payments described above,
and will rank equally with all of our existing and future unsecured and
unsubordinated debt. The new notes will effectively rank junior to all
secured debt to the extent of the value of the assets securing such debt
and to all debt of our subsidiaries.
- We may redeem the new notes at any time on or after April 15, 2004. See
page for redemption prices. Before April 15, 2002, we may redeem up to
35% of the new notes at 112.75% with the proceeds of public equity
offerings and/or the sale of stock in one or more private transactions to
strategic equity investors, provided that not less than 65% of the
original principal amount of the notes remain outstanding immediately
after such redemption.
- No public market currently exists for the new notes. We do not expect that
an active public market in the new notes will develop. We do not intend to
list the new notes on any securities exchange or the Nasdaq National
Market.
TERMS OF THE EXCHANGE OFFER
- We will exchange all old notes that are validly tendered and not withdrawn
prior to the expiration of the exchange offer.
- We will not receive any proceeds from the exchange offer.
- We will issue the new notes promptly after the expiration of the exchange
offer.
- You may withdraw tenders of original notes at any time prior to the
expiration of the exchange offer.
- We believe that the exchange of old notes will not be a taxable event for
federal income tax purposes, but you should see "Federal Income Tax
Considerations" on page for more information.
- We are mailing this prospectus and the letter of transmittal on ,
1999.
SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR INFORMATION THAT YOU SHOULD
CONSIDER BEFORE YOU DECIDE TO PARTICIPATE IN THIS EXCHANGE OFFER.
------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the new notes or determined that this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
------------------------
THE DATE OF THIS PROSPECTUS IS , 1999
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SUMMARY
THIS SUMMARY HIGHLIGHTS CERTAIN SIGNIFICANT ASPECTS OF OUR BUSINESS AND THIS
OFFERING, BUT YOU SHOULD READ THE ENTIRE PROSPECTUS, INCLUDING THE FINANCIAL
DATA AND RELATED NOTES, BEFORE DECIDING WHETHER OR NOT TO PARTICIPATE IN THIS
EXCHANGE OFFER. WHEN WE REFER TO OUR COMPANY IN THIS PROSPECTUS, WE REFER TO US
AND OUR SUBSIDIARIES, AS A COMBINED ENTITY, EXCEPT WHERE WE INDICATE OTHERWISE.
WE HAVE PROVIDED A GLOSSARY OF TERMS FOR YOUR CONVENIENCE BEGINNING ON PAGE A-1.
YOU SHOULD CAREFULLY CONSIDER THE INFORMATION SET FORTH UNDER "RISK FACTORS."
We are a leading service provider of high-speed local access networking
solutions using DSL technology to businesses. We have designed our network to
give our customers a high-speed "always on" local connection to the Internet and
to private local and wide area networks. We offer a variety of DSL technologies
that deliver data transfer rates ranging from 128 Kbps to 7.1 Mbps. For
customers that subscribe at the 7.1 Mbps rate, our network provides transfer
speeds faster than frame relay and T-1 circuits, and is approximately 125 times
the speed of the fastest dial-up modem and over 55 times the speed of integrated
services digital network (ISDN) lines. Through our packet-based network,
multiple users on a single connection are able to simultaneously access the
Internet and private networks. Beyond high-speed access, we also offer a growing
suite of features and applications that we can individually configure to each
user's needs. We believe our network solutions will increase remote office and
worker productivity and reduce the complexity of communications for businesses.
Since our inception in February 1997, we have made substantial progress in
implementing a scalable nationwide network. We began offering commercial
services in our first market, San Diego, in April 1998, and have subsequently
begun service in 13 additional markets: San Francisco, San Jose, Oakland/East
Bay, Chicago, Los Angeles, Orange County, Boston, Sacramento, New York,
Philadelphia, Washington D.C., Seattle and Detroit. We intend to continue our
network rollout into an additional 20 markets in 1999 and a further 17 markets
by the end of 2000. Upon completion of this network expansion, we anticipate
providing services in 50 of the nation's largest metropolitan areas, which we
believe contain 60% of the nation's local area networks. We have signed
interconnection agreements with Ameritech, Bell Atlantic, BellSouth, GTE,
Pacific Bell and U S WEST, and we are currently pursuing interconnection
arrangements with three other incumbent carriers. As of May 31, 1999, we provide
service or have installed equipment in over 430 incumbent carrier central
offices. We have obtained competitive carrier authority or have been permitted
to operate as a competitive carrier in 26 states. We intend to continue to
investigate expansion of our network both in the United States and
internationally.
In March 1999, we entered into separate strategic arrangements with MCI
WorldCom and Microsoft. As part of our strategic arrangements, MCI WorldCom's
investment fund and Microsoft each invested $30 million in us. The MCI WorldCom
arrangement also designates us as MCI WorldCom's preferred provider of business
DSL lines in certain circumstances, and provides that MCI WorldCom is committed
to sell at least 100,000 of our DSL lines over a period of five years, subject
to penalties for failure to reach target commitments. In turn, we have
designated MCI WorldCom as our preferred provider of network services in certain
circumstances. MCI WorldCom will also work with us to develop voice and data
applications over a single DSL connection. In our Microsoft arrangement, we will
jointly develop and distribute with Microsoft a co-branded DSL version of the
Microsoft Network (MSN) service focused on our small business customers and on
our customers' teleworkers.
We also market our services through our direct sales force and through our
partnerships with recognized leaders in the networking industry, including
Microsoft and Cisco. Under our strategic partnership with Cisco, Cisco agreed to
jointly market and sell our networking solutions to its customer base and will
engage in joint development projects with us. As of May 31, 1999, we had over
2,275 lines in service, and we are currently under contract to supply over 9,000
additional DSL lines to our business customers, including Cisco, Silicon
Graphics, Inc., QUALCOMM Incorporated, Wind River
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Systems and Broadcom Corporation and service providers such as Verio Inc.,
Williams Communications, Inc., Savvis Communications Corporation, Intermedia
Communications Inc., CTS Network Services, Epoch Networks, Inc. and Ingram
Micro. As of May 31, 1999 we had approximately 80 egress circuits from business
customers in service or ordered.
In April 1999, we entered into a customer relationship with Qwest
Communications Corporation, in connection with which Qwest's wholly owned
subsidiary, U.S. Telesource, Inc., invested $15 million in us. In April 1999, we
also closed an initial public offering of our common stock, raising aggregate
proceeds of approximately $211.4 million (net of underwriting discounts). On
April 23, 1999, we closed the sale and issue of the old notes, raising aggregate
proceeds of approximately $315.3 million (net of underwriting discount), of
which approximately $113.7 million was used to purchase a portfolio of U.S.
government securities to secure the payment of the fist six scheduled interest
payments on the new notes.
Our senior management team has extensive experience in developing
next-generation networking businesses. Our Chairman and Chief Executive Officer,
Catherine Hapka, was previously the founder, President and Chief Operating
Officer of !NTERPRISE Networking Services, U S WEST's data networking business.
Steve Stringer, our President and Chief Operating Officer, was previously the
Global Chief Operating Officer of GE Capital IT Solutions. Scott Chandler, our
Chief Financial Officer, was previously President and Chief Executive Officer of
C-COR Electronics, Inc., a manufacturer of broadband telecommunications
equipment. James Greenberg, our Chief Network Officer, directed the design,
planning, operation and construction of Sprint Corporation's data networks.
Frank Tolve, our Chief Sales Officer, previously served as Vice President, Sales
Operations of Bay Networks. Our sponsors, which include Microsoft, MCI
WorldCom's investment fund, Qwest's subsidiary, Kleiner Perkins Caufield &
Byers, Enterprise Partners, Brentwood Venture Capital, the Sprout Group and a
subsidiary of Enron Corp., have to date invested approximately $105.3 million.
MARKET OPPORTUNITY
We believe that a substantial market opportunity exists as a result of the
convergence of six factors:
- the growing demand for high-speed access to the Internet and corporate
networks;
- the inherent limitations of dial-up modems as a connection to data
networks;
- the need for large companies to improve the productivity of their remote
offices and workers;
- the need for small and medium businesses to have an integrated
communication solution for their networking requirements;
- the increasing adoption of DSL and widespread use of packet-based
networks; and
- the 1996 Telecommunications Act.
These factors create a dual market opportunity: new carriers can create
efficient high-speed data, voice and video networks using existing
infrastructure, and business customers can better address their local and wide
area networking needs through a single carrier.
THE RHYTHMS SOLUTIONS
We believe our network solutions effectively address many of the unmet
communication needs of today's businesses by offering an appealing combination
of quality, performance, price and service. Our network consists of:
- HIGH-SPEED, "ALWAYS ON" LOCAL CONNECTIONS. Using DSL technology over
standard telephone lines, our network is capable of delivering data at
speeds ranging from 128 Kbps to 7.1 Mbps.
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- METROPOLITAN AND WIDE AREA OVERLAY NETWORK. We have designed our network
architecture so that we can effectively and efficiently manage data
traffic within and among metropolitan areas in which we offer our
services. We manage the network and monitor service levels on a nationwide
basis from our Network Operations Center in Denver.
- PRODUCTIVITY-ENHANCING FEATURES AND APPLICATIONS. We offer a growing suite
of network-enabled features and applications to extend the functionality
of corporate communications and networking resources for remote offices
and workers. We also offer high performance Internet access solutions to
remote offices and workers as well as small and medium businesses in
conjunction with our Internet Service Provider customers.
- SERVICE FLEXIBILITY. We have designed our network so that, over a single
DSL connection, we are able to customize the features and applications for
each individual user and local area network user.
- TURNKEY SOLUTION. We offer turnkey network solutions for our customers by
providing each customer with a single point of contact for all of our
services, including network implementation, maintenance and billing.
BUSINESS STRATEGY
Our goal is to become the leading national service provider of high
performance networking solutions for remote offices and workers. We intend to
implement the following strategies in an effort to achieve our goal:
- exploit our early market entrance by deploying our network rapidly and
building strong relationships with businesses and service provider
customers;
- focus on businesses that demand high performance networking solutions;
- use our network as a platform for productivity-enhancing features and
applications that we and third parties develop;
- continue to establish strong distribution channels to reach large, medium
and small businesses; and
- provide superior service and customer care.
------------------------
Our principal executive office is located at 6933 South Revere Parkway,
Englewood, Colorado 80112, and our telephone number is (303) 476-4200 or (800)
RHYTHMS.
THE EXCHANGE OFFER
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Old Notes......................... On April 23, 1999, we completed the offering of $325
million aggregate principal amount of our 12 3/4% senior
notes due 2009 to Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Salomon Smith Barney Inc. and Chase
Securities Inc., as initial purchasers. The initial
purchasers sold the old notes to "qualified
institutional buyers" as defined in Rule 144A under the
Securities Act of 1933. We have filed the registration
statement of which this prospectus is a part to comply
with a registration rights agreement between us and the
initial purchasers.
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Exchange Offer.................... We are offering to exchange the old notes for new notes
in the aggregate principal amount of up to $325 million
provided that the old notes are properly tendered and
accepted for exchange. We will issue the new notes
promptly after the expiration of the exchange offer. If
you were not prohibited from participating in the
exchange offer and you did not tender your old notes
prior to the completion of the exchange offer, you will
have no further exchange rights under the registration
rights agreement. Accordingly, such non-tendered old
notes will continue to be subject to restrictions on
transfer.
Expiration Date................... The exchange offer will expire at 5:00 p.m., New York
City time, on , 1999, or on a later extended date
and time as we may decide.
Conditions to the Exchange The exchange offer is subject to certain customary
Offer........................... conditions. The conditions are limited and relate in
general to proceedings or laws that might impair our
ability to proceed with the exchange offer. As of the
date of this prospectus, none of these events had
occurred, and we believe their occurrence to be
unlikely. If any such conditions do exist prior to the
expiration date, we may take the following actions:
- refuse to accept any old notes and return all
previously tendered old notes;
- extend the duration of the exchange offer; or
- waive such conditions.
Procedures for Tendering Old If you wish to participate in the exchange offer, you
Notes........................... must complete, sign and date the letter of transmittal
and send it, together with your old notes to be
exchanged and any other required documentation to State
Street Bank and Trust Company of California, N.A., as
exchange agent, at the address set forth in the letter
of transmittal. Brokers, dealers, commercial banks,
trust companies and other nominees may tender old notes
which they hold as nominee by book-entry transfer.
Questions regarding the tender of the old notes or the
exchange offer, generally, must be directed to the
exchange agent.
Special Procedures for Beneficial
Owners.......................... If you are the beneficial owner of old notes which are
registered in the name of a broker, dealer, commercial
bank, trust company or other nominee and you wish to
tender the old notes in the exchange offer, you should
contact such registered holder promptly and instruct
such registered holder to tender the old notes on your
behalf. If you wish to tender on your own behalf, you
must, prior to completing and executing the letter of
transmittal and delivering the old notes, either make
appropriate arrangements to register ownership of the
old notes in your own name or obtain a properly
completed bond power from the registered holder. The
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<S> <C>
transfer of registered ownership may take considerable
time and it may not be possible to complete prior to the
expiration date.
Guaranteed Delivery Procedures.... If you wish to tender your old notes and your old notes
are not immediately available or you cannot deliver your
old notes, the letter of transmittal or any other
documents required by the letter of transmittal to the
exchange agent, or you cannot complete the procedure for
book-entry transfer, then prior to the expiration date
you must tender your old notes according to the
guaranteed delivery procedures set forth in "The
Exchange Offer--Guaranteed Delivery Procedures."
Withdrawal Rights................. Tenders of old notes may be withdrawn at any time before
5:00 p.m., New York City time, on the expiration date by
delivering a written notice of such withdrawal to the
exchange agent in conformity with the procedures set
forth under "The Exchange Offer--Withdrawal of Tenders."
Acceptance of Old Notes and
Delivery of New Notes........... We will accept for exchange any and all old notes which
are properly tendered in the exchange offer before 5:00
p.m., New York City time, on the expiration date. We
will deliver the new notes promptly following the
expiration date. If we do not accept any of your old
notes for exchange we will return them to you as
promptly as practicable after the expiration or
termination of the exchange offer without any expense to
you.
Certain Tax Considerations........ The exchange pursuant to the exchange offer should not
result in the recognition of income, gain or loss to you
or to us for federal income tax purposes.
Exchange Agent.................... State Street Bank and Trust Company of California, N.A.,
the trustee under the indenture, is serving as exchange
agent in connection with the exchange offer.
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CONSEQUENCES OF NOT EXCHANGING OLD NOTES
You may not offer, sell or otherwise transfer the old notes except:
- in compliance with the registration requirements of the Securities Act and
any other applicable securities laws; or
- pursuant to an exemption therefrom; or
- in a transaction not subject to such securities laws. In addition, we or
the trustee may require you to deliver opinions of counsel, certifications
and other information prior to such transfer. Old notes that you do not
exchange for new notes in the exchange offer will continue to bear a
legend reflecting such restrictions on transfer. In addition, upon
consummation of the exchange offer, you will not be entitled to any rights
to have old notes registered under the Securities Act. We do not intend to
register under the Securities Act any old notes which remain outstanding
after completion of the exchange offer (subject to such limited
exceptions, if applicable).
To the extent that old notes are tendered and accepted in the exchange
offer, any trading market for old notes which remain outstanding after the
exchange offer could be adversely affected.
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The new notes and any old notes which remain outstanding after consummation
of the exchange offer will vote together as a single class for purposes of
determining whether holders of the requisite percentage in outstanding principal
amount thereof have taken certain actions or exercised certain rights under the
indenture.
TERMS OF NEW NOTES
The exchange offer applies to up to $325 million aggregate principal amount
of our old notes. The new notes will evidence the same debt as the old notes and
will be entitled to the benefits of the same indenture. The terms of the new
notes are the same as the terms of the old notes in all material respects except
that the new notes:
- have been registered under the Securities Act,
- do not include certain rights to registration under the Securities Act,
and
- do not contain transfer restrictions or terms with respect to additional
interest payments applicable to the old notes.
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New Notes Offered................. $325 million in aggregate principal amount of 12 3/4%
senior notes due 2009.
Maturity.......................... April 15, 2009.
Interest.......................... The new notes will bear interest at a fixed annual rate
of 12 3/4%, to be paid in cash every six months on April
15 and October 15 of each year, beginning on October 15,
1999.
Ranking........................... The new notes will be our general unsecured senior
obligations, except as described under "--Security."
They will rank equally with all of our other existing
and future unsecured debt and unsubordinated debt. They
will effectively rank junior to all of our secured debt,
to the extent of the value of the assets securing the
debt. In addition, they will effectively rank junior to
all existing and future debt of any or our subsidiaries.
As of March 31, 1999, we had outstanding debt of
approximately $163.7 million, of which
- approximately $0.7 million is secured debt, which
effectively would have ranked senior in right of payment
to the new notes, and
- approximately $163.0 million is unsecured and
unsubordinated debt, which would have ranked equally
in right of payment with the new notes.
As of March 31, 1999, our subsidiaries had no
outstanding debt.
Change of Control................. Upon certain change-of-control events, each holder of
new notes may require us to purchase all or a portion of
its new notes at a purchase price equal to 101% of the
principal amount thereof, plus any accrued and unpaid
interest and liquidated damages. See "Description of the
Notes--Certain Covenants--CHANGE OF CONTROL."
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Asset Sale Offer.................. Subject to certain conditions, we must offer to purchase
new notes with the net cash proceeds of certain asset
sales at a purchase price equal to 100% of the principal
amount thereof, plus any accrued and unpaid interest and
liquidated damages. See "Description of the
Notes--Certain Covenants-- DISPOSITION OF PROCEEDS OF
ASSET SALES."
Optional Redemption............... We may redeem the new notes, in whole or in part, at any
time on or after April 15, 2004 at the redemption prices
listed in the section "Description of Notes" under the
heading "Optional Redemption."
Public Equity Offering and
Strategic Equity Sale Optional
Redemption...................... Before April 15, 2002, we may redeem up to 35% of the
aggregate principal amount of the new notes originally
issued in certain circumstances with the net proceeds of
certain public equity offerings and/or certain private
sales of capital stock to strategic equity investors, at
112.75% of the principal amount of the new notes
redeemed, plus any accrued interest and any liquidated
damages, if at least 65% of the aggregate principal
amount of the new notes originally issued remains
outstanding immediately after such redemption.
Basic Covenants of the The indenture governing the new notes will contain
Indenture....................... covenants that, among other things, will limit our
ability and the ability of our restricted subsidiaries
to:
- incur additional debt,
- pay dividends on, redeem or repurchase our capital
stock,
- make investments,
- grant security interests in our assets,
- consolidate, merge or transfer all or substantially
all of our assets,
- restrict dividend or other payments to us by our
restricted subsidiaries,
- dispose of the proceeds of asset sales,
- issue and sell capital stock of our restricted
subsidiaries,
- engage in transactions with related persons,
- enter new lines of business,
- issue guarantees of our other debt by our restricted
subsidiaries,
- engage in sale/leaseback transactions and
- designate unrestricted subsidiaries.
These covenants are subject to important exceptions and
qualifications, which are described under the headings
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<S> <C>
"Description of the Notes--Certain Covenants" and "--
Consolidation, Merger, Sale of Assets, Etc."
Security.......................... We used approximately $113.7 million of the net proceeds
from the issuance of the old notes to purchase a
portfolio of U.S. government securities in an amount
sufficient to pay the first six scheduled payments of
interest on the new notes. We pledged this portfolio of
securities for the ratable benefit of the holders of the
new notes and the 1998 senior discount notes and may
under certain circumstances substitute other readily
marketable securities.
Registration Rights............... Holders of new notes are not entitled to any
registration rights with respect to the new notes.
Pursuant to the registration rights agreement among the
initial purchasers of the old notes and us, we agreed to
file an exchange offer registration statement with
respect to an offer to exchange the old notes for the
new notes. The registration statement of which this
prospectus is a part constitutes such exchange offer
registration statement. Once this exchange offer is
consummated, we will have no further obligations to
register any old notes not tendered for exchange.
Use of Proceeds................... We will not receive any proceeds from, and will bear the
expenses of, the exchange offer.
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RISK FACTORS
AN INVESTMENT IN THE NEW NOTES INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD
CAREFULLY CONSIDER THE RISKS AND UNCERTAINTIES DESCRIBED BELOW AND THE OTHER
INFORMATION IN THIS OFFERING MEMORANDUM BEFORE TENDERING YOUR OLD NOTES FOR NEW
NOTES. THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY ONES FACING
OUR COMPANY.
WE CANNOT PREDICT OUR SUCCESS BECAUSE WE HAVE A SHORT OPERATING HISTORY
We formed our company in February 1997, and we have a short operating
history for you to review in evaluating our business. We have limited historical
financial and operating data upon which you can evaluate our business and
prospects. We entered into our first interconnection agreement with an incumbent
carrier in July 1997 and began to offer commercial services in San Diego in
April 1998. We have limited commercial operations and have recognized limited
revenues since our inception. In addition, our senior management team and our
other employees have worked together at our company for only a short period of
time.
BECAUSE OUR MARKET IS NEW AND EVOLVING, WE CANNOT PREDICT ITS FUTURE GROWTH OR
ULTIMATE SIZE, AND WE MAY BE UNABLE TO COMPETE EFFECTIVELY
The market for packet-based high-speed digital communication services using
telephone lines is in the early stages of development. Since this market is new
and evolving and because our current and future competitors are likely to
introduce competing services, we cannot accurately predict the rate at which
this market will grow, if at all, or whether new or increased competition will
result in market saturation. Various providers of high-speed digital
communication services are testing products from various suppliers for various
applications, and suppliers have not broadly adopted an industry standard.
Certain critical issues concerning commercial use of DSL for Internet and local
area network access, including security, reliability, ease and cost of access
and quality of service, remain unresolved and may impact the growth of these
services. If the markets for our services fail to develop, grow more slowly than
anticipated or become saturated with competitors, these events could materially
and adversely affect our business, prospects, operating results and ability to
repay our debt, including the new notes.
Our success will depend on the development of this new and rapidly evolving
market and our ability to compete effectively in this market. To address these
risks, we must, among other things:
- rapidly expand the geographic coverage of our network services;
- raise additional capital;
- enter into interconnection agreements and working arrangements with
additional incumbent carriers, substantially all of which we expect to be
our competitors;
- deploy an effective network infrastructure;
- attract and retain customers;
- successfully develop relationships and activities with our partners and
distributors, including MCI WorldCom, Microsoft, Qwest and Cisco;
- continue to attract, retain and motivate qualified personnel;
- accurately assess potential markets and effectively respond to competitive
developments;
- continue to develop and integrate our operational support system and other
back office systems;
- obtain any required governmental authorizations;
- comply with evolving governmental regulatory requirements;
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- increase awareness of our services;
- continue to upgrade our technologies; and
- effectively manage our expanding operations.
We may not be successful in addressing these and other risks, and our
failure to address risks would materially and adversely affect our business,
prospects, operating results and ability to repay our debt, including the new
notes.
WE CANNOT PREDICT OUR SUCCESS BECAUSE OUR BUSINESS MODEL IS UNPROVEN
We have not validated our business model and strategy in the market. We
believe that the combination of our unproven business model and the highly
competitive and fast changing market in which we compete makes it impossible to
predict the extent to which our network service will achieve market acceptance
and our overall success. To be successful, we must develop and market network
services that are widely accepted by businesses at profitable prices. We may
never be able to deploy our network as planned, achieve significant market
acceptance, favorable operating results or profitability or generate sufficient
cash flow to repay our debt. Of the 9,800 lines that we have committed to
deliver to date, we committed approximately 8,700 to only two customers. None of
our large business customers has rolled out our services broadly to its
employees, and we cannot be certain when or if these rollouts will occur. We
will not receive significant revenue from our large customers unless these
rollouts occur. Any continued or ongoing failure for any reason of large
business customers to roll out our services, failure to validate our business
model in the market, including failure to build out our network, achieve
widespread market acceptance or sustain desired pricing would materially and
adversely affect our business, prospects, operating results and ability to repay
our debt, including the new notes.
WE EXPECT OUR LOSSES TO CONTINUE
We have incurred losses and experienced negative operating cash flow for
each month since our formation. As of March 31, 1999, we had an accumulated
deficit of approximately $62.7 million. We intend to rapidly and substantially
increase our expenditures and operating expenses in an effort to expand our
network services. We expect to have annual interest and amortization expense
relating to our 1998 senior discount notes and the new notes of approximately
$52.2 million in 1999 and increasing to $80.6 million in 2003, and additional
interest expense relating to the notes offered hereby. In addition, we may incur
more debt in the future. Furthermore, as a result of recent preferred stock
issuances and stock option grants, we anticipate that there will be significant
charges to earnings in future periods. As a result of these factors, we expect
to incur substantial operating and net losses and negative operating cash flow
for the foreseeable future. We will need to obtain additional financing to pay
our expenses and to make payments on our debt. We cannot give you any assurance
about whether or when we will have sufficient revenues to satisfy our funding
requirements or pay our debt service obligations, including our obligations
under the new notes.
OUR OPERATING RESULTS IN ONE OR MORE FUTURE PERIODS ARE LIKELY TO FLUCTUATE
SIGNIFICANTLY AND MAY FAIL TO MEET OR EXCEED THE EXPECTATIONS OF SECURITIES
ANALYSTS OR INVESTORS
Our annual and quarterly operating results are likely to fluctuate
significantly in the future due to numerous factors, many of which are outside
of our control. These factors include:
- the rate of customer acquisition and turnover;
- the prices our customers are willing to pay;
- the amount and timing of expenditures relating to the expansion of our
services and infrastructure;
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- the timing and availability of incumbent carrier central office
collocation facilities and transport facilities;
- the success of our relationships with our partners and distributors,
including MCI WorldCom, Microsoft, Qwest and Cisco;
- our ability to deploy our network on a timely basis;
- introduction of new services or technologies by our competitors;
- price competition;
- the ability of our equipment and service suppliers to meet our needs;
- regulatory developments, including interpretations of the 1996
Telecommunications Act;
- technical difficulties or network downtime;
- the success of our strategic alliances; and
- the condition of the telecommunication and network service industries and
general economic conditions.
Because of these factors, our operating results in one or more future
periods could fail to meet or exceed the expectations of securities analysts or
investors. In that event, any trading price of the new notes would likely
decline.
IF SALES FORECASTED FOR A PARTICULAR PERIOD ARE NOT REALIZED IN THAT PERIOD DUE
TO THE LENGTHY SALES CYCLE OF OUR SERVICES, OUR OPERATING RESULTS FOR THAT
PERIOD WILL BE HARMED
The sales cycle of our network services can be very lengthy, particularly
for large businesses. The sales cycle for large businesses typically involves:
- a significant technical evaluation;
- an initial trial rollout to a relatively small number of end users;
- a commitment of capital and other resources by the customer;
- delays associated with the customer's internal procedures to approve large
capital expenditures;
- time required to engineer the deployment of our services;
- coordination of the activation of multiple access lines with incumbent
carriers; and
- testing and acceptance of our services.
For these and other reasons, our sales cycle for large businesses lasts at
least six months. During this lengthy sales cycle, we will incur significant
expenses in advance of the receipt of revenues. If sales that we forecast for a
particular period do not occur because of our lengthy sales cycle, this event
could materially and adversely affect our business, prospects, operating results
and ability to make payments on our debt, including the new notes, during that
period.
WE DEPEND ON INCUMBENT CARRIERS FOR COLLOCATION AND TRANSMISSION FACILITIES
We must use copper telephone lines controlled by the incumbent carriers to
provide DSL connections to customers. We also depend on the incumbent carriers
for collocation and for a substantial portion of the transmission facilities we
use to connect our equipment in incumbent carrier central offices to our Metro
Service Centers. In addition, we depend on the incumbent carriers to test and
maintain the quality of the copper lines that we use. We have not established a
history of obtaining access to collocation and transmission facilities from
incumbent carriers in large volumes. In many
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cases, we may be unable to obtain access to collocation and transmission
facilities from the incumbent carriers, or to gain access at acceptable rates,
terms and conditions, including timeliness. We have experienced, and expect to
experience in the future, lengthy periods between our request for and the actual
provision of the collocation space and telephone lines. An inability to obtain
adequate and timely access to collocation space or transmission facilities on
acceptable terms and conditions from incumbent carriers could have a material
and adverse effect on our business, prospects, operating results and ability to
repay our debt, including the new notes.
Because we compete with incumbent carriers in our markets, they may be
reluctant to cooperate with us. The incumbent carriers may experience, or claim
to experience, a shortage of collocation space or transmission capacity. If this
occurs, we may not have alternate means of connecting our DSL equipment with the
copper lines or connecting our equipment in central offices to Metro Service
Centers. We have experienced rejections of some of our collocation applications
on the grounds that no space is available. We may receive additional rejections
in the future. The number of other competitive local exchange carriers that
request collocation space will also affect the availability of collocation space
and transmission capacity. If we are unable to obtain physical collocation space
or transmission capacity from our targeted incumbent carriers, we may face
delays, additional costs or an inability to provide services in certain
locations. In many cases where our application for physical collocation is
rejected, we expect to have the option of adjacent location--where we install
our equipment in a building that is very close to the incumbent carrier central
office--or virtual collocation--where the incumbent carrier manages and operates
our equipment. While we have used adjacent and virtual collocation in our
network, those alternatives reduce our control over our equipment, and therefore
may reduce the level of quality and service we provide to our customers. We are
currently in an arbitration proceeding with SBC Communications Inc. concerning
the availability of DSL-enabled copper lines, as well as other operational
issues. Delays in obtaining access to collocation space and telephone lines or
the rejection of our applications for collocation could result in delays in, and
increased expenses associated with, the rollout of our services, which in turn
could have a material and adverse effect on our business, prospects, operating
results and ability to repay our debt, including the notes.
WE ARE UNABLE TO CONTROL THE TERMS AND CONDITIONS UNDER WHICH WE GAIN ACCESS TO
INCUMBENT CARRIER COLLOCATION AND TRANSMISSION FACILITIES
We cannot control the terms under which we collocate our equipment, connect
to copper lines or gain the use of an incumbent carrier's transmission
facilities. State tariffs, state public utility commissions and interconnection
agreements with the incumbent carriers determine the price, terms and conditions
under which collocation space is made available, and they make these
administrative determinations in ongoing hearings. Interconnection agreements
and state public utility commissions also determine the terms and conditions of
access to copper lines and other components of an incumbent carrier's network.
We may be unable to negotiate or enter into interconnection agreements on
acceptable terms or at all. In addition, we cannot be sure that incumbent
carriers will abide by their obligations under those agreements. Delays in
obtaining interconnection agreements would delay our entry into certain markets.
In addition, disputes may arise between us and the incumbent carriers with
respect to interconnection agreements, and we may be unable to resolve disputes
in our favor. If we are unable to enter into, or experience a delay in
obtaining, interconnection agreements, this inability or delay could adversely
affect our business, prospects, operating results and ability to repay our debt,
including the new notes. Further, the interconnection agreements are generally
short term, and we may be unable to renew the interconnection agreements on
acceptable terms or at all. The state commissions, the Federal Communications
Commission and the courts oversee, in varying degrees, interconnection
arrangements as well as the terms and conditions under which we gain access to
incumbent carrier copper lines and transmission facilities. These government
entities may modify the terms or prices of our interconnection agreements and
our access to incumbent carrier copper lines and transmission facilities in ways
that would be adverse to our business. State regulatory commissions
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establish the price rates for DSL-capable copper lines as well as other rates,
terms and conditions of our dealings with the incumbent carriers in ongoing
public hearings. Participation in these hearings will involve significant
management time and expense. Incumbent carriers may from time to time propose
new rates, and the outcomes of hearings and rulings could have a material and
adverse effect on our business, prospects, operating results and ability to
repay our debt, including the new notes.
WE DEPEND ON THIRD PARTIES, PARTICULARLY MCI WORLDCOM, MICROSOFT, QWEST AND
CISCO, FOR THE MARKETING AND SALES OF OUR NETWORK SERVICES
We will rely significantly on indirect sales channels for the marketing and
sales of our network services. We will seek to establish relationships with
numerous service providers, including Internet Service Providers, interexchange
carriers, other competitive carriers and value-added resellers, to gain access
to customers. Our agreements to date with service providers are non-exclusive,
and we anticipate that future agreements will also be on a non-exclusive basis,
allowing service providers to resell services offered by our competitors. These
agreements are generally short term, and can be cancelled by the service
provider without significant financial consequence. We cannot control how these
service providers perform and cannot be certain that their performance will be
satisfactory to us or our customers. Many of these companies also compete with
us. If the number of customers we obtain through indirect sales channels is
significantly lower than our forecast for any reason, or if the service
providers with which we have contracted are unsuccessful in competing in their
own intensely competitive markets, these events would have a material and
adverse effect on our business, prospects, operating results and financial
condition.
We expect to rely particularly on the sales and marketing efforts of our
strategic partners, including MCI WorldCom, Microsoft, Qwest and Cisco. While
our agreement with MCI WorldCom calls for it to sell 100,000 DSL lines, the
agreement also enables MCI WorldCom to terminate the agreement under certain
circumstances and to receive offsets and credits under other circumstances.
Therefore, MCI WorldCom might sell significantly fewer than 100,000 DSL lines,
or we might receive significantly lower revenues than we otherwise would.
THE MARKET IN WHICH WE OPERATE IS HIGHLY COMPETITIVE, AND WE MAY NOT BE ABLE TO
COMPETE EFFECTIVELY, ESPECIALLY AGAINST ESTABLISHED INDUSTRY COMPETITORS WITH
SIGNIFICANTLY GREATER FINANCIAL RESOURCES
We will face competition from many competitors with significantly greater
financial resources, well-established brand names and large, existing installed
customer bases. We expect the level of competition to intensify in the future.
We expect significant competition from incumbent carriers, traditional and new
long distance carriers, cable modem service providers, Internet Service
Providers, wireless and satellite data service providers and other competitive
carriers. Incumbent carriers have existing metropolitan area networks and
circuit-switched local access networks. In addition, most incumbent carriers are
establishing their own Internet Service Provider businesses and are in some
stage of market trials and retail sales of DSL-based access services. Some
incumbent carriers have announced that they intend to aggressively market these
services to their residential customers at attractive prices. We believe that
incumbent carriers have the potential to quickly overcome many of the issues
that have delayed widespread deployment of DSL services in the past. In
addition, we may experience substantial customer turnover in the future. Many
providers of telecommunications and networking services experience high rates of
customer turnover.
Many of the leading traditional long distance carriers, including AT&T
Corporation, MCI WorldCom and Sprint, are expanding their capabilities to
support high-speed, end-to-end networking services. The newer long distance
carriers, including Williams Companies Inc., Qwest Communications International,
Inc. and Level 3 Communications, Inc., are building and managing high bandwidth,
nationwide packet networks and partnering with Internet Service Providers to
offer services directly to
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the public. Cable modem service providers, like @Home Networks, are offering or
preparing to offer high-speed Internet access over hybrid fiber networks to
consumers, and @Work positioned itself to do the same for businesses. Several
new companies are emerging as wireless, including satellite-based, data service
providers. Internet Service Providers, including some with significant and even
nationwide presences, provide Internet access to residential and business
customers, generally over the incumbent carriers' circuit switched networks,
although some have begun offering DSL-based access. Certain competitive
carriers, including Covad Communications Group, Inc. and NorthPoint
Communications, Inc., have begun offering DSL-based access services, and, like
us, have attracted strategic equity investors, marketing allies and product
development partners. Others are likely to do the same in the future. In
addition, regional Internet Service Providers and competitive carriers,
including HarvardNet, Inc., Network Access Solutions Corp. and DSLNet have begun
offering DSL-based access services that compete with the services we offer. As a
result of increasing competition for our services, we are experiencing
substantial price competition, particularly with respect to sales generated
through our indirect sales channels.
Many of these competitors are offering, or may soon offer, technologies and
services that will directly compete with some or all of our service offerings.
Some of the technologies used by these competitors for local access connections
include integrated services digital network (ISDN), DSL, wireless data and cable
modems. Some of the competitive factors in our markets include transmission
speed, reliability of service, breadth of service availability, price
performance, network security, ease of access and use, content bundling,
customer support, brand recognition, operating experience, capital availability
and exclusive contracts. We believe that we compare unfavorably with many of our
competitors with regard to, among other things, brand recognition, existing
relationships with end users, available pricing discounts, central office
access, capital availability and exclusive contracts. Substantially all of our
competitors and potential competitors have substantially greater resources than
us. We may not be able to compete effectively in our target markets. Our failure
to compete effectively would have a material and adverse effect on our business,
prospects, operating results and financial condition. See
"Business--Competition."
OUR NETWORK SERVICES MAY NOT ACHIEVE SIGNIFICANT MARKET ACCEPTANCE BECAUSE OUR
PRICES ARE OFTEN HIGHER THAN THOSE CHARGED FOR COMPETING SERVICES
Our prices are in some cases higher than those that our competitors charge
for some of their services. Prices for digital communications services have
fallen historically, and we expect prices in the industry in general, and for
the services we offer now and plan to offer in the future, to continue to fall.
We may be required to reduce prices periodically to respond to competition and
to generate increased sales volume. Our prices may not permit our network
services to gain a desirable level of commercial acceptance, and we may be
unable to sustain any current or future pricing levels. Due to these factors, we
cannot accurately forecast our revenues or the rate at which we will add new
customers.
WE WILL NEED SIGNIFICANT ADDITIONAL FUNDS, WHICH WE MAY NOT BE ABLE TO OBTAIN
The expansion and development of our business will require significant
additional capital. We intend to seek substantial additional financing in the
future to fund the growth of our operations, including funding the significant
capital expenditures and working capital requirements necessary for us to
provide service in our targeted markets. We believe that our current capital
resources will be sufficient to fund our aggregate capital expenditures and
working capital requirements, including operating losses, approximately until
June 2001. We will not have completed our network rollout by this date and will
need additional capital, whether or not our estimate on how long current capital
resources will last is accurate. In addition, our actual funding requirements
may differ materially if our
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assumptions underlying this estimate turn out to be incorrect. Therefore, you
should consider our estimate in light of the following facts:
- we have no meaningful history of operations or revenues;
- our estimated funding requirements do not reflect any contingency amounts
and may increase, perhaps substantially, if we are unable to generate
revenues in the amount and within the time frame we expect or if we have
unexpected cost increases; and
- we face many challenges and risks, including those discussed elsewhere in
"Risk Factors."
We may be unable to obtain any future equity or debt financing on acceptable
terms or at all. Recently the financial markets have experienced extreme price
fluctuations. A market downturn or general market uncertainty may adversely
affect our ability to secure additional financing. The indentures that govern
the old notes and the 1998 senior discount notes restrict our ability to obtain
additional debt financing. Any future borrowing instruments, such as credit
facilities and lease agreements, are likely to contain similar or more
restrictive covenants and could require us to pledge assets as security for the
borrowings. If we are unable to obtain additional capital or are required to
obtain it on terms less satisfactory than what we desire, we will need to delay
deployment of our network services or take other actions that could adversely
affect our business, prospects, operating results and ability to repay our debt,
including the new notes. If we are unable to generate sufficient cash flow or
obtain funds necessary to meet required payments of our debt, then we will be in
default on our debt instruments. To date, our cash flow from operations has been
insufficient to cover our expenses and capital needs. Please see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
OUR SERVICES ARE SUBJECT TO GOVERNMENT REGULATION, AND CHANGES IN CURRENT OR
FUTURE LAWS OR REGULATIONS COULD RESTRICT THE WAY WE OPERATE OUR BUSINESS
A significant portion of the services that we offer through our subsidiaries
is subject to regulation at the federal, state and/or local levels. Future
federal or state regulations and legislation may be less favorable to us than
current regulation and legislation and therefore have an adverse impact on our
business, prospects, operating results and financial condition. In addition, we
may expend significant financial and managerial resources to participate in
rule-setting proceedings at either the federal or state level, without achieving
a favorable result. The Federal Communications Commission prescribes rules
applicable to interstate communications, including rules implementing the 1996
Telecommunications Act, a responsibility it shares with the state regulatory
commissions. In particular, we believe that incumbent carriers will work
aggressively to modify or restrict the operation of many provisions of the 1996
Telecommunications Act. We expect incumbent carriers will pursue litigation in
courts, institute administrative proceedings with the Federal Communications
Commission and other regulatory agencies and lobby the United States Congress,
all in an effort to affect laws and regulations in a manner favorable to the
incumbent carriers and against the interest of competitive carriers such as us.
If the incumbent carriers succeed in any of their efforts, if these laws and
regulations change or if the administrative implementation of laws develops in
an adverse manner, these events could have a material and adverse effect on our
business, prospects, operating results and ability to repay our debt, including
the new notes. For more details about our regulatory situation, please see
"Business-- Government Regulation."
OUR FAILURE TO MANAGE GROWTH COULD ADVERSELY AFFECT US
We have rapidly and significantly expanded our operations. We anticipate
further significant expansion of our operations in an effort to achieve our
network rollout and deployment objectives. Our expansion to date has strained
our management, financial controls, operations systems, personnel and other
resources. Any future rapid expansion would increase these strains. If our
marketing strategy is
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successful, we may experience difficulties responding to customer demand for
services and technical support in a timely manner and in accordance with their
expectations. As a result, rapid growth of our business would make it difficult
to implement successfully our strategy to provide superior customer service. To
manage any growth of our operations, we must:
- improve existing and implement new operational, financial and management
information controls, reporting systems and procedures;
- hire, train and manage additional qualified personnel;
- expand and upgrade our core technologies; and
- effectively manage multiple relationships with our customers, suppliers
and other third parties.
We may not be able to install management information and control systems in
an efficient and timely manner, and our current or planned personnel, systems,
procedures and controls may not be adequate to support our future operations.
Failure to manage our future growth effectively could adversely affect the
expansion of our customer base and service offerings. Any failure to
successfully address these issues could materially and adversely affect our
business, prospects, operating results and ability to repay our debt, including
the new notes.
OUR SUBSTANTIAL DEBT CREATES FINANCIAL AND OPERATING RISK
We are highly leveraged, and we intend to seek additional debt funding in
the future. As of March 31, 1999, on a pro forma basis giving effect to the
issuance of the old notes, the equity investment by Qwest and the initial public
offering of our common stock, we had approximately $488.7 million of outstanding
debt, and our debt made up 63.3% of our capitalization. Please see
"Capitalization." We are not generating any meaningful revenue to fund our
operations or to repay our debt, including the notes. Our substantial leverage
poses the risks that:
- we may be unable to repay our debt, including the notes, due to one or
more events discussed in "Risk Factors;"
- we may be unable to obtain additional financing;
- we must dedicate a substantial portion of our cash flow from operations to
servicing our debt once our debt requires us to make cash interest
payments, and any remaining cash flow may not be adequate to fund our
planned operations; and
- we may be more vulnerable during economic downturns, less able to
withstand competitive pressures and less flexible in responding to
changing business and economic conditions.
THE TELECOMMUNICATIONS INDUSTRY IS UNDERGOING RAPID TECHNOLOGICAL CHANGE, AND
NEW TECHNOLOGIES MAY BE SUPERIOR TO THE TECHNOLOGY WE USE
The telecommunications industry is subject to rapid and significant
technological changes, such as continuing developments in DSL technology and
alternative technologies for providing high-speed data communications. We cannot
predict the effect of technological changes on our business. We will rely in
part on third parties, including certain of our competitors and potential
competitors, for the development of and access to communications and networking
technology. We expect that new products and technologies applicable to our
market will emerge. New products and technologies may be superior and/or render
obsolete the products and technologies that we currently use. Our future success
will depend, in part, on our ability to anticipate and adapt to technological
changes and evolving industry standards. We may be unable to obtain access to
new technology on acceptable terms or at all, and we may be unable to adapt to
new technologies and offer services in a competitive manner. Our joint
development projects with Cisco and MCI WorldCom and our strategic arrangement
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with Microsoft may not produce useful technologies or services for us. Further,
new technologies and products may not be compatible with our technologies and
business plan. We believe that the telecommunications industry must set
standards to allow for the compatibility of various products and technologies.
However, the industry may not set standards on a timely basis or at all. In
addition, many of the products and technologies that we intend to use in our
network services are relatively new and unproven and may be unreliable.
WE MAY BE UNABLE TO EFFECTIVELY EXPAND OUR NETWORK SERVICES AND PROVIDE HIGH
PERFORMANCE TO A SUBSTANTIAL NUMBER OF END USERS
Due to the limited deployment of our network services, we cannot guarantee
that our network will be able to connect and manage a substantial number of end
users at high transmission speeds. We may be unable to scale our network to
service a substantial number of end users while achieving high performance.
Further, our network may be unable to achieve and maintain competitive digital
transmission speeds. While digital transmission speeds of up to 7.1 Mbps are
possible on certain portions of our network, that speed is not available over a
majority of our network. Actual transmission speeds on our network will depend
on a variety of factors and many of these factors are beyond our control,
including the type of DSL technology deployed, the distance an end user is
located from a central office, the quality of the telephone lines, the presence
of interfering transmissions on nearby lines and other factors. As a result, we
may not be able to achieve and maintain digital transmission speeds that are
attractive in the market.
OUR SERVICES MAY SUFFER BECAUSE THE TELEPHONE LINES WE REQUIRE MAY BE
UNAVAILABLE OR IN POOR CONDITION
Our ability to provide DSL-based services to potential customers depends on
the quality, physical condition, availability and maintenance of telephone lines
within the control of the incumbent carriers. We believe that the current
condition of telephone lines in many cases will be inadequate to permit us to
fully implement our network services. In addition, the incumbent carriers may
not maintain the telephone lines in a condition that will allow us to implement
our network effectively. The telephone lines may not be of sufficient quality or
the incumbent carriers may claim they are not of sufficient quality to allow us
to fully implement or operate our network services. Further, some customers use
technologies other than copper lines to provide telephone services, and DSL
might not be available to these customers.
OUR SUCCESS DEPENDS ON OUR RETENTION OF CERTAIN KEY PERSONNEL AND ON THE
PERFORMANCE OF THOSE PERSONNEL
Our success depends on the performance of our officers and key employees,
especially our Chief Executive Officer. Members of our senior management team
have worked together for only a short period of time. We do not have "key
person" life insurance policies on any of our employees nor do we have
employment agreements for fixed terms with any of our employees. Any of our
employees, including any member of our senior management team, may terminate his
or her employment with us at any time. Given our early stage of development, we
depend on our ability to retain and motivate high quality personnel, especially
our management. Our future success also depends on our continuing ability to
identify, hire, train and retain highly qualified technical, sales, marketing
and customer service personnel. Moreover, the industry in which we compete has a
high level of employee mobility and aggressive recruiting of skilled personnel.
We may be unable to continue to employ our key personnel or to attract and
retain qualified personnel in the future. We face intense competition for
qualified personnel, particularly in software development, network engineering
and product management. Please see "Business--Employees" and "Management."
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WE DEPEND ON THIRD PARTIES FOR EQUIPMENT, INSTALLATION AND PROVISION OF FIELD
SERVICE
We currently plan to purchase all of our equipment from many vendors and
outsource the majority of the installation and field service of our networks to
third parties. Our reliance on third party vendors involves a number of risks,
including the absence of guaranteed capacity and reduced control over delivery
schedules, quality assurance, production yields and costs. If any of our
suppliers reduces or interrupts its supply, or if any significant installer or
field service provider interrupts its service to us, this reduction or
interruption could disrupt our business. Although multiple manufacturers
currently produce or are developing equipment that will meet our current and
anticipated requirements, our suppliers may be unable to manufacture and deliver
the amount of equipment we order, or the available supply may be insufficient to
meet our demand. Currently, almost all of the DSL modem and DSL multiplexing
equipment we use for a single connection over a copper line must come from the
same vendor since there are no existing interoperability standards for the
equipment used in our higher speed services. If our suppliers or licensors enter
into competition with us, or if our competitors enter into exclusive or
restrictive arrangements with the suppliers or licensors, then these events may
materially and adversely affect the availability and pricing of the equipment we
purchase and the technology we license.
A SYSTEM FAILURE OR BREACH OF NETWORK SECURITY COULD CAUSE DELAYS OR
INTERRUPTIONS OF SERVICE TO OUR CUSTOMERS
Our operations depend on our ability to avoid damages from fires,
earthquakes, floods, power losses, excessive sustained or peak user demand,
telecommunications failures, network software flaws, transmission cable cuts and
similar events. A natural disaster or other unanticipated problem at our owned
or leased facilities could interrupt our services. Additionally, if an incumbent
carrier, competitive carrier or other service provider fails to provide the
communications capacity we require, as a result of a natural disaster,
operational disruption or any other reason, then this failure could interrupt
our services.
Despite the implementation of security measures, our network may be
vulnerable to unauthorized access, computer viruses and other disruptive
problems. Corporate networks and Internet Service Providers have in the past
experienced, and may in the future experience, interruptions in service as a
result of accidental or intentional actions of Internet users, current and
former employees and others. Unauthorized access could also potentially
jeopardize the security of confidential information stored in the computer
systems of our customers, which might cause us to be liable to our customers,
and also might deter potential customers. Eliminating computer viruses and
alleviating other security problems may require interruptions, delays or
cessation of service to our customers and our customers' end users.
INTERFERENCE OR CLAIMS OF INTERFERENCE COULD DELAY OUR ROLLOUT OR HARM OUR
SERVICES
All transport technologies deployed on copper telephone lines have the
potential to interfere with, or to be interfered with by, other transport
technologies on the copper telephone lines. We believe that our DSL
technologies, like other transport technologies, do not interfere with existing
voice services. We believe that a workable plan that takes into account all
technologies could be implemented in a scalable way across all incumbent
carriers using existing plant engineering principles. There are several
initiatives underway to establish national standards and principles for the
deployment of DSL technologies. We believe that our technologies can be deployed
consistently with these evolving standards. Nevertheless, incumbent carriers may
claim that the potential for interference permits them to restrict or delay our
deployment of DSL services. Interference could degrade the performance of our
services or make us unable to provide service on selected lines. The procedures
to resolve interference issues between competitive carriers and incumbent
carriers are still being developed, and these procedures may not be effective.
We may be unable to successfully negotiate interference resolution procedures
with incumbent carriers. Moreover, incumbent carriers may make claims regarding
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interference or unilaterally take action to resolve interference issues to the
detriment of our services. State or federal regulators could also institute
responsive actions. Interference, or claims of interference, if widespread,
would adversely affect our speed of deployment, reputation, brand image, service
quality and customer satisfaction and retention.
WE DEPEND ON THIRD PARTIES FOR FIBER OPTIC TRANSPORT FACILITIES
We depend on the availability of fiber optic transmission facilities from
third parties to connect our equipment within and between metropolitan areas.
These third party fiber optic carriers include long distance carriers, incumbent
carriers and other competitive carriers. Many of these entities are, or may
become, our competitors. This approach includes a number of risks. For instance,
we may be unable to negotiate and renew favorable supply agreements. Further, we
depend on the timeliness of these companies to process our orders for customers
who seek to use our services. We have in the past experienced supply problems
with certain of our fiber optic suppliers, and they may not be able to meet our
needs on a timely basis in the future. Moreover, the fiber optic transport
providers whose networks we lease may be unable to obtain or maintain permits
and rights-of-way necessary to develop and operate existing and future networks.
UNCERTAIN FEDERAL AND STATE TAX AND OTHER SURCHARGES ON OUR SERVICES MAY
INCREASE OUR PAYMENT OBLIGATIONS
Telecommunications providers pay a variety of surcharges and fees on their
gross revenues from interstate and intrastate services. The division of our
services between interstate and intrastate services is a matter of
interpretation, and in the future the Federal Communications Commission or
relevant state commission authorities may contest this division. A change in the
characterization of the jurisdiction of our services could cause our payment
obligations to increase. In addition, pursuant to periodic revisions by state
and federal regulators of the applicable surcharges, we may be subject to
increases in the surcharges and fees currently paid.
OUR INTELLECTUAL PROPERTY PROTECTION MAY BE INADEQUATE TO PROTECT OUR
PROPRIETARY RIGHTS, AND WE MAY BE SUBJECT TO INFRINGEMENT CLAIMS
We rely on a combination of licenses, confidentiality agreements and other
contracts to establish and protect our technology and other intellectual
property rights. We have applied for trademarks and servicemarks on certain
terms and symbols that we believe are important for our business. We currently
have no patents or patent applications pending. The steps we have taken may be
inadequate to protect our technology or other intellectual property. Moreover,
our competitors may independently develop technologies that are substantially
equivalent or superior to ours. Third parties may assert infringement claims
against us and, in the event of an unfavorable ruling on any claim, we may be
unable to obtain a license or similar agreement to use technology we rely upon
to conduct our business. We also rely on unpatented trade secrets and know-how
to maintain our competitive positions, which we seek to protect, in part, by
confidentiality agreements with employees, consultants and others. However,
these agreements may be breached or terminated, and we may not have adequate
remedies for any breach. In addition, our competitors may otherwise learn or
discover our trade secrets. Our management personnel were previously employees
of other telecommunications companies. In many cases, these individuals are
conducting activities for us in areas similar to those in which they were
involved prior to joining us. As a result, we or our employees could be subject
to allegations of violation of trade secrets and other similar claims.
RISKS ASSOCIATED WITH POTENTIAL GENERAL ECONOMIC DOWNTURN
In the last few years the general health of the economy, particularly the
economy of California where we have conducted a significant portion of our
operations to date, has been relatively strong and
20
<PAGE>
growing, a consequence of which has been increasing capital spending by
individuals and growing companies to keep pace with rapid technological
advances. To the extent the general economic health of the United States or of
California declines from recent historically high levels, or to the extent
individuals or companies fear a decline is imminent, these individuals and
companies may reduce expenditures such as those for our services. Any decline or
concern about an imminent decline could delay decisions among certain of our
customers to roll out our services or could delay decisions by prospective
customers to make initial evaluations of our services. Any delays would have a
material and adverse effect on our business, prospects, operating results and
ability to repay our debt, including the new notes.
WE MAY BE UNABLE TO SATISFY, OR MAY BE ADVERSELY CONSTRAINED BY, THE COVENANTS
IN OUR EXISTING DEBT SECURITIES
The indentures governing the old notes and the 1998 senior discount notes
impose significant restrictions on how we can conduct our business. For example,
the restrictions prohibit or limit our ability to incur additional debt, make
dividend payments and engage in certain business activities. The restrictions
may materially and adversely affect our ability to finance future operations or
capital needs or conduct additional business activities. Any future senior debt
that we may incur will likely impose additional restrictions on us. If we fail
to comply with any existing or future restrictions, we could default under the
terms of the applicable debt, including the new notes, and be unable to meet our
debt obligations. If we default, the holders of the applicable debt could demand
that we pay the debt, including interest, immediately. We may be unable to make
the required payments or raise sufficient funds from alternative sources to make
the payments. Even if additional financing is available in the event that we
default, it may not be on acceptable terms.
OUR PRINCIPAL STOCKHOLDERS AND MANAGEMENT OWN A SIGNIFICANT PERCENTAGE OF OUR
COMPANY, HAVE INTERESTS THAT MAY CONFLICT WITH THE INTERESTS OF THE HOLDERS OF
NEW NOTES AND WILL BE ABLE TO EXERCISE SIGNIFICANT INFLUENCE OVER OUR COMPANY
Our executive officers and directors and principal stockholders together
beneficially own 80.0% of the total voting power of our company. Accordingly,
these stockholders will be able to determine the composition of our Board of
Directors, will retain the voting power to approve all matters requiring
stockholder approval and will continue to have significant influence over our
affairs. Certain decisions concerning our operations or financial structure may
present conflicts of interest between the stockholders and the holders of new
notes. For example, if we encounter financial difficulties or are unable to pay
our debts as they mature, the stockholders' interests may conflict with those of
the holders of new notes. In addition, the stockholders may wish to pursue
acquisitions, divestitures, financings or other transactions and business
strategies that, in their judgment, could enhance their equity investment in our
company, even though these transactions might involve increased risks to the
holders of new notes.
OUR FAILURE AND THE FAILURE OF THIRD PARTIES TO BE YEAR 2000 COMPLIANT COULD
NEGATIVELY IMPACT OUR BUSINESS
Many computer programs have been written using two digits rather than four
to define the applicable year. This poses a problem at the end of the century
because these computer programs may recognize a date using "00" as the year 1900
rather than the year 2000. This, in turn, could result in major system failures
or miscalculations, and is generally referred to as the "Year 2000 issue." We
have formulated and, to a large extent, effected a plan to address our Year 2000
issues.
Our Year 2000 plan applies to two areas: internal business systems and
compliance by external customers and providers. We have completed our Year 2000
compliance testing for all of our internal systems and believe that they are
Year 2000 compliant. Because we are a young company, we believe
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<PAGE>
we have been able to build our business systems with the Year 2000 issue in mind
in a more effective manner than many older companies. Therefore, there have been
few Year 2000 changes required to our existing systems and applications. We have
substantially completed a compliance check of our external customers and
providers, except for the incumbent carriers. Based on responses from these
third parties, other than the incumbent carriers, we believe that they will not
experience Year 2000 problems that would materially and adversely affect our
business. We have not been able to conduct a compliance check of incumbent
carriers nor assess the incumbent carriers' Year 2000 compliance. To the extent
that one or more incumbent carriers or other third parties experience Year 2000
problems, our network and services could be adversely affected. Furthermore, the
purchasing patterns of our customers may be affected by Year 2000 issues as
companies expend significant resources to correct their current systems for Year
2000 compliance. These expenditures may result in reduced funds available for
our services. Any of these developments could have a material and adverse effect
on our business, prospects, operating results and financial condition. We have
not fully determined the risks associated with the reasonably worst-case
scenario and have not formulated a contingency plan to address Year 2000 issues.
We do not expect to have a specific contingency plan in place in the future.
IF WE ARE REQUIRED TO REGISTER AS AN INVESTMENT COMPANY, WE WOULD BECOME SUBJECT
TO SUBSTANTIAL REGULATION WHICH WOULD INTERFERE WITH OUR ABILITY TO CONDUCT
OUR BUSINESS ACCORDING TO OUR BUSINESS PLAN
As a result of our previous financings, we have substantial cash, cash
equivalents and short-term investments. We plan to continue investing the excess
proceeds of these financings in short-term instruments consistent with prudent
cash management and not primarily for the purpose of achieving investment
returns. Investment in securities primarily for the purpose of achieving
investment returns could result in our being treated as an "investment company"
under the Investment Company Act of 1940. The Investment Company Act requires
the registration of companies that are primarily in the business of investing,
reinvesting or trading securities or that fail to meet certain statistical tests
regarding their composition of assets and sources of income even though they
consider themselves not to be primarily engaged in investing, reinvesting or
trading securities.
We believe that we are primarily engaged in a business other than investing
in or trading securities and, therefore, are not an investment company within
the meaning of the Investment Company Act. If the Investment Company Act
required us to register as an investment company, we would become subject to
substantial regulation with respect to our capital structure, management,
operations, transactions with affiliated persons and other matters. Application
of the provisions of the Investment Company Act to us would materially and
adversely affect our business, prospects, operating results and ability to repay
our debt, including the new notes.
THE NEW NOTES WILL BE EFFECTIVELY SUBORDINATED TO OUR SECURED DEBT AND OUR
SUBSIDIARIES' DEBT
The new notes will be senior unsecured obligations and will rank equally in
right of payment with all other existing and future senior unsecured debt we
incur, including our 1998 senior discount notes. Our assets, the assets of our
current subsidiaries and the assets of any future subsidiaries will not secure
the new notes, except to the extent described under "Description of the New
Notes--Security." The indenture governing the old notes permits us and our
subsidiaries to incur certain secured debt in the future. Please see
"Description of Notes--Certain Covenants--LIMITATION ON ADDITIONAL
INDEBTEDNESS." Any secured debt would have a prior claim over the new notes to
the extent of the assets that secure such debt. For example, the holders of
secured debt would have the right to receive payment with respect to their
collateral before any payment to the holders of general unsecured debt,
including the old notes, if we or our subsidiaries were to default on the
secured debt or if we or our subsidiaries undergo a bankruptcy, liquidation or
reorganization. In addition, none of our current or future subsidiaries will
guarantee the new notes; therefore, the old notes will rank behind all debt and
22
<PAGE>
other liabilities of our subsidiaries, including subordinated debt and trade
payables. Please see "Description of the New Notes--Certain
Covenants--LIMITATION ON LIENS SECURING INDEBTEDNESS."
CONSEQUENCES OF NOT TENDERING OLD NOTES IN THE EXCHANGE OFFER
Upon consummation of the exchange offer, we will have no further obligation
to register your old notes. Thereafter, if you do not tender your old notes in
the exchange offer, you will continue to hold restricted securities which may
not be offered, sold or otherwise transferred, pledged or hypothecated except
pursuant to Rule 144 and Rule 144A under the Securities Act or pursuant to any
other exemption from registration under the Securities Act relating to the
disposition of securities, provided that an opinion of counsel is furnished to
us that such an exemption is available. These restrictions would limit the
trading market and price for the old notes.
THERE IS NO PUBLIC MARKET FOR THE NEW NOTES
No trading market for the new notes we are offering currently exists.
Although we expect the new notes to be eligible for trading in the PORTAL(SM)
market, no such liquid market might develop for the new notes, and their holders
might be unable to sell them. Future trading prices of the new notes will depend
on many factors, such as:
- prevailing interest rates;
- our operating results; and
- the market for similar securities.
The initial purchasers advised us that they intend to make a market in the
new notes. However, they are not obligated to do so, and they may discontinue
any market-making activities at any time without notice. We do not intend to
apply to list the new notes on any securities exchange or automated quotation
system.
OUR SALE OF THE NOTES MIGHT BE DEEMED TO BE A FRAUDULENT TRANSFER
Federal bankruptcy law and state fraudulent transfer laws govern the
conveyance of debt instruments. If, when we incurred the debt evidenced by the
new notes, we received less than reasonably equivalent value or fair
consideration for the incurrence of the new notes, and if we:
- were or are either insolvent or rendered insolvent by reason of such
incurrence;
- were or are engaged in a business or transaction for which our remaining
assets constituted unreasonably small capital; or
- intended or intend to incur, or believed or believe that we would incur,
debts beyond our ability to repay as they mature;
then the new notes could be voided, or claims based on the new notes could be
subordinated to all of our other debts. In addition, our payment of interest and
principal pursuant to the new notes could be voided and required to be returned
to us or to someone acting on our behalf. The measures of insolvency for
purposes of the foregoing considerations will vary depending upon the law
applied in any particular proceeding. Although we believe we are solvent, a
court may disagree. In rendering their opinion on the validity of the new notes,
our counsel and counsel for the initial purchasers will express no opinion
regarding federal or state laws governing fraudulent transfers.
WE MAY BE UNABLE TO MAKE PAYMENTS UPON A CHANGE OF CONTROL
If we merge, sell our company or sell most of our assets, then the indenture
governing the new notes and the indenture related to the 1998 senior discount
notes will require us to offer to repurchase
23
<PAGE>
all of the outstanding notes and 1998 senior discount notes for a cash purchase
price of 101% of their principal amount or accreted value, as the case may be,
plus any accrued interest and liquidated damages. If such an event occurs, we
may be unable to repay all of our obligations under the new notes, the 1998
senior discount notes and any other debt that may become payable because of that
event. In addition, other debt we have incurred may restrict us from
repurchasing the new notes upon a change of control. We may be unable to
refinance any of these obligations on commercially reasonable terms, if at all,
and therefore we may be unable to repurchase any of the new notes upon a change
of control. Please see "Description of the Notes--Certain Covenants--CHANGE OF
CONTROL."
USE OF PROCEEDS
We will not receive any cash proceeds from the issuance of the new notes
offered in the exchange offer. In consideration for issuing the new notes, we
will receive an equivalent principal amount of old notes. The old notes
surrendered in exchange for new notes will be retired and canceled and cannot be
reissued. Accordingly, issuance of the new notes will not result in any increase
in our indebtedness.
Our net proceeds from the issuance of the old notes were approximately
$314.8 million after deducting discounts, commissions and expenses of the
issuance. We used approximately $113.7 million of such proceeds to purchase a
portfolio of U.S. government securities in an amount sufficient to pay the first
six scheduled interest payments under the new notes. See "Description of the
Notes-- Security." We plan to use the remaining net proceeds to us from the
issuance of the old notes for expenses associated with the continued development
of our sales and marketing activities, to fund operating losses, to pay our debt
obligations and for general corporate purposes. Pending use of the net proceeds,
we intend to invest them in short-term, investment grade securities to the
extent permitted by the covenants governing the new notes and our 1998 senior
discount notes and our existing debt and any statistical asset tests imposed by
the Investment Company Act of 1940.
The actual amounts we spend will vary significantly depending upon a number
of factors, including future revenue growth, if any, capital expenditures, the
amount of cash generated by our operations and other factors, many of which are
beyond our control. Additionally, we may modify the number, selection and timing
of our entry with respect to any or all of our targeted markets. Accordingly,
our management will retain broad discretion in the allocation of the net
proceeds. Please see "Risk Factors--We will need significant additional funds,
which we may not be able to obtain" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
DIVIDEND POLICY
We have not paid any dividends since our inception and do not intend to pay
any dividends on our capital stock in the foreseeable future. In addition, the
terms of the indentures relating to the 1998 senior discount notes and the new
notes restrict our ability to pay dividends on our capital stock.
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<PAGE>
CAPITALIZATION
The following unaudited table sets forth our capitalization as of March 31,
1999:
- on an actual basis;
- pro forma to give effect to the issuance of Series C preferred stock and
Series D preferred stock and warrants to Qwest's subsidiary on April 6,
1999; the issuance of warrants to Cisco Systems Capital Corporation on
April 5, 1999 and to MCI WorldCom's investment fund on April 6, 1999; and
the issuance of common stock in our initial public offering effective
April 12, 1999 (including the conversion of all preferred stock to common
stock); and
- pro forma as adjusted to give effect to the Old Notes issuance effective
April 23, 1999.
Please read this table in conjunction with our consolidated financial
statements, the related notes to the financial statements and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this offering memorandum.
<TABLE>
<CAPTION>
AS OF
MARCH 31, 1999 (UNAUDITED)
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash, cash equivalents and short-term investments............................. $ 149,308 $ 374,165 $ 575,284
--------- ----------- -----------
--------- ----------- -----------
Restricted cash (1)........................................................... $ -- $ -- $ 113,631
--------- ----------- -----------
--------- ----------- -----------
Debt:
Bank note (2)............................................................... $ 694 $ 694 $ 694
13 1/2% senior discount notes due 2008...................................... 162,990 162,990 162,990
Old Notes issuance.......................................................... -- -- 325,000
--------- ----------- -----------
Total debt................................................................ 163,684 163,684 488,684
--------- ----------- -----------
Mandatorily redeemable common stock warrants.................................. 6,567 6,567 6,567
--------- ----------- -----------
Stockholders' equity:
Series A convertible preferred stock, $0.001 par value; 12,900,000 shares
authorized actual and no shares authorized pro forma and pro forma as
adjusted; 12,855,094 shares issued and outstanding actual and no shares
issued and outstanding pro forma and pro forma as adjusted................ 13 -- --
Series B convertible preferred stock, $0.001 par value; 4,044,943 shares
authorized actual and no shares authorized pro forma and pro forma as
adjusted; 4,044,943 shares issued and outstanding actual and no shares
issued and outstanding pro forma and pro forma as adjusted................ 4 -- --
Series C convertible preferred stock, $0.001 par value; 7,462,819 shares
authorized actual and no shares authorized pro forma and pro forma as
adjusted; 7,462,819 shares issued and outstanding actual and no shares
issued and outstanding pro forma and pro forma as adjusted................ 7 -- --
Common stock, $0.001 par value; 89,005,274 shares authorized actual, and
250,000,000 shares authorized pro forma and pro forma as adjusted;
9,619,720 shares issued actual and 71,477,021 shares issued pro forma and
pro forma as adjusted (3)................................................. 10 71 71
Treasury stock, at cost; 438,115 shares....................................... (18) (18) (18)
Additional paid-in capital.................................................... 107,543 341,441 341,441
Warrants...................................................................... 4,714 6,446 6,446
Deferred compensation......................................................... (8,007) (8,007) (8,007)
Accumulated deficit........................................................... (62,655) (62,655) (62,655)
--------- ----------- -----------
Total stockholders' equity (deficit)...................................... (41,611) 277,278 277,278
--------- ----------- -----------
Total capitalization.................................................... $ 211,862 $ 447,529 $ 772,529
--------- ----------- -----------
--------- ----------- -----------
</TABLE>
- ------------------------------
(1) Reflects the portion of the net proceeds from the issuance of the Old Notes
used to purchase a portfolio of U.S. government securities to fund the first
six scheduled interest payments on the notes.
(2) Consists of a $1.0 million note payable to Silicon Valley Bank which is
being amortized over a 36-month period that ends in April 2001.
(3) Excludes 971,344 shares of common stock issued between April 1, 1999 and May
31, 1999 upon the exercise of options. Also excludes 7,184,674 shares of
common stock issuable upon the exercise of outstanding warrants and
3,732,052 shares of common stock issuable upon the exercise of outstanding
options as of May 31, 1999.
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<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following statement of operations data for the period from February 27,
1997 to December 31, 1997, year ended December 31, 1998 and for the three month
periods ended March 31, 1998 and March 31, 1999, and the balance sheet data as
of December 31, 1997 and 1998 and March 31, 1999 (actual) have been derived from
our consolidated financial statements and the related notes to the financial
statements. The following selected consolidated financial data should be read in
conjunction with our consolidated financial statements and the related notes to
the financial statements and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this offering
memorandum.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FEBRUARY 27, 1997 --------------------------------
(INCEPTION) TO YEAR ENDED MARCH 31, 1998 MARCH 31, 1999
DECEMBER 31, 1997 DECEMBER 31, 1998 (UNAUDITED) (UNAUDITED)
----------------- ----------------- --------------- ---------------
(DOLLARS IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue............................................. $ -- $ 528 $ 10 $ 660
Operating expenses:
Network and service costs......................... -- 4,695 198 6,138
Selling, marketing, general and administrative.... 2,534 23,153 2,322 13,796
Depreciation and amortization..................... 1 1,081 16 782
-------- -------- ------- ---------------
Total operating expenses........................ 2,535 28,929 2,536 20,716
-------- -------- ------- ---------------
Loss from operations................................ (2,535) (28,401) (2,526) (20,056)
Interest and other income (expense), net............ 113 (7,933) 146 (3,843)
-------- -------- ------- ---------------
Net loss............................................ $ (2,422) $ (36,334) $ (2,380) $ (23,899)
-------- -------- ------- ---------------
-------- -------- ------- ---------------
Net loss per share (basic and diluted).............. $ (1.12) $ (12.18) $ (1.10) $ (5.38)
-------- -------- ------- ---------------
-------- -------- ------- ---------------
OTHER FINANCIAL DATA:
EBITDA (1).......................................... $ (2,342) $ (26,628) $ (2,416) $ (18,673)
Adjusted EBITDA (2)................................. (2,342) (25,036) (2,416) (16,415)
Net cash used for operating activities.............. (1,560) (19,024) (1,508) (17,478)
Net cash used for investing activities.............. (1,345) (139,032) (658) (31,966)
Net cash provided by financing activities........... 13,071 169,205 18,519 61,881
Deficiency of earnings to cover fixed charges (3)... (2,422) (36,334) (2,380) (23,899)
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 1999 (UNAUDITED)
AS OF AS OF -----------------------------------------
DECEMBER 31, 1997 DECEMBER 31, 1998 ACTUAL PRO FORMA (4) AS ADJUSTED (5)
------------------- ----------------- --------- ------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments............................. $ 10,166 $ 136,812 $ 149,308 $ 374,165 $ 575,284
Restricted cash (6)....................... -- -- -- -- 113,631
Equipment and furniture, net.............. 1,621 11,510 48,912 48,912 48,912
Total assets.............................. 12,241 171,726 245,547 481,214 806,214
Total debt................................ 568 158,270 163,684 163,684 488,684
Mandatorily redeemable common stock
warrants................................ -- 6,567 6,567 6,567 6,567
Total stockholders' equity (deficit)...... 10,346 (6,747) 41,611 277,278 277,278
</TABLE>
- ------------------------------
(1) EBITDA consists of the net loss excluding net interest, depreciation and
amortization of capital assets and deferred compensation expense. EBITDA is
presented to enhance an understanding of our operating results and is not
intended to represent cash flow or results of operations in accordance with
generally accepted accounting principles for the period indicated and may be
calculated differently than EBITDA for other companies.
(2) Total operating expenses for the year ended December 31, 1998 and the three
months ended March 31, 1999 include $1,592,000 and $2,258,000, respectively,
of operating lease expense to GATX Capital Corporation. No amounts were
incurred to GATX for operating leases for the period ended December 31, 1997
or the three months ended March 31, 1998. Adjusted EBITDA reflects EBITDA
excluding the GATX operating lease expense.
(3) The deficiency of earnings to cover fixed charges represents the dollar
amount of earnings required to attain a one-to-one ratio to fixed charges,
which includes interest on debt and the interest component of operating
leases.
(4) Gives effect to the issuance of Series C and Series D preferred stock and
warrants in April 1999 for $15 million, the issuance of warrants in April
1999 and the issuance of Common Stock in our initial public offering in
April 1999 (including the conversion of all preferred stock to common stock
upon completion of the initial public offering). Pro forma amounts are
unaudited. See "Certain Relationships and Related Transactions--Series C
Purchase Agreement; Other Agreements with MCI WorldCom and --Series C
Purchase Agreement; Other Agreements with Microsoft and --Series C Purchase
Agreement and Series D Purchase Agreement; Other Agreements with Qwest."
(5) Adjusts the pro forma information to give effect to the Old Notes issuance
effective April 23, 1999. As adjusted amounts are unaudited.
(6) Reflects the portion of the net proceeds from the issuance of the Old Notes
used to purchase a portfolio of U.S. government securities to fund the first
six scheduled interest payments on the notes.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis is based on our consolidated financial
statements and the notes thereto and should be read in conjunction with such
consolidated financial statements and related notes thereto included elsewhere
in this prospectus. Certain statements set forth below constitute
"forward-looking statements." Such forward-looking statements involve known and
unknown risks, uncertainties, and other factors that may cause our actual
results, performance or achievements, or industry results to be materially
different from any future results, performance, or achievements expressed or
implied by such forward-looking statements. Given these uncertainties, investors
and prospective investors are cautioned not to place undue reliance on such
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in "Risk Factors."
We disclaim any obligation to update information contained in any
forward-looking statement. See "--Forward Looking Statements."
RESULTS OF OPERATIONS
During the first three months of fiscal year 1999, we continued the
development of our business operations, entering one new market, adding 155
central office locations, and adding service to approximately 735 DSL lines. In
accordance with our plan to rapidly expand our infrastructure and network
services, we intend to offer service in an additional 22 markets by the end of
this year and a further 17 markets by the end of year 2000.
During the first quarter of 1999, we received $60.0 million from selling
Series C Preferred Stock and Warrants. Also during the first quarter, we entered
into a 36-month lease line that provides for an additional $24.0 million in
equipment leasing.
THREE MONTHS ENDED MARCH 31, 1999
During the first quarter of 1999, we continued the development of our
business operations in our existing markets and additionally commenced service
in Philadelphia. We recorded $660,000 in revenues during the quarter, compared
to $10,000 in the same quarter of 1998, which comprise primarily DSL service and
installation charges, net of discounts given to customers upon service
establishment. Network service costs for the quarter also reflect the increases
in commercial service and include customer installation costs, line and backbone
expenses, the cost of customer premise equipment, equipment operating leases,
and repair and support costs. Since we did not offer commercial services until
April 1, 1998, revenues and network service costs for the first quarter of 1998
were minimal.
Our selling, general, and administrative expenses for the quarter were $13.8
million. These expenses reflect our continuing increase in staffing levels,
increased marketing efforts coinciding with the launch of commercial services,
and increased legal fees associated with development of additional markets.
We recorded depreciation and amortization of $782,000 during the quarter, a
significant increase over the $16,000 recorded for the same period in 1998. This
increase is primarily attributable to depreciation on our operating equipment,
which we began to use commercially on April 1, 1998.
During the first quarter of 1999, we recorded interest income of $1.7
million, which was generated from our invested cash balances. These investment
balances include the proceeds from the issuance of the Series C Preferred Stock
and Warrants during the quarter in the amount of $60.0 million. We recorded $5.5
million in amortized debt discount during the quarter, which arose from issuing
our 13.5 percent Senior Discount Notes in May 1998.
We continue to be in a net operating loss tax position through March 31,
1999; consequently, we have not recorded a provision for income taxes through
the first quarter.
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<PAGE>
YEAR ENDED DECEMBER 31, 1998
REVENUE
We did not offer commercial services in 1997 and, as a result, did not
record any revenue in 1997. During the year ended December 31, 1998, we
continued the development of our business operations, commencing service in the
San Diego market in April, the San Francisco, the Oakland/East Bay and San Jose
markets in July, the Los Angeles and Orange County markets in September and the
Chicago market in October. We recorded revenue of $528,000 during this period,
which was primarily from DSL service and installation charges, net of discounts
given to customers.
NETWORK AND SERVICE COSTS
Since we did not offer commercial services in 1997, we did not record any
network or service costs in 1997. For the year ended December 31, 1998, we
recorded network and service costs of $4.7 million. We expect network and
service costs to increase significantly in future periods as we expand our
network into additional markets.
SELLING, MARKETING, GENERAL AND ADMINISTRATIVE
From inception through December 31, 1997 selling, marketing, general and
administrative expenses were $2.5 million and consisted primarily of salaries
and legal and consulting fees incurred to establish a management team and
develop our business. For the year ended December 31, 1998, we recorded selling,
marketing, general and administrative expenses of $23.2 million. This increase
is attributable to a continued increase in staffing levels, increased marketing
efforts coinciding with the launch of commercial services and increased legal
fees associated with the development of additional markets. We expect selling,
marketing, general and administrative expenses to continue to increase
significantly as we expand our business.
DEPRECIATION AND AMORTIZATION
Depreciation from network equipment is minimal since substantially all of
this equipment is currently leased. Depreciation and amortization was $1,000 for
the period from inception through December 31, 1997 and was $1.1 million for the
year ended December 31, 1998. The increase was due to the commencement of our
operations in 1998. We expect depreciation and amortization to increase
significantly in future periods as we increase capital expenditures to expand
our network.
OTHER INCOME AND EXPENSE
Other income and expense consists primarily of interest income from our cash
and short-term investments and interest expense associated with our debt. From
inception through December 31, 1997 net interest income was $113,000, which was
primarily attributable to the interest income earned from the proceeds raised in
our Series A preferred stock financing. For the year ended December 31, 1998, we
recorded net interest expense of $8.0 million, consisting of interest income of
$5.8 million generated from invested cash balances, offset by $13.8 million in
interest expense. The increase in the interest expense is substantially due to
the accretion of interest on the senior discount notes that were issued in May
1998.
INCOME TAXES
We generated net operating loss carryforwards of $2.1 million from inception
to December 31, 1997 and $35.0 million during the year ended December 31, 1998.
We expect significant consolidated losses for the foreseeable future which will
generate additional net operating loss carryforwards. However, our ability to
use net operating losses may be subject to annual limitations. In addition,
income taxes may be payable during this time due to operating income in certain
tax jurisdictions. In the future, if we achieve operating profits and the net
operating losses have been exhausted or have
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expired, we may experience significant tax expense. We recognized no provision
for taxes because we operated at a loss throughout 1997 and 1998.
CHANGES IN FINANCIAL POSITION
Through December 31, 1998, we financed our operations primarily through
private placements of equity totaling $30.8 million, of which we received $30.3
million from our venture capital and institutional sponsors, the use of
operating equipment leases totaling $26.5 million, borrowings under a note
payable from Silicon Valley Bank of $1.0 million, and $144.0 million in net
proceeds raised from the issuance of the senior discount notes. As of December
31, 1998, we had an accumulated deficit of $38.8 million and cash, cash
equivalents and short-term investments of $136.8 million. In March 1999, we
received $60.0 million in separate investments by Microsoft and MCI WorldCom's
investment fund. In April 1999, we received $15.0 million in an equity
investment by Qwest's subsidiary. In April 1999, we also received aggregate
proceeds of approximately $211.4 million (net of underwriting discounts) in an
initial public offering of our common stock.
For the year ended December 31, 1998, the net cash used in our operating
activities was $19.0 million. This cash was used for a variety of operating
purposes, including salaries, consulting and legal expenses, network operations
and overhead expense. Our net cash used for investing activities for the year
ended December 31, 1998 was $139.0 million and was used primarily for purchases
of short-term investments and equipment and payments of collocation fees. Net
cash provided by financing activities for the year ended December 31, 1998 was
$169.2 million and primarily came from the issuance of the senior discount notes
and from the issuance of preferred stock.
We had $136.8 million in cash and investments at the beginning of our first
quarter 1999. During the quarter, we received $60.0 million from selling Series
C Preferred Stock and Warrants and we received $3.2 million from the sale of
Common Stock and the sale/leaseback of operating equipment. Of our available
cash and investments, we used approximately $50.7 million for operations and
capital purchases during the quarter, leaving $149.3 million in cash and
investments at the end of the quarter. Also during the first quarter, we entered
into a 36-month lease line that provides for an additional $24.0 million in
equipment leasing, which we will begin utilizing during the second quarter.
As discussed above in "Results of Operations," we continued our market
build-out and development efforts. The result on financial condition was
increased operating losses, increased accounts payable and accrued expenses,
increased collocation expenditures, and smaller increases in accounts
receivable, inventory, and other assets.
LIQUIDITY AND CAPITAL RESOURCES
The development and expansion of our business requires significant capital
expenditures. These capital expenditures primarily include build-out costs such
as the procurement, design, and construction of our connections points and one
or two metro service center locations in each market, as well as other costs
that support our network design.
The number of targeted central offices in each market varies, as does the
average capital cost to build our connection points in the given market. Capital
expenditures, including payments for collocation fees, were $42.3 million during
the first quarter of 1999. We expect our capital expenditures to be
substantially higher in future periods, arising primarily from payments of
collocation fees and the purchase of infrastructure equipment necessary for the
development and expansion of our network.
Our capital requirements may vary based upon the timing and success of our
rollout and as a result of regulatory, technological, and competitive
developments or if
- demand for our services or our anticipated cash flow from operations is
less or more than expected;
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- our development plans or projections change or prove to be inaccurate;
- we engage in any acquisitions; or
- we accelerate deployment of our network services or otherwise alter the
schedule or targets of our rollout plan.
Since our primary activities since inception have focused on building our
network and building a customer base, we have operated at a loss since
inception. We intend to continue to expand our operations at a rapid pace and
expect to continue to operate at a loss for the foreseeable future. The nature
of expenses contributing to our future losses will include:
- network and service costs in existing and new markets;
- legal, marketing, and selling expenses as we enter each new market;
- payroll-related expenses as we continue to add employees;
- general overhead to support the operational increases; and
- interest expense arising from financing our expenditures.
We have not paid any dividends to our shareholders and will not pay
dividends for the foreseeable future. Our 1998 senior discount notes contain
covenants that restrict our ability to make certain payments, including dividend
payments.
Through March 31, 1999, we have financed our operations and market
build-outs primarily through the issuance of senior discount notes in May 1998
for $144.0 million in net proceeds and the private placements of equity totaling
$90.8 million, of which we received $60.0 million during the first quarter of
1999. We have also utilized operating leases totaling $26.5 million for the
acquisition of a large portion of our operating equipment. As of March 31, 1999,
we had $149.3 million in cash and investments and we had an accumulated deficit
of $62.7 million.
Subsequent to the end of the first quarter we completed several significant
financings. On April 6, 1999, we received $15.0 million from the private
placement of preferred stock and warrants. On April 12, 1999, we completed our
initial public offering of common stock, from which we received $211.4 million
in proceeds, net of underwriting discounts. Effective April 23, 1999, we issued
senior notes and received $315.3 million in proceeds, net of underwriting
discounts, of which $113.7 million is restricted and may be used to pay interest
on the notes only. We additionally entered into a 36-month lease line that
provides for $20.0 million in equipment on an operating lease basis.
We believe that our existing cash and investment balances as of March 31,
1999, together with the net proceeds from the April 1999 financing activities
and the anticipated future revenue generated from operations, will be sufficient
to fund our operating losses, capital expenditures, lease payments, and interest
payments through approximately June 2001. We expect our operating losses and
capital expenditures to increase substantially in the near-term, primarily due
to our network expansion. We expect that additional financing will be required
in the future. We may attempt to raise financing through some combination of
commercial bank borrowings, leasing, vendor financings, or the private or public
sale of equity or debt securities. Future equity or debt financings may not be
available to us at all, or, if available, may not be on favorable terms. If we
are unable to obtain financing in the future, we will continue the expansion of
our operations on a reduced scale based on our existing capital resources.
IMPACT OF THE YEAR 2000 ISSUE
Many computer programs have been written using two digits rather than four
to define the applicable year. This poses a problem at the end of the century
because these computer programs may recognize a date using "00" as the year 1900
rather than the year 2000. This, in turn, could result in major system failures
or miscalculations, and is generally referred to as the "Year 2000 issue." We
have
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formulated and, to a large extent, effected a plan to address our Year 2000
issues. Our Year 2000 plan applies to two areas: internal business systems and
compliance by external customers and providers. We have completed our Year 2000
compliance testing for all of our internal systems and believe that they are
Year 2000 compliant. Because we are a young company, we believe we have been
able to build our business systems with the Year 2000 issue in mind in a more
effective manner than many older companies. Therefore, there have been few Year
2000 changes required to our existing systems and applications. We have
substantially completed a compliance check of our external customers and
providers, except for the incumbent carriers. Based on responses from these
third parties, other than the incumbent carriers, we believe that they will not
experience Year 2000 problems that would materially and adversely affect our
business. We have not been able to conduct a compliance check of incumbent
carriers nor assess the incumbent carriers' Year 2000 compliance. To the extent
that one or more incumbent carriers or other third parties experience Year 2000
problems, our network and services could be adversely affected. Furthermore, the
purchasing patterns of our customers may be affected by Year 2000 issues as
companies expend significant resources to correct their current systems for Year
2000 compliance. These expenditures may result in reduced funds available for
our services. Any of these developments could have a material and adverse effect
on our business, prospects, operating results and ability to repay our debt,
including the notes. We have not fully determined the risks associated with the
reasonably worst-case scenario and have not formulated a contingency plan to
address Year 2000 issues. We do not expect to have a specific contingency plan
in place in the future.
DESCRIPTION OF OTHER INDEBTEDNESS
In December 1997 and May 1998, we entered into 36-month lease lines for an
aggregate $26.5 million in lease financing with Sun Financial Group, Inc., now
GATX Capital Corporation, pursuant to which we lease office equipment,
telecommunications equipment, network equipment and furniture on an operating
lease basis. In connection with this leasing arrangement, we issued to GATX a
warrant to purchase 574,380 shares of common stock at a price of $1.85 per
share. GATX transferred warrants to purchase an aggregate of 258,472 of these
shares to two parties. These transferred warrants have been exercised. The
remaining GATX warrant, exercisable for 315,908 shares of common stock, is
immediately exercisable. In March 1999, we entered into additional 36-month
lease lines for an aggregate of up to $24 million in lease financing with GATX
to be used for equipment. In connection with these March 1999 leases, we issued
to GATX warrants to purchase an aggregate of 45,498 shares of common stock at a
price of $10.55 per share. These warrants are immediately exercisable. In April
1999, we entered into an agreement with Cisco Systems Capital Corporation for up
to $20 million in equipment lease financing and issued to Cisco a warrant to
purchase up to 75,000 shares of common stock at an exercise price per share of
$10.55. This warrant is immediately exercisable.
We also have outstanding $290 million in aggregate principal amount at
maturity of senior discount notes, which we issued in May 1998. These 13 1/2%
notes were issued at a discount and raised net proceeds of approximately $144.0
million. These notes are senior unsecured obligations that mature with a
principal amount of $290 million on May 15, 2008. The discount amount is being
accreted to interest expense for the first five years of the 1998 senior
discount notes; cash interest on the 1998 senior discount notes will not accrue
prior to May 15, 2003, but will do so after that date and will be payable
semi-annually each year, commencing November 15, 2003. The 1998 senior discount
notes are redeemable at our option, in whole or in part, at any time after May
15, 2003 and, prior to May 15, 2001, out of the proceeds of certain equity
offerings, at predetermined redemption prices together with accrued and unpaid
interest through the date of redemption. Upon a change of control, each holder
of the 1998 senior discount notes may require us to repurchase the notes at 101%
of the principal amount thereof, plus accrued and unpaid interest to the date of
purchase. The 1998 senior discount notes contain certain restrictive covenants,
including limitations on future indebtedness, restricted payments, transactions
with affiliates, liens, sale of stock of subsidiaries, dividends, mergers and
transfers of assets.
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BUSINESS
THE COMPANY
We are a leading service provider of high-speed local access networking
solutions using DSL technology to businesses. We have designed our network to
give our customers a high-speed "always on" local connection to the Internet and
to private local and wide area networks. We offer a variety of DSL technologies
that deliver data transfer rates ranging from 128 Kbps to 7.1 Mbps. For
customers that subscribe at the 7.1 Mbps rate, our network provides transfer
speeds faster than frame relay and T-1 circuits, and is approximately 125 times
the speed of the fastest dial-up modem and over 55 times the speed of integrated
services digital network (ISDN) lines. Through our packet-based network,
multiple users on a single connection are able to simultaneously access the
Internet and private networks. Beyond high-speed access, we also offer a growing
suite of features and applications that we can individually configure to each
user's needs. We believe our network solutions will increase remote office and
worker productivity and reduce the complexity of communications for businesses.
Since our inception in February 1997, we have made substantial progress in
implementing a scalable nationwide network. We began offering commercial
services in our first market, San Diego, in April 1998, and have subsequently
begun service in 13 additional markets: San Francisco, San Jose, Oakland/East
Bay, Chicago, Los Angeles, Orange County, Boston, Sacramento, New York,
Philadelphia, Washington D.C., Seattle and Detroit. We intend to continue our
network rollout into an additional 20 markets in 1999 and a further 17 markets
by the end of 2000. Upon completion of this network expansion, we anticipate
providing services in 50 of the nation's largest metropolitan areas, which we
believe contain 60% of the nation's local area networks. We have signed
interconnection agreements with Ameritech, Bell Atlantic, BellSouth, GTE,
Pacific Bell and U S WEST, and we are currently pursuing interconnection
arrangements with three other incumbent carriers. As of May 31, 1999, we provide
service or have installed equipment in over 430 incumbent carrier central
offices. We have obtained competitive carrier authority or have been permitted
to operate as a competitive carrier in 26 states. We intend to continue to
investigate expansion of our network both in the United States and
internationally.
In March 1999, we entered into separate strategic arrangements with MCI
WorldCom and Microsoft. As part of our strategic arrangements, MCI WorldCom's
investment fund and Microsoft each invested $30 million in us. The MCI WorldCom
arrangement also designates us as MCI WorldCom's preferred provider of business
DSL lines in certain circumstances, and provides that MCI WorldCom is committed
to sell at least 100,000 of our DSL lines over a period of five years, subject
to penalties for failure to reach target commitments. In turn, we have
designated MCI WorldCom as our preferred provider of network services in certain
circumstances. MCI WorldCom will also work with us to develop voice and data
applications over a single DSL connection. In our Microsoft arrangement, we will
jointly develop and distribute with Microsoft a co-branded DSL version of the
Microsoft Network (MSN) service focused on our small business customers and on
our customers' teleworkers.
We also market our services through our direct sales force and through our
partnerships with recognized leaders in the networking industry, including
Microsoft and Cisco. Under our strategic partnership with Cisco, Cisco agreed to
jointly market and sell our networking solutions to its customer base and will
engage in joint development projects with us. As of May 31, 1999, we had over
2,275 lines in service, and we are currently under contract to supply over 9,000
additional DSL lines to our business customers, including Cisco, Silicon
Graphics, Inc., QUALCOMM Incorporated, Wind River Systems and Broadcom
Corporation and service providers such as Verio, Williams Companies Inc.,
Savvis, Intermedia, CTS Network Services, Epoch Networks, Inc. and Ingram Micro.
As of May 31, 1999 we had approximately 80 egress circuits from business
customers in service or ordered.
In April 1999, we entered into a customer relationship with Qwest
Communications Corporation, in connection with which Qwest's wholly owned
subsidiary, U.S. Telesource, Inc., invested $15 million in us. In April 1999, we
also closed an initial public offering of our common stock, raising aggregate
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proceeds of approximately $211.4 million (net of underwriting discounts). On
April 23, 1999, we closed the sale and issue of the old notes, raising aggregate
proceeds of approximately $315.3 million (net of underwriting discounts), of
which approximately $113.7 million was used to purchase a portfolio of U.S.
government securities to secure the payment of the fist six scheduled interest
payments on the new notes.
Our senior management team has extensive experience in developing
next-generation networking businesses. Our Chairman and Chief Executive Officer,
Catherine Hapka, was previously the founder, President and Chief Operating
Officer of !NTERPRISE Networking Services, U S WEST's data networking business.
Steve Stringer, who is our President and Chief Operating Officer, was previously
the Global Chief Operating Officer of GE Capital IT Solutions. Scott Chandler,
our Chief Financial Officer, was previously President and Chief Executive
Officer of C-COR Electronics, Inc., a manufacturer of broadband
telecommunications equipment. James Greenberg, our Chief Network Officer,
directed the design, planning, operation and construction of Sprint
Corporation's data networks. Frank Tolve, our Chief Sales Officer, previously
served as Vice President, Sales Operations of Bay Networks. Our sponsors, which
include Microsoft, MCI WorldCom's investment fund, Qwest's subsidiary, Kleiner
Perkins Caufield & Byers, Enterprise Partners, Brentwood Venture Capital, the
Sprout Group and a subsidiary of Enron Corp., have to date invested
approximately $105.3 million.
MARKET OPPORTUNITY
We believe that a substantial market opportunity exists as a result of the
convergence of six factors:
- the growing demand for high-speed access to the Internet and corporate
networks;
- the inherent limitations of dial-up modems as a connection to data
networks;
- the need for large companies to improve the productivity of their remote
offices and workers;
- the need for small and medium businesses to have an integrated
communication solution for their networking requirements;
- the increasing adoption of DSL and widespread use of packet-based
networks; and
- the 1996 Telecommunications Act.
GROWING DEMAND FOR HIGH-SPEED ACCESS TO THE INTERNET AND CORPORATE NETWORKS
The value of goods and services sold through the Internet will grow from
$2.6 billion in 1996 to $400 billion in 2002, according to analyst projections.
Today, business spending for connecting remote workers, branch offices and
corporate headquarters to each other and to customers, suppliers and
partners--either through the Internet or private networks--is large and growing.
Industry analysts estimate that the U.S. market for remote Internet and local
area network access will grow from $5.9 billion in 1997 to $11.7 billion by
2002. Industry sources estimate that spending in the United States on
distributed networking and network services and applications will grow from
$54.2 billion in 1998 to $173 billion in 2002. Much of that growth is expected
to result from increased demand for e-mail, Web hosting services, e-commerce,
collaboration and real-time video services and applications. Industry sources
expect spending on distributed networking and network services and applications
to encompass 57% of a company's total annual information technology spending by
2002.
LIMITATIONS OF DIAL-UP MODEMS AND INTEGRATED SERVICES DIGITAL NETWORK (ISDN)
Because only five percent of buildings in the United States are currently
connected to high-speed fiber rings--typically large buildings in metropolitan
areas or clusters of buildings in regional campus parks--the vast majority of
workers who access data networks do so through slow dial-up modems connected to
the traditional circuit switched public telephone system. These traditional
dial-up modems are creating a bottleneck in data communications because the
data-carrying capacity of the fastest
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commercially available dial-up modem is only 56 Kbps. The capacity of another
alternative, an integrated services digital network (ISDN) line, is only 128
Kbps. While integrated services digital network (ISDN) technology provides
improved capacity relative to dial-up modems, the cost of an integrated services
digital network (ISDN) solution is often prohibitive.
NEEDS OF LARGE BUSINESSES FOR REMOTE OFFICE AND WORKER PRODUCTIVITY
Many large companies are supporting increasing numbers of remote offices and
workers. These companies face the challenge of finding a cost effective way to
make their remote workers as productive as those who have access to all of the
high performance communications and networking resources available to workers
located at corporate headquarters. A high-speed network solution that
encompasses access to the corporate local area network, the corporate telephone
system, the Internet, the corporate video conferencing system, customers,
suppliers and partners would substantially increase remote office and worker
productivity. At present, large businesses are incurring significant capital
expenditures to purchase equipment to support dial-up modems and integrated
services digital network (ISDN) connections, and paying for high cost technical
support personnel only to implement networking solutions that fail to optimize
worker productivity.
NEEDS OF SMALL AND MEDIUM BUSINESSES FOR INTEGRATED COMMUNICATION SOLUTIONS
A significant number of small and medium businesses have no practical
alternative to dial-up modems or integrated services digital network (ISDN) for
their workers to access the Internet and remote local area networks. As a
result, these workers suffer productivity limitations associated with slow
transmission speeds. In addition, these businesses need to contend with the cost
and complexity of retaining multiple vendors for their communication needs:
incumbent carriers for local voice traffic; long distance carriers for long
distance voice traffic; Internet Service Providers for Internet access; and
equipment integrators for on-premises voice and network systems. We believe that
these businesses can benefit from working with a single service provider that
offers integrated communication solutions, using a single connection.
EMERGENCE OF DSL AND PACKET-BASED TECHNOLOGIES
DSL technology dramatically increases the data, voice and video carrying
capacity of standard copper telephone lines. Because DSL technology uses
existing copper telephone lines, a broad network deployment can be implemented
rapidly, and requires a lower initial fixed investment than some existing
alternative technologies, such as fiber, cable modems and satellite
communications systems. A significant portion of the build-out of a DSL-based
network is directly related to the demand of paying subscribers, resulting in a
success-based deployment of capital.
Packet-based networks often are more efficient than traditional
point-to-point networks, and allow end users to connect to any location that can
be assigned an Internet Protocol address. Traditional point-to-point networks,
including the traditional telephone network and private line networks, are less
efficient because they require a dedicated connection between two locations.
Packet-based networks allow multiple users to share connections between
locations.
1996 TELECOMMUNICATIONS ACT
The 1996 Telecommunications Act allows competitive carriers to leverage the
existing incumbent carrier infrastructure, as opposed to building a competing
infrastructure at significant cost. The 1996 Telecommunications Act requires all
incumbent carriers to allow competitive carriers to collocate their equipment
along with incumbent carrier equipment in incumbent carrier central offices,
which enables competitive carriers to access end users through existing
telephone line connections. The 1996 Telecommunications Act was designed to
create an incentive for incumbent carriers that were formerly part of the Bell
system to cooperate with competitive carriers: these incumbent carriers cannot
provide
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long distance service until regulators determine that there is competition in
the incumbent carrier's local market.
MARKET IMPACT OF CONVERGENCE
We believe the convergence of these factors has had several fundamental
effects on the communications market. New carriers can:
- leverage the existing network infrastructure by obtaining local network
access connections, and offer efficient high-speed data, voice and video
networks;
- provide large businesses with productivity enhancing remote office and
worker networking solutions;
- offer small and medium businesses integrated voice and data solutions that
reduce the complexity of using multiple vendors for communication
services; and
- build new networks that can provide efficient high-speed access over a
single connection to any Internet Protocol address on the Internet and/or
corporate network, along with features and applications that can be
configured to meet each user's needs.
THE RHYTHMS SOLUTIONS
We believe our network solutions effectively address many of the unmet
communications needs of today's businesses by offering an appealing combination
of quality, performance, price and service. Our network consists of:
- HIGH-SPEED, "ALWAYS ON" LOCAL CONNECTIONS. Our network delivers
high-speed, "always on" local access. Using DSL technology over standard
copper telephone lines, our network is capable of delivering data transfer
rates at speeds ranging from 128 Kbps to 7.1 Mbps. For customers that
subscribe at the 7.1 Mbps rate, the transfer rate is faster than frame
relay and T-1 circuits, and is approximately 125 times the rate of the
fastest dial-up modem and over 55 times the rate of an integrated services
digital network (ISDN) line. Moreover, unlike dial-up modems and
integrated services digital network (ISDN) lines, the DSL solution is
"always-on"--it does not require users to dial-up to connect to the
Internet or their local area network for each use.
- METROPOLITAN AND WIDE AREA OVERLAY NETWORK. We have designed our network
so that we can effectively and efficiently manage data traffic within and
among the metropolitan areas in which we offer our services. We use
transport services provided by other carriers for local access to users,
metropolitan area network connections and for long distance backbone
capacity. This overlay network is designed to route and switch traffic
within each metropolitan area, keeping local traffic local and sending
only long distance traffic over the wide area network, thereby increasing
overall network capacity and reliability and minimizing our backbone
costs. We manage the network and monitor service levels on a nationwide
basis from our Network Operations Center in Denver.
- PRODUCTIVITY ENHANCING FEATURES AND APPLICATIONS. We offer a growing suite
of network-enabled features and applications that extend the functionality
of corporate communications and networking resources to remote offices and
workers. We also offer remote offices and workers, as well as small and
medium businesses high performance Internet access solutions in
conjunction with our service provider customers.
- SERVICE FLEXIBILITY. We have designed our network so that we are able,
over a single DSL connection, to individually configure each network
user's features and applications.
- TURNKEY SOLUTION. We offer turnkey network solutions for our customers by
providing each customer with a single point of contact for a complete
package of services, including network implementation, maintenance,
billing and the DSL modem. For large customers, we provide complete
project management, including design, implementation and results
reporting. In some
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cases, we also seamlessly link our network operations systems to existing
customer information systems to ensure maximum service efficiency.
BUSINESS STRATEGY
Our goal is to become the leading national service provider of high
performance networking solutions for remote offices and workers. We intend to
implement the following strategies to achieve our goal:
EXPLOIT EARLY MOVER ADVANTAGE
We intend to exploit our early market entrance to deploy our network and
establish strong relationships with business and service provider customers. As
of May 31, 1999, we provide service or had installed our network equipment in
over 430 central offices. Installation on this scale requires significant time
and resources; therefore, we believe our progress to date provides us a
significant time-to-market advantage over would-be competitors. We have gained
significant build-out experience, which we believe will streamline our further
expansion. In addition, we plan to construct our network rapidly and intend to
evaluate the potential acquisition of other companies so that we are an early
mover in our other target markets. We intend to exploit our early mover
advantage to gain significant market share in our target markets.
FOCUS ON PERFORMANCE-DRIVEN BUSINESS CUSTOMERS
We believe that the underserved segment of the business networking market
that demands high performance is currently relying on dial-up modems or
integrated services digital network (ISDN) for network access. Many large
businesses have remote offices and workers that are not able to take advantage
of the full array of communications and networking resources available to
workers at the main office. In addition to offering these businesses high-speed
access to the Internet and corporate networks, we intend to offer them
network-enabled features and applications that increase worker productivity.
Further, we believe that small and medium businesses are looking for an
integrated service provider to reduce their reliance on multiple vendors.
Accordingly, we intend to offer multiple networking services, including voice
and data services over a single DSL connection, to meet the needs of small and
medium businesses. We intend to evaluate offering new or enhanced products and
services to the consumer market.
EXPAND NETWORK-ENABLED FEATURES AND APPLICATIONS
We seek to have our network become a platform that facilitates the delivery
of productivity-enhancing features and applications to businesses and their
employees. By collaborating with industry leaders such as MCI WorldCom,
Microsoft and Cisco, we intend to jointly develop features and applications that
will meet the needs of our customers. For example, as part of our strategic
agreement with MCI WorldCom, we have agreed to jointly develop voice and data
applications over a single DSL connection. In addition, we believe that the
proliferation of high-speed local access networks, such as our own, will
encourage third parties to create more bandwidth-intensive features and
applications. One of our objectives in providing these enhanced features and
applications is to strengthen customer loyalty and increase revenue per network
user.
ESTABLISH STRONG DISTRIBUTION CHANNELS
We intend to build strong distribution channels. For large businesses, we
are building a direct sales force and are entering into strategic joint
marketing alliances. We have entered into a strategic alliances with Microsoft,
MCI WorldCom, Qwest and Cisco. Pursuant to our alliance with Microsoft, we will
jointly distribute with Microsoft a co-branded DSL version of the Microsoft
Network service focused on our small business customers and our customers'
teleworkers. Our strategic alliance with MCI WorldCom designates us as MCI
WorldCom's preferred provider of business DSL connections for
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large, medium and small businesses. Under our Qwest alliance, Qwest has
committed to purchase from us performance class DSL services for re-sale to its
customers. In our alliance with Cisco, we have agreed with Cisco to jointly
market and sell our networking solutions to large businesses. For small and
medium businesses, we will distribute our services through our service provider
customers. Over time, we will seek to develop additional strategic alliances,
focusing on partners that can both add value to our network and give us a
meaningful distribution channel.
PROVIDE SUPERIOR CUSTOMER SERVICE
As part of our strategy to obtain and retain business and service provider
customers, we intend to provide superior service and customer care. We will
guarantee high-quality service by providing carrier-class networking solutions
and superior customer service. Our carrier-class networking solutions include
end-to-end proactive network monitoring and management through our Network
Operations Center, 24 hours a day, seven days a week. We also offer multiple
security features and a network that we can scale to meet demand. Our customer
service includes a personal and Web-based single point of contact, a complete
packaged solution including the DSL modem, installation, activation and network
management, and specific customer service objectives against which we measure
our performance. Our objective in providing outstanding customer service is to
provide a high level of customer satisfaction, achieve customer loyalty and
accelerate the adoption rate of our service.
STRATEGIC PARTNERSHIPS
MCI WORLDCOM
In March 1999, we entered into a strategic partnership with MCI WorldCom,
which was amended in April and May 1999, pursuant to which, among other things:
- MCI WORLDCOM INVESTMENT. MCI WorldCom's investment fund invested $30
million in us, in return for 3,731,410 shares of our Series C preferred
stock, which converted into 4,477,692 shares of common stock upon the
closing of our initial public offering in April 1999, and a warrant to
purchase 720,000 shares of our common stock at $6.70 per share. MCI
WorldCom's investment fund also received a warrant to purchase 136,996
shares of common stock at $21.00 per share.
- PROVIDING DSL TO MCI WORLDCOM. We have been designated MCI WorldCom's
preferred provider of business DSL access services in areas where we
deploy our network, except for services to certain subsidiaries and in
locations where MCI WorldCom deploys its own DSL equipment. We have a
right of first refusal to match offers made to MCI WorldCom by other
providers of DSL services.
MCI WorldCom has committed to sell a minimum of 100,000 business quality DSL
lines, subject to penalties for failure to reach target commitments. MCI
WorldCom will have 60 months to place orders for these lines, starting on the
date when we have 1,250 collocations in commercial service in at least 29
metropolitan statistical areas. As part of our agreement, we must provide
specified service levels and have available capacity.
- OBTAINING NETWORK SERVICES FROM MCI WORLDCOM. We have designated MCI
WorldCom as our preferred provider of network services, including
metropolitan area network services, long-haul backbone services and
Internet Protocol backbone services. MCI WorldCom has a right of first
refusal to provide all of these services to us.
- COLLABORATION. We are jointly developing voice and data applications over
a single DSL connection. We have also formed a working group with MCI
WorldCom to develop and implement the systems and procedures necessary to
jointly deploy DSL service nationwide. We will collaborate with MCI
WorldCom in selecting technologies and vendors to support our network
deployments.
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MICROSOFT
In March 1999, we entered into a strategic partnership with Microsoft,
pursuant to which, among other things:
- MICROSOFT INVESTMENT. Microsoft invested $30 million in us, in return for
3,731,409 shares of our Series C preferred stock, which converted into
4,477,691 shares of common stock upon the closing of our initial public
offering in April 1999, and a warrant to purchase 720,000 shares of our
common stock at $6.70 per share.
- CO-BRANDING FOR SMALL BUSINESSES AND TELEWORKERS.Microsoft has agreed to
jointly distribute with us over the Internet a co-branded DSL version of
the Microsoft Network service focused on our small business customers and
on our customers' teleworkers. This agreement expires in March 2002.
QWEST
In April 1999, we entered into a customer relationship with Qwest, pursuant
to which, among other things:
- QWEST INVESTMENT. Qwest's wholly owned subsidiary, U.S. Telesource, Inc.,
invested $15 million in us, in return for 932,836 shares of Series C
preferred stock, which converted into 1,119,403 shares of common stock
upon the closing of our initial public offering in April 1999, and 441,176
shares of Series D preferred stock, which converted into 441,176 shares of
common stock upon the closing of our initial public offering in April
1999. U.S. Telesource also received a warrant to purchase 180,000 shares
of our common stock at $6.70 per share.
- COMMERCIAL RELATIONSHIPS. Qwest has committed to purchase from us
performance class DSL services for re-sale to its customers. In return, we
have agreed to use Qwest's network and application hosting services in
certain situations.
CISCO SYSTEMS
In October 1998, we entered into a strategic partnership with Cisco, in
which Cisco agreed to work jointly with us to sell our services to its customers
including providing compensation to its sales representatives for selling our
services. In addition, Cisco has committed to a joint marketing program with us
to increase our market recognition among businesses. We are also under contract
with Cisco to manage and upgrade its remote access program for 8,500 teleworkers
nationwide.
RHYTHMS NETWORK SERVICES, FEATURES AND APPLICATIONS
We offer our customers solutions that address many of their high performance
networking needs. Our local connection services use a variety of DSL
technologies to deliver high-speed, "always on" local access. We also aggregate
traffic within metropolitan areas and route or switch the traffic to our service
provider customers, or to a corporate local area network within the same
metropolitan area or another metropolitan area using our inter-network
connections. In addition to local connections and metropolitan and wide area
inter-network connections, we offer a growing suite of network-enabled features
and applications.
LOCAL CONNECTIONS
Our local connection services connect individual users or multiple users on
a local area network to our metropolitan or national network or to the Internet
using DSL technology over traditional telephone lines. Using DSL technology over
copper lines, our network is capable of data transfer rates ranging from 128
Kbps to 7.1 Mbps. Unlike dial-up modems and integrated services digital network
(ISDN) lines, the DSL solution is "always on"--it does not require users to
dial-up to connect to the Internet or their local area network for each use.
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We place DSL equipment both at the customer premises--a residence or
business--and in the central office that services that specific customer
premises. There are typically many incumbent carrier central offices in each
metropolitan area. We connect the DSL equipment in each central office to one of
our Metro Service Centers so that we can route or switch network traffic to
either a local destination, a national destination where we provide service or
the Internet.
For our local connection services, the speed and effectiveness of the DSL
connection will vary based on a number of factors, including the distance of the
end user from the central office and the condition of the copper line that
connects the end user to the central office. However, the specific number of
potential users for higher speeds will vary by central office and by region and
will be affected by line quality. In the future, we intend to examine adding a
variety of high-speed local access technologies as they are developed, including
emerging wireless technologies. The chart below compares the performance and
range for our local connection services as of May 31, 1999.
<TABLE>
<CAPTION>
SPEED TO SPEED FROM RANGE(1)
END USER END USER (FEET) TECHNOLOGY(2)
- --------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C>
144 Kbps 144 Kbps Unlimited IDSL(3)
256 Kbps 256 Kbps 18,000 SDSL
384 Kbps 384 Kbps 15,000 RADSL
512 Kbps 512 Kbps 14,000 RADSL
768 Kbps 768 Kbps 12,000 RADSL
1 Mbps 1 Mbps 12,000 RADSL
1.5 Mbps 1.5 Mbps 8,000 SDSL
3 Mbps 1 Mbps 10,700 RADSL
5 Mbps 1 Mbps 9,000 RADSL
7.1 Mbps 1 Mbps 7,800 RADSL
</TABLE>
- ------------------------
(1) Estimated maximum distance from the central office to the end user.
(2) The technologies are described more fully in "--DSL Technologies" below.
(3) Speeds are 128 Kbps under certain circumstances.
METROPOLITAN AREA AND WIDE AREA INTER-NETWORK CONNECTIONS
For our business and service provider customers, we offer high-speed
connections both within and among metropolitan areas. In order to switch and
route traffic aggregated from each central office to its ultimate local or long
distance destination, we offer two interconnection services.
Our 1.544 Mbps service--DS-1--is suitable for small business customers or
service providers. Our 45 Mbps service--DS-3--is intended for large business
customers or service providers. The monthly service charge for both services is
greater if traffic aggregated in one metropolitan area is terminated in another
metropolitan area, and varies based on the speed of the local access connection.
Our wide area network currently operates between each of the metropolitan
areas in which we provide service, and is currently a frame relay network which
we lease from a long distance carrier. In the future, we expect to add
Asynchronous Transfer Mode capability.
NETWORK-ENABLED SERVICES, FEATURES AND APPLICATIONS
We intend to use our high-speed local access connection to provide multiple
network services, features and applications. Instead of just providing a
high-speed access connection, we intend to offer many network-enabled features
and applications, which we are able to configure to meet each user's needs. We
believe our strategy to provide additional network services, features and
applications for each user on our network allows us to address a larger market
opportunity than the market opportunity
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represented by connection services alone. Our strategy is to benefit from
additional recurring monthly revenue by providing multiple network features and
applications.
The features and applications that we currently offer are outlined below.
- CORPORATE TELEPHONE SYSTEM EXTENSION. This feature extends the
functionality of the corporate telephone system directly into a
teleworker's home or, in the future, a company's branch office. This
feature supports common corporate telephone functions such as four digit
dialing, conference calling and speed dialing. Benefits to our business
customers include increased worker productivity, reduced second line
expenses for voice service and the ability to aggregate and control long
distance charges.
- COMPUTER BACKUP. The computer backup feature allows end users to
automatically backup data to a secure remote site. Computer backup
leverages our "always on," high-speed local access connection and allows
the backup to be done at the times most convenient for the end user. We
believe this feature is more cost effective than substitutes such as tape
drives and disk cartridge drives, and has the additional protection of
being stored off site. This application is provided by a third party,
@Backup, Inc.
- CONTENT CACHING. We offer content caching for our customers' end users who
access the Internet. This network feature operates in the background,
serving user requests for Web pages locally rather than obtaining the
content from the actual server across the Internet. Caching enables our
customers to retrieve content faster than would otherwise be possible. Our
caching solution requires no configuration setup by our customer. If the
cache fails in any way, it will be automatically bypassed and user
requests will be sent directly to the Internet.
- SERVICE SELECTION. We have implemented a service selection feature within
our network that enables end users to access multiple destinations,
including the corporate local area network, the corporate telephone
system, the Internet, customers, suppliers and partners. Using this
feature, a connection to the Internet and the corporate local area network
can be established simultaneously by different users over the same DSL
access line. This feature alleviates the corporate network from servicing
Internet traffic to a teleworker.
- DYNAMIC HOST CONFIGURATION PROTOCOL FUNCTIONALITY. This feature relieves
network administrators from the burden of notifying each teleworker of
network configuration changes. Through the use of this protocol, once
teleworkers start up their computers, the customer's server automatically
downloads all of his or her network configuration parameters. If any
modifications to the configuration are necessary, they only need to be
modified once by the network administrator, and the network configuration
parameters will be automatically distributed to all of the organization's
teleworkers.
- TURNKEY INTERNET. This application allows small and medium businesses or
large business branch offices the ability to host Internet and intranet
websites. This application includes network equipment on the customer
premises that provides router, Web server, e-mail, file server, firewall
and Web-page caching. This premises-based Internet solution is combined
with our "always on" high-speed network connection and Internet services
from an Internet Service Provider customer.
In the future, we plan to continue to expand our network features and
applications by working closely with leading hardware, software and networking
companies. We expect to focus on many applications, including combining voice
and data communications, increasing our directory and security capabilities, and
providing businesses with the ability to access their important applications
from remote locations. We have agreed to jointly develop directory and
voice-over Internet Protocol applications with Cisco. In addition, as part of
our strategic agreement with MCI WorldCom, we expect to jointly develop multiple
applications using DSL technology including voice and data applications over a
single
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DSL connection. Our strategic relationship with Microsoft will focus on
delivering co-branded network applications that will facilitate our customers'
access to the Internet and other destinations.
Using these network-enabled features and applications, we can assemble a
broad solution to meet our business customer needs. For example, for a
teleworker, we might combine high-speed access to the corporate network and the
Internet with computer backup and corporate telephone extension. For a small
business, we might offer a turnkey Internet solution by combining high-speed
access to the Internet through our Internet Service Provider customer, with
customer premise equipment that supports Web server, e-mail, file server,
firewall, Web-page caching and network backup.
TURNKEY SOLUTION
We offer a full service solution for the configuration, provisioning, and
installation of the local access connection at the end user location, for which
the customer pays a one-time charge. That charge covers the cost of installing
the DSL line, any required inside wiring, the DSL modem, attaching the DSL modem
to either a single computer, local area network or enterprise server,
installation of a single network interface card if required, and installing the
TCP/IP software if required. For our large business customers, we provide
complete project management, including design, implementation and results
reporting. In some cases we seamlessly link our network operations systems to
existing customer information systems through Web-based interfaces.
CUSTOMERS, SALES AND MARKETING
We offer our services to large, medium and small businesses. As of May 31,
1999, we served more than 35 business and 280 service provider customers. For
these business and service provider customers we have over 2,275 lines in
service and are under contract to supply over 9,000 additional DSL lines.
Selected business customers include Cisco, Silicon Graphics, QUALCOMM Wind River
Systems and Broadcom. In addition, our service provider customers include Verio,
Williams, Savvis, Intermedia, CTS Network Services, Epoch Networks and Ingram
Micro.
DIRECT SALES CHANNELS
We market our services to large businesses through a direct sales force. Our
target account profile is a large, information-intensive enterprise with
multiple locations and large numbers of distributed workers. Our sales force
seeks to deal directly with the Chief Information Officer and the
telecommunications manager responsible for remote access in the target account.
Sales teams are deployed in each of the metropolitan areas in which we offer our
services. As of May 31, 1999, we had approximately 100 sales and technical
personnel supporting our direct sales efforts. We intend to increase the size of
our sales and technical support force to sell and support large businesses as we
enter new geographic markets.
Our relationship with large business customers can involve multiple phases.
A customer typically initially agrees to a first phase commitment for a specific
number of connections at a negotiated price and one year contract term.
Typically, three to six months into the first phase implementation, the customer
agrees to successive phases of implementation that could include additional
connections and upgrades in services, features and applications. In general, we
have experienced a six to nine month sales cycle prior to receiving significant
order volume from a business customer. We currently have two large business
customers that have committed to multi-phase implementation programs: Cisco and
Silicon Graphics. Collectively, these two customers account for over 90% of our
commitments to purchase our connections. Please see "Risk Factors--We cannot
predict our success because our business model is unproven."
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INDIRECT SALES CHANNELS
We also market our services to small and medium businesses through indirect
channels, including Internet Service Providers, interexchange carriers,
competitive carriers, value-added resellers, and integrators. We offer each
service provider the ability to select those services that it would like to
bundle with its own service offerings to offer a total solution to its
customers. For example, Internet Service Providers typically combine our
high-speed connections with their Internet access services and resell the
combination to their existing and new customers. We address these markets
through sales and marketing personnel dedicated to each of these indirect
channels.
We supplement our sales effort to certain of these service providers by
offering marketing support services that may include training, proposal
development, lead generation, channel support materials, joint marketing funds,
Web promotion, joint participation in national and regional customer events and
press announcements. We also offer promotions and sales incentives from time to
time to our service providers. Additionally, we support our service providers by
acting as a network integrator by qualifying potential customers for service,
ordering connections, installing equipment on the customer premises, turning up
the service, monitoring the network, troubleshooting, making repairs and
invoicing the customer on a single bill.
Our agreements with our service provider customers vary widely. Generally,
our agreements have a one to three year term, and are based on negotiated prices
that decline with increasing levels of volume achievement. In many cases,
service providers have selected one or two, and perhaps three, DSL service
providers as preferred suppliers in each market. Our goal is to be selected as
the preferred supplier or one of the preferred suppliers in each metropolitan
area where we operate. When we are selected as a preferred supplier within a
given market, we may enter into joint marketing arrangements to promote our DSL
services. See "Risk Factors--We depend on third parties, particularly MCI
WorldCom, Microsoft, Qwest and Cisco, for the marketing and sales of our network
services."
CUSTOMER SERVICE
We offer our business and service provider customers a single point of
contact for implementation, maintenance and billing. Our Network Operations
Center provides both proactive and customer initiated maintenance services 24
hours a day, seven days a week. We also provide a broad range of customer
service and Network Operations Center services through our Web interface.
- IMPLEMENTATION. Working with a business or service provider customer, our
customer service technicians and sales engineers will develop an
implementation plan for each customer. The plan will include qualifying
the customer for our service offerings, placing orders for the connection
facilities, coordinating the delivery of the connection, installation and
turn up.
- MAINTENANCE. Our Network Operations Center in Denver provides network
surveillance through standard Simple Network Management Protocol tools for
all equipment in our network. Because we have complete end-to-end
visibility of our network, we are able to proactively detect and correct
the majority of our customer's maintenance problems remotely. Our goal is
to proactively detect and repair 90% of our customer's maintenance
problems before our customer is aware of a problem. Customer initiated
maintenance and repair requests are managed and resolved primarily through
the Customer Service Center. We utilize a trouble ticket management system
to communicate customer maintenance problems from the customer service
center to the Network Operations Center engineers and the field services
engineers. Because our Network Operations Center is fully staffed 24 hours
a day, seven days a week, we believe our ability to provide superior
proactive maintenance is significantly enhanced.
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- BILLING. Customer bills are currently issued on a monthly basis through an
internal billing system. Customer billing inquiries are managed by our
Customer Service Center. In the future, billing inquiries will also be
supported through our Web interface.
- CUSTOMER SUPPORT SYSTEMS. Our system architecture is designed to
facilitate rapid service responsiveness and reduce the cost of customer
support. We use an integrated set of standard, off-the-shelf systems to
support our business processes. We designed all business functions,
including sales, ordering, provisioning, maintenance and repair, billing,
accounting and decision support to use a single database, ensuring that
every function has accurate, up-to-date information. The use of
client-server tools and scalable Unix and Microsoft NT servers enables
automation within and between processes.
NETWORK ARCHITECTURE
NETWORK TECHNOLOGY
The key design features allowing us to be a business-class network are:
- CARRIER-CLASS NETWORK MANAGEMENT. Our network is designed to be
carrier-class throughout. For example, it has been designed with redundant
network electronics and transmission paths. We have the ability to
electronically view our entire network including the DSL modem located at
the end user's computer or located on our customer's local area network
from our Network Operations Center in Denver. We provide our business and
service provider customers with service level agreements that guarantee
specific levels of network performance. We have found that by offering
service level agreements, we are better able to convince businesses to
move their mission-critical applications onto our network.
- SCALABLE SYSTEMS. We use industry standard, off-the-shelf software to
support preordering, ordering, provisioning, billing, network monitoring
and trouble management. We have implemented these systems using web-based
and distributed client-server systems architecture. This approach allows
us to grow our customer support and network management capabilities as
customer demand increases.
- NETWORK SECURITY. Non-dedicated access, such as dial-up modem or
integrated services digital network (ISDN) lines, or dedicated access to
the public Internet, represents security risks for business networks.
These security risks are mitigated through the use of virtual private
network technologies such as authentication, tunneling, encryption, and
through the use of permanent virtual circuits that define a logical
dedicated connection between the end user and the corporate network. Our
network enables businesses to fully employ these virtual private network
technologies by using their own equipment at the edges of our network, or
optionally purchasing virtual private networking services from us.
NETWORK COMPONENTS
Our network is an overlay network in that we lease existing transport
services from other service providers: local access copper lines from incumbent
carriers, metropolitan fiber from incumbent carriers or competitive carriers and
long-distance backbone fiber from long distance carriers. This overlay network
is designed to switch and route traffic within each metropolitan area, keeping
local traffic local and only sending non-local traffic over the wide area
network, thereby increasing overall network capacity and reliability and
reducing costs. The primary components of our network are customer endpoint
devices, local transport, our Connection Points, high-speed metropolitan area
network, our Metro Service Centers, our backbone and our Network Operations
Center.
- CUSTOMER ENDPOINT DEVICES. We currently offer DSL and private line local
access connections in our network. For DSL access, we include the customer
endpoint device--the DSL modem--as
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part of our complete turnkey service offering. We configure and install
these modems with the end user's computer, or local area network or
enterprise router along with any required on-site wiring needed to connect
the modem to the telephone line leased from the incumbent carrier.
Currently, almost all of the DSL modem and DSL multiplexing equipment we
use for a single connection over a copper line must come from the same
vendor since there are no existing interoperability standards for the
equipment used in our higher speed services.
- LOCAL TRANSPORT. Our local transport connects customer end-point devices
to our network. For digital subscriber line access, the transport is a
DSL-capable copper loop leased by us from the incumbent carrier under
terms specified in our interconnection agreements. In many cases,
DSL-capable lines result from modification of voice grade lines to carry
digital signals, at times involving an additional one-time or monthly
charge relative to voice grade lines. For private line access, the
transport is leased copper or fiber trunks provided by the incumbent
carrier or a competitive carrier.
- CONNECTION POINTS. Through our interconnection agreements with the
incumbent carriers, we secure collocation space in central offices. In
each of these Connection Points, we connect the DSL-equipped copper loop
to our DSL multiplexing equipment. Each of our Connection Points is
designed to offer the same high reliability and availability standards as
the incumbent carrier's own central office space. We expect to place our
equipment in each of 30 to 90 central offices in any metropolitan area
that we enter. As of May 31, 1999, we had Connection Points in over 430
central offices. Although we expect that many Connection Points will be
physically located within the central office, we have placed and will
continue to place our Connection Points in locations immediately adjacent
to central offices, when collocation space within the central office is
not available.
- HIGH-SPEED METROPOLITAN AREA NETWORK. In each of our targeted metropolitan
area markets, we operate a private metropolitan area network. The network
consists of high-speed Asynchronous Transfer Mode communications circuits
that we lease from competitive carriers or incumbent carriers to connect
our Connection Points to the Metro Service Center. The metropolitan area
network operates at 45 Mbps--DS-3--today, and can be upgraded to 150
Mbps--OC-3--and 600 Mbps--OC-12--in the future. We anticipate leasing a
substantial portion of this capacity from MCI WorldCom, as described in
"--Strategic Partnerships."
- METRO SERVICE CENTERS. The Metro Service Center is a physical point of
presence within a metropolitan area where local access traffic is
aggregated from the Connection Points over our high-speed metropolitan
area network. Although we generally expect to have one Metro Service
Center in each of our targeted metropolitan areas, in larger metropolitan
areas, we may have two. The Metro Service Center houses our Asynchronous
Transfer Mode switches and Internet Protocol routers. We also place
applications servers in our Metro Service Centers to support network
enabled feature and applications. We design our Metro Service Centers for
high availability including battery backup power, redundant equipment and
active network monitoring.
- BACKBONE. Our backbone interconnects our Metro Service Centers so that
communications traffic can be transported among different metropolitan
areas. Currently, we lease a frame relay backbone from a long distance
carrier. We anticipate leasing a substantial portion of this capacity from
MCI WorldCom, as described in "--Strategic Partnerships." In the future,
we expect to add Asynchronous Transfer Mode capability.
- NETWORK OPERATIONS CENTER. Our entire network is managed from the Network
Operations Center located in Denver. From these centers, we provide
end-to-end network monitoring and management using advanced network
management tools 24 hours a day, seven days a week. This enhances our
ability to address performance or connection issues before they affect our
end
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user's experience. From the Network Operations Center, we monitor the
equipment and circuits
in each Metro Service Center, each metropolitan area network, each
Connection Point, individual end user lines and modems. Please see "Risk
Factors--A system failure or breach of network security could cause delays
or interruptions of service to our customers."
We are pursuing a program of ongoing network development. Our engineering
efforts focus on the design and development of new technologies and services to
increase the speed, efficiency, reliability and security of our network and to
enable network features and applications developed by us or by third parties.
Please see "Risk Factors--We may be unable to effectively expand our network
services and provide high performance to a substantial number of end users."
DSL TECHNOLOGIES
We utilize various DSL equipment and technologies from different vendors.
The various DSL technologies allow us to offer a range of connection speeds.
Actual speeds are a function of the distance from the end user or local area
network to the central office and the quality of the copper line. We describe
the basic features and the market positioning of our primary DSL technologies
below.
RATE ADAPTIVE DIGITAL SUBSCRIBER LINE (RADSL)
RADSL technology allows each end user or local area network to utilize the
full digital capability of the underlying telephone line. Speeds reach up to 7.1
Mbps downstream and up to 1.1 Mbps upstream if the end user or local area
network is within 15,000 feet, or approximately 2.8 miles, from the central
office. We use this technology for end users or local area networks needing very
high access speeds. Our target customers for RADSL connections consist of small
and medium businesses and branch offices of large businesses needing T-1 or
higher speeds. We believe that these businesses often find the cost of dedicated
private line or frame relay services to be prohibitive. Our RADSL connection
competes favorably on a price/performance basis relative to traditional
fractional T-1 and frame relay services. The service also provides the highest
speed of any DSL service for bandwidth intensive applications.
SYMMETRIC DIGITAL SUBSCRIBER LINE (SDSL)
Our SDSL technology allows end users and local area network to achieve up to
1.5 Mbps speeds both downstream and upstream. Depending on the quality of the
copper line, 1.5 Mbps can typically be achieved if the end user or local area
network is within 8,000 feet, or approximately 1.5 miles, from the central
office.
INTEGRATED DIGITAL SUBSCRIBER LINE (IDSL)
IDSL technology allows us to reach all end users or local area networks
within a central office serving area irrespective of the end user or local area
network distance from the central office. Our IDSL service operates at up to 144
Kbps in each direction. This service can use existing integrated services
digital network (ISDN) equipment at the end user site, and is targeted at the
integrated services digital network (ISDN) replacement market. For information
intensive users, we believe that IDSL compares favorably with integrated
services digital network (ISDN) on a price/performance basis when the monthly
flat rate IDSL charge is compared with the per minute integrated services
digital network (ISDN) charge. We also offer IDSL to end users that have lines
that do not consist of continuous copper, such as digital line carrier equipped
lines that are partially copper and partially fiber.
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COMPETITION
We will face competition from many competitors with significantly greater
financial resources, well-established brand names and large, existing installed
customer bases. Moreover, we expect the level of competition to intensify in the
future. We expect significant competition from:
- INCUMBENT CARRIERS. Incumbent carriers, such as GTE and U S WEST, are
leasing wide area connections from long distance carriers, and have
existing metropolitan area networks and circuit switched local access
networks. Most incumbent carriers have announced deployment of commercial
DSL services in certain areas. In addition, most incumbent carriers are
combining their DSL service with their own Internet Service Provider
businesses. We believe that incumbent carriers have the potential to
quickly overcome many of the issues that have delayed widespread
deployment of DSL services in the past. If a Regional Bell Operating
Company is authorized to provide in-region long distance service in one or
more states, by fulfilling the market-opening provisions of the 1996
Telecommunications Act, the Regional Bell Operating Company may be able to
offer "one stop shopping" that would be competitive with our offerings.
The incumbent carriers have an established brand name in their service
areas, possess sufficient capital to deploy DSL services rapidly and are
in a position to offer service from central offices where we may be unable
to secure collocation space.
- TRADITIONAL INTEREXCHANGE CARRIERS. Many of the leading traditional
interexchange carriers, such as AT&T, MCI WorldCom and Sprint, are
expanding their capabilities to support high-speed, end-to-end networking
services. Increasingly, their bundled services include high-speed local
access combined with metropolitan and wide area networks, and a full range
of Internet services and applications. We expect them to offer combined
data, voice and video services over these networks.
These carriers have deployed large scale networks, have large numbers of
existing business and residential customers and enjoy strong brand
recognition, and as a result represent significant competition. For
instance, they have extensive fiber networks in many metropolitan areas
that primarily provide high-speed data and voice communications to large
companies. They could deploy DSL services in combination with their current
fiber networks. They also have interconnection agreements with many of the
incumbent carriers and have secured collocation spaces from which they
could begin to offer competitive DSL services.
- NEWER INTEREXCHANGE CARRIERS. The newer interexchange carriers, such as
Williams, Qwest Communications International and Level 3 Communications,
are building and managing high bandwidth, packet-based networks
nationwide. They are also building direct sales forces and partnering with
Internet Service Providers to offer services directly to business
customers. They could extend their existing networks to include fiber
metropolitan area networks and high-speed, off-net services using DSL,
either alone, or in partnership with others.
- CABLE MODEM SERVICE PROVIDERS. Cable modem service providers, like @Home
Networks and its cable partners, are offering or preparing to offer
high-speed Internet access over hybrid fiber coaxial cable networks to
consumers. @Work has positioned itself to do the same for businesses.
Where deployed, these networks provide local access services similar to
our services, and in some cases at higher speeds. They typically offer
these services at lower prices than our services, in part by sharing the
bandwidth available on their cable networks among multiple end users.
- WIRELESS AND SATELLITE DATA SERVICE PROVIDERS. Several new companies are
emerging as wireless and satellite-based data service providers, over a
variety of frequency allocations. These include:
- WinStar Communications, Inc.,
- Teligent, Inc.,
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- Teledesic LLC,
- Hughes Space Communications, and
- Iridium World Communications Ltd.
These companies use a variety of new and emerging technologies, such as
terrestrial wireless services, point-to-point and point-to-multipoint fixed
wireless services, satellite-based networking and high-speed wireless
digital communications.
- INTERNET SERVICE PROVIDERS. Internet Service Providers provide Internet
access to residential and business customers. These companies generally
provide such Internet access over the incumbent carriers' circuit switched
networks at integrated services digital network (ISDN) speeds or below.
However, some Internet Service Providers, including HarvardNet, Inc. in
Massachusetts, have begun offering DSL-based access using their own DSL
services, or DSL services offered by the incumbent carrier or other
DSL-based competitive carriers. Some Internet Service Providers have
significant and even nationwide marketing presences and combine these with
strategic or commercial alliances with DSL-based competitive carriers.
Some Internet Service Providers, such as Concentric Network Corporation,
Mindspring Enterprises, Inc., PSINet Inc. and Verio have significant and
even nationwide presences.
- COMPETITIVE CARRIERS. Certain competitive carriers, including Covad
Communications Group, Inc. and NorthPoint Communications, Inc., have begun
offering DSL-based data services. Other competitive carriers are likely to
do so in the future. The 1996 Telecommunications Act specifically grants
competitive carriers the right to negotiate interconnection agreements
with incumbent carriers, including interconnection agreements which may be
identical in all respects to our agreements.
Many of these competitors are offering, or may soon offer, technologies and
services that will directly compete with some or all of our service offerings.
Such technologies include integrated services digital network (ISDN), DSL,
wireless data and cable modems. Please see "Risk Factors--The market in which we
operate is highly competitive, and we may not be able to compete effectively,
especially against established industry competitors with significantly greater
financial resources." Some of the competitive factors we face include:
- transmission speed,
- reliability of service,
- breadth of service availability,
- price performance,
- network security,
- ease of access and use,
- content bundling,
- customer support,
- brand recognition,
- operating experience,
- ability to scale,
- capital availability and
- exclusive contracts.
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<PAGE>
INTERCONNECTION AGREEMENTS WITH INCUMBENT CARRIERS
Interconnection agreements with incumbent carriers are critical to our
business. These agreements cover a number of aspects of our relationships with
incumbent carriers, including:
- the price we pay to lease and the access we have to the incumbent
carrier's copper lines;
- the removal by the incumbent carrier of equipment or electronics from
lines to enable these lines to transmit DSL signals;
- the price and terms for collocation of our equipment in the incumbent
carrier central offices;
- the price we pay and the access we have to the incumbent carrier's
transport facilities;
- the ability we have to access conduits and other rights of way the
incumbent carrier has to construct its own network facilities;
- the operational support systems and interfaces that we can use to place
orders and report and monitor the incumbent carrier's response to our
requests;
- the dispute resolution process we use with the incumbent carrier to
resolve disagreements on the terms of the interconnection contract; and
- the term of the interconnection agreement, its transferability to
successors, its liability limits and other general aspects of our
relationship with the incumbent carrier.
We have signed interconnection agreements with six different major incumbent
carriers covering 23 states and the District of Columbia. In many cases,
incumbent carriers do not agree to the provisions in interconnection agreements
that we request, and we have not consistently prevailed in obtaining all of the
provisions we desire. We may be unable to continue to sign interconnection
agreements with incumbent carriers. If we are unable to enter into, or
experience delay in obtaining, interconnection agreements, this inability or
delay may materially and adversely affect our business and financial prospects.
The incumbent carriers are also permitting competitive carriers to adopt
previously signed interconnection agreements.
Our interconnection agreements have a maximum term of three years, requiring
us to renegotiate the existing terms in the future. We may be unable to extend
our existing interconnection agreements or renegotiate new agreements on
favorable or any terms. In addition, our interconnection agreements are subject
to state commission, Federal Communications Commission and judicial oversight.
These bodies may modify the terms or prices of our interconnection agreements in
ways that would adversely affect our business and financial prospects.
GOVERNMENT REGULATION
A significant portion of the services that we offer, particularly through
our wholly owned subsidiaries, ACI Corp. and ACI Corp.--Virginia, may be subject
to regulation at the federal, state and/or local levels. Future federal or state
regulations and legislation may be less favorable to us than current regulation
and legislation and therefore have a material and adverse impact on our business
and financial prospects. In addition, we may expend significant financial and
managerial resources to participate in proceedings setting rules at either the
federal or state level, without achieving a favorable result.
FEDERAL LEGISLATION AND REGULATION
The 1996 Telecommunications Act, enacted on February 8, 1996, substantially
departs from prior legislation in the telecommunications industry by
establishing local exchange competition as a national policy. This act removes
state regulatory barriers to competition and preempts laws restricting
competition in the local exchange market.
The 1996 Telecommunications Act in some sections is self-executing, but in
addition, the Federal Communications Commission issues regulations that identify
specific requirements upon which we and
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<PAGE>
our competitors rely in implementing the changes it prescribes. The outcome of
these various ongoing Federal Communications Commission rulemaking proceedings
or judicial appeals of such proceedings could materially affect our business and
financial prospects.
The Federal Communications Commission prescribes rules applicable to
interstate communications, including rules implementing the 1996
Telecommunications Act, a responsibility it shares with the state regulatory
commissions. The 1996 Telecommunications Act, and the Federal Communications
Commission's initial rules interpreting such act, encouraged increased local
competition. A federal appeals court for the Eighth Circuit reviewed some of the
initial rules, and overruled some of its provisions, including some rules on
pricing and nondiscrimination. In January, 1999, the United States Supreme Court
reversed elements of the Eighth Circuit's ruling, finding that the Federal
Communications Commission has broad authority to interpret the 1996
Telecommunications Act and issue rules for its implementation, specifically
including authority over pricing methodology. The Supreme Court upheld the
Federal Communications Commission's orders to the incumbent carriers to combine
unbundled elements for competitors, and to allow competitors to pick and choose
among provisions in existing interconnection agreements. The Supreme Court also
found that the Federal Communications Commission's interpretation of the rules
for establishing unbundled elements was not consistent with the 1996
Telecommunications Act, and required the Federal Communications Commission to
reconsider its delineation of unbundled elements. The Federal Communications
Commission's replacement decision on unbundled elements may adversely affect our
business. In addition, some incumbent carriers may take the position that they
have no obligation to provide unbundled elements, including copper loops, until
the Federal Communications Commission issues new rules, which could adversely
affect our business.
In November, 1998, the Federal Communications Commission ruled that DSL
services provided as dedicated access services in connection with interstate
services such as Internet access are interstate services subject to the Federal
Communications Commission's jurisdiction. This decision is currently subject to
reconsideration and appeal.
In addition, in the spring of 1998, four of the Regional Bell Operating
Companies petitioned the Federal Communications Commission to be relieved of
certain regulatory requirements in connection with their own DSL services,
including obligations to unbundle DSL loops, but not the obligation to unbundle
the loops we purchase for our DSL services, and to resell DSL services. In
October 1998, the Federal Communications Commission ruled that DSL services are
telecommunications services subject to the requirements of the 1996
Telecommunications Act to unbundle such services and offer them for resale. In
October 1998, the Federal Communications Commission also issued a Notice of
Proposed Rulemaking indicating its intention to clarify expanded rights of
competitive carriers for collocation, access to copper loops, and various other
issues of consequence to competitive carriers deploying DSL services. The
Federal Communications Commission also indicated its intention to allow
incumbent carriers to create separate affiliates for their DSL businesses that
would have to operate as competitive carriers and would be permitted to operate
free of the resale and unbundling obligations of the 1996 Telecommunications
Act. The final outcome of these decisions, originally scheduled to be announced
on January 28, 1999, had been postponed by the Federal Communications Commission
while it considered the impact of the Supreme Court's ruling on the 1996
Telecommunications Act. On March 31, 1999, the Federal Communicaitons Commission
issued a decision on collocation issues which was generally favorable to the
competitive carriers. This decision has been appealed to the D.C. Circuit by U S
WEST and GTE, although it has not been stayed. In the same decision the Federal
Communications Commission established further proceedings to consider issues
related to unbundled network elements. The Federal Communications Commission is
also engaged in a proceeding to define what the incumbent carriers' obligations
are to make available unbundled network elements. The final outcome of these
petitions or other proceedings interpreting the requirements of the 1996
Telecommunications Act may adversely affect our business.
49
<PAGE>
STATE REGULATION
Some of our services, particularly those of our subsidiaries, ACI Corp. and
ACI Corp.--Virginia, may be classified as intrastate services subject to state
regulation. All of the states where we operate, or will operate, require some
degree of state regulatory commission approval to provide certain intrastate
services. In most states, intrastate tariffs are also required for various
intrastate services, although we are not typically subject to price or rate of
return regulation for tariffed intrastate services. Actions by state public
utility commissions could cause us to incur substantial legal and administrative
expenses.
Under the 1996 Telecommunications Act, if we so request, incumbent carriers
have a statutory duty to negotiate in good faith with us for agreements for
interconnection and access to unbundled network elements. These negotiations are
conducted on a region-wide basis, and individual agreements are then signed for
each of the states in the region for which we have made a request. We have
signed interconnection agreements with Ameritech, Bell Atlantic, BellSouth, GTE,
Pacific Bell and U S WEST. We have signed agreements with Ameritech for Illinois
and Michigan and currently are negotiating interconnection agreements for
Indiana, Ohio and Wisconsin. We have signed agreements with Bell Atlantic for
the District of Columbia, Maryland, Massachusetts, New Jersey, New York,
Pennsylvania and Virginia and are currently negotiating agreements for
Connecticut, Delaware, New Hampshire and Rhode Island. We have signed agreements
with BellSouth for Alabama, Florida, Georgia, Kentucky, Louisiana, Mississippi,
North Carolina, South Carolina and Tennessee. We have signed agreements with GTE
for California, North Carolina and Washington and are currently completing
agreements for Florida, Ohio, Oregon, Texas and Virginia. We have signed an
agreement with Pacific Bell for California. We have signed agreements with U S
WEST for Arizona, Colorado, Minnesota, Oregon, and Washington and are currently
negotiating an agreement for Utah. In addition, we are currently negotiating
with SBC Communications Inc. for Kansas and Missouri and with Sprint for
Florida, Minnesota, Nevada, New Jersey, North Carolina, Ohio, Pennsylvania
Tennessee and Virginia, with the Southern New England Telephone Company for
Connecticut and with Cincinnati Bell for Indiana, Ohio and Kentucky. These
interconnection agreements may not be on terms that are entirely satisfactory to
us.
During these negotiations, either the incumbent carrier or we may submit
disputes to the state regulatory commissions for mediation and, after the
expiration of the statutory negotiation period set forth in the 1996
Telecommunications Act, we may submit outstanding disputes to the states for
arbitration. We are currently arbitrating with SBC Communications Inc. in Texas
the terms of our interconnection agreement with Southwestern Bell for Texas. The
outcome of this arbitration may be unfavorable to us.
Under the 1996 Telecommunications Act, states have begun and, in a number of
cases, completed regulatory proceedings to determine the pricing of unbundled
network elements and services, and the results of these proceedings will
determine the price we pay for, and whether it is economically attractive for us
to use, these elements and services.
LOCAL GOVERNMENT REGULATION
Should we in the future decide to operate our own transport facilities over
public rights-of-way, we may be required to obtain various permits and
authorizations from municipalities in which we operate such facilities. Some
municipalities may seek to impose similar requirements on users of transmission
facilities, even though they do not own such facilities. If municipal
governments impose conditions on granting permits or other authorizations or if
they fail to act in granting such permits or other authorizations, our business
could be adversely affected.
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EMPLOYEES
As of May 31, 1999, we had approximately 500 employees. We believe that our
future success will depend in part on our continued ability to attract, hire and
retain qualified personnel. Competition for such personnel is intense, and we
may be unable to identify, attract and retain such personnel in the future. None
of our employees are represented by a labor union or are the subject of a
collective bargaining agreement. We have never experienced a work stoppage and
believe that our employee relations are good.
PROPERTIES
Our headquarters are located in facilities consisting of approximately
80,000 square feet in Englewood, Colorado, which we occupy under leases that
expire in October 1999 and January 2004. These leases may be extended. We also
lease space for network equipment installations in a number of other locations.
LEGAL PROCEEDINGS
We are currently a party to an arbitration proceeding between us and
Southwestern Bell Telephone Company regarding the terms of interconnection with
Southwestern Bell in Texas. This arbitration, instituted December 11, 1998, is
pending before the Public Utility Commission of Texas. The dispute involves the
terms and conditions of issues related to DSL-based services and loops in
connection with our interconnection agreement with Southwestern Bell. We are
seeking to compel Southwestern Bell to include in our interconnection agreement
language comparable to that in our other interconnection agreements, which gives
us the ability to obtain copper telephone lines on which we provide our chosen
variety of DSL technologies, among other issues.
In addition, on March 12, 1999, our subsidiary ACI Corp. filed a complaint
with the Oregon Public Utilities Commission (the "Oregon PUC") against U S West
Communications regarding collocation matters. This complaint was amended on May
12, 1999. ACI has requested the Oregon PUC to intervene in an on-going dispute
between ACI and U S West Communications regarding ACI's ability to collocate in
three central offices located in Portland, Oregon pursuant to Section 251(c)(6)
of the 1996 Telecommunications Act. ACI has requested that the Oregon PUC make a
determination that U S West Communications can, in fact, accommodate ACI's
requests for collocation and, if such a determination is made, that the Oregon
PUC immediately order U S West Communications to make space available to ACI on
the terms and conditions set forth in the existing interconnection agreement
between the companies. ACI has also sought monetary damages in an amount to be
proven at a hearing to compensate for ACI's economic losses. June 1999 hearings
have been scheduled for this complaint.
On February 18, 1999, we filed a complaint for declaratory relief in San
Diego County Superior Court (North County) against Thomas R. Lafleur. Mr.
Lafleur was a former employee who resigned and/or was terminated in 1998. After
he left, we sent him a check for the repurchase or buy-back of his unvested
shares; Mr. Lafleur refused to cash this check. The declaratory relief action is
to determine that his shares were unvested and thus properly repurchased. On or
about March 26, 1999, Mr. Lafleur filed an answer to the complaint and also
filed a cross-complaint against us for fraud, breach of the covenant of good
faith and fair dealing, conspiracy to inflict emotional distress, intentional
infliction of emotional distress, conversion and declaratory relief. The
cross-complaint seeks compensatory and punitive damages according to proof, and
438,115 shares of common stock. Mr. Lafleur alleges in his cross-complaint that
since we failed to purchase his shares within 60 days following his termination,
the terms of his stock purchase agreement prevent us from repurchasing his
shares. We intend to vigorously defend against such cross-claims, and have filed
a demurrer to the cross-complaint. We are currently accounting for these 438,115
shares as treasury stock.
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In addition, we are subject to state commission, Federal Communications
Commission and court decisions as they relate to the interpretation and
implementation of the 1996 Telecommunications Act, the interpretation of
competitive carrier interconnection agreements in general and our
interconnection agreements in particular. In some cases, we may be deemed to be
bound by the results of ongoing proceedings of these bodies. We therefore may
participate in proceedings before these regulatory agencies or judicial bodies
that affect, and allow us to advance, our business plans.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth, as of May 31, 1999, the names, ages and
positions of our executive officers and directors. Their respective backgrounds
are described below.
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- --------------------------------------------- --- ------------------------------------------------------------
<S> <C> <C>
Catherine M. Hapka........................... 44 Chief Executive Officer and Director
Jeffrey Blumenfeld........................... 51 Vice President and General Counsel
Michael E. Calabrese......................... 33 Vice President, Sales Engineering
Scott C. Chandler............................ 37 Chief Financial Officer
Eric H. Geis................................. 53 Vice President of National Deployment
James A. Greenberg........................... 38 Chief Network Officer
Michael S. Lanier............................ 55 Chief Information Officer
David J. Shimp............................... 53 Chief Marketing Officer
Steve Stringer............................... 44 President and Chief Operating Officer
Frank J. Tolve, Jr........................... 54 Chief Sales Officer
Kevin R. Compton............................. 40 Director
Keith B. Geeslin............................. 46 Director
Ken L. Harrison.............................. 56 Director
Susan Mayer.................................. 48 Director
William R. Stensrud.......................... 48 Director
John L. Walecka.............................. 39 Director
Edward J. Zander............................. 52 Director
</TABLE>
All the officers identified above serve at the discretion of our Board of
Directors. There are no family relationships between any persons identified
above. The following are brief biographies of the persons identified above.
CATHERINE M. HAPKA has been our Chief Executive Officer and a director since
June 1997. Prior to joining us, Ms. Hapka served as President of NETS, Inc., an
electronic commerce software company, from March 1997 to May 1997. NETS, Inc.
filed a bankruptcy petition in May 1997. Prior to joining NETS, Inc., Ms. Hapka
served as Executive Vice President, Markets, for U S WEST Communications, Inc.
from January 1995 to October 1996. In this capacity, Ms. Hapka led business and
consumer telecommunications units responsible for the voice, data, wireless,
video and long distance businesses. From 1991 to 1994, Ms. Hapka served as
President and Chief Operating Officer of the !NTERPRISE Networking Services Unit
of U S WEST. Prior to joining U S WEST, Ms. Hapka held general management
positions with General Electric and McKinsey & Co., Inc.
JEFFREY BLUMENFELD has been our Vice President and General Counsel since
August 1997, and has been a partner in the Washington, D.C. law firm of
Blumenfeld & Cohen since 1984, which specializes in pro-competition advocacy for
technology-intensive companies. Since 1995, Mr. Blumenfeld has served as senior
trial counsel to the Antitrust Division of the U.S. Department of Justice in
several matters. Before starting Blumenfeld & Cohen in 1984, Mr. Blumenfeld held
positions with the U.S. Department of Justice from 1973 to 1984, most recently
as Chief of the U.S. V. AT&T staff of the Antitrust Division. Mr. Blumenfeld is
an adjunct professor of communications law at the Georgetown University Law
Center. Pursuant to his employment agreement, Mr. Blumenfeld has agreed to
expend approximately 24 hours a week in his capacity as one of our officers. For
more information on Mr. Blumenfeld's relationship with us, please see "Certain
Relationships and Related Transactions-- Legal Services."
MICHAEL E. CALABRESE has been our Vice President, Sales Engineering since
August 1998. Prior to joining us, Mr. Calabrese served in various positions at
Cisco Systems, Inc. from August 1995 to
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August 1998, most recently as Account Manager of the Data Equipment Group. In
that capacity, Mr. Calabrese maintained primary responsibility for managing
Cisco's major accounts. From January 1993 to August 1995, Mr. Calabrese held
management positions at Sprint Communications. First, as Manager, Project
Engineering, Mr. Calabrese led Sprint Communication's new product rollouts.
Subsequently, as Manager, Network Planner, Mr. Calabrese was responsible for the
design and build-out of Sprint Communications Data Networks.
SCOTT C. CHANDLER has served as our Chief Financial Officer since April
1998. From August 1996 to April 1998, Mr. Chandler served as President and Chief
Executive Officer of C-COR Electronics, Inc., a manufacturer of broadband
telecommunications equipment. From June 1990 to August 1996, Mr. Chandler served
in various positions at U S WEST and its subsidiaries, most recently as Vice
President and General Manager of U S WEST Cable and Multimedia from September
1995 to August 1996. While at U S WEST, Mr. Chandler also served as Vice
President and General Manager of the U S WEST subsidiary, !NTERPRISE AMERICA,
from January 1994 to August 1995 and as Director of Vendor Relations and Channel
Support of !NTERPRISE Networking Services from January 1992 to December 1993.
ERIC H. GEIS has been our Vice President of National Deployment since
January 1, 1999. Prior to that, he served as our Vice President and General
Manager, Western Region beginning June 1997 and was a consultant to us from
April 1997 to June 1997. From November 1995 to December 1996, Mr. Geis served as
National Sales Director at GRC International, a producer and seller of wide area
data network design and optimization software applications. Between July 1990
and November 1995, Mr. Geis served as President and Chief Executive Officer of
Quintessential Solutions Inc., a provider of wide area network design, pricing
and optimization software applications for interexchange carriers, regional bell
operating companies, incumbent carriers, Internet Service Providers and major
corporate accounts. Mr. Geis was also Founder, President and Chief Executive
Officer of TeleQuest, Inc., a telecommunications products company from May 1983
to December 1990.
JAMES A. GREENBERG has been our Chief Network Officer since July 1997. From
January 1990 to July 1997, Mr. Greenberg served in various positions at Sprint
Communications, most recently as Senior Director and interim Vice President of
the Data Operations and Engineering Group. In that capacity, Mr. Greenberg
directed the design, planning, operation and construction of Sprint's data
networks.
MICHAEL S. LANIER has been our Chief Information Officer since May 1999.
Prior to joining us, Mr. Lanier was most recently President and CEO of the
Technology Extension Company, a consulting firm specializing in business systems
architecture and design, a position he held from March 1996 to April 1999. Prior
to that, Mr. Lanier served as Chief Information Officer at Intelligent
Electronics, Inc. from May, 1993 to May 1996.
DAVID J. SHIMP has served as our Chief Marketing Officer since October 1998.
Prior to joining us, Mr. Shimp was a partner at LAI Ward Howell, Inc., a
professional services firm, where he implemented that firm's first systems group
and was a leader in the technology department during his tenure from January
1991 to October 1998. Previously, Mr. Shimp held management positions at
McKinsey & Co. and the Deerpath Group.
STEVE STRINGER has been our President and Chief Operating Officer since May
1999. Prior to joining us, Mr. Stringer served in various positions at GE
Capital from 1991 to May, 1999, most recently as Global Chief Operating Officer
at GE Capital IT Solutions. At GE Capital, Mr. Stringer has also held the
position of President and CEO of the United States Division, President of the
company's Midwest and Atlantic regions and CEO of GE Capital's Federal Systems
group.
FRANK J. TOLVE, JR. has served as our Chief Sales Officer since December
1998. From November 1994 to September 1998, Mr. Tolve served as Vice President,
Sales Operations at Bay
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Networks. In that capacity, Mr. Tolve's responsibilities included sales
administration, channel strategy and worldwide telesales/telemarketing. Mr.
Tolve also served as Vice President, Sales Operations for SynOptics
Communications from November 1992 to November 1994.
KEVIN R. COMPTON has been a director since July 1997. Since 1990, Mr.
Compton has served as a general partner of Kleiner Perkins Caufield & Byers, a
venture capital investment firm ("KPCB"). Mr. Compton is a director of Citrix
Systems, Inc., Digital Generation Systems, Inc., Global Village Communication,
Inc. and Corsair Communications, Inc., and is also a director of several
privately held companies. Mr. Compton was elected a director as the nominee of
KPCB, pursuant to the terms of a voting agreement.
KEITH B. GEESLIN has been a director since July 1997. Since 1988, Mr.
Geeslin has served as a general partner of The Sprout Group, a venture capital
investment firm. Mr. Geeslin is a director of SDL, Inc., and is also a director
of several privately held companies, including Paradyne Corporation, a DSL
equipment manufacturer and supplier to us. Please see "Certain Relationships and
Related Transactions--Director Relationships." Mr. Geeslin was elected a
director as the nominee of The Sprout Group, pursuant to the terms of a voting
agreement.
KEN L. HARRISON has been a director since March 1998. Since 1975, Mr.
Harrison has held various management positions at Portland General Electric
Company, where he currently serves as its Chairman and Chief Executive Officer,
a position he has held since December 1988. In addition, Mr. Harrison currently
serves as Vice Chairman and is a director of Enron Corp., a position he has held
since July 1997. Mr. Harrison has also served as Chairman of Enron
Communications Group, Inc. since September 1997, and as a director of Enron Oil
and Gas Corporation since October 1997. Mr. Harrison was elected a director as
the nominee of Enron, pursuant to the terms of a voting agreement.
SUSAN MAYER has been a director since March 1999. Ms. Mayer is the President
of the MCI WorldCom Venture Fund and a Senior Vice President of MCI WorldCom
Inc. Previously, she was Senior Vice President of MCI Communications Corporation
from 1994 to 1998. From 1996 to 1997, Ms. Mayer was also President and Chief
Operating Officer of Sky MCI. From 1993 to 1994, Ms. Mayer was Vice President of
MCI Communications Corporation.
WILLIAM R. STENSRUD has been a director since our inception in February 1997
and also served as our President and Chief Executive Officer from February 1997
to June 1997. Mr. Stensrud has been a general partner at the venture capital
investment firm of Enterprise Partners since January 1997. From June 1996
through December 1996, Mr. Stensrud served as President of Paradyne Corporation.
Previously, from February 1992 to March 1996, Mr. Stensrud served as President
and Chief Executive Officer of Primary Access Corporation. Mr. Stensrud is a
director of several privately held companies, including Paradyne Corporation.
Please see "Certain Relationships and Related Transactions--Director
Relationships." Mr. Stensrud was elected a director as the nominee of Enterprise
Partners, pursuant to the terms of a voting agreement.
JOHN L. WALECKA has been a director since July 1997. Since 1984, Mr. Walecka
has been at Brentwood Venture Capital, a venture capital investment firm, and
has been a general partner since 1990. Mr. Walecka is a director of Documentum,
Inc. and Xylan Corporation, and is also a director of several privately held
companies. Please see "Certain Relationships and Related Transactions--Director
Relationships." Mr. Walecka was elected a director as the nominee of Brentwood
Venture Capital, pursuant to the terms of a voting agreement.
EDWARD J. ZANDER has been a director since March 1999. Since 1987, Mr.
Zander has held various management positions at Sun Microsystems, Inc., where he
currently serves as its Chief Operating Officer, a position he has held since
February 1998. Mr. Zander is a director of Documentum, Inc. and one privately
held company.
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All of our executive officers are appointed annually by and serve at the
discretion of the Board of Directors. All of our executive officers are at-will
employees.
CLASSIFIED BOARD
The board of directors is divided into three classes. The term of office and
directors consisting of each class is as follows:
<TABLE>
<CAPTION>
CLASS DIRECTORS TERM OF OFFICE
- ------------------------------ --------------------------------------- ---------------------------------------
<S> <C> <C>
Class I....................... Keith Geeslin expires at the annual meeting of
Ken Harrison stockholders in 2000 and at each third
Edward Zander succeeding annual meeting thereafter
Class II...................... Susan Mayer expires at the annual meeting of
William Stensrud stockholders in 2001 and at each third
John Walecka succeeding annual meeting thereafter
Class III..................... Catherine Hapka expires at the annual meeting of
Kevin Compton stockholders in 2002 and at each third
succeeding annual meeting thereafter
</TABLE>
The classification of directors has the effect of making it more difficult
to change the composition of the board of directors.
COMMITTEES OF THE BOARD OF DIRECTORS
We have a standing compensation committee currently composed of Messrs.
Harrison, Stensrud and Walecka. The compensation committee reviews and acts on
matters relating to compensation levels and benefit plans for our executive
officers and key employees, including salary and stock options. The compensation
committee is also responsible for granting stock awards, stock options and stock
appreciation rights and other awards to be made under our existing incentive
compensation plans. We also have a standing audit committee composed of Messrs.
Compton and Geeslin. The audit committee assists in selecting our independent
auditors and in designating services to be performed by, and maintaining
effective communication with, those auditors.
DIRECTOR COMPENSATION
Directors do not receive compensation for services provided as a director or
for participation on any committee of the Board of Directors. All directors are
reimbursed for their out-of-pocket expenses in serving on the Board of Directors
or any committee thereof.
EXECUTIVE COMPENSATION
The following table sets forth certain information with respect to the
compensation awarded to, earned by or paid to our current Chief Executive
Officer and our four other most highly compensated executive officers (the
"Named Executive Officers") during 1998 and 1997.
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SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
--------------------------
ANNUAL COMPENSATION SECURITIES
---------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION(S) YEAR SALARY BONUS OPTIONS (#) COMPENSATION
- ----------------------------------------------------- --------- ---------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Catherine M. Hapka(1) ............................... 1998 $ 339,583 $ 134,584 -- $ --
Chief Executive Officer and Director 1997 163,654 50,000 3,504,905(2) --
365,094(3)
Michael E. Calabrese(4) ............................. 1998 42,417 157,623(5) 360,000(2) --
Vice President, Sales Engineering 1997 -- -- -- --
James A. Greenberg(6) ............................... 1998 145,000 31,538 48,000(2) --
Chief Network Officer 1997 63,205 16,615 547,642(2) 50,000(7)
Gloria A. Farler(8) ................................. 1998 137,500 29,906 24,000(2) --
Vice President, Marketing Support 1997 25,781 7,161 48,000(2)
Eric H. Geis(9) ..................................... 1998 136,000 29,580 -- --
Vice President of National Deployment 1997 96,519 18,417 132,000(2) --
</TABLE>
- ------------------------------
(1) Ms. Hapka has been employed by us since June 1997, and the amount listed
sets forth her compensation since such date.
(2) Represents the number of shares of common stock that may be purchased upon
the exercise of options.
(3) Represents a right to purchase 365,094 shares of Series A preferred stock,
which she purchased in 1998.
(4) Mr. Calabrese has been employed by us since August 1998, and the amount
listed sets forth his compensation since such date.
(5) Includes a cash payment of $150,000 to cover a signing bonus and relocation
expenses.
(6) Mr. Greenberg has been employed by us since July 1997, and the amount listed
sets forth his compensation since such date.
(7) Represents a flat fee relocation payment.
(8) Ms. Farler had been employed by us since October 1997; she resigned her
position in February 1999.
(9) Mr. Geis has been employed by us since April 1997, and the amount listed
sets forth his compensation since such date.
OPTION GRANTS IN 1998
The following table sets forth information with respect to stock options
granted to each of the Named Executive Officers during 1998 pursuant to our 1997
Stock Option/Stock Issuance Plan, which
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has been superseded by our 1999 Stock Incentive Plan. We did not grant any stock
appreciation rights to the Named Executive Officers during 1998.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS (1) VALUE AT ASSUMED
---------------------------------------------------------------- ANNUAL RATES OF STOCK
NUMBER OF % OF TOTAL
SECURITIES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM (3)
OPTIONS EMPLOYEES IN PRICE PER ---------------------
NAME GRANTED 1998(2) SHARE EXPIRATION DATE 5% 10%
- -------------------------------------- ----------- --------------- ----------- --------------------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Catherine M. Hapka.................... -- -- -- -- -- --
Michael E. Calabrese.................. 360,000 10.7% $ 0.25 September 9, 2008 $ 56,601 $ 143,437
James A. Greenberg.................... 48,000 1.4% 0.25 September 9, 2008 7,547 19,125
Gloria A. Farler(4)................... 24,000 0.7% 0.25 September 9, 2008 3,773 9,562
Eric H. Geis.......................... -- -- -- -- -- --
</TABLE>
- ------------------------------
(1) Options granted are immediately exercisable for all the option shares, but
any shares purchased under such options will be subject to repurchase by us
at such shares' option exercise price until they vest.
(2) We granted options to purchase 3,364,680 shares of common stock during 1998.
(3) Amount represents potential realizable value of option grants, assuming that
our common stock appreciates at the annual rate shown, compounded annually,
from the date of grant until expiration of the granted options. These
numbers are calculated based on Securities and Exchange Commission
requirements and do not reflect our projection or estimate of future stock
price growth. Actual gains, if any, on stock option exercises are dependent
on the future performance of our common stock.
(4) Ms. Farler resigned her position in February 1999.
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FISCAL YEAR-END 1998 OPTION VALUES
The following table provides information with respect to each of the Named
Executive Officers, concerning the exercise of common and preferred stock
options during 1998 and unexercised options held by them at the end of 1998.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED OPTIONS VALUE OF UNEXERCISED
IN-THE-MONEY OPTIONS AT
SHARES AT DECEMBER 31, 1998 DECEMBER 31, 1998(1)
ACQUIRED ON VALUE ------------------------------ -------------------------------
NAME EXERCISE(2) REALIZED(3) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------------------- ----------- ----------- ----------- ----------------- ------------ -----------------
<S> <C> <C> <C> <C> <C> <C>
Catherine M. Hapka.................... 3,869,999(4) $ 73,019 -- -- -- --
Michael E. Calabrese.................. -- -- 360,000 -- $ 1,440,000 --
James A. Greenberg.................... 547,642(5) -- 48,000 -- 192,000 --
Gloria A. Farler(6)................... 43,200(7) -- 24,000 -- 96,000 --
Eric H. Geis.......................... 132,000(8) -- -- -- -- --
</TABLE>
- ------------------------------
(1) Amount based on the fair market value of our common stock on December 31,
1998 as determined by our Board of Directors, less the exercise price
payable for such shares.
(2) The shares of common stock were deposited in escrow with our corporate
secretary where they continue to vest in accordance with the applicable
vesting provisions.
(3) Amount based on the fair market value, as determined by our Board of
Directors, of our common stock and Series A preferred stock on the exercise
date for such shares, less the exercise price paid for such shares.
(4) Ms. Hapka exercised all of these options in February 1998 for a net purchase
price of $146,038 for common stock and $292,075 for Series A preferred
stock. Ms. Hapka purchased the shares of Series A preferred stock at a $0.20
per share discount from market value, for an aggregate discount of $73,019.
(5) Mr. Greenberg exercised all of these options in January 1998 for a net
purchase price of $22,818.
(6) Ms. Farler resigned her position in February 1999.
(7) Ms. Farler exercised all of these options in March 1998 for a net purchase
price of $1,800.
(8) Mr. Geis exercised all of these options in January 1998 for a net purchase
price of $5,500.
EMPLOYMENT AGREEMENTS AND CHANGE IN CONTROL ARRANGEMENTS
None of our employees are employed for a specified term, and each employee's
employment with us is subject to termination at any time by either party for any
reason, with or without cause.
Ms. Hapka's employment agreement provides for a salary of $350,000 per year,
subject to periodic increases by the Board of Directors at its discretion. In
addition, it provides for a bonus potential of 50% of her base salary for her
second year of employment, which ends in June 1999, payable upon achievement of
certain milestones to be proposed by Ms. Hapka and agreed to by the Board of
Directors. In connection with her employment in June 1997, Ms. Hapka was granted
an option to purchase 3,504,905 shares of common stock at an exercise price of
$0.04 per share under the 1997 Stock Option/Stock Issuance Plan. Ms. Hapka
exercised such options in February 1998, subject to our right of repurchase
which lapses in accordance with the vesting schedule of the options. In
connection with her employment, Ms. Hapka was also given the right to purchase
up to 365,094 shares of Series A preferred stock at $0.80 per share. In February
1998, Ms. Hapka purchased these shares for an aggregate purchase price of
$292,075. We do not hold a right to repurchase these shares of Series A
preferred stock. In the event Ms. Hapka's employment is terminated involuntarily
and without cause, Ms. Hapka will be entitled to receive a lump sum payment in
an amount equal to her then-current annual salary.
Mr. Calabrese's employment agreement provides for an annual salary of
$130,000, subject to periodic increases by the Board of Directors at its
discretion. It provides for an annual bonus of up to
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20% of his annual salary. In addition, Mr. Calabrese received, as part of the
acceptance of his employment, a cash payment of $150,000, which also covered
relocation expenses. In the event Mr. Calabrese's employment is terminated
involuntarily and without cause during the first year of employment, which ends
in August 1999, Mr. Calabrese will be entitled to receive a payment equal to one
year's base salary payable in 12 monthly installments.
Mr. Greenberg's employment agreement provides for an annual salary of
$145,000, subject to periodic increases by the Board of Directors at its
discretion.
Mr. Geis' employment agreement provides for an annual salary of $136,000,
subject to periodic increases by the Board of Directors at its discretion. It
provides for an annual bonus of up to 25% of his base salary.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Our Board of Directors currently has a compensation committee that reviews
and approves the compensation and benefits to be provided to our executive
officers and other key employees. In addition, the compensation committee
administers the 1999 Stock Incentive Plan. The compensation committee currently
consists of Messrs. Harrison, Stensrud and Walecka.
BENEFIT PLANS
1999 STOCK INCENTIVE PLAN
Our 1999 Stock Incentive Plan is the successor equity incentive program to
the 1997 Stock Option/ Stock Issuance Plan. The 1999 Stock Incentive Plan was
adopted by the board on March 16, 1999 and became effective in April 1999. All
outstanding options under the 1997 Stock Option/Stock Issuance Plan were at that
time incorporated into the 1999 Stock Incentive Plan, and no further option
grants may be made under the 1997 Stock Option/Stock Issuance Plan. The
incorporated options will continue to be governed by their existing terms,
unless the plan administrator elects to extend one or more features of the 1999
Incentive Plan to those options. Except as otherwise noted below, the
incorporated options have substantially the same terms as grants made under the
Discretionary Option Grant Program of the 1999 Stock Incentive Plan.
As of May 31, 1999, we had reserved 8,161,944 shares of common stock for
issuance under the 1999 Stock Incentive Plan. The number of shares of common
stock reserved for issuance under the 1999 Stock Incentive Plan will
automatically increase on the first trading day in January each calendar year,
beginning in calendar year 2000, by an amount equal to four percent (4%) of the
total number of shares of common stock outstanding on the last trading day in
December in the preceding calendar year, but in no event will this annual
increase exceed 2,880,000 shares. In addition, no participant in the 1999 Stock
Incentive Plan may be granted stock options, separately exercisable stock
appreciation rights and direct stock issuances for more than 900,000 shares of
common stock in the aggregate per calendar year.
The 1999 Stock Incentive Plan is divided into five separate components:
- the Discretionary Option Grant Program, under which eligible individuals
in our employ or service (including officers, non-employee board members
and consultants) may, at the discretion of the plan administrator, be
granted options to purchase shares of common stock at an exercise price
not less than 100% of the fair market value of those shares on the grant
date;
- the Stock Issuance Program under which eligible individuals may, in the
plan administrator's discretion, be issued shares of common stock
directly, upon the attainment of designated performance milestones or upon
the completion of a specified service requirement or as a bonus for past
services;
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- the Salary Investment Option Grant Program, which may, at the plan
administrator's sole discretion, be activated for one or more calendar
years and, if so activated, will allow executive officers and other highly
compensated employees the opportunity to apply a portion of their base
salary each year to the acquisition of special below-market stock option
grants;
- the Automatic Option Grant Program, under which option grants will
automatically be made at periodic intervals to eligible non-employee board
members to purchase shares of common stock at an exercise price equal to
100% of the fair market value of those shares on the grant date; and
- the Director Fee Option Grant Program, which may, in the plan
administrator's sole discretion, be activated for one or more calendar
years and, if so activated, will allow non-employee board members the
opportunity to apply a portion of the annual retainer fee otherwise
payable to them in cash each year to the acquisition of special
below-market option grants.
The Discretionary Option Grant Program and the Stock Issuance Program are
administered by the compensation committee. The compensation committee as plan
administrator has complete discretion to determine which eligible individuals
are to receive option grants or stock issuances under those programs, the time
or times when the grants or issuances are to be made, the number of shares
subject to each grant or issuance, the status of any granted option as either an
incentive stock option or a non-statutory stock option under the Federal tax
laws, the vesting schedule to be in effect for the option grant or stock
issuance and the maximum term for which any granted option is to remain
outstanding. However, the board acting by disinterested majority has the
exclusive authority to make any discretionary option grants or stock issuances
to members of the compensation committee. The compensation committee also has
the exclusive authority to select the executive officers and other highly
compensated employees who may participate in the Salary Investment Option Grant
Program in the event that program is activated for one or more calendar years.
Neither the compensation committee nor the board may exercise any administrative
discretion with respect to option grants under the Salary Investment Option
Grant Program or under the Automatic Option Grant or Director Fee Option Grant
Program for the non-employee board members. All grants under those latter three
programs shall be made in strict compliance with the express provisions of each
program.
The exercise price for the shares of common stock subject to option grants
made under the 1999 Stock Incentive Plan may be paid in cash or in shares of
common stock valued at fair market value on the exercise date. The option may
also be exercised through a same-day sale program without any cash outlay by the
optionee.
The plan administrator has the authority to effect the cancellation of
outstanding options under the Discretionary Option Grant Program (including
options incorporated from the 1997 Stock Option/ Stock Issuance Plan) in return
for the grant of new options for the same or different number of option shares
with an exercise price per share based upon the fair market value of the common
stock on the new grant date.
Stock appreciation rights are authorized for issuance under the
Discretionary Option Grant Program. These rights provide the holders with the
election to surrender their outstanding options for an appreciation distribution
from us equal to the excess of (i) the fair market value of the vested shares of
common stock subject to the surrendered option over (ii) the aggregate exercise
price payable for those shares. Such appreciation distribution may be made in
cash or in shares of common stock. None of the incorporated options from the
1997 Stock Option/Stock Issuance Plan contain any stock appreciation rights.
In the event that we are acquired by merger or asset sale, each outstanding
option under the Discretionary Option Grant Program which is not to be assumed
by the successor corporation will automatically accelerate in full, and all
unvested shares under the Discretionary Option Grant and
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<PAGE>
Stock Issuance Programs will immediately vest, except to the extent our
repurchase rights with respect to those shares are to be assigned to the
successor corporation. The plan administrator has complete discretion to grant
one or more options under the Discretionary Option Grant Program which will vest
and become exercisable for all the option shares in the event those options are
assumed in the acquisition and the optionee's service with us or the acquiring
entity is terminated within a designated period (not to exceed eighteen months)
following that acquisition. The vesting of outstanding shares under the Stock
Issuance Program may be accelerated upon similar terms and conditions.
The plan administrator is also authorized to grant options and structure
repurchase rights so that the shares subject to those options or repurchase
rights will immediately vest in connection with a change in ownership or control
(whether by successful tender offer for more than fifty percent of our
outstanding voting stock or by a change in the majority of our board through one
or more contested elections for board membership). Such accelerated vesting may
occur either at the time of such change or upon the subsequent termination of
the individual's service within a designated period (not to exceed eighteen
months) following the change.
The options incorporated from the 1997 Stock Option/Stock Issuance Plan will
immediately vest if we are acquired by merger or asset sale, unless our
repurchase rights with respect to the unvested shares subject to those options
are assigned to the successor entity. There are no other change in control
provisions currently in effect for those options. However, the plan
administrator has the discretion to extend the acceleration provisions of the
1999 Stock Incentive Plan to any or all of the options outstanding under the
1997 Stock Option/Stock Issuance Plan.
In the event the plan administrator elects to activate the Salary Investment
Option Grant Program for one or more calendar years, each executive officer and
other highly compensated employee selected for participation may elect, prior to
the start of the calendar year, to reduce his or her base salary for that
calendar year by a specified dollar amount not less than $10,000 nor more than
$50,000. Each selected individual who files this timely election will
automatically be granted, on the first trading day in January of the calendar
year for which that salary reduction is to be in effect, a non-statutory option
to purchase that number of shares of common stock determined by dividing the
salary reduction amount by two-thirds of the fair market value per share of
common stock on the grant date. The option will be exercisable at a price per
share equal to one-third of the fair market value of the option shares on the
grant date. As a result, the total spread on the option shares at the time of
grant (the fair market value of the option shares on the grant date less the
aggregate exercise price payable for those shares) will be equal to the amount
of salary invested in that option. The option will vest and become exercisable
in a series of twelve equal monthly installments over the calendar year for
which the salary reduction is to be in effect.
Under the Automatic Option Grant Program, eligible non-employee board
members will receive a series of option grants over their period of board
service. Each individual who first becomes a non-employee board member at any
time at or after April 6, 1999 will receive an option grant for 28,800 shares of
common stock on the date such individual joins the board, provided such
individual has not been in our prior employ. In addition, on the date of each
annual stockholders meeting held after April 6, 1999, each non-employee board
member who is to continue to serve as a non-employee board member (including the
individuals who are currently serving as non-employee board members) will
automatically be granted an option to purchase 7,200 shares of common stock,
provided such individual has served on the board for at least six months. There
will be no limit on the number of such 7,200 share option grants any one
eligible non-employee Board member may receive over his or her period of
continued board service, and non-employee board members who have previously been
in our employ will be eligible to receive one or more such annual option grants
over their period of board service.
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Each automatic grant will have an exercise price per share equal to the fair
market value per share of common stock on the grant date and will have a term of
10 years, subject to earlier termination following the optionee's cessation of
board service. Each automatic option will be immediately exercisable for all of
the option shares; however, any unvested shares purchased under the option will
be subject to repurchase by us, at the exercise price paid per share, should the
optionee cease to serve on the board service prior to vesting in those shares.
The shares subject to each initial 28,800-share automatic option grant will vest
in a series of six successive equal semi-annual installments upon the optionee's
completion of each six-month period of board service over the thirty-six-month
period measured from the grant date. The shares subject to each annual
7,200-share automatic grant will vest in two successive equal semi-annual
installments upon the optionee's completion of each six-month period of board
service measured from the grant date. However, the shares will immediately vest
in full upon certain changes in control or ownership or upon the optionee's
death or disability while a board member. Following the optionee's cessation of
board service for any reason, each option will remain exercisable for a 12-month
period and may be exercised during that time for any or all shares in which the
optionee is vested at the time of such cessation of service.
If the Director Fee Option Grant Program is activated in the future, each
non-employee board member will have the opportunity to apply all or a portion of
any annual retainer fee otherwise payable in cash to the acquisition of a
below-market option grant. The option grant will automatically be made on the
first trading day in January in the year for which the retainer fee would
otherwise be payable in cash. The option will have an exercise price per share
equal to one-third of the fair market value of the option shares on the grant
date, and the number of shares subject to the option will be determined by
dividing the amount of the retainer fee applied to the program by two-thirds of
the fair market value per share of common stock on the grant date. As a result,
the total spread on the option (the fair market value of the option shares on
the grant date less the aggregate exercise price payable for those shares) will
be equal to the portion of the retainer fee invested in that option. The option
will vest and become exercisable for the option shares in a series of twelve
equal monthly installments over the calendar year for which the election is to
be in effect. However, the option will become immediately exercisable and vested
for all the option shares upon (i) certain changes in the ownership or control
or (ii) the death or disability of the optionee while serving as a board member.
The shares subject to each option under the Salary Investment Option Grant,
Automatic Option Grant and Director Fee Option Grant Programs will immediately
vest upon (i) an acquisition of us by merger or asset sale or (ii) the
successful completion of a tender offer for more than 50% of our outstanding
voting stock or a change in the majority of our board effected through one or
more contested elections for board membership.
Limited stock appreciation rights will automatically be included as part of
each grant made under the Automatic Option Grant, Salary Investment Option Grant
and Director Fee Option Grant Programs and may be granted to one or more
officers as part of their option grants under the Discretionary Option Grant
Program. Options with this limited stock appreciation right may be surrendered
to us upon the successful completion of a hostile tender offer for more than 50%
of our outstanding voting stock. In return for the surrendered option, the
optionee will be entitled to a cash distribution from us in an amount per
surrendered option share equal to the excess of (i) the highest price per share
of common stock paid in connection with the tender offer over (ii) the exercise
price payable for such share.
The board may amend or modify the 1999 Stock Incentive Plan at any time,
subject to any required stockholder approval. The 1999 Stock Incentive Plan will
terminate on the earliest of (i) February 28, 2009, (ii) the date on which all
shares available for issuance under the 1999 Stock Incentive Plan have been
issued as fully vested shares or (iii) the termination of all outstanding
options in connection with certain changes in control or ownership of us.
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1999 EMPLOYEE STOCK PURCHASE PLAN
Our 1999 Employee Stock Purchase Plan was adopted by the board on March 16,
1999 and became effective in April 1999. The plan is designed to allow our
eligible employees and those of our participating subsidiaries to purchase
shares of common stock, at semi-annual intervals, through their periodic payroll
deductions under the plan.
One million two hundred thousand shares (1,200,000) of common stock have
been reserved for issuance under the plan. The reserve will automatically
increase on the first trading in January each year, beginning with calendar year
2000, by an amount equal to one percent of the total number of outstanding
shares of our common stock on the last trading day in December in the
immediately preceding calendar year, but in no event will any such annual
increase exceed 780,000 shares.
The plan will be implemented in a series of successive offering periods,
each with a maximum duration of 24 months. However, the initial offering period
began on April 6, 1999 and will end on the last business day in April 2001. The
next offering period will commence on the first business day in May 2001, and
subsequent offering periods will commence as designated by the plan
administrator.
Individuals who are eligible employees (scheduled to work more than 20 hours
per week for more than five calendar months per year) on the start date of any
offering period may enter the plan on that start date or on any subsequent
semi-annual entry date (the first business day of May or November each year).
Individuals who become eligible employees after the start date of the offering
period may join the plan on any subsequent semi-annual entry date within that
offering period.
Payroll deductions may not exceed 15% of the participant's cash earnings,
and the accumulated payroll deductions of each participant will be applied to
the purchase of shares on his or her behalf on each semi-annual purchase date
(the last business day in April and October each year) at a purchase price per
share equal to 85% of the lower of (i) the fair market value of the common stock
on the participant's entry date into the offering period or (ii) the fair market
value on the semi-annual purchase date. In no event, however, may any
participant purchase more than 900 shares on any semi-annual purchase date, nor
may all participants in the aggregate purchase more than 300,000 shares on any
semi-annual purchase date.
If the fair market value per share of our common stock on any purchase date
is less than the fair market value per share on the start date of the two-year
offering period, then that offering period will automatically terminate, and a
new two-year offering period will begin on the next business day, with all
participants in the terminated offering to be automatically transferred to the
new offering period.
Should we be acquired by merger, sale of substantially all our assets or
sale of securities possessing more than fifty percent of the total combined
voting power of our outstanding securities, then all outstanding purchase rights
will automatically be exercised immediately prior to the effective date of an
acquisition. The purchase price will be equal to 85% of the lower of (i) the
fair market value per share of common stock on the participant's entry date into
the offering period in which an acquisition occurs or (ii) the fair market value
per share of common stock immediately prior to an acquisition. The limitation on
the maximum number of shares purchasable in the aggregate on any one purchase
date will not be in effect for any purchase date attributable to such an
acquisition.
The plan will terminate on the earlier of (i) the last business day of April
2009, (ii) the date on which all shares available for issuance under the plan
shall have been sold pursuant to purchase rights exercised thereunder or (iii)
the date on which all purchase rights are exercised in connection with an
acquisition of us by merger or asset sale.
The board may at any time alter, suspend or discontinue the plan. However,
certain amendments may require stockholder approval.
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LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS
Our certificate of incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. In addition, our bylaws require us to
indemnify our directors and officers, and allow us to indemnify our other
employees and agents, to the fullest extent permitted by law. We have also
entered into agreements to indemnify our directors and certain executive
officers. We believe that these provisions and agreements are necessary to
attract and retain qualified directors and executive officers. At present, there
is no pending litigation or proceeding involving any director, officer, employee
or agent where indemnification will be required or permitted. We are not aware
of any threatened litigation or proceeding that might result in a claim for such
indemnification. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers or persons controlling
our company pursuant to the foregoing provisions, we have been informed 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.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
SERIES A PURCHASE AGREEMENT
On July 3, 1997, we entered into a Series A Preferred Stock Purchase
Agreement with Enterprise Partners, Brentwood Venture Capital, Kleiner Perkins
Caufield & Byers, The Sprout Group and certain other investors (together, the
"Series A Purchasers"). In a series of three closings, the Series A Purchasers
purchased in the aggregate 12,280,000 shares of our Series A preferred stock for
an aggregate purchase price of $12.3 million, which converted into 29,472,000
shares of common stock upon the closing of the initial public offering of our
common stock in April 1999. Also, pursuant to a Subsequent Closing Purchase
Agreement dated as of December 23, 1997, we sold an additional 210,000 shares of
our Series A preferred stock to certain other investors (the "Additional Series
A Purchasers") for an aggregate purchase price of $210,000, which converted into
504,000 shares of common stock upon the closing of the initial public offering
of our common stock in April 1999. In connection with these sales, we entered
into an Investors' Rights Agreement and Addendum with the Series A Purchasers
and the Additional Series A Purchasers, which provided the Series A Purchasers
and Additional Series A Purchasers with certain demand and piggyback
registration rights, and certain rights of first offer in the event we propose
to offer for sale certain of our securities. This investors' rights agreement
and addendum has been superseded by the 1999 Investors' Rights Agreement from
the Qwest investment. Please see "--Investors' Rights Agreement."
In connection with an employment agreement between us and Catherine Hapka,
we issued 365,094 shares of Series A preferred stock at a purchase price of
$0.80 per share to Ms. Hapka, which converted into 876,226 shares of common
stock upon the closing of the initial public offering of our common stock in
April 1999. Please see "Management--Employment Agreements and Change in Control
Arrangements."
SERIES B PURCHASE AGREEMENT
On March 12, 1998, we entered into a Series B Preferred Stock Purchase
Agreement with certain of the Series A Purchasers and Enron Communications
Group, Inc. (together, the "Series B Purchasers"). Under this agreement, the
Series B Purchasers acquired an aggregate of 4,044,943 shares of Series B
preferred stock for an aggregate purchase price of $18.0 million, which
converted into 9,707,863 shares of common stock upon the closing of the initial
public offering of our common stock in April 1999. In connection with the Series
B Preferred Stock Purchase Agreement, we entered into an Amended and Restated
Investors' Rights Agreement with the Series A Purchasers, the Additional Series
A Purchasers and the Series B Purchasers on March 12, 1998. This agreement
replaced the investors' rights agreement and addendum from the Series A
preferred stock financing and has been superseded by the 1999 Investors' Rights
Agreement from the Qwest investment. Please see "--Investors' Rights Agreement."
SERIES C PURCHASE AGREEMENT; OTHER AGREEMENTS WITH MCI WORLDCOM
In March 1999, we entered into a Series C Preferred Stock and Warrant
Purchase Agreement with MCI WorldCom's investment fund, pursuant to which the
fund acquired, for an aggregate purchase price of $30.0 million, 3,731,410
shares of Series C preferred stock, which converted into 4,477,692 shares of
common stock upon the closing of the initial public offering of our common stock
in April 1999, and a warrant to purchase an aggregate of 720,000 shares of our
common stock at $6.70 per share. In April 1999, we issued to MCI WorldCom's
investment fund a warrant to purchase an additional 136,996 shares of common
stock at $21.00 per share. In connection with this purchase agreement, we
entered into an Amended and Restated Investors' Rights Agreement, which replaced
the investors' rights agreement from the Series B Preferred Stock financing and
has been superseded by
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the 1999 Investors' Rights Agreement from the Qwest investment. Please see
"--Investors' Rights Agreement."
The MCI WorldCom investment was part of a broader strategic arrangement
between us and MCI WorldCom. As part of this strategic arrangement, we also
entered into an agreement with MCI WorldCom which designates us as MCI
WorldCom's preferred provider of business DSL lines in certain circumstances,
and which provides that MCI WorldCom is committed to sell at least 100,000 of
our DSL lines over a period of five years, subject to penalties for failure to
reach target commitments. In turn, we have designated MCI WorldCom as our
preferred provider of network services. See "Business--Strategic Partnerships."
SERIES C PURCHASE AGREEMENT; OTHER AGREEMENTS WITH MICROSOFT
In March 1999, we entered into a Series C Preferred Stock and Warrant
Purchase Agreement with Microsoft, pursuant to which Microsoft acquired, for an
aggregate purchase price of $30.0 million, 3,731,409 shares of Series C
preferred stock, which converted into 4,477,691 shares of common stock upon the
closing of the initial public offering of our common stock in April 1999, and a
warrant to purchase an aggregate of 720,000 shares of our common stock at a
purchase price of $6.70 per share. In connection with this purchase agreement,
we entered into an Amended and Restated Investors' Rights Agreement dated March
16, 1999 which replaced the investors' rights agreement from the MCI WorldCom
investment and has been superseded by the 1999 Investors' Rights Agreement from
the Qwest investment. Please see "--Investors' Rights Agreement."
The Microsoft investment was also part of a broader strategic arrangement.
As part of the Microsoft arrangement, we entered into an agreement in which
Microsoft agreed to jointly distribute with us a co-branded DSL version of the
Microsoft Network service focused on our small business customers. See
"Business--Strategic Partnerships."
SERIES C PURCHASE AGREEMENT AND SERIES D PURCHASE AGREEMENT; OTHER AGREEMENTS
WITH QWEST
In connection with a broader customer relationship between us and Qwest, in
April 1999 we entered into a Series C Preferred Stock and Warrant Purchase
Agreement and a Series D Preferred Stock Purchase Agreement with U.S.
Telesource, Qwest's wholly owned subsidiary. Pursuant to these agreements it
acquired, for an aggregate purchase price of approximately $15 million, 932,836
shares of Series C preferred stock, which converted into 1,119,403 shares of
common stock upon the closing of the initial public offering of our common stock
in April 1999, 441,176 shares of Series D preferred stock, which converted into
441,176 shares of common stock upon the closing of the initial public offering
of our common stock in April 1999, and a warrant to purchase an aggregate of
180,000 shares of our common stock at a purchase price of $6.70 per share. In
connection with these purchase agreements, we entered into an Amended and
Restated Investors' Rights Agreement (the "1999 Investors' Rights Agreement"),
that replaced the investors' rights agreement from the Microsoft investment.
Please see "--Investors Rights Agreement."
The Qwest investment was also part of a broader strategic arrangement
between us and Qwest. As part of the Qwest relationship, Qwest has committed to
purchase from us performance class DSL services for re-sale to its customers. In
return, we have agreed to use Qwest's network and application hosting services
in certain situations.
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INVESTORS' RIGHTS AGREEMENT
Pursuant to the terms of the 1999 Investors' Rights Agreement, the former
holders of preferred stock acquired certain registration rights with respect to
our common stock. At any time after October 6, 1999:
- holders of 60% or more of the registrable securities, as defined in the
1999 Investors' Rights Agreement, may require us to register for public
sale no less than 20% of their shares then outstanding; or
- Enron may require us to register for public sale no less than 20% of our
shares it then holds; or
- MCI WorldCom's investment fund may require us to register for public sale
no less than 20% of our shares it then holds.
In addition, if certain competitors of MCI WorldCom or Qwest acquire greater
than 5% of our common stock, then MCI WorldCom's investment fund or Qwest's
wholly owned subsidiary, as the case may be, may require us to register for
public sale all of its shares of our stock (each, a "Contingent Demand for
Registration").
Our Board of Directors may defer any of the above demands for registration
for a period up to 120 days. We are obligated to effect only:
- two such registrations pursuant to the request of holders of 60% or more
of the registrable securities,
- one such registration pursuant to the request of Enron,
- one such registration pursuant to the request of MCI WorldCom's investment
fund,
- one Contingent Demand for Registration pursuant to the request of MCI
WorldCom's investment fund, and
- one Contingent Demand for Registration pursuant to the request of Qwest's
subsidiary.
In addition, if we propose to register securities under the Securities Act,
with certain exceptions, then any of the parties to the 1999 Investors' Rights
Agreement has a right to request that we register such holder's registrable
securities, subject to quantity limitations determined by underwriters if the
offering involves an underwriting. All registration expenses incurred in
connection with the registrations described above and all piggyback
registrations will be borne by us. The participating stockholders will pay for
underwriting discounts and commissions incurred in connection with any such
registrations. We have agreed to indemnify the parties to the agreement against
certain liabilities in connection with any registration effected pursuant to the
1999 Investors' Rights Agreement, including Securities Act liabilities. Further,
the holders of 40% or more of the registrable securities may require us to
register all or a portion of our registrable securities on Form S-3 (a "Form S-3
Registration") when we qualify to file on such form, provided that the aggregate
proceeds of each such registration are at least $5 million and subject to
certain other conditions and limitations, including our ability to defer the
filing of the Form S-3 Registration for a period of not more than 120 days in
certain circumstances. All expenses incurred in connection with such a Form S-3
Registration shall be borne pro rata by the stockholders participating in the
Form S-3 Registration. All registration rights will terminate no later than
April 12, 2004. We have agreed to indemnify the stockholders against certain
liabilities in connection with any registration effected pursuant to the 1999
Investors' Rights Agreement, including liabilities under the Securities Act.
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OFFERING OF NOTES AND WARRANTS
On May 5, 1998, we closed a private placement of units consisting of $290
million aggregate principal amount at maturity of senior discount notes and
warrants to purchase 4,732,800 shares of our common stock. In October 1998, we
exchanged our senior discount notes for a like principal amount of 1998 senior
discount notes that we registered under the Securities Act. Certain associates
of Donaldson, Lufkin & Jenrette Securities Corporation ("DLJSC"), an initial
purchaser in the May 1998 offering, own an aggregate of 8,278,651 shares of our
common stock, which represent in the aggregate approximately 11.5% of our
outstanding equity.
Of these, Sprout Capital VII, L.P. beneficially owns 7,201,565 shares of our
common stock, which represent in the aggregate approximately 10.0% of our
outstanding equity. All of the shares owned by Sprout Capital VII, L.P. are
subject to a voting trust and are held by an independent third party as trustee.
The trustee will vote such shares in its sole and absolute discretion as advised
by an independent adviser who is not affiliated with Sprout Capital VII, L.P.
and DLJSC.
Also, Mr. Keith B. Geeslin is currently a member of our Board of Directors.
Mr. Geeslin is a Divisional Senior Vice President of DLJ Capital Corporation, a
wholly owned subsidiary of Donaldson, Lufkin & Jenrette, Inc., the parent of
DLJSC. Mr. Geeslin is also one of several individuals who serve as general
partners of DLJ Associates VII, L.P., which is a general partner of Sprout
Capital VII, L.P. DLJ Capital Corporation is the managing general partner of
each of Sprout Capital VII, L.P. and The Sprout CEO Fund, L.P.
DIRECTOR RELATIONSHIPS
William R. Stensrud, a member of our Board of Directors, also served as our
President and Chief Executive Officer from February 1997 through June 1997. Mr.
Stensrud and Mr. Geeslin, also a member of our Board of Directors, each also
serve as directors for Paradyne Corporation, one of our vendors. Additionally,
from June 1996 through December 1996, Mr. Stensrud served as President of
Paradyne Corporation. John L. Walecka, a member of our Board of Directors, also
serves as a director for Xylan Corporation, an indirect vendor to us. For the
period ended December 31, 1997 and for the year ended December 31, 1998, we made
purchases totaling approximately $419,000 and $13.0 million, respectively, from
Paradyne Corporation. We do not purchase any products directly from Xylan
Corporation; rather, our purchase of Xylan Corporation products is sourced
through Paradyne Corporation. We believe that our transactions with Paradyne
Corporation and Xylan Corporation were completed at rates similar to those
available from alternative vendors.
Susan Mayer, a member of our Board of Directors, also serves as President of
MCI WorldCom's investment fund and a Senior Vice President of MCI WorldCom, Inc.
In March 1999, we entered into a strategic arrangement with MCI WorldCom, Inc.
As part of this strategic arrangement, MCI WorldCom's investment fund invested
$30.0 million in us. Please see "Business--Strategic Partnerships."
LEGAL SERVICES
Jeffrey Blumenfeld, our Vice President and General Counsel, also serves as a
partner of Blumenfeld & Cohen, a law firm which performs legal services for us.
In connection with Mr. Blumenfeld's employment with us, we issued to him options
to purchase 438,115 shares of common stock at an exercise price of $0.04 per
share, which were exercised in January 1998. In addition, Mr. Blumenfeld and
certain other partners of Blumenfeld & Cohen purchased an aggregate of 140,000
shares of Series A preferred stock at $1.00 per share, which converted into
336,000 shares of common stock upon the closing of the initial public offering
of our common stock in April 1999. For the period ended December 31, 1997 and
for the year ended December 31, 1998, we incurred expenses for legal fees to
Blumenfeld & Cohen of approximately $92,000 and $1.3 million, respectively.
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Pursuant to the terms of a written employment agreement with Mr. Blumenfeld,
we have agreed to employ him as Vice President and General Counsel at an annual
salary of $110,000 for a minimum time commitment by Mr. Blumenfeld of 24 hours a
week. Under the terms of such agreement, Blumenfeld & Cohen has agreed to charge
us at a discount from its regular rates for legal services, including Mr.
Blumenfeld's time in excess of his minimum time commitment.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of May 31, 1999 with
respect to the beneficial ownership of our common stock by:
- each person known by us to own beneficially more than five percent, in the
aggregate, of the outstanding shares of our common stock,
- our directors and our Named Executive Officers, and
- all executive officers and directors as a group.
Share ownership in each case includes shares issuable upon exercise of
outstanding options and warrants that are exercisable within 60 days of May 31,
1999 as described in the footnotes below. Percentage of ownership is calculated
pursuant to SEC Rule 13d-3(d)(1). Unless otherwise indicated, the address for
each stockholder is c/o Rhythms NetConnections Inc., 6933 South Revere Parkway,
Englewood, Colorado 80112.
<TABLE>
<CAPTION>
NUMBER OF
BENEFICIALLY PERCENTAGE
BENEFICIAL OWNER(1) OWNED SHARES(1) BENEFICIALLY OWNED
- ----------------------------------------------------------------------------- ---------------- ---------------------
<S> <C> <C>
Brentwood Venture Capital(2)................................................. 8,278,651 11.5%
Enterprise Partners(3)....................................................... 10,440,415 14.5%
Kleiner Perkins Caufield & Byers(4).......................................... 8,278,651 11.5%
MCI WorldCom Venture Fund, Inc.(5)........................................... 5,334,688 7.3%
The Sprout Group(6).......................................................... 8,278,651 11.5%
Enron Communications Group(7)................................................ 5,393,258 7.5%
Microsoft Corporation(8)..................................................... 5,197,691 7.2%
Catherine M. Hapka(9)........................................................ 4,621,130 6.4%
Michael E. Calabrese......................................................... 360,000 *
Eric H. Geis................................................................. 150,000 *
James A. Greenberg(10)....................................................... 715,642 1.0%
Gloria Farler(11)............................................................ 30,000 *
Kevin R. Compton(12)......................................................... -- --
Keith B. Geeslin(13)......................................................... -- --
Ken Harrison(14)............................................................. -- --
Susan Mayer(15).............................................................. -- --
William R. Stensrud(16)...................................................... -- --
John L. Walecka(17).......................................................... -- --
Edward J. Zander(18)......................................................... 50,000 *
All directors and executive officers as a group (18 persons)(19)............. 8,284,168 11.4%
</TABLE>
- ------------------------------
* Represents beneficial ownership of less than one percent of the outstanding
shares of our common stock.
(1) Except as indicated by footnote, we understand that the persons named in the
table above have sole voting and investment power with respect to all shares
shown as beneficially owned by them, subject to community property laws
where applicable.
(2) Consists of shares beneficially owned by Brentwood Affiliates Fund, L.P. and
Brentwood Associates VII, L.P. (collectively, the "Brentwood Entities"). The
address for the Brentwood Entities is 3000 Sand Hill Road, Building 1, Suite
260, Menlo Park, California 94025.
(3) Consists of shares beneficially owned by Enterprise Partners III Associates,
L.P., Enterprise Partners III, L.P. and Enterprise Partners IV, L.P.
(collectively, the "Enterprise Entities"). The address for each of the
Enterprise Entities is 7979 Ivanhoe, Suite 550, La Jolla, California 92037.
(4) Consists of shares beneficially owned by Kleiner Perkins Caufield & Byers
VIII, KPCB VIII Founders Fund and KPCB VIII Information Sciences Zaibatsu
Fund II (collectively, the "KPCB Entities"). The address for each of the
KPCB Entities is 2750 Sand Hill Road, Menlo Park, California 94025.
(5) Includes 856,996 shares issuable upon exercise of warrants exercisable
within 60 days of May 31, 1999. The address for MCI WorldCom Venture Fund,
Inc. is 1801 Pennsylvania Avenue, Washington, D.C. 20006.
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(6) Consists of shares beneficially owned by DLJ Capital Corporation, DLJ First
ESC L.L.C., Sprout Capital VII, L.P. and The Sprout CEO Fund, L.P.
(collectively, the "Sprout Entities"). The address for each of the Sprout
Entities is 3000 Sand Hill Road, Building 3, Suite 170, Menlo Park,
California 94025. Of these, Sprout Capital VII, L.P. beneficially owns
7,201,565 shares. All of the shares beneficially owned by Sprout Capital
VII, L.P. are subject to a voting trust agreement and are held and voted by
an independent third party, First Union Trust Company, National Association,
as voting trustee. Please see "Certain Relationships and Related
Transactions--Offering of Notes and Warrants."
(7) The address for Enron Communications Group, Inc. is 210 Southwest Morrison
Street, Suite 400, Portland, Oregon 97204.
(8) Includes 720,000 shares issuable upon exercise of a warrant exercisable
within 60 days of May 31, 1999. The address for Microsoft Corporation is One
Microsoft Way, Redmond, Washington 98052.
(9) Includes shares held by Ms. Hapka's children, Christopher H. Safaya and
Catherine A. Safaya, in the amount of 5,333 shares each and shares held by
Christopher H. Safaya 1999 Trust and Catherine A. Safaya 1999 Trust in the
amount of 120,000 shares each.
(10) Includes 120,000 shares issuable upon exercise of options exercisable
within 60 days of May 31, 1999.
(11) Ms. Farler resigned in February 1999.
(12) Excludes shares held by the KPCB Entities. Mr. Compton, as a General
Partner of KPCB, may be deemed to have voting and investment power over the
shares held by the KPCB Entities. Mr. Compton disclaims beneficial interest
in such shares, except to the extent of his interest in the KPCB Entities.
(13) Excludes shares held by the Sprout Entities. Mr. Geeslin, as a General
Partner of The Sprout Group, may be deemed to have voting and investment
power over the shares held by the Sprout Entities. Mr. Geeslin disclaims
beneficial interest in such shares, except to the extent of his interest in
the Sprout Entities.
(14) Excludes shares held by Enron. Mr. Harrison, as Chairman of Enron, may be
deemed to have voting and investment power over the shares held by Enron.
Mr. Harrison disclaims beneficial interest in such shares, except to the
extent of his interest in Enron.
(15) Excludes shares held by MCI WorldCom's investment fund. Ms. Mayer, as
President of MCI WorldCom's investment fund, may be deemed to have voting
and investment power over the shares held by MCI WorldCom's investment fund.
Ms. Mayer disclaims beneficial interest on such shares, except to the extent
of her interest in MCI WorldCom's investment fund.
(16) Excludes shares held by the Enterprise Entities. Mr. Stensrud, as a General
Partner of Enterprise Partners, may be deemed to have voting and investment
power over the shares held by the Enterprise Entities. Mr. Stensrud
disclaims beneficial interest in such shares, except to the extent of his
interest in the Enterprise Entities.
(17) Excludes shares held by the Brentwood Entities. Mr. Walecka, as a General
Partner of Brentwood Venture Capital, may be deemed to have voting and
investment power over the shares held by the Brentwood Entities. Mr. Walecka
disclaims beneficial interest in such shares, except to the extent of his
interest in the Brentwood Entities.
(18) Includes 50,000 shares issuable upon exercise of options exercisable within
60 days of May 31, 1999.
(19) Includes 821,282 shares issuable upon exercise of options or warrants
exercisable within 60 days of May 31, 1999 and excludes shares held by the
Brentwood Entities, the Enterprise Entities, the KPCB Entities, MCI
WorldCom, the Sprout Entities, Enron Communications Group and Microsoft.
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THE EXCHANGE OFFER
PURPOSES OF THE EXCHANGE OFFER
We sold the old notes to the initial purchasers. The initial purchasers
resold the old notes to "qualified institutional buyers" (as defined in Rule
144A under the Securities Act). In issuing the old notes, we agreed to use our
reasonable best efforts to cause to become effective within the time period
specified in the registration rights agreement dated April 23, 1999, a
registration statement with respect to the exchange offer (the "Exchange Offer
Registration Statement"). We will file with the SEC a shelf registration
statement (the "Shelf Registration Statement") if:
(1) we are not required to file the Exchange Offer Registration Statement or
permitted to consummate the exchange offer because the exchange offer is
not permitted by applicable law or SEC policy; or
(2) any holder of old notes notifies us prior to the 20th day following the
consummation of the exchange offer that:
(a) it is prohibited by law or SEC policy from participating in the
exchange offer; or
(b) it may not resell the new notes it acquired in the exchange offer to
the public without delivering a prospectus and the prospectus
contained in the Exchange Offer Registration Statement is not
appropriate or available for such resales; or
(c) it is a broker-dealer and owns old notes acquired directly from us or
one of our affiliates.
The Shelf Registration Statement will cover resales of old notes by holders who
have provided certain information required by us in connection with the Shelf
Registration Statement.
We are making the exchange offer to satisfy our obligations under the
registration rights agreement. Once the exchange offer is complete, we will have
no further obligation to register any of the old notes not tendered by the
holders for exchange. See "Risk Factors--Consequences of not tendering old notes
in the exchange offer." We filed a copy of the registration rights agreement as
an exhibit to the registration statement of which this prospectus is a part.
We believe that new notes issued in the exchange offer in exchange for old
notes may be offered for resale, resold and otherwise transferred by their
holders without compliance with the registration and prospectus delivery
provisions of the Securities Act. Our belief is based on an interpretation by
the staff of the SEC set forth in the staff's Exxon Capital Holdings Corp. SEC
No-Action Letter (available April 13, 1989), Morgan Stanley & Co., Inc. SEC
No-Action Letter (available June 5, 1991), Shearman & Sterling SEC No-Action
Letter (available July 7, 1993), and other no-action letters issued to third
parties. Any holder who is an "affiliate" of ours or who intends to participate
in the exchange offer for the purpose of distributing the new notes:
(1) cannot rely on the interpretation by the staff of the SEC set forth in
the above referenced no-action letters,
(2) cannot tender its old notes in the exchange offer, and
(3) must comply with the registration and prospectus delivery requirements
of the Securities Act in connection with any sale or transfer of the old
notes, unless such sale or transfer is made pursuant to an exemption from
such requirements.
In addition, each broker-dealer that holds old notes acquired for its own
account as a result of market-making or other trading activities (a
"Participating Broker-Dealer") that receives new notes for its own account in
exchange for old notes not acquired directly from us must acknowledge that it
will deliver a prospectus in connection with any resale of such new notes. See
"Plan of Distribution."
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Except as described above, this prospectus may not be used for an offer to
resell, resale or other transfer of new notes.
TERMS OF THE EXCHANGE OFFER
GENERAL. Upon the terms and subject to the conditions of the exchange offer
described in this prospectus and the letter of transmittal, we will accept any
and all old notes validly tendered and not withdrawn before 5:00 p.m., New York
City time, on the expiration date. We will issue $1,000 principal amount of new
notes in exchange for each $1,000 principal amount of outstanding old notes
accepted in the exchange offer. You may tender some or all of your old notes
pursuant to the exchange offer. Old notes may be tendered only in integral
multiples of $1,000 principal amount.
As of May 31, 1999, there was $325 million of aggregate principal amount of
the old notes outstanding. We are sending this prospectus, together with the
letter of transmittal to such registered holders as of , 1999.
We arranged for the old notes to be issued and transferable in book-entry
form through the facilities of The Depository Trust Company acting as
depositary. The new notes will also be issued and transferable in book-entry
form through DTC. See "--Book-Entry Transfer; Delivery and Form."
We will accept validly tendered old notes by giving oral or written notice
of acceptance to the exchange agent. The exchange agent will act as agent for
the tendering holders of old notes for the purpose of receiving the new notes
from us.
If any tendered old notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events described in this
prospectus or otherwise, the certificates for any such unaccepted old notes will
be returned, without expense, to the holder tendering them or the appropriate
book-entry transfer will be made, in each case, as promptly as practicable after
the expiration date.
You will not be required to pay brokerage commissions or fees or, subject to
the instructions in the letter of transmittal, transfer taxes with respect to
the exchange of old notes tendered in the exchange offer. We will pay the
expenses, other than certain applicable taxes, of the exchange offer. See
"--Fees and Expenses."
WE ARE NOT MAKING, NOR IS OUR BOARD OF DIRECTORS MAKING, ANY RECOMMENDATION
TO YOU AS TO WHETHER TO TENDER OR REFRAIN FROM TENDERING ALL OR ANY PORTION OF
YOUR OLD NOTES IN THE EXCHANGE OFFER. NO ONE HAS BEEN AUTHORIZED TO MAKE ANY
SUCH RECOMMENDATION. YOU MUST MAKE YOUR OWN DECISION WHETHER TO TENDER IN THE
EXCHANGE OFFER AND, IF SO, THE AGGREGATE AMOUNT OF OLD NOTES TO TENDER AFTER
READING THIS PROSPECTUS AND THE LETTER OF TRANSMITTAL AND CONSULTING WITH YOUR
ADVISERS, IF ANY, BASED ON YOUR OWN FINANCIAL POSITION AND REQUIREMENTS.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS. The "expiration date" is ,
1999. In our sole discretion, we may extend the exchange offer, in which case
the term "expiration date" means the latest date to which the exchange offer is
extended.
To extend the expiration date, we will notify the exchange agent and the
record holders of old notes of any extension by oral (followed by written)
notice, before 9:00 a.m., New York City time, on the business day following the
previously scheduled expiration date. We may extend the exchange offer for a
specified period of time or on a daily basis until 5:00 p.m., New York City
time, on the date on which a specified percentage of old notes are tendered.
We reserve the right to delay accepting any old notes, to extend the
exchange offer, to amend the exchange offer or to terminate the exchange offer
and not accept old notes not previously accepted if any of the conditions
described in "--Conditions" occurs and is not waived. Waiver must be given by
oral or written notice to the exchange agent as promptly as practicable. If the
exchange offer is
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amended in a manner we determine to be material, we will promptly disclose such
amendment in a manner reasonably calculated to inform the holders of such
amendment. We will also extend the exchange offer in such circumstances for a
period of five to ten business days, depending upon the significance of the
amendment and the manner of disclosure to holders of the old notes, if the
exchange offer would otherwise expire during such five to ten business day
period.
We have no obligation to publish, advertise, or otherwise communicate any
public announcement of any delay, extension, amendment or termination of the
exchange offer, other than by making a timely release to the Dow Jones News
Service. We may make such announcement in any additional ways at our discretion.
INTEREST ON THE NEW NOTES AND THE OLD NOTES
The old notes will continue to accrue interest at the rate of 12 3/4% per
annum through (but not including) the date of issuance of the new notes. Any old
notes not tendered or accepted for exchange will continue to accrue interest at
the rate of 12 3/4% per annum in accordance with their terms. From and after the
date of issuance of the new notes, the new notes will accrue interest at the
rate of 12 3/4% per annum. Interest on the new notes and any old notes not
tendered or accepted for exchange will be payable semi-annually in arrears on
April 15 and October 15 of each year, commencing on October 15, 1999.
PROCEDURES FOR TENDERING
To tender in the exchange offer, you must follow these steps:
(a) complete, sign and date the letter of transmittal, or a facsimile of it;
(b) have the signatures on the letter guaranteed if required by Instruction
3 of the letter of transmittal; and
(c) mail or otherwise deliver such letter of transmittal or such facsimile,
together with the old notes and any other required documents, to the
exchange agent before 5:00 p.m., New York City time, on the expiration
date.
If delivery of the old notes is made through book-entry transfer into the
exchange agent's account at DTC, you must tender the old notes in accordance
with DTC's Automated Tender Offer Program (ATOP) procedures. See "--Book-Entry
Transfer; Delivery and Form."
Your tender of old notes will constitute an agreement between us in
accordance with the terms and subject to the conditions set forth in this
prospectus and in the letter of transmittal.
You must deliver all documents for tender to the exchange agent at its
address set forth below. You may also request your brokers, dealers, commercial
banks, trust companies or nominees to effect the above transactions for you.
THE METHOD OF DELIVERY OF CERTIFICATES, THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS, IS AT YOUR OPTION AND YOUR SOLE RISK. DOCUMENTS ARE
DELIVERED ONLY WHEN ACTUALLY RECEIVED BY THE EXCHANGE AGENT. IF DELIVERY IS BY
MAIL, WE RECOMMEND REGISTERED MAIL, RETURN RECEIPT REQUESTED, PROPERLY INSURED,
OR AN OVERNIGHT DELIVERY SERVICE. IN ALL CASES, YOU SHOULD ALLOW SUFFICIENT TIME
TO INSURE TIMELY DELIVERY.
Only a holder of old notes may tender such old notes in the exchange offer.
The term "holder" with respect to the exchange offer means any person in whose
name old notes are registered on our books or any other person who has obtained
a properly completed bond power from the registered holder.
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If your old notes are registered in the name of your broker, dealer,
commercial bank, trust company or other nominee and you wish to tender, you
should contact such registered holder promptly and instruct such registered
holder to tender on your behalf. If your old notes are so registered and you
wish to tender on your own behalf, you must, prior to completing and executing
the letter of transmittal and delivering your old notes, either make appropriate
arrangements to register ownership of the old notes in your name or obtain a
properly completed bond power from the registered holder. The transfer of record
ownership may take considerable time.
Signatures on a letter of transmittal or notice of withdrawal must be
guaranteed by a member firm of a registered national securities exchange or of
the National Association of Securities Dealers, Inc., or a commercial bank or
trust company having an office or correspondent in the U.S. (an "Eligible
Institution"). Signatures do not need to be guaranteed if the old notes are
tendered (i) by a registered holder who has not completed the box entitled
"Special Payment Instructions" or "Special Delivery Instructions" on the letter
of transmittal or (ii) for the account of an Eligible Institution.
If the letter of transmittal is signed by a person other than the registered
holder of any old notes listed on the letter, such old notes must be endorsed or
accompanied by appropriate bond powers signed as the name of the registered
holder or holders appears on the old notes.
If the letter of transmittal or any old notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons must indicate their capacity when signing. Unless waived by us, you must
then submit evidence satisfactory to us of their authority to so act with the
letter of transmittal.
We will determine in our sole discretion all questions as to the validity,
form, eligibility (including time of receipt) and acceptance of tendered old
notes and withdrawal of tendered old notes. Our determination will be final and
binding. We reserve the absolute right to reject any and all old notes not
properly tendered or any old notes acceptance of which would, in the opinion of
our counsel, be unlawful for us to accept. We also reserve the right to waive
any defects, irregularities or conditions of tender as to particular old notes.
Our interpretation of the terms and conditions of the exchange offer (including
the instructions in the letter of transmittal) will be final and binding on all
parties. Unless waived, any defects or irregularities in connection with tenders
of old notes must be cured within such time as we determine. No one is under any
duty to give notification of defects or irregularities with respect to tenders
of old notes, nor will any person incur any liability for failure to give such
notification. Old notes are not properly tendered until such irregularities have
been cured or waived. Any old notes received by the exchange agent that are not
properly tendered and as to which the defects or irregularities have not been
cured or waived will be returned by the exchange agent to the tendering holders
of such old notes, unless otherwise provided in the letter of transmittal, as
soon as practicable after the expiration date.
In addition, we reserve the right in our sole discretion:
- to purchase or make offers for any old notes that remain outstanding after
the expiration date;
- to terminate the exchange offer as described in "--Conditions"; and
- to the extent permitted by applicable law, purchase old notes in the open
market, in privately negotiated transactions or otherwise. The terms of
any such purchases or offers could differ from the terms of the exchange
offer.
By tendering, you will represent to us, among other things, that:
- the new notes you acquire in the exchange offer are being obtained in the
ordinary course of your business;
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- you have no arrangement with any person to participate in the distribution
of such new notes; and
- you are not an "affiliate," as defined under Rule 405 of the Securities
Act, of ours.
If you are a Participating Broker-Dealer that will receive new notes for
your own account in exchange for old notes that were not acquired directly from
us, by tendering you will acknowledge that you will deliver a prospectus in
connection with any resale of such new notes. See "Plan of Distribution."
BOOK-ENTRY TRANSFER; DELIVERY AND FORM
The old notes, which were purchased by "qualified institutional buyers" (as
such term is defined in Rule 144A under the Securities Act), were initially
represented by two global old notes in fully registered form, all registered in
the name of a nominee of DTC.
The new notes exchanged for the old notes represented by the global old
notes will be represented by global new notes in fully registered form,
registered in the name of the nominee of DTC.
The global new notes will be exchangeable for definitive new notes in
registered form, in denominations of $1,000 principal amount and integral
multiples of $1,000. The new notes in global form will trade in DTC's same-day
funds settlement system, and secondary market trading activity in such new notes
will therefore settle in immediately available funds.
We understand that the exchange agent will make a request promptly after the
date of this prospectus to establish an account with respect to the old notes at
DTC for the purpose of facilitating the exchange offer. Subject to the
establishment of this account, any financial institution that is a participant
in DTC's system may make book-entry delivery of old notes by causing DTC to
transfer such old notes into the exchange agent's account with respect to the
old notes in accordance with DTC's ATOP procedures for such book-entry
transfers. Although delivery of the old notes may be effected through book-entry
transfer into the exchange agent's account at DTC, the exchange for old notes so
tendered will be made only after two conditions are met.
First, DTC must timely confirm (a "Book-Entry Confirmation") such book-entry
transfer of the old notes into the exchange agent's account.
Second, the exchange agent must timely receive a Book-Entry Confirmation
with a message, transmitted by DTC and received by the exchange agent and
forming part of the Book-Entry Confirmation, which states that DTC has received
express acknowledgment from a participant tendering old notes that such
participant has received and agrees to be bound by the terms of the letter of
transmittal, and that such agreement may be enforced against such participant
(an "Agent's Message").
GUARANTEED DELIVERY PROCEDURES
OLD NOTES HELD THROUGH DTC. If you are a DTC Participant and hold your old
notes through DTC, but you cannot transmit your acceptance through ATOP prior to
the expiration date, you may effect a tender if:
(1) a guaranteed delivery is made by or through an Eligible Institution;
(2) before 5:00 p.m., New York City time on the expiration date, the
exchange agent receives from such Eligible Institution a properly
completed and duly executed notice of guaranteed delivery (by mail, hand
delivery, facsimile transmission or overnight courier) substantially in
the form we have provided; and
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(3) Book-Entry Confirmation and a corresponding Agent's Message are received
by the exchange agent within three New York Stock Exchange trading days
after the date of the execution of the notice of guaranteed delivery.
OLD NOTES HELD BY HOLDERS. If your old notes are not immediately available,
if you cannot deliver your old notes, the letter of transmittal or any other
required documents to the exchange agent prior to the expiration date or if you
cannot complete the procedures for book-entry transfer prior to the expiration
date, you may effect a tender if:
(1) the tender is made through an Eligible Institution;
(2) before the expiration date, the exchange agent receives from such
Eligible Institution a properly completed and duly executed notice of
guaranteed delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the holder of the old notes, the
certificate number or numbers of such old notes and the principal amount
of old notes tendered, stating that the tender is being made thereby and
guaranteeing that, within three New York Stock Exchange trading days
after the expiration date, the letter of transmittal (or facsimile of
such letter) together with the certificate(s) representing the old notes
to be tendered in proper form for transfer and any other documents
required by the letter of transmittal, or a Book-Entry Confirmation, as
the case may be, will be delivered by the Eligible Institution to the
exchange agent; and
(3) such properly completed and executed letter of transmittal (or facsimile
of such letter), as well as the certificate(s) representing all tendered
old notes in proper form for transfer and all other documents required by
the letter of transmittal, or a Book-Entry Confirmation, as the case may
be, are received by the exchange agent within three New York Stock
Exchange trading days after the expiration date.
Upon request of the exchange agent, a notice of guaranteed delivery will be sent
to holders who wish to tender their old notes according to the guaranteed
delivery procedures set forth above.
WITHDRAWAL OF TENDERS
OLD NOTES HELD THROUGH DTC. If you are a DTC Participant and have
transmitted your acceptance through ATOP, you may, before 5:00 p.m., New York
City time, on the expiration date, withdraw the instruction given by such
acceptance by delivering to the exchange agent a written or facsimile notice of
withdrawal of your acceptance instruction. This notice of withdrawal must be
delivered to the exchange agent at its address set forth under "--Exchange
Agent" and must contain:
- your name and number;
- the principal amount of the old notes to which such withdrawal is related;
and
- your signature.
Withdrawal of your acceptance instruction will be effective when the exchange
agent receives your written notice of withdrawal.
OLD NOTES HELD BY HOLDERS. Except as otherwise described in this
prospectus, tenders of old notes may be withdrawn at any time before 5:00 p.m.,
New York City time, on the expiration date. To withdraw a tender of old notes in
the exchange offer, the exchange agent must receive a written or facsimile
transmission notice of withdrawal at its address set forth in this prospectus
before 5:00 p.m., New York City time, on the expiration date. Any such notice of
withdrawal must:
(1) specify the name of the person having deposited the old notes to be
withdrawn (the "Depositor");
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(2) identify the old notes to be withdrawn (including the certificate number
or numbers and principal amount of such old notes);
(3) be signed by the holder in the same manner as the original signature on
the letter of transmittal by which such old notes were tendered
(including any required signature guarantees) or be accompanied by
documents of transfer sufficient to have the trustee with respect to the
old notes register the transfer of such old notes into the name of the
person withdrawing the tender; and
(4) specify the name in which any such old notes are to be registered, if
different from that of the Depositor.
All questions as to the validity, form and eligibility (including time of
receipt) of such notices will be determined by us. Our determination will be
final and binding on all parties. Any old notes so withdrawn will be deemed not
to have been validly tendered for purposes of the exchange offer and no new
notes will be issued with respect thereto unless the old notes so withdrawn are
validly retendered. Any old notes which have been tendered but which are not
accepted for exchange will be returned to their holder without cost to such
holder as soon as practicable after withdrawal, rejection of tender or
termination of the exchange offer. Properly withdrawn old notes may be
retendered by following one of the procedures, described above under
"--Procedures for Tendering" at any time before the expiration date.
CONDITIONS
Notwithstanding any other term of the exchange offer, we will not be
required to accept for exchange, or exchange new notes for, any old notes not
accepted for exchange, and may terminate or amend the exchange offer as provided
in this prospectus before the acceptance of such old notes, if any of the
following conditions exist:
(1) the exchange offer, or the making of any exchange by a holder, violates
applicable law or any applicable interpretation of the SEC;
(2) any action or proceeding is instituted or threatened in any court or by
or before any governmental agency with respect to the exchange offer
which, in our sole judgment, might impair our ability to proceed with the
exchange offer;
(3) any law, statute, rule or regulation is adopted or enacted which, in our
sole judgment, might materially impair our ability to proceed with the
exchange offer;
(4) a banking moratorium is declared by U.S. federal or California or New
York state authorities which, in our judgment, would reasonably be
expected to impair our ability to proceed with the exchange offer;
(5) trading on the New York Stock Exchange or generally in the U.S.
over-the-counter market is suspended by order of the SEC or any other
governmental authority which, in our judgment, would reasonably be
expected to impair our ability to proceed with the exchange offer; or
(6) a stop order is issued by the SEC or any state securities authority
suspending the effectiveness of the registration statement or proceedings
are initiated or, to our knowledge, threatened for that purpose.
If any such conditions exist, we may:
- refuse to accept any old notes and return all tendered old notes to
exchanging holders;
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- extend the exchange offer and retain all old notes tendered prior to the
expiration of the exchange offer, subject, however, to the rights of
holders to withdraw such old notes (see "-- Withdrawal of Tenders"); or
- waive certain of such conditions with respect to the exchange offer and
accept all properly tendered old notes which have not been withdrawn or
revoked.
If such waiver constitutes a material change to the exchange offer, we will
promptly disclose such waiver in a manner reasonably calculated to inform
holders of old notes of such waiver. The conditions described above are for our
sole benefit. We may assert any condition regardless of the circumstances giving
rise to any such condition. We may waive any condition in whole or in part at
any time and from time to time in our sole discretion. We are not waiving these
rights by failing to exercise them. These rights are ongoing and may be asserted
at any time and from time to time.
EXCHANGE AGENT
We appointed State Street Bank and Trust Company of California, N.A. as
exchange agent for the exchange offer. Send letters of transmittal and notices
of guaranteed delivery to the exchange agent addressed as follows:
<TABLE>
<S> <C>
By Registered or Certified Mail: By Overnight Courier:
Attention: Kellie Mullen Attention: Kellie Mullen
State Street Bank and Trust Company of State Street Bank and Trust Company of
California, N.A. California, N.A.
c/o State Street Bank and Trust Company c/o State Street Bank and Trust Company
P.O. Box 778 2 Avenue de Lafayette
Boston, MA 02102-0778 Corporate Trust Window, Fifth Floor
Phone: (617) 664-5587 Boston, MA 02111-1724
Phone: (617) 664-5587
By Hand: By Facsimile:
Attention: Kellie Mullen Attention: Kellie Mullen
State Street Bank and Trust Company of (617) 664-5290
California, N.A. Confirm by telephone:
c/o State Street Bank and Trust Company (617) 664-5587
2 Avenue de Lafayette
Corporate Trust Window, Fifth Floor
Boston, MA 02111-1724
Phone: (617) 664-5587
</TABLE>
FEES AND EXPENSES
We will pay the expenses of soliciting tenders. The principal solicitation
is being made by mail. Additional solicitation may be made by telegraph,
telephone or in person by officers and regular employees of ours and our
affiliates and by persons so engaged by the exchange agent.
We will not make any payments to brokers, dealers or others soliciting
acceptances of the exchange offer. We will pay the exchange agent reasonable and
customary fees for its services and will reimburse it for its reasonable
out-of-pocket expenses in connection therewith. We may also pay brokerage houses
and other custodians, nominees and fiduciaries the reasonable out-of-pocket
expenses incurred by them in forwarding copies of this prospectus and related
documents to the beneficial owners of the old notes, and in handling or
forwarding tenders for exchange.
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We will pay the cash expenses to be incurred in connection with the exchange
offer, including fees and expenses of the exchange agent and the trustee under
the indenture and accounting and legal fees.
We will pay all transfer taxes, if any, applicable to the exchange of old
notes in the exchange offer. The amount of any such transfer taxes (whether
imposed on the registered holder or any other persons) will be payable by the
tendering holder if:
(1) certificates representing new notes or old notes for principal amounts
not tendered or accepted for exchange are to be delivered to, or are to
be registered or issued in the name of, any person other than the
registered holder of the old notes tendered;
(2) tendered old notes are registered in the name of any person other than
the person signing the letter of transmittal; or
(3) a transfer tax is imposed for any reason other than the exchange of old
notes in the exchange offer.
In such circumstances, you must submit satisfactory evidence of payment of such
taxes or exception from such taxes with the letter of transmittal or the amount
of such transfer taxes will be billed directly to you.
ACCOUNTING TREATMENT
The new notes will be recorded at the same carrying value as the old notes.
Accordingly, no gain or loss for accounting purposes will be recognized upon
completion of the exchange offer. The issuance costs incurred in connection with
the exchange offer will be capitalized and amortized over the term of the new
notes.
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DESCRIPTION OF THE NOTES
The old notes were issued under an Indenture (the "Indenture") dated as of
April 23, 1999, between Rhythms NetConnections Inc. (the "Company") and State
Street Bank and Trust Company of California, N.A., as Trustee, a copy of the
form of which will be made available to prospective purchasers upon request, in
a private transaction that was not subject to the registration requirements of
the Securities Act. The terms of the old 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 old notes are
subject to all such terms, and holders of old notes are referred to the
Indenture and the Trust Indenture Act for a statement thereof. The following
summary of the material provisions of the Indenture and the Registration Rights
Agreement does not purport to be complete and is qualified in its entirety by
reference to such agreements, including the definitions therein of certain terms
used below. Copies of such agreements have been filed as exhibits to the
registration statement of which this prospectus is a part and are available from
the SEC or as set forth below under "Where You Can Find More Information." The
following summary of certain provisions of the Indenture does not purport to be
complete and is subject to, and is qualified in its entirety by reference to,
the Trust Indenture Act and to all of the provisions of the Indenture, including
the definitions of certain terms therein and those terms made a part of the
Indenture by reference to the Trust Indenture Act, as in effect on the date of
the Indenture. The definitions of certain capitalized terms used in the
following summary are set forth below under "Certain Definitions."
GENERAL
The notes were issued only in fully registered form without coupons, in
denominations of $1,000 principal amount and integral multiples thereof.
Principal of, premium, if any, on and interest on the notes are payable, and the
notes are exchangeable and transferable, at the office or agency of the Company
in the City of New York maintained for such purposes (which initially will be
the corporate trust office of the Trustee). See "Exchange Offer--Book-Entry
Transfer; Delivery and Form." No service charge will be made for any
registration of transfer, exchange or redemption of the notes, except in certain
circumstances for any tax or other governmental charge that may be imposed in
connection therewith.
MATURITY, INTEREST AND PRINCIPAL
The notes are general unsecured (except as set forth under "--Security"),
obligations of the Company, limited to $325 million aggregate principal amount,
and will mature on April 15, 2009. Cash interest on the notes will accrue at a
rate of 12 3/4% per annum, and will be payable semi-annually in arrears on each
April 15 and October 15 to registered holders of notes on the April 1 or October
1, as the case may be, immediately preceding such interest payment date,
commencing October 15, 1999. Interest on the notes will accrue from the most
recent interest payment date to which interest has been paid or duly provided
for, or, if no interest has been paid or duly provided for, from April 23, 1999.
Interest will be computed on the basis of a 360-day year of twelve 30-day
months. If the Company defaults on any payment of principal (whether at
maturity, upon redemption or otherwise), cash interest will continue to accrue
and, to the extent permitted by law, cash interest will accrue on overdue
installments of interest at the rate of interest borne by the notes.
REDEMPTION
OPTIONAL REDEMPTION. The notes are redeemable, at the option of the
Company, in whole or in part, at any time on or after April 15, 2004, upon not
less than 30 nor more than 60 days' written notice at the redemption prices
(expressed as percentages of principal amount) set forth below, plus accrued and
unpaid interest thereon, if any, and liquidated damages, if any, to the
applicable
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redemption date, if redeemed during the twelve-month period beginning on April
15 of each of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---------------------------------------------------------------------------------- -----------
<S> <C>
2004.............................................................................. 106.375%
2005.............................................................................. 104.250%
2006.............................................................................. 102.125%
2007 and thereafter............................................................... 100.000%
</TABLE>
In addition, at any time on or prior to April 15, 2002, the Company may,
other than in any circumstances resulting in a Change of Control, redeem, at its
option, up to a maximum of 35% of the originally-issued aggregate principal
amount of notes at a redemption price (determined at the applicable redemption
date) equal to 112.75% of the principal amount of the notes so redeemed plus
accrued and unpaid interest, if any, and liquidated damages, if any, with the
net cash proceeds of (a) one or more Public Equity Offerings and/or (b) the
sale, subsequent to the Issue Date, of Capital Stock (other than Disqualified
Stock) in one or more transactions not constituting a Public Equity Offering to
Strategic Equity Investors, resulting in gross cash proceeds to the Company of
at least $25.0 million in the aggregate; PROVIDED that not less than 65% of the
originally-issued aggregate principal amount of notes is outstanding immediately
following such redemption. Any such redemption must be effected upon not less
than 30 nor more than 60 days' notice given within 30 days after the
consummation of a Public Equity Offering or sale to one or more Strategic Equity
Investors, the net proceeds from which, together with any net proceeds from any
prior Public Equity Offerings or sales to Strategic Equity Investors, are to be
used to effect an optional redemption in accordance with this paragraph.
MANDATORY REDEMPTION. The Company will not be required to repurchase the
notes or make any mandatory redemption or sinking fund payments in respect of
the notes. However, (i) following the occurrence of a Change of Control, the
Company will be required to make an offer to purchase all outstanding notes at a
price equal to 101% of the principal amount thereof, and (ii) following the
occurrence of an Asset Sale, the Company may be obligated to make an offer to
purchase all or a portion of the outstanding notes at a price equal to 100% of
the principal amount thereof, in each case plus accrued and unpaid interest, if
any, and liquidated damages, if any, to the date of purchase. See "--Certain
Covenants--CHANGE OF CONTROL" and "--DISPOSITION OF PROCEEDS OF ASSET SALES,"
respectively.
SELECTION; EFFECT OF REDEMPTION NOTICE. In the case of a partial
redemption, selection of the notes for redemption will be made pro rata, by lot
or such other method as the Trustee in its sole discretion deems appropriate and
just; provided that any redemption pursuant to the provisions relating to
redemptions from the proceeds of one or more Public Equity Offerings or sales to
one or more Strategic Equity Investors shall be made on a pro rata basis or on
as nearly a pro rata basis as practicable (subject to DTC procedures). No notes
of a principal amount of $1,000 or less shall be redeemed in part. Notice of
redemption shall be mailed by first-class mail at least 30 but not more than 60
days before the redemption date to each holder of notes to be redeemed at its
registered address. If any note is to be redeemed in part only, the notice of
redemption that relates to such note shall state the portion of the principal
amount thereof to be redeemed. A new note in a principal amount equal to the
unredeemed portion thereof will be issued in the name of the holder thereof upon
surrender for cancellation of the original note. Upon giving of a redemption
notice, interest on notes called for redemption will cease to accrue from and
after the date fixed for redemption (unless the Company defaults in providing
the funds for such redemption) and such notes will cease to be outstanding.
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SECURITY
We used approximately $113.7 million of the net proceeds of the issuance of
the old notes to purchase the Pledged Securities in an amount sufficient, upon
receipt of scheduled interest and principal on the Pledged Securities, to pay in
full the first six scheduled interest payments (excluding liquidated damages, if
any) due on the notes (unless already paid). The Pledged Securities consist of
six groups of Government Securities, one for each of the first six scheduled
interest payments. Each such group consists of Government Securities maturing
on, or as nearly as possible prior to, the date of the corresponding scheduled
interest payment in an aggregate amount sufficient upon receipt of scheduled
interest and principal payments of such securities (determined as described in
the preceding sentence) to provide for payment in full of such scheduled
interest payment.
We pledged the Pledged Securities to the Trustee as escrow agent for the
benefit of the holders of the notes and the 1998 Notes pursuant to the Pledge
and Escrow Agreement, and the Trustee holds the Pledged Securities in the
Collateral Investments Account. The Pledged Securities equally and ratably
secure the notes and the 1998 Notes. Pursuant to the Pledge and Escrow
Agreement, immediately prior to a scheduled interest payment date on the notes,
either the Company may 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 Collateral
Investments Account proceeds sufficient to pay interest then due. In the event
that the Company exercises the former option, the Company may thereafter direct
the Trustee to release to the Company Pledged Securities from the Collateral
Investments Account in like amount. A failure by the Company to pay any of the
first six scheduled interest payments on the notes in a timely manner after a
five-day cure period will constitute an immediate Event of Default under the
Indenture.
Interest earned on the Pledged Securities is held in a cash collateral
account maintained by the Trustee. In the event that collectively the funds held
in the cash collateral account and the Pledged Securities held in the Collateral
Investment Account exceed the amount sufficient, based on the report of an
internationally recognized firm of independent public accountants or a
nationally recognized investment banking firm, in either case selected by the
Company, to provide for payment in full of the first six scheduled interest
payments (excluding liquidated damages, if any) due on the notes (or, in the
event any interest payment or payments shall have been made, an amount
sufficient to provide for the payment in full of any interest payments
remaining, up to and including the sixth scheduled interest payment) the Trustee
will be permitted to release any such excess amount to the Company at the
Company's request. The notes and the 1998 Notes will be equally and ratably
secured by a first priority security interest in the Pledged Securities in the
Collateral Investment Account and the cash collateral account. Accordingly, the
Pledged Securities in the Collateral Investment Account and the cash collateral
account will also secure repayment of the principal amount of the notes and the
1998 Notes to the extent of such security. The Pledge and Escrow Account allows
the Company to substitute for the Government Securities originally pledged as
collateral either:
(a) Marketable U.S. Securities; PROVIDED, HOWEVER, that the Marketable U.S.
Securities so substituted must have a value (measured at the date of
substitution), in the opinion of a nationally recognized firm of
independent public accountants or a nationally recognized investment
banking firm, in either case selected by the Company, at least equal to
125.0% of the amount of all of the first six scheduled interest payments
(excluding liquidated damages, if any) due on the notes that are unpaid
(or the pro rata portion of such interest payments equal to the
percentage of such interest payments to be secured by such Marketable
U.S. Securities) as of the date such Marketable U.S. Securities are
proposed to be substituted as security for the Company's obligations
under the Pledge and Escrow Agreement; or
(b) Government Securities with different maturities than the Government
Securities originally pledged; PROVIDED, HOWEVER, that the Government
Securities so substituted must be in such
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amount and with such maturity as will be sufficient upon receipt of
scheduled interest and principal payments of such securities, in the
opinion of a nationally recognized firm of independent public accountants
or a nationally recognized investment banking firm, in either case
selected by the Company, to provide for payment in full of those of the
first six scheduled interest payments (excluding liquidated damages, if
any) due on the notes that are then unpaid.
Under the Pledge and Escrow Agreement, assuming that the Company makes the
first six scheduled interest payments on the notes in a timely manner, all of
the Pledged Securities will have been released from the Collateral Investment
Account and all remaining cash will be released from the cash collateral account
and thereafter the notes will be unsecured.
RANKING
The Indebtedness of the Company evidenced by the notes will rank senior in
right of payment to all Subordinated Indebtedness of the Company and PARI PASSU
in right of payment with all existing and future unsecured and unsubordinated
Indebtedness of the Company. The notes will be effectively subordinated in right
of payment to all secured Indebtedness of the Company to the extent of the value
of the assets securing such Indebtedness. Assuming the notes had been issued on
March 31, 1999, and after giving PRO FORMA effect to the application of the net
proceeds therefrom, the Company would have had outstanding at that date
Indebtedness of approximately $488.7 million, of which approximately $0.7
million is secured Indebtedness (consisting of bank Indebtedness), which would
have been effectively senior in right of payment to the notes, and approximately
$488.0 million in unsecured and unsubordinated Indebtedness (including the notes
and the 1998 Notes, which will accrete to $290 million in 2003 if not earlier
repurchased or redeemed), which would have been PARI PASSU in right of payment
with the notes. The notes will also be structurally subordinated to all existing
and future Indebtedness of any Subsidiary of the Company. As of March 31, 1999,
the Company's Subsidiaries had no outstanding Indebtedness.
Although the Indenture contains limitations on the amount of additional
Indebtedness that the Company or its Restricted Subsidiaries may incur, under
certain circumstances the amount of such Indebtedness could be substantial. See
"--Certain Covenants--LIMITATION ON ADDITIONAL INDEBTEDNESS" below. If the
Company becomes insolvent or is liquidated, or if payment under any secured
Indebtedness is accelerated, the lenders under such Indebtedness would be
entitled to exercise the remedies available to a secured lender under applicable
law pursuant to the terms of the applicable financing agreements. Accordingly,
any claims of such lenders with respect to assets secured in their favor will be
prior to any claims of the holders of the notes with respect to such assets.
CERTAIN COVENANTS
Set forth below are certain covenants that are contained in the Indenture.
LIMITATION ON ADDITIONAL INDEBTEDNESS. The Indenture provides that the
Company will not, and will not permit any Restricted Subsidiary to, directly or
indirectly, create, incur, assume, issue, Guarantee or in any manner become
directly or indirectly liable for or with respect to, contingently or otherwise,
the payment of (collectively, to "incur") any Indebtedness (including any
Acquired Indebtedness), except for Permitted Indebtedness (including Acquired
Indebtedness to the extent it would constitute Permitted Indebtedness); PROVIDED
(i) the Company will be permitted to incur Indebtedness (including Acquired
Indebtedness) and (ii) a Restricted Subsidiary will be permitted to incur
Acquired Indebtedness, if, in either case, after giving PRO FORMA effect to such
incurrence (including the application of the net proceeds therefrom), the
Indebtedness to EBITDA Ratio would be less than or equal to 6 to 1.
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Indebtedness of any Person or any of its Subsidiaries existing at the time
such Person becomes a Restricted Subsidiary (or is merged into or consolidated
with the Company or any Restricted Subsidiary), whether or not such Indebtedness
was incurred in connection with, or in contemplation of, such Person becoming a
Restricted Subsidiary (or being merged into or consolidated with the Company or
any Restricted Subsidiary) shall be deemed incurred at the time such Person
becomes a Restricted Subsidiary or merges into or consolidates with the Company
or any Restricted Subsidiary. In addition, pursuant to the purchase agreement
entered into among the Company and each of Merrill Lynch, Salomon Smith Barney
Inc. and Chase Securities Inc., the Company has agreed that for a period of 180
days from the date of the final Offering Memorandum (April 16, 1999), it will
not, without the prior written consent of Merrill Lynch, directly or indirectly,
offer, sell, grant any option to purchase, or otherwise dispose of, any debt
security of the Company or security of the Company that is convertible into, or
exchangeable for, any debt security of the Company (other than the new notes).
See "Plan of Distribution."
Accrual of interest, accretion or amortization of original issue discount
and reductions in any collateral described in clause (B) of the definition of
"Indebtedness" by reason of payments of interest on the Indebtedness secured by
such collateral will not be deemed to be an incurrence of Indebtedness for
purposes of this covenant.
LIMITATION ON RESTRICTED PAYMENTS. The Indenture provides that the Company
will not, and will not permit any of the Restricted Subsidiaries to, make,
directly or indirectly, any Restricted Payment unless:
(i) no Default shall have occurred and be continuing at the time of or upon
giving effect to such Restricted Payment;
(ii) immediately after giving effect to such Restricted Payment, the Company
would be able to incur $1.00 of Indebtedness under the proviso of the
covenant "--LIMITATION ON ADDITIONAL INDEBTEDNESS"; and
(iii) immediately after giving effect to such Restricted Payment, the
aggregate amount of all Restricted Payments declared or made on or
after the Issue Date does not exceed an amount equal to the sum of,
without duplication, (a) 50% of the Consolidated Net Income accrued on
a cumulative basis during the period beginning on the first day of the
first fiscal quarter immediately subsequent to the Issue Date and
ending on the last day of the fiscal quarter of the Company immediately
preceding the date of such proposed Restricted Payment (or, if such
cumulative Consolidated Net Income of the Company for such period is a
deficit, minus 100% of such deficit) for which financial statements are
available, in any event determined by excluding income resulting from
transfers of assets by the Company or a Restricted Subsidiary to an
Unrestricted Subsidiary, PLUS (b) the aggregate net cash proceeds
received by the Company either (x) as capital contributions to the
Company after May 5, 1998 or (y) from the issuance and sale of its
Capital Stock (other than Disqualified Stock) or options, warrants or
other rights to acquire its Capital Stock (other than Disqualified
Stock), in each case on or after May 5, 1998 to a Person who is not a
Subsidiary of the Company, PLUS (c) the aggregate net proceeds received
by the Company from the issuance (other than to a Subsidiary of the
Company) on or after May 5, 1998 of its Capital Stock (other than
Disqualified Stock) upon the conversion of, or in exchange for,
Indebtedness of the Company or upon the exercise of options, warrants
or other rights of the Company, PLUS (d) in the case of the disposition
or repayment (in whole or in part) of any Investment constituting a
Restricted Payment made after the Issue Date, an amount equal to the
lesser of the return of capital with respect to the applicable portion
of such Investment and the cost of the applicable portion of such
Investment, in either case, less the cost of the disposition of such
Investment, PLUS (e) in the case of any Revocation with respect to a
Subsidiary of the Company that was made subject to a Designation after
the Issue Date, an amount equal to the lesser of the Designation Amount
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with respect to such Subsidiary or the Fair Market Value of the
Investment of the Company and the Restricted Subsidiaries in such
Subsidiary at the time of Revocation. For purposes of the preceding
clause (b), there shall be excluded in all cases any issuance and sale
of Capital Stock in one or more Public Equity Offerings or to Strategic
Equity Investors to the extent the net cash proceeds are used, prior to
April 15, 2002, to redeem notes as described under
"--Redemption--OPTIONAL REDEMPTION." The Company may not redeem notes
as described under "--Redemption--OPTIONAL REDEMPTION" from net cash
proceeds received by the Company from the issuance on or after the
Issue Date of its Capital Stock if such net cash proceeds have ever
been included in a determination of the amount of Restricted Payments
that may be made by the Company pursuant to this covenant, unless the
Company would have been able to make such Restricted Payment without
including such net cash proceeds in such determination.
For purposes of determining the amount expended for Restricted Payments,
cash distributed shall be valued at the face amount thereof and property other
than cash shall be valued at its Fair Market Value.
The provisions of this covenant shall not prohibit the following (each of
which shall be given independent effect): (1) the payment of any dividend or
other distribution within 60 days after the date of declaration thereof if at
such date of declaration such payment would be permitted by the provisions of
the Indenture; (2) the purchase, redemption, retirement or other acquisition of
any shares of Capital Stock of the Company in exchange for, or out of the net
cash proceeds of the substantially concurrent issue and sale (other than to a
Subsidiary of the Company) of, shares of Capital Stock of the Company (other
than Disqualified Stock); PROVIDED that any such net cash proceeds are excluded
from clause (iii) (b) of the second preceding paragraph; (3) so long as no
Default shall have occurred and be continuing, the purchase, redemption,
retirement, defeasance or other acquisition of Subordinated Indebtedness (A)
made by exchange for, or out of the net cash proceeds of, a substantially
concurrent issue and sale (other than to a Subsidiary of the Company) of (x)
Capital Stock (other than Disqualified Stock) of the Company PROVIDED that any
such net cash proceeds are excluded from clause (iii)(b) of the second preceding
paragraph; or (y) other Subordinated Indebtedness to the extent that (I) its
stated maturity for the payment of principal thereof is not prior to the 91st
day after the final stated maturity of the notes, (II) its principal amount does
not exceed the principal amount (or, if such Subordinated Indebtedness being
refinanced provides for an amount less than the principal amount thereof to be
due and payable upon an acceleration thereof, such lesser amount) of the
Subordinated Indebtedness being refinanced, PLUS any premium required to be paid
in connection with such refinancing pursuant to the terms of such Subordinated
Indebtedness being refinanced, plus the amount of expenses of the Company
incurred in connection with such refinancing, and (III) such new Subordinated
Indebtedness is subordinated to the notes to the same extent as the Subordinated
Indebtedness being refinanced, or (B) with Unutilized Cash Proceeds remaining
after completion of an Asset Sale pursuant to the fifth paragraph of the
covenant described under "--DISPOSITION OF PROCEEDS OF ASSET SALES"; (4) so long
as no Default shall have occurred and be continuing, purchases or redemptions of
Capital Stock (including cash settlements of stock options) held by employees,
officers or directors upon or following termination (whether by reason of death,
disability or otherwise) of their employment with the Company or one of its
Subsidiaries; PROVIDED that payments shall not exceed $500,000 in any fiscal
year in the aggregate; (5) payments or distributions to dissenting stockholders
pursuant to applicable law, pursuant to or in contemplation of merger,
consolidation or transfer of assets that complies with the provisions of the
Indenture relating to mergers, consolidations or transfers of substantially all
of the assets of the Company; (6) any purchase of any fractional share of Common
Stock of the Company in connection with an exercise of the 1998 Warrants and any
repurchase of 1998 Warrants pursuant to a Repurchase Offer (as defined in the
1998 Warrant Agreement); and (7) Restricted Payments in addition to those
otherwise permitted pursuant to this covenant in an aggregate amount not to
exceed $10.0 million.
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In determining the amount of Restricted Payments permissible under this
covenant, amounts expended pursuant to clauses (1), (4) and (7) above shall be
included, without duplication, as Restricted Payments.
LIMITATION ON LIENS SECURING CERTAIN INDEBTEDNESS. The Indenture will
provide that the Company will not, and will not permit any Restricted Subsidiary
to, create, incur, assume or suffer to exist any Liens of any kind against or
upon any of the property or assets of the Company or any Restricted Subsidiary,
whether now owned or hereafter acquired, or any proceeds therefrom, which secure
either (x) Subordinated Indebtedness, unless the notes are secured by a Lien on
such property, assets or proceeds that is senior in priority to the Liens
securing such Subordinated Indebtedness or (y) Indebtedness of (A) the Company
that is not Subordinated Indebtedness or (B) any Restricted Subsidiary, unless
in each case the notes are equally and ratably secured with the Liens securing
such other Indebtedness, except, in the case of clauses (x) and (y), for
Permitted Liens and for Liens to secure Debt Securities on cash representing the
proceeds of such Debt Securities or on Government Securities acquired with such
cash and pledged for the purpose of providing for the payment of principal of,
and/or interest on, such Debt Securities.
CHANGE OF CONTROL. Upon the occurrence of a Change of Control (the date of
such occurrence being the "Change of Control Date"), the Company shall make an
offer to purchase (the "Change of Control Offer"), on a business day (the
"Change of Control Payment Date") not later than 60 days following the Change of
Control Date, all notes then outstanding at a purchase price equal to 101% of
the principal amount thereof, plus accrued and unpaid interest thereon, if any,
and liquidated damages, if any, to such Change of Control Payment Date. Notice
of a Change of Control Offer shall be given to holders of notes, not less than
30 days nor more than 60 days before the Change of Control Payment Date. The
Change of Control Offer is required to remain open for at least 20 business days
and until the close of business on the Change of Control Payment Date.
Except as described above with respect to a Change of Control, the Indenture
does not contain provisions that permit the holders of the notes to require that
the Company repurchase or redeem the notes in the event of a takeover,
recapitalization or similar transaction which may be highly leveraged.
Future Indebtedness of the Company may contain prohibitions on the
occurrence of certain events that would constitute a Change of Control or may
require such Indebtedness to be repurchased upon a change of control (as defined
in the instruments governing such Indebtedness). Moreover, the exercise by the
Holders of their right to require the Company to repurchase the notes could
cause a default under such Indebtedness, even if the Change of Control itself
does not.
If a Change of Control Offer is made, there can be no assurance that the
Company will have available funds sufficient to pay for all of the notes that
might be delivered by holders of notes seeking to accept the Change of Control
Offer. The Company's obligation to make a Change of Control Offer following a
Change of Control shall be satisfied if a third party makes the Change of
Control Offer in the manner, at the times and otherwise in compliance with the
requirements applicable to a Change of Control Offer made by the Company and
purchases all notes validly tendered and not withdrawn under such Change of
Control Offer. See "Risk Factors--Risks Associated with a Change of Control."
If the Company is required to make a Change of Control Offer, the Company
shall comply with all applicable tender offer laws and regulations, including,
to the extent applicable, Section 14(e) and Rule 14e-1 under the Exchange Act,
and any other applicable securities laws and regulations. To the extent that the
provisions of any such securities laws or regulations conflict with provisions
of this covenant, the Company will comply with the applicable securities laws
and regulations and will not be deemed to have breached its obligations under
this covenant solely by virtue of such compliance.
LIMITATION ON DIVIDENDS AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED
SUBSIDIARIES. The Indenture provides that the Company will not, and will not
permit any Restricted Subsidiary to, directly
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or indirectly, create or otherwise enter into or cause to become effective any
encumbrance or restriction of any kind on the ability of any Restricted
Subsidiary to (a) pay dividends, in cash or otherwise, or make any other
distributions on its Capital Stock or any other interest or participation in, or
measured by, its profits to the extent owned by the Company or any Restricted
Subsidiary, (b) pay any Indebtedness owed to the Company or any Restricted
Subsidiary, (c) make any Investment in the Company or any Restricted Subsidiary
or (d) transfer any of its properties or assets to the Company or to any
Restricted Subsidiary, except for (i) any encumbrance or restriction in
existence on the Issue Date, (ii) customary non-assignment provisions, (iii) any
encumbrances or restriction pertaining to an asset subject to a Lien to the
extent set forth in the security documentation governing such Lien, (iv) any
encumbrance or restriction applicable to a Restricted Subsidiary at the time
that it becomes a Restricted Subsidiary that is not created in contemplation
thereof, (v) any encumbrance or restriction existing under any agreement that
refinances or replaces an agreement containing a restriction permitted by clause
(iv) above; PROVIDED that the terms and conditions of any such encumbrance or
restriction are not materially less favorable to the holders of notes than those
under or pursuant to the agreement being replaced or the agreement evidencing
the Indebtedness refinanced, (vi) any encumbrance or restriction imposed upon a
Restricted Subsidiary pursuant to an agreement which has been entered into for
the sale or disposition of all or substantially all of the Capital Stock or
assets of such Restricted Subsidiary or any Asset Sale to the extent limited to
the Capital Stock or assets in question, and (vii) any customary encumbrance or
restriction applicable to a Restricted Subsidiary that is contained in an
agreement or instrument governing or relating to Permitted Indebtedness
contained in any Debt Securities or Permitted Credit Facility; provided that the
terms and conditions of any such encumbrance or restriction contained in any
Debt Securities are no more restrictive than those contained in the Indenture;
PROVIDED FURTHER, that (subject to customary net worth, leverage, invested
capital and other financial covenants and the absence of default under such
agreement or instrument) the provisions of such agreement or instrument permit
the payment of interest and principal and mandatory repurchases pursuant to the
terms of the Indenture and the notes and other Indebtedness (other than
Subordinated Indebtedness) that is solely an obligation of the Company; and
PROVIDED FURTHER that such agreement or instrument may contain customary
covenants regarding the merger of or sale of all or any substantial part of the
assets of the Company or any Restricted Subsidiary, customary restrictions on
transactions with affiliates and customary subordination provisions governing
indebtedness owed to the Company or any Restricted Subsidiary.
DISPOSITION OF PROCEEDS OF ASSET SALES. The Indenture provides that the
Company will not, and will not permit any Restricted Subsidiary to, make any
Asset Sale unless (a) the Company or such Restricted Subsidiary, as the case may
be, receives consideration at the time of such Asset Sale at least equal to the
Fair Market Value of the shares or assets sold or otherwise disposed of and (b)
at least 75% of such consideration consists of cash or Cash Equivalents;
PROVIDED that the following shall be treated as cash for purposes of this
covenant: (x) the amount of any Indebtedness (other than Subordinated
Indebtedness) of the Company or any Restricted Subsidiary that is actually
assumed by the transferee of assets disposed of in such Asset Sale and from
which the Company and the Restricted Subsidiaries are fully released and (y) the
amount of any notes or other obligations that within 30 days of receipt are
converted into cash (to the extent of the cash (after payment of any costs of
disposition) so received). Notwithstanding the preceding sentence, the Company
and its Restricted Subsidiaries may consummate an Asset Sale without complying
with clause (b) of the immediately preceding sentence if at least 75% of the
consideration for such Asset Sale consists of any combination of cash, Cash
Equivalents and Permitted Business Assets (as defined below) (or in Capital
Stock of any Person that will become a Restricted Subsidiary as a result of such
investment if all or substantially all of the properties and assets of such
Person are Permitted Business Assets); provided that any non-cash consideration
(other than Permitted Business Assets received by the Company or any of its
Restricted Subsidiaries in connection with such Asset Sale) that is converted
into or sold or otherwise disposed of for cash or Cash Equivalents within 365
days after such Asset Sale and any Permitted Business Assets
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constituting cash or Cash Equivalents received by the Company or any Restricted
Subsidiary shall constitute Net Cash Proceeds subject to the provisions set
forth below. The Company or the applicable Restricted Subsidiary, as the case
may be, may (i) apply the Net Cash Proceeds from such Asset Sale, within 365
days of the receipt thereof, to the permanent reduction (whether by means of
repayment, release pursuant to clause (x) of the first sentence of this covenant
or otherwise) of (A) Indebtedness of any Restricted Subsidiary and/or (B)
Indebtedness of the Company ranking senior to or PARI PASSU with the notes, and,
in each case, permanently reduce the amount of the commitments thereunder by the
amount of the Indebtedness so repaid, and/or (ii) apply such Net Cash Proceeds,
within 365 days of the receipt thereof, to an investment in properties and
assets (including leases of such properties or assets) that will be used or are
usable in the same or a related line of business as that being conducted by the
Company or any Restricted Subsidiary at the time of such Asset Sale or such
investment therein (collectively, "Permitted Business Assets") (or in Capital
Stock of any Person that will become a Restricted Subsidiary as a result of such
investment if all or substantially all of the properties and assets of such
Person are Permitted Business Assets).
To the extent all or part of the Net Cash Proceeds of any Asset Sale are not
applied within 365 days of such Asset Sale as described in clause (i) or (ii) of
the preceding paragraph (such Net Cash Proceeds, the "Unutilized Net Cash
Proceeds"), the Company shall, within 20 days after such 365th day, make an
offer to purchase (an "Asset Sale Offer") all outstanding notes up to a maximum
principal amount (expressed as a multiple of $1,000) equal to the Note Pro Rata
Share of Unutilized Net Cash Proceeds, at a purchase price in cash equal to 100%
of the principal amount thereof, plus accrued and unpaid interest, if any, and
liquidated damages, if any, to such purchase date; PROVIDED, HOWEVER, that an
Asset Sale Offer may be deferred by the Company until there are Unutilized Net
Cash Proceeds equal to at least $5.0 million, at which time the entire amount of
such Unutilized Net Cash Proceeds (and not just the amount in excess of $5.0
million) shall be applied as required pursuant to this paragraph and the next
following paragraph.
If any other Indebtedness of the Company which ranks PARI PASSU with the
notes (the "Other Indebtedness"), including the 1998 Notes, requires that an
offer to repurchase such Indebtedness be made upon the consummation of an Asset
Sale, the Company may apply the Unutilized Net Cash Proceeds otherwise required
to be applied to an Asset Sale Offer to offer to purchase such Other
Indebtedness and to an Asset Sale Offer so long as the amount of such Unutilized
Net Cash Proceeds applied to repurchase the notes is not less than the Note Pro
Rata Share of Unutilized Net Cash Proceeds. Any offer to purchase such Other
Indebtedness shall be made at the same time as the Asset Sale Offer, and the
purchase date in respect of any such offer to purchase and the Asset Sale Offer
shall occur on the same day.
For purposes of this covenant, "Note Pro Rata Share of Unutilized Net Cash
Proceeds" means the amount of the Unutilized Net Cash Proceeds equal to the
product of (x) the Unutilized Net Cash Proceeds and (y) a fraction, the
numerator of which is the aggregate principal amount of, and all accrued
interest thereon to the purchase date on, all notes (or portions thereof)
validly tendered and not withdrawn pursuant to an Asset Sale Offer related to
such Unutilized Net Cash Proceeds (the "Note Amount") and the denominator of
which is the sum of the Note Amount and the lesser of (i) the aggregate
principal face amount, and all accrued interest thereon to the purchase date, or
(ii) the accreted value as of the purchase date, of all Other Indebtedness (or
portions thereof) validly tendered and not withdrawn pursuant to a concurrent
offer to purchase such Other Indebtedness made at the time of such Asset Sale
Offer.
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Each Asset Sale Offer shall remain open for a period of 20 business days or
such longer period as may be required by law. To the extent that the principal
amount, plus accrued interest thereon, if any, to the payment date, of notes
validly tendered and not withdrawn pursuant to an Asset Sale Offer is less than
the Unutilized Net Cash Proceeds or the Note Pro Rata Share of Unutilized Net
Cash Proceeds, as the case may be, the Company or any Restricted Subsidiary may
use such deficiency for general corporate purposes, including the repayment or
repurchase of Indebtedness. If the principal amount, plus accrued interest
thereon, if any, to the payment date, of notes validly tendered and not
withdrawn by holders thereof exceeds the amount of notes which can be purchased
with the Unutilized Net Cash Proceeds or the Note Pro Rata Share of Unutilized
Net Cash Proceeds, as the case may be, then the notes to be purchased will be
selected on a pro rata basis. Upon completion of an Asset Sale Offer and offer
for any Other Indebtedness, the amount of Unutilized Net Cash Proceeds shall be
reset to zero.
If the Company is required to make an Asset Sale Offer, the Company shall
comply with all applicable tender offer rules, including, to the extent
applicable, Section 14(e) and Rule 14e-1 under the Exchange Act, and any other
applicable securities laws and regulations. To the extent that the provisions of
any such securities laws or regulations conflict with provisions of this
covenant, the Company will comply with the applicable securities laws and
regulations and will not be deemed to have breached its obligations under this
covenant solely by virtue of such compliance.
LIMITATION ON ISSUANCES AND SALES OF CAPITAL STOCK OF RESTRICTED
SUBSIDIARIES. The Indenture provides that the Company will not sell, and will
not permit any Restricted Subsidiary, directly or indirectly, to issue or sell,
any shares of Capital Stock (or any options, warrants or other rights to
purchase such Capital Stock) of a Restricted Subsidiary, except (i) any sale or
issuance of Capital Stock to the Company or a Wholly Owned Restricted
Subsidiary, (ii) any sale or issuance of Common Stock to directors as director
qualifying shares, but only to the extent required under applicable law, (iii)
any sale or other disposition of all, but not less than all, of the issued and
outstanding Capital Stock of any Restricted Subsidiary owned by the Company and
the Restricted Subsidiaries or (iv) any sale or issuance of Capital Stock of a
Restricted Subsidiary (other than pursuant to clauses (i) or (ii)) if such
Restricted Subsidiary would no longer be a Restricted Subsidiary immediately
after such transaction and any Investment in such Person remaining after giving
effect to such sale or issuance would have been permitted to be made under the
covenant described under "--LIMITATION ON RESTRICTED PAYMENTS," and, in the case
of both (iii) and (iv), in compliance with the covenant described under
"--DISPOSITION OF PROCEEDS OF ASSET SALES."
LIMITATION ON TRANSACTIONS WITH AFFILIATES. The Indenture provides that the
Company shall not, and shall not permit, cause or suffer any Restricted
Subsidiary to, directly or indirectly, conduct any business, sell, lease,
transfer or otherwise dispose of any of its properties or assets to, or purchase
any property or assets from, or enter into any contract, agreement, loan,
advance or Guarantee or engage in any other transaction (or series of related
transactions which are similar or part of a common plan) with or for the benefit
of any of their respective Affiliates or any beneficial owner of 10% or more of
the Common Stock of the Company or any officer or director of the Company or any
Subsidiary (each, an "Affiliate Transaction"), unless the terms of the Affiliate
Transaction are set forth in writing and are no less favorable to the Company or
such Restricted Subsidiary, as the case may be, than would be available in a
comparable transaction with an unaffiliated third party. Each Affiliate
Transaction (or series of related Affiliate Transactions) involving aggregate
payments and/or other consideration having Fair Market Value (i) in excess of
$1.0 million shall be approved by a majority of the Board, such approval to be
evidenced by a Board Resolution stating that the Board has determined that such
transaction or transactions comply with the foregoing provisions, (ii) in excess
of $5.0 million shall further require the approval of a majority of the
Disinterested Directors and (iii) in excess of $10.0 million shall further
require that the Company obtain a written opinion from an Independent Financial
Advisor stating that the terms of such Affiliate Transaction (or series of
related Affiliate
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Transactions) are fair to the Company or the Restricted Subsidiary, as the case
may be, from a financial point of view; PROVIDED that this clause (iii) shall
not apply to purchases of goods and/or services in the ordinary course of the
Company's business, and on terms no less favorable to the Company than those
customarily granted to purchasers of such goods and/or services, from Paradyne
Corporation or Xylan Corporation. For purposes of this covenant, any Affiliate
Transaction approved by a majority of the Disinterested Directors or as to which
a written opinion has been obtained from an Independent Financial Advisor, on
the basis set forth in the preceding sentence, shall be deemed to be on terms
that are no less favorable to the Company or such Restricted Subsidiary, as the
case may be, than would be available in a comparable transaction with an
unaffiliated third party and, therefore, shall be permitted under this covenant.
Notwithstanding the foregoing, the restrictions set forth in this covenant
shall not apply to (i) transactions with or among, or solely for the benefit of,
the Company and/or any of the Restricted Subsidiaries, provided that in any such
case, no officer, director or beneficial owner of 10% or more of any class of
Capital Stock of the Company shall beneficially own any Capital Stock of any
such Restricted Subsidiary, (ii) transactions pursuant to agreements and
arrangements existing on the Issue Date and specified on a schedule to the
Indenture, (iii) any Restricted Payment made in compliance with the covenant
"--LIMITATION ON RESTRICTED PAYMENTS," (iv) the payment of reasonable and
customary regular fees to directors of the Company or any Restricted Subsidiary
who are not employees of the Company or any Restricted Subsidiary, (v)
employment agreements, stock option agreements and indemnification arrangements
entered into by the Company or any of its Restricted Subsidiaries in the
ordinary course of business and consistent with industry practice, (vi) the
granting and performance of registration rights for securities of the Company,
(vii) loans and advances to officers, directors and employees of the Company or
any Restricted Subsidiary for travel, entertainment, moving and other relocation
expenses, in each case made in the ordinary course of business and consistent
with industry practice, and (viii) any Permitted Investment.
BUSINESS ACTIVITIES. Pursuant to the Indenture, the Company will not, and
will not permit any Restricted Subsidiary to, engage in any business other than
the Permitted Business.
LIMITATION ON ISSUANCES OF GUARANTEES BY RESTRICTED SUBSIDIARIES. The
Indenture prohibits the Company from permitting any Restricted Subsidiary,
directly or indirectly, to Guarantee the payment of any other Indebtedness of
the Company unless such Restricted Subsidiary simultaneously executes and
delivers a supplemental indenture to the Indenture providing for the Guarantee
of the payment of the notes by such Restricted Subsidiary, which Guarantee shall
be senior to or PARI PASSU with such Restricted Subsidiary's Guarantee of such
other Indebtedness; PROVIDED that this paragraph shall not apply to any
Guarantee of Indebtedness described in clause (h) of the definition of
"Permitted Indebtedness." Notwithstanding the foregoing, any such Guarantee by a
Restricted Subsidiary of the notes shall provide by its terms that it shall be
automatically and unconditionally released and discharged upon (i) any sale,
exchange or transfer, to any Person not an Affiliate of the Company, of all of
the Company's stock in, or all or substantially all the assets of, such
Restricted Subsidiary, which sale, exchange or transfer is made in compliance
with the applicable provisions of the Indenture, (ii) the Designation of such
Restricted Subsidiary as an Unrestricted Subsidiary in compliance with the
covenant described under "--LIMITATION ON DESIGNATIONS OF UNRESTRICTED
SUBSIDIARIES" or (iii) the release of such Restricted Subsidiary from all of its
obligations under all of its Guarantees of Indebtedness of the Company. A form
of such Guarantee will be attached as an exhibit to the Indenture.
LIMITATION ON SALE/LEASEBACK TRANSACTIONS. The Indenture prohibits the
Company and its Restricted Subsidiaries from, directly or indirectly, entering
into, assuming, Guaranteeing or otherwise becoming liable with respect to any
Sale/Leaseback Transaction. However, the Company or any Restricted Subsidiary
may enter into any such transaction if (i) the Company or such Restricted
Subsidiary would be permitted under the covenants described above under
"--LIMITATION ON ADDITIONAL
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INDEBTEDNESS" and "--LIMITATION ON LIENS SECURING CERTAIN INDEBTEDNESS" to incur
secured Indebtedness in an amount equal to the Attributable Debt with respect to
such transaction; (ii) the consideration received by the Company or such
Restricted Subsidiary from such transaction is at least equal to the Fair Market
Value of the property being transferred, and (iii) to the extent that such
transaction constitutes an Asset Sale, the Net Cash Proceeds received by the
Company or such Restricted Subsidiary from such transaction are applied in
accordance with the covenant described above under "--DISPOSITION OF PROCEEDS OF
ASSET SALES."
REPORTS. The Indenture provides that, whether or not the Company is subject
to Section 13(a) or 15(d) of the Exchange Act or any successor provision of law,
the Company shall furnish without cost to each holder of notes and file with the
Trustee (i) within 135 days after the end of each fiscal year of the Company,
financial information that would be required to be contained in an annual report
on Form 10-K for such year filed by the Company with the Commission (whether or
not the Company is then required to file such Form with the Commission),
including a "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and audited financial statements of the Company,
including a report thereon by the Company's certified public accountants, (ii)
within 60 days after the end of each of the first three fiscal quarters of each
fiscal year of the Company, financial information that would be required to be
contained in a quarterly report on Form 10-Q filed by the Company with the
Commission (whether or not the Company is then required to file such Form with
the Commission), including a "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and (iii) on a timely basis, any
information concerning the Company or any Restricted Subsidiary required to be
contained in a current report on Form 8-K (whether or not the Company is then
required to file such Form with the Commission), and, unless such information is
included or incorporated in a Form 10-K, Form 10-Q or Form 8-K filed by the
Company with the Commission, the Company shall file a copy of all such
information described in clauses (i), (ii) and (iii) above with the Commission
(if permitted by Commission practice and applicable law and regulations). In
addition, for so long as any notes remain outstanding, the Company shall furnish
to securities analysts and prospective investors, upon their request, the
information required to be delivered pursuant to Rule 144A(d)(4) under the
Securities Act, and, to any beneficial holder of notes, if not obtainable from
the Commission, information of the type that would be filed with the Commission
pursuant to the foregoing provisions, upon the request of any such holder.
LIMITATION ON DESIGNATIONS OF UNRESTRICTED SUBSIDIARIES. The Indenture
provides that the Company will not designate any Subsidiary of the Company
(other than a newly created Subsidiary in which the Company has made an
Investment of $1,000 or less) as an "Unrestricted Subsidiary" under the
Indenture (a "Designation") unless:
(a) no Default shall have occurred and be continuing at the time of or after
giving effect to such Designation; and
(b) the Company would be permitted under the Indenture to make an Investment
at the time of such Designation (assuming the effectiveness of such
Designation) in an amount (the "Designation Amount") equal to the Fair
Market Value of the interest of the Company and its Restricted
Subsidiaries in such Subsidiary on such date.
In the event of any such Designation, the Company shall be deemed to have
made an Investment constituting a Restricted Payment pursuant to the covenant
"--LIMITATION ON RESTRICTED PAYMENTS" for all purposes of the Indenture in an
amount equal to the Designation Amount. The Indenture will further provide that
neither the Company nor any Restricted Subsidiary shall at any time (x) provide
a Guarantee of, or similar credit support for, or subject any of its properties
or assets (other than the Capital Stock of any Unrestricted Subsidiary) to the
satisfaction of, any Indebtedness of any Unrestricted Subsidiary (including any
undertaking, agreement or instrument evidencing such Indebtedness), (y) be
directly or indirectly liable for any Indebtedness of any Unrestricted
Subsidiary or
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(z) be directly or indirectly liable for any other Indebtedness which provides
that the holder thereof may (upon notice, lapse of time or both) declare a
default thereon (or cause the payment thereof to be accelerated or payable prior
to its final scheduled maturity) upon the occurrence of a default with respect
to any other Indebtedness that is Indebtedness of an Unrestricted Subsidiary
(including any corresponding right to take enforcement action against such
Unrestricted Subsidiary), except in the case of clause (x) or (y) to the extent
otherwise permitted under the Indenture, including, without limitation, under
the covenant "--LIMITATION ON RESTRICTED PAYMENTS" above.
The Indenture further provides that the Company will not revoke any
Designation of a Subsidiary as an Unrestricted Subsidiary (a "Revocation")
unless:
(a) no Default shall have occurred and be continuing at the time of and
after giving effect to such Revocation; and
(b) all Liens and Indebtedness of such Unrestricted Subsidiary outstanding
immediately following such Revocation would, if incurred at such time,
have been permitted to be incurred for all purposes of the Indenture.
All Designations and Revocations must be evidenced by Board Resolutions and
officers' certificates delivered to the Trustee certifying compliance with the
foregoing provisions.
LIMITATION ON STATUS AS INVESTMENT COMPANY. The Indenture provides that the
Company will not, and will not permit any of its Subsidiaries or Affiliates to,
conduct its business in a fashion that would cause the Company to be required to
register as an "investment company" (as that term is defined in the Investment
Company Act of 1940, as amended (the "Investment Company Act")), or otherwise
become subject to regulation under the Investment Company Act. For purposes of
establishing the Company's compliance with this provision, any exemption that is
or would become available under Section 3(c)(1) or Section 3(c)(7) of the
Investment Company Act will be disregarded.
CONSOLIDATION, MERGER, SALE OF ASSETS, ETC.
The Indenture provides that the Company will not (i) consolidate or combine
with or merge with or into or, directly or indirectly, sell, assign, convey,
lease, transfer or otherwise dispose of all or substantially all of its
properties and assets to any Person or Persons in a single transaction or
through a series of transactions, or (ii) permit any of the Restricted
Subsidiaries to enter into any such transaction or series of transactions if it
would result in the disposition of all or substantially all of the properties or
assets of the Company and the Restricted Subsidiaries on a consolidated basis,
unless, in the case of either (i) or (ii), (a) the Company shall be the
continuing Person or, if the Company is not the continuing Person, the
resulting, surviving or transferee Person (the "surviving entity") shall be a
company organized and existing under the laws of the United States or any State
or territory thereof; (b) the surviving entity (if other than the Company) shall
expressly assume all of the obligations of the Company under the notes and the
Indenture, and shall execute a supplemental indenture to effect such assumption
which supplemental indenture shall be delivered to the Trustee and shall be in
form and substance reasonably satisfactory to the Trustee; (c) immediately after
giving effect to such transaction or series of transactions on a pro forma basis
(including, without limitation, any Indebtedness incurred or anticipated to be
incurred in connection with or in respect of such transaction or series of
transactions), (I) the Company or the surviving entity (assuming such surviving
entity's assumption of the Company's obligations under the notes and the
Indenture), as the case may be, would be able to incur $1.00 of Indebtedness
(other than Permitted Indebtedness) under the covenant described under
"--Certain Covenants--LIMITATION ON ADDITIONAL INDEBTEDNESS" above, and (II) the
Company or the surviving entity, as the case may be, would have a Consolidated
Net Worth equal to or greater than the Consolidated Net Worth of the Company
immediately prior to such transaction or series of transactions; (d) immediately
after giving effect to such transaction or series of transactions on a PRO FORMA
basis (including, without limitation, any Indebtedness incurred or anticipated
to be incurred in
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connection with or in respect of such transaction or series of transactions), no
Default shall have occurred and be continuing; and (e) the Company or the
surviving entity, as the case may be, shall have delivered to the Trustee an
Officers' Certificate and an Opinion of Counsel stating that such transaction or
series of transactions and, if a supplemental indenture is required in
connection with such transaction or series of transactions to effectuate such
assumption, such supplemental indenture, complies with this covenant and that
all conditions precedent in the Indenture relating to the transaction or series
of transactions have been satisfied.
Upon any consolidation or merger or any sale, assignment, conveyance, lease,
transfer or other disposition of all or substantially all of the assets of the
Company in accordance with the foregoing in which the Company or the Restricted
Subsidiary, as the case may be, is not the surviving corporation, then the
successor corporation formed by such a consolidation or into which the Company
or such Restricted Subsidiary is merged or to which such transfer is made, will
succeed to, and be substituted for, and may exercise every right and power of,
the Company or such Restricted Subsidiary, as the case may be, under the
Indenture with the same effect as if such successor corporation had been named
as the Company or such Restricted Subsidiary therein; and thereafter, except in
the case of (i) any lease or (ii) any sale, assignment, conveyance, transfer,
lease or other disposition to a Restricted Subsidiary of the Company, the
Company shall be discharged from all obligations and covenants under the
Indenture and the notes.
The Indenture provides that, for all purposes of the Indenture (including
the provisions of this covenant and the covenants described under "--Certain
Covenants--LIMITATION ON ADDITIONAL INDEBTEDNESS," "--LIMITATION ON RESTRICTED
PAYMENTS" and "--LIMITATION ON LIENS SECURING CERTAIN INDEBTEDNESS") and the
notes, Subsidiaries of any surviving entity will, upon such transaction or
series of related transactions, become Restricted Subsidiaries or Unrestricted
Subsidiaries as provided pursuant to the covenant "--Certain
Covenants--LIMITATION ON DESIGNATIONS OF UNRESTRICTED SUBSIDIARIES," and all
Indebtedness, and all Liens on property or assets, of the surviving entity and
the Restricted Subsidiaries (except Indebtedness, or Liens on property or
assets, of the Company and the Restricted Subsidiaries in existence immediately
prior to such transaction or series of related transactions) will be deemed to
have been incurred upon such transaction or series of related transactions.
The meaning of the phrase "all or substantially all" as used above varies
according to the facts and circumstances of the subject transaction, has no
clearly established meaning under relevant law and is subject to judicial
interpretation. Accordingly, in certain circumstances, there may be a degree of
uncertainty in ascertaining whether a particular transaction would involve a
disposition of "all or substantially all" of the assets of the Company, and
therefore it may be unclear whether the foregoing provisions are applicable.
EVENTS OF DEFAULT
The following are "Events of Default" under the Indenture:
(i) default in the payment of interest on the notes when it becomes due and
payable and, with respect to any installment of interest after the first
six scheduled interest payments, continuance of such default for a
period of 30 days or more, and, with respect to any of the first six
scheduled interest payments, continuance of such default for a period of
five days or more; or
(ii) default in the payment of the principal of, or premium, if any, on the
notes when due at maturity, upon redemption or otherwise; or
(iii) default in the performance, or breach, of any covenant described under
"--Certain Covenants--CHANGE OF CONTROL," "--DISPOSITION OF PROCEEDS OF
ASSET SALES" or "--CONSOLIDATION, MERGER, SALE OF ASSETS, ETC."; or
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(iv) default in the performance, or breach, of any covenant in the Indenture
(other than defaults specified in clause (i), (ii) or (iii) above), and
continuance of such default or breach for a period of 30 days or more
after written notice to the Company by the Trustee or to the Company
and the Trustee by the holders of at least 25% in aggregate principal
amount of the outstanding notes (in each case, when such notice is
deemed given in accordance with the Indenture); or
(v) (a) failure to pay, following any applicable grace period, any
installment of principal due (whether at maturity or otherwise) under
one or more classes or issues of Indebtedness in an aggregate principal
amount of $7.5 million or more under which the Company or any Restricted
Subsidiary is obligated or (b) failure by the Company or any Restricted
Subsidiary to perform any other term, covenant, condition or provision
of one or more classes or issues of Indebtedness in an aggregate
principal amount of $7.5 million or more under which the Company or such
Restricted Subsidiary is obligated and, in the case of this clause (b),
such failure results in an acceleration of the maturity thereof; or
(vi) one or more judgments, orders or decrees for the payment of money of
$7.5 million or more, either individually or in the aggregate, shall be
entered against the Company or any Restricted Subsidiary or any of
their respective properties and shall not be paid or discharged and
there shall have been a period of 60 consecutive days or more during
which a stay of enforcement of such judgment or order, by reason of
pending appeal or otherwise, shall not be in effect; or
(vii) certain events of bankruptcy, insolvency, reorganization,
administration or similar proceedings with respect to the Company or
any Restricted Subsidiary shall have occurred; or
(viii) the Indenture or the Registration Rights Agreement ceases to be in
force and effect in all material respects (other than with respect to
the invalidity or alleged invalidity of any provision in the
Registration Rights Agreement regarding indemnification for matters
arising under the federal securities laws) or is declared null and void
or the Company denies that it has any further obligation or liability
thereunder or gives notice to that effect (other than by reason of
termination or release in accordance with the terms thereof).
If an Event of Default (other than an Event of Default specified in clause
(vii) above with respect to the Company or any Restricted Subsidiary) occurs and
is continuing, then the Trustee or the holders of at least 25% in principal
amount of the outstanding notes may, by written notice, and the Trustee upon the
request of the holders of not less than 25% in principal amount of the
outstanding notes shall, declare the Default Amount of all outstanding notes to
be immediately due and payable and upon any such declaration such amount shall
become immediately due and payable. If an Event of Default specified in clause
(vii) above with respect to the Company or any Restricted Subsidiary occurs and
is continuing, then the Default Amount of all outstanding notes 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.
After a declaration of acceleration, the holders of a majority in aggregate
principal amount of outstanding notes may, by notice to the Trustee, rescind
such declaration of acceleration if all existing Events of Default, other than
nonpayment of the Default Amount of the notes that has become due solely as a
result of such acceleration, have been cured or waived and if the rescission of
acceleration would not conflict with any judgment or decree. The holders of a
majority in principal amount of the outstanding notes also have the right to
waive past defaults under the Indenture, except a default in the payment of
principal of, or any interest on, any outstanding Note, or in respect of certain
covenants or provisions that cannot be modified or amended without the consent
of all holders of notes.
No holder of any of the notes has any right to institute any proceeding with
respect to the Indenture or any remedy thereunder, unless (i) the holders of at
least 25% in principal amount of the
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outstanding notes have made written request, and offered reasonable security or
indemnity, to the Trustee to institute such proceeding as Trustee, (ii) the
Trustee has failed to institute such proceeding within 60 days after receipt of
such notice, and (iii) the Trustee has not within such 60-day period received
directions inconsistent with such written request by holders of a majority in
principal amount of the outstanding notes. Such limitations do not apply,
however, to a suit instituted by a holder of a note for the enforcement of the
payment of the principal of, or any accrued and unpaid interest on, such note on
or after the respective due dates expressed in such note.
During the existence of an Event of Default, the Trustee is required to
exercise such rights and powers vested in it under the Indenture and use the
same degree of care and skill in its exercise thereof as a prudent person would
exercise under the circumstances in the conduct of such person's own affairs.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, if an Event of Default shall occur and be continuing, the Trustee is
not under any obligation to exercise any of its rights or powers under the
Indenture at the request or direction of any of the holders unless such holders
shall have offered to such Trustee reasonable security or indemnity. Subject to
certain provisions concerning the rights of the Trustee, the holders of a
majority in principal amount of the outstanding notes have the right to direct
the time, method and place of conducting any proceeding for any remedy available
to the Trustee or exercising any trust or power conferred on the Trustee.
The Indenture provides that the Trustee will, within 30 days after the
occurrence of any Default, give to the holders of the notes notice of such
Default known to it, unless such Default shall have been cured or waived;
PROVIDED that the Trustee shall be protected in withholding such notice if it
determines in good faith that the withholding of such notice is in the interest
of such holders.
The Company is required to furnish to the Trustee annually a statement as to
its compliance with all conditions and covenants under the Indenture.
DEFEASANCE
The Company may at any time terminate all of its obligations with respect to
the notes ("defeasance"), except for certain obligations, including those
regarding any trust established for a defeasance and obligations to register the
transfer or exchange of the notes, to replace mutilated, destroyed, lost or
stolen notes as required by the Indenture and to maintain agencies in respect of
notes. The Company may at any time terminate its obligations under certain
covenants set forth in the Indenture, some of which are described under
"--Certain Covenants" above, and any omission to comply with such obligations
shall not constitute a Default or an Event of Default with respect to the notes
("covenant defeasance"). To exercise either defeasance or covenant defeasance,
the Company must irrevocably deposit in trust, for the benefit of the holders of
the notes, with the Trustee money (in United States dollars) or Government
Securities (denominated in United States dollars), or a combination thereof, in
such amounts as will be sufficient to pay the principal of and premium, if any,
and accrued but unpaid interest on the notes to redemption or maturity and
comply with certain other conditions, including the delivery of a legal opinion
as to certain tax matters. The requirements for defeasance shall not be deemed
satisfied if a Default specified in clause (vii) of "--Events of Default" above
occurs on or prior to the 91st calendar day after the date of the deposit of
money or securities in the defeasance trust.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights or registration of transfer or exchange of notes)
as to all outstanding notes when either (a) all such notes theretofore
authenticated and delivered (except lost, stolen or destroyed notes that have
been replaced or paid and notes for whose payment money has theretofore been
deposited in trust or segregated and held in trust by the Company and thereafter
repaid to the Company or discharged from
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such trust) have been delivered to the Trustee for cancellation; or (b) (i) all
such notes not theretofore delivered to the Trustee for cancellation have become
due and payable and the Company has irrevocably deposited or caused to be
deposited with the Trustee as trust funds in trust for the purpose an amount of
money sufficient to pay and discharge the entire indebtedness on the notes not
theretofore delivered to the Trustee for cancellation, for principal amount,
premium, if any, and accrued and unpaid interest to the date of such deposit;
(ii) the Company has paid all sums payable by it under the Indenture; and (iii)
the Company has delivered irrevocable instructions to the Trustee to apply the
deposited money toward the payment of the notes at maturity or on the redemption
date, as the case may be. In addition, the Company must deliver an Officers'
Certificate and an Opinion of Counsel stating that all conditions precedent to
satisfaction and discharge have been complied with.
AMENDMENT AND WAIVERS
From time to time, the Company, when authorized by resolutions of the Board,
and the Trustee, without the consent of the holders of the notes, may amend,
waive or supplement the Indenture or the notes for certain specified purposes,
including, among other things, curing ambiguities, defects or inconsistencies,
maintaining the qualification of the Indenture under the Trust Indenture Act or
making any change that does not adversely affect the rights of any holder. Other
amendments and modifications of the Indenture and the notes may be made by the
Company and the Trustee by supplemental indenture with the consent of the
holders of not less than a majority of the aggregate principal amount of the
outstanding notes; PROVIDED that no such modification or amendment may, without
the consent of the holder of each outstanding note affected thereby, (i) reduce
the principal amount of, change the fixed maturity of, or alter the redemption
provisions of, the notes or amend or modify the calculation of the Default
Amount so as to reduce the amount of the Default Amount, (ii) change the
currency in which any notes or amounts owing thereon is payable, (iii) reduce
the percentage of the aggregate principal amount of the outstanding notes which
must consent to an amendment, supplement or waiver or consent to take any action
under the Indenture or the notes, (iv) impair the right to institute suit for
the enforcement of any payment on or with respect to the notes, (v) waive a
default in payment with respect to the notes, except a rescission of
acceleration of the relevant notes by the holders thereof as provided in the
Indenture and a waiver of the payment default that resulted from such
acceleration, (vi) reduce the rate or change the time for payment of interest on
the notes, (vii) alter the Company's obligation to purchase the notes following
the occurrence of a Change of Control or an Asset Sale in accordance with the
Indenture or waive any default in the performance thereof or (viii) affect the
ranking of the notes in a manner adverse to the holder of the notes.
Holders of a majority in aggregate principal amount of the outstanding
notes, on behalf of all holders of notes, may waive compliance by the Company
with certain restrictive provisions of the Indenture. Subject to certain rights
of the Trustee as provided in the Indenture, the holders of a majority in
aggregate principal amount of the notes, on behalf of all holders, may waive any
past Default under the Indenture (including any such waiver obtained in
connection with a tender offer or exchange offer for such notes), except a
default in the payment of principal or interest or a Default arising from
failure to purchase any notes tendered pursuant to an offer to purchase required
to be made by any provision of the Indenture, or a Default in respect of a
provision that under the Indenture cannot be modified or amended without the
consent of the holder of each note that is affected.
REGARDING THE TRUSTEE
State Street Bank and Trust Company of California, N.A. will serve as
Trustee under the Indenture.
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GOVERNING LAW
The Indenture provides that the Indenture and the notes, respectively, will
be governed by and construed in accordance with the laws of the State of New
York, without giving effect to principles of conflicts of law.
CERTAIN DEFINITIONS
Set forth below is a summary of certain defined terms used in the Indenture.
Reference is made to the Indenture for the full definition of all such terms, as
well as any other capitalized terms used herein for which no definition is
provided.
"1998 Notes" means the Company's 13 1/2% Senior Discount notes due 2008.
"1998 Warrants" means the warrants issued in connection with the Company's
1998 Notes.
"1998 Warrant Agreement" means the Warrant Agreement dated May 5, 1998,
between the Company and State Street Bank and Trust Company of California, N.A.
"Acquired Indebtedness" means Indebtedness of a Person (i) assumed in
connection with an Asset Acquisition from such Person or (ii) existing at the
time such Person is merged or consolidated with or into the Company or any
Restricted Subsidiary or becomes a Restricted Subsidiary, in each case not
incurred in connection with, or in anticipation of, such Asset Acquisition or
merger or consolidation or such Person becoming a Restricted Subsidiary;
PROVIDED that Indebtedness of such Person which is redeemed, defeased, retired
or otherwise repaid at the time of or immediately upon consummation of such
Asset Acquisition or the transactions by which such Person is merged or
consolidated with or into the Company or any Restricted Subsidiary or becomes a
Restricted Subsidiary shall not constitute Acquired Indebtedness.
"Affiliate" of any specified Person means (i) any other Person which,
directly or indirectly, controls, is controlled by or is under direct or
indirect common control with, the specified Person, (ii) any other Person that
owns, directly or indirectly, 10% or more of the specified Person's Voting Stock
or (iii) any executive officer or director of the specified Person; PROVIDED
that Donaldson, Lufkin & Jenrette, Inc. and its Affiliates shall not be deemed
to be Affiliates of the Company solely as a result of such entities holding the
1998 Notes, the 1998 Warrants or the Company's Common Stock (or any security
which is convertible into or exchangeable for any of the foregoing). For the
purposes of this definition, "control" when used with respect to any Person
means the power to direct the management and policies of such Person, directly
or indirectly, whether through the ownership of voting securities, by contract
or otherwise, and the terms "affiliated," "controlling" and "controlled" have
meanings correlative to the foregoing.
"Asset Acquisition" means (i) any capital contribution (by means of
transfers of cash or other property to others or payments for property or
services for the account or use of others, or otherwise) by the Company or any
Restricted Subsidiary in any other Person, or any acquisition or purchase of
Capital Stock of any other Person by the Company or any Restricted Subsidiary,
in either case pursuant to which such Person shall (a) become a Restricted
Subsidiary or (b) shall be merged or consolidated with or into the Company or
any Restricted Subsidiary or (ii) any acquisition by the Company or any
Restricted Subsidiary of the assets of any Person which constitute substantially
all of an operating unit or line of business of such Person or which is
otherwise outside of the ordinary course of business.
"Asset Sale" means any direct or indirect sale, conveyance, transfer or
lease (that has the effect of a disposition and is not for security purposes) or
other disposition (that is not for security purposes) (including by way of a
Sale/Leaseback Transaction) to any Person other than the Company or a Restricted
Subsidiary, in one transaction or a series of related transactions, of (i) any
Capital Stock of any Restricted Subsidiary, (ii) any assets of the Company or
any Restricted Subsidiary which constitute
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substantially all of an operating unit or line of business of the Company and
the Restricted Subsidiaries or (iii) any other property or asset of the Company
or any Restricted Subsidiary outside of the ordinary course of business. For the
purposes of this definition, the term "Asset Sale" shall not include (i) any
disposition of properties and assets of the Company that is governed under
"--Consolidation, Merger, Sale of Assets, Etc." above, (ii) sales of property or
equipment that have become worn out, obsolete or damaged or otherwise unsuitable
for use in connection with the business of the Company or any Restricted
Subsidiary, as the case may be, and (iii) for purposes of the covenant
"--Certain Covenants--DISPOSITION OF PROCEEDS OF ASSET SALES," (a) sales,
conveyances, transfers, leases or other dispositions of property or assets,
whether in one transaction or a series of related transactions occurring within
one year, involving assets with a Fair Market Value not in excess of $500,000 in
any 12 month period and (b) any asset of the Company or a Restricted Subsidiary
that is the subject of a Sale/Leaseback Transaction with a Person (other than
the Company or an Affiliate of the Company) made in accordance with the covenant
described under "--Certain Covenants--LIMITATION ON SALE/ LEASEBACK
TRANSACTIONS" and that was acquired by the Company or such Restricted Subsidiary
no more than 120 days prior to the transfer to a third party in a Sale/Leaseback
Transaction.
"Attributable Debt" in respect of a Sale/Leaseback Transaction means, as at
the time of determination, the present value (discounted at the interest rate
implicit in the terms of the lease included in such Sale/Leaseback Transaction)
of the total obligations of the lessee for rental payments during the remaining
term of the lease included in such Sale/Leaseback Transaction (including any
period for which such lease has been extended).
"Average Life to Stated Maturity" means, with respect to any Indebtedness,
as at any date of determination, the quotient obtained by dividing (i) the sum
of the products of (a) the number of years from such date to the date or dates
of each successive scheduled principal payment (including, without limitation,
any sinking fund requirements) of such Indebtedness multiplied by (b) the amount
of each such principal payment by (ii) the sum of all such principal payments;
PROVIDED that, in the case of any Capitalized Lease Obligation, all calculations
hereunder shall give effect to any applicable options to renew in favor of the
Company or any Restricted Subsidiary.
"Board" means the Board of Directors of the Company.
"Board Resolution" means a copy of a resolution certified by the Secretary
or an Assistant Secretary of the Company to have been duly adopted by the Board
and to be in full force and effect on the date of such certification, and
delivered to the Trustee.
"Borrowing Base" means, as of any date, an amount equal to 85% of the book
value of the accounts, loans and other receivables (before giving effect to any
related allowances and reserves) as shown on the Company's most recent
consolidated balance sheet determined in accordance with GAAP not more than 90
days past due.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations, rights in, or other equivalents (however designated
and whether voting and/or non-voting) of, such Person's capital stock, including
Preferred Stock, whether outstanding on the Issue Date or issued after the Issue
Date, and any and all rights (other than any evidence of Indebtedness), warrants
or options exchangeable for or convertible into such capital stock.
"Capitalized Lease Obligation" means any obligation to pay rent or other
amounts under a lease of (or other agreement conveying the right to use) any
property (whether real, personal or mixed, immovable or movable) that is
required to be classified and accounted for as a capitalized lease obligation
under GAAP, and, for the purpose of the Indenture, the amount of such obligation
at any date shall be the capitalized amount thereof at such date, determined in
accordance with GAAP.
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"Cash Equivalents" means (i) any evidence of Indebtedness which matures 365
days or less from the date of purchase or acquisition issued or directly and
fully guaranteed or insured by the United States Government or any agency or
instrumentality thereof (PROVIDED that the full faith and credit of the United
States Government is pledged in support thereof or such Indebtedness constitutes
a general obligation of such country); (ii) deposits, certificates of deposit or
acceptances with a maturity of 365 days or less of any financial institution
that is a member of the Federal Reserve System, in each case having combined
capital and surplus and undivided profits (or any similar capital concept) of
not less than $500.0 million and whose senior unsecured debt is rated at least
"A-1" by S&P or "P-1" by Moody's; (iii) commercial paper with a maturity of 365
days or less issued by a corporation (other than an Affiliate of the Company)
organized under the laws of the United States or any State thereof and rated at
least "A-1" by S&P or "P-1" by Moody's; (iv) repurchase agreements and reverse
repurchase agreements relating to marketable direct obligations issued or
unconditionally guaranteed by the United States Government or issued by any
agency thereof and backed by the full faith and credit of the United States
Government maturing within 365 days from the date of acquisition; and (v) money
market funds in the United States which invest substantially all of their assets
in securities of the type described in any of the preceding clauses (i) through
(iv).
"Change of Control" means the occurrence of any of the following events: (a)
any "person" or "group" (as such terms are used in Sections 13(d) or 14(d) of
the Exchange Act), excluding Permitted Holders, is or becomes the "beneficial
owner" (as defined in Rules 13d-3 or 13d-5 under the Exchange Act, except that a
person shall be deemed to have "beneficial ownership" of all securities that
such person has or acquires the right to acquire, whether such right is
exercisable immediately or only after the passage of time), directly or
indirectly, of more than 50% of the total voting power of all Voting Stock of
the Company (except that the person or group shall not be deemed the "beneficial
owner" of shares tendered pursuant to a tender or exchange offer made by that
person or group or any of their Affiliates until the tendered shares are
accepted for purchase or exchange) or has, directly or indirectly, the right to
elect or designate a majority of the Board or (b) the Company consolidates with,
or merges with or into, another person or sells, assigns, conveys, transfers,
leases or otherwise disposes of all or substantially all of its assets to any
person, or any person consolidates with, or merges with or into, the Company, in
any such event pursuant to a transaction in which the outstanding Voting Stock
of the Company is converted into or exchanged for cash, securities or other
property, other than any such transaction where (i) the outstanding Voting Stock
of the Company is converted into or exchanged for (1) Voting Stock (other than
Disqualified Stock) of the surviving or transferee corporation or its parent
corporation and/or (2) cash, securities and other property in any amount which
could be paid by the Company as a Restricted Payment under the Indenture, (ii)
the "beneficial owners" (as so defined) of the Voting Stock of the Company
immediately before such transaction own, directly or indirectly, immediately
after such transaction, at least a majority of the voting power of all Voting
Stock of the surviving or transferee corporation or its parent corporation
immediately after such transaction, as applicable, or (iii) immediately after
such transaction, no "person" or "group" (as such terms are defined above),
excluding the Permitted Holders, is the "beneficial owner" (as defined above),
directly or indirectly, of more than 50% of the Voting Stock of such surviving
or transferee corporation or its parent corporation, as applicable, or has,
directly or indirectly, the right to elect or designate a majority of the board
of directors of the surviving or transferee corporation or its parent
corporation, as applicable, or (c) during any consecutive two-year period,
individuals who at the beginning of such period constituted the Board (together
with any new directors whose election by the Board or whose nomination for
election by the stockholders of the Company was approved by a vote of a majority
of the directors then still in office who were either directors at the beginning
of such period or whose election or nomination for election was previously so
approved) cease for any reason to constitute a majority of the Board then in
office. The good faith determination by the Board, based upon advice of outside
counsel, of the beneficial ownership of securities of the Company within the
meaning of Rules 13d-3 and 13d-5 under the Exchange Act shall be conclusive,
absent contrary controlling
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precedent or contrary written interpretation published by the Commission. No
inference shall be created that officers or employees of the Company are acting
as a "person" or "group" (as such terms are used in Sections 13(d) or 14(d) of
the Exchange Act) with the power to designate a majority of the members of the
Board solely because such officers or employees constitute a majority of the
members of the Board.
"Collateral Investments Account" means an account established in the United
States with the Trustee pursuant to the terms of the Pledge and Escrow Agreement
for the deposit of the Pledged Securities purchased by the Company with a
portion of the net proceeds from the sale of the notes.
"Commission" means the United States Securities and Exchange Commission, or
any successor agency.
"Common Stock" means, with respect to any Person, any and all shares,
interests, participations or rights in, or other equivalents (however designated
and whether voting and/or nonvoting) of, such Person's common stock and
includes, without limitation, all series and classes of such common stock.
"Consolidated Income Tax Expense" means, with respect to any period, the
provision for federal, state, local, foreign and other income taxes of the
Company and the Restricted Subsidiaries for such period as determined on a
consolidated basis in accordance with GAAP.
"Consolidated Interest Expense" means, with respect to any period, without
duplication, the sum of (i) the interest expense of the Company and the
Restricted Subsidiaries for such period as determined on a consolidated basis in
accordance with GAAP, including, without limitation, (a) any amortization of
debt discount, (b) the net cost under Interest Rate Obligations (including any
amortization of discounts), (c) the interest portion of any deferred payment
obligation, (d) all commissions, discounts and other fees and charges owed with
respect to letters of credit and bankers' acceptance financing and similar
transactions and (e) all capitalized interest and accrued interest, (ii) the
interest component of Capitalized Lease Obligations paid, accrued and/or
scheduled to be paid or accrued by the Company and the Restricted Subsidiaries
during such period as determined on a consolidated basis in accordance with
GAAP, (iii) the portion of any rental obligation in respect of any
Sale/Leaseback Transaction allocable to interest expense (determined as if such
were treated as a Capital Lease Obligation), and (iv) the amount of dividends
and distributions in respect of Preferred Stock or Disqualified Stock paid by
the Restricted Subsidiaries to a Person other than the Company or a Restricted
Subsidiary or by the Company during such period.
"Consolidated Net Income" means, with respect to any period, the net income
(or loss) of the Company and the Restricted Subsidiaries for such period
determined on a consolidated basis in accordance with GAAP, adjusted, to the
extent included in calculating such consolidated net income (or loss), by
excluding, without duplication, (i) all extraordinary, unusual or nonrecurring
gains or losses and all gains or losses from sales or other dispositions of
assets (including Asset Sales) out of the ordinary course of business (net of
taxes, fees and expenses relating to the transaction giving rise thereto) for
such period, (ii) that portion of such net income (or loss) derived from or in
respect of Investments in Persons other than Restricted Subsidiaries, except to
the extent of any cash dividends actually received by the Company or any
Restricted Subsidiary (subject, in the case of any Restricted Subsidiary, to the
provisions of clause (vi) of this definition); (iii) any gain or loss, net of
taxes, realized upon the termination of any employee pension benefit plan during
such period, (iv) that portion of such net income (or loss) allocable to
minority interests in any Restricted Subsidiary for such period, (v) net income
(or loss) of any other Person combined with the Company or any Restricted
Subsidiary on a "pooling of interests" basis attributable to any period prior to
the date of combination and (vi) the net income of any Restricted Subsidiary for
such period to the extent that the declaration of dividends or similar
distributions by that Restricted Subsidiary of that income is not at the time
permitted, directly or indirectly, by operation of the terms of its charter or
any agreement, instrument,
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judgment, decree, order, statute, rule or governmental regulations applicable to
that Restricted Subsidiary or its stockholders.
"Consolidated Net Worth" means, with respect to any Person, the consolidated
stockholders' or partners' equity of such Person reflected on the most recent
balance sheet of such Person, determined in accordance with GAAP, less any
amounts attributable to redeemable capital stock (as determined under applicable
accounting standards promulgated by the Commission) of such Person.
"Consolidated Operating Cash Flow" means, with respect to any period,
Consolidated Net Income for such period (a) increased (without duplication), to
the extent deducted in arriving at such Consolidated Net Income, by the sum of
(i) Consolidated Income Tax Expense for such period; (ii) Consolidated Interest
Expense for such period; and (iii) depreciation, amortization and any other
non-cash items for such period of the Company and the Restricted Subsidiaries
(other than any non-cash item which requires the accrual of, or a reserve for,
cash charges for any future period), including, without limitation, amortization
of capitalized debt issuance costs for such period, all determined on a
consolidated basis in accordance with GAAP, and (b) decreased by any non-cash
items (including non-recurring gains and non-recurring items of income) to the
extent they increased Consolidated Net Income for such period (including any
partial or complete reversal of reserves taken in a prior period).
"covenant defeasance" has the meaning set forth under "--Defeasance."
"Debt Securities" means any debt securities issued by the Company in a
public offering or in a private placement to institutional "accredited
investors" (as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities
Act).
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Default Amount" means the principal amount of the notes (and any applicable
premium thereon) and any accrued and unpaid interest thereon.
"defeasance" has the meaning set forth under "--Defeasance."
"Designation" and "Designation Amount" have the meanings set forth under
"--Certain Covenants--LIMITATION ON DESIGNATIONS OF UNRESTRICTED SUBSIDIARIES."
"Disinterested Director" means, with respect to any transaction or series of
related transactions, a member of the Board other than a director who (i) has
any material direct or indirect financial interest in or with respect to such
transaction or series of related transactions or (ii) is an employee or officer
of the Company or an Affiliate that is itself a party to such transaction or
series of transactions or an Affiliate of a party to such transaction or series
of related transactions.
"Disqualified Stock" means, with respect to any Person, any Capital Stock
which, by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable), or upon the happening of any
event, matures or becomes mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or becomes exchangeable for Indebtedness at the option
of the holder thereof, or becomes redeemable at the option of the holder
thereof, in whole or in part, on or prior to the final maturity date of the
notes; PROVIDED that any Capital Stock that would not constitute Disqualified
Stock but for provisions thereof giving holders thereof the right to require
such Person to repurchase or redeem such Capital Stock upon the occurrence of an
"asset sale" or "change of control" occurring prior to the final maturity date
of the notes will not constitute Disqualified Stock so long as the "asset sale"
or "change of control" provisions applicable to such Capital Stock are no more
favorable to the holders thereof than the provisions described in "--Certain
Covenants--CHANGE OF CONTROL" and "--DISPOSITION OF PROCEEDS OF ASSET SALES" and
such Capital Stock specifically provides that such Person will not repurchase or
redeem any such stock pursuant to such provision prior to the Company's
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repurchase of such notes as are required to be repurchased pursuant to the
provisions described in "--Certain Covenants--CHANGE OF CONTROL" and
"--DISPOSITION OF PROCEEDS OF ASSET SALES."
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
together with the rules and regulations promulgated thereunder.
"Fair Market Value" means, with respect to any asset or property, the price
(after taking into account any liabilities relating to such asset or property)
that could be negotiated in an arms-length free market transaction, for cash,
between a willing seller and a willing buyer, neither of whom is under pressure
or compulsion to complete the transaction. Unless otherwise specified in the
Indenture, Fair Market Value shall be determined by the Board acting in good
faith and shall be evidenced by a Board Resolution.
"GAAP" means, as of any date of determination, generally accepted accounting
principles 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, the
Commission or in such other statements by such other entity as may be approved
by a significant segment of the accounting profession of the United States,
which are in effect as of such date of determination and which are consistently
applied for all applicable periods.
"Government Securities" means direct obligations of, or obligations
guaranteed by, the United States of America for the payment of which obligations
or guarantee the full faith and credit of the United States is pledged.
"Guarantee" means, as applied to any obligation, (i) a guarantee (other than
by endorsement of negotiable instruments for collection in the ordinary course
of business), direct or indirect, in any manner, of any part or all of such
obligation and (ii) an agreement, direct or indirect, contingent or otherwise,
the practical effect of which is to assure in any way the payment or performance
(or payment of damages in the event of non-performance) of all or any part of
such obligation, including, without limiting the foregoing, any obligation (A)
to pay amounts drawn down by letters of credit, (B) to purchase or pay (or
advance or supply funds for the purchase or payment of) such obligation (whether
arising by virtue of partnership arrangement, agreements to keep-well, to
purchase assets, goods, securities or services, to take-or-pay, or to maintain
financial statement conditions or otherwise) or (C) entered into for purposes of
assuring in any other manner the obligee of such obligation 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.
"Indebtedness" means, with respect to any Person, without duplication
(whether or not the recourse of the lender is to the whole of the assets of such
Person or only to a portion thereof), (i) every liability of such Person,
whether or not contingent, (A) for borrowed money, (B) evidenced by notes,
bonds, debenture or other similar instruments (whether or not negotiable), (C)
for reimbursement of amounts expended under letters of credit, bankers'
acceptances or similar facilities issued for the account of such Person, (D)
issued or assumed as the deferred purchase price of property or services, (E)
relating to a Capitalized Lease Obligation and all Attributable Debt in respect
of Sale/Leaseback Transactions of such Person and (F) in respect of an Interest
Rate Obligation of such Person; (ii) every liability of others of the kind
described in the preceding clause (i) which such Person has Guaranteed or which
is otherwise its legal liability; or (iii) every obligation secured by a Lien
(other than (x) Permitted Liens of the types described in clauses (b), (d) or
(e) of the definition of Permitted Liens; provided that the obligations secured
would not constitute Indebtedness under clauses (i) or (ii) or (iii) of this
definition, and (y) Liens on Capital Stock or Indebtedness of any Unrestricted
Subsidiary) to which the property or assets of such Person are subject, whether
or not the obligations secured thereby shall have been assumed by or shall
otherwise be such Person's legal liability (the amount of such obligation being
deemed to be the, lesser of the Fair Market Value of such
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property or asset or the amount of the obligation so secured); (iv) all
Disqualified Stock of such Person, valued at the greater of its voluntary or
involuntary maximum fixed repurchase or redemption price (plus accrued and
unpaid dividends to the date of determination); and (v) any and all deferrals,
renewals, extensions and refundings of, or amendments, modifications or
supplements to, any liability of the kind described in any of the preceding
clauses (i), (ii), (iii) or (iv). In no event shall "Indebtedness" include trade
payables and accrued liabilities that are current liabilities incurred in the
ordinary course of business, excluding the current maturity of any obligation
which would otherwise constitute Indebtedness. For purposes of the covenants
described under "--Certain Covenants-- LIMITATION ON ADDITIONAL INDEBTEDNESS"
and "--LIMITATION ON RESTRICTED PAYMENTS" and the definition of "Events of
Default," in determining the principal amount of any Indebtedness to be incurred
by the Company or a Restricted Subsidiary or which is outstanding at any date,
(A) the principal amount of any Indebtedness which provides that an amount less
than the principal amount at maturity thereof shall be due upon any declaration
of acceleration thereof shall be the accreted value thereof at the date of
determination; (B) the principal amount of any Indebtedness shall be reduced by
any amount of cash, Government Securities or Cash Equivalent collateral securing
on a perfected basis, and dedicated for disbursement to the payment of principal
of or interest on, such Indebtedness; and (C) the amount of Indebtedness of any
Person at any date shall be the outstanding balance at such date of all
unconditional obligations as described above and the maximum liability of any
Guarantees at such date.
"Indebtedness to EBITDA Ratio" means, as at any date of determination (the
"Transaction Date"), the ratio of (i) Total Consolidated Indebtedness as at the
Transaction Date to (ii) two times the Consolidated Operating Cash Flow for the
two full fiscal quarters immediately preceding the Transaction Date for which
financial statements are available (such two full fiscal quarter period being
referred to herein as the "Measurement Period"). For purposes of calculating
Consolidated Operating Cash Flow for the relevant Measurement Period prior to a
Transaction Date, (A) any Person that is a Restricted Subsidiary on the
Transaction Date (or would become a Restricted Subsidiary on such Transaction
Date in connection with the transaction that requires the calculation of such
Consolidated Operating Cash Flow) shall be deemed to have been a Restricted
Subsidiary at all times during the Measurement Period, (B) any Person that is
not a Restricted Subsidiary on such Transaction Date (or would cease to be a
Restricted Subsidiary on such Transaction Date in connection with the
transaction that requires the calculation of Consolidated Operating Cash Flow)
will be deemed not to have been a Restricted Subsidiary at any time during the
Measurement Period, and (C) if the Company or any Restricted Subsidiary shall
have in any manner (x) acquired through an Asset Acquisition or (y) disposed of
(including by way of an Asset Sale or the termination or discontinuance of
activities constituting such operating business) any operating business during
such Measurement Period or after the end of such period and on or prior to the
Transaction Date, such calculation will be made on a PRO FORMA basis in
accordance with GAAP as if, in the case of an Asset Acquisition, such
transaction had been consummated on the first day of the Measurement Period and,
in the case of an Asset Sale or other disposition, termination or discontinuance
of activities constituting such an operating business, such transaction had been
consummated prior to the first day of the Measurement Period; PROVIDED, HOWEVER
that such PRO FORMA adjustment shall not give effect to the operating cash flow
of any Person that would become a Restricted Subsidiary on the Transaction Date
in connection with the transaction that requires the calculation of Consolidated
Operating Cash Flow to the extent that such Person's net income would be
excluded from the calculation of Consolidated Net Income pursuant to clause (vi)
of the definition of Consolidated Net Income.
"Independent Financial Advisor" means a United States investment banking
firm of national or regional standing in the United States (i) which does not,
and whose directors, officers and employees or Affiliates do not have, a direct
or indirect financial interest in the Company and (ii) which, in the judgment of
the Board, is otherwise independent and qualified to perform the task for which
it is to be engaged.
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"Interest Rate Obligations" means the obligations of any Person pursuant to
any arrangement with any other Person whereby, directly or indirectly, such
Person is entitled to receive from time to time periodic payments calculated by
applying either a floating or a fixed rate of interest on a stated notional
amount and shall include, without limitation, interest rate swaps, caps, floors,
collars, forward interest rate agreements and similar agreements.
"Investment" means, with respect to any Person, any direct or indirect
advance, loan, account receivable (other than an account receivable arising in
the ordinary course of business), or other extension of credit (including,
without limitation, by means of any Guarantee) or any capital contribution to
(by means of transfers of cash or other property or assets to others, payments
for property or services for the account or use of others, or otherwise), or any
purchase or acquisition of capital stock, bonds, notes, debentures or other
securities or evidences of Indebtedness of any other Person. The amount of any
Investment shall be the original cost of such Investment, plus the cost of all
additions thereto, and minus the amount of any portion of such Investment repaid
to such Person in cash as a repayment of principal or a return of capital, as
the case may be, but without any other adjustments for increases or decreases in
value, or write-ups, write-downs or write-offs with respect to such Investment.
In determining the amount of any Investment involving a transfer of any property
or assets other than cash, such property shall be valued at its Fair Market
Value at the time of transfer.
"Issue Date" means the original date of issuance of the old notes.
"Lien" means any mortgage, charge, pledge, lien (statutory or other),
security interest, hypothecation, assignment for security, claim, or preference
or priority or other encumbrance upon or with respect to any property of any
kind whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest and any filing of or agreement to give any financing statement under
the Uniform Commercial Code (or equivalent statutes) of any jurisdiction). A
Person shall be deemed to own subject to a Lien any property which such Person
has acquired or holds subject to the interest of a vendor or lessor under any
conditional sale agreement, capital lease or other title retention agreement.
"Marketable U.S. Securities" means (i) any Cash Equivalents or (ii) any fund
investing primarily in investments that are Cash Equivalents.
"Market Capitalization" of any Person means, as of any day of determination,
the product of (i) the average Closing Price of a share of such Person's Common
Stock over the 20 consecutive trading days immediately preceding such date and
(ii) the number of shares of such Common Stock issued and outstanding on such
date. "Closing Price" on any trading day with respect to the per share price of
any shares of Common Stock means the last reported sale price regular way or, in
case no such reported sale takes place on such day, the average of the reported
closing bid and asked prices regular way, in either case on the New York Stock
Exchange or, if such shares of Common Stock are not listed or admitted to
trading on such exchange, on the principal national securities exchange on which
such shares are listed or admitted to trading or, if not listed or admitted to
trading on any national securities exchange, on the Nasdaq National Market or,
if such shares are not listed or admitted to trading on any national securities
exchange or quoted on the Nasdaq National Market but such Person is a "Foreign
Issuer" (as defined in Rule 3b-4(b) under the Exchange Act) and the principal
securities exchange on which such shares are listed or admitted to trading is a
"designated offshore securities market" (as defined in Rule 902(b) under the
Securities Act), the average of the reported closing bid and asked prices
regular way on such principal exchange or, if such shares are not listed or
admitted to trading on any national securities exchange or quoted on the Nasdaq
National Market and such Person and any securities markets in which such
Person's Common Stock trades does not meet any of the foregoing such
requirements, the average of the closing bid and asked prices in the
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over-the-counter market as furnished by any New York Stock Exchange member firm
that is selected from time to time by the Company for the purpose and is
reasonably acceptable to the Trustee.
"Maturity Date" means, with respect to any note, the date specified in such
note as the fixed date on which the principal of such note is due and payable.
"Moody's" means Moody's Investors Service, Inc. (and any successor).
"Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds
thereof received by the Company or any Restricted Subsidiary in the form of cash
(including assumed Indebtedness (other than Subordinated Indebtedness) and other
items deemed to be cash under the proviso to the first sentence of the covenant
described under "--Certain Covenants--DISPOSITION OF PROCEEDS OF ASSET SALES")
or Cash Equivalents including payments in respect of deferred payment
obligations when received in the form of cash or Cash Equivalents (except to the
extent that such obligations are financed or sold with recourse to the Company
or any Restricted Subsidiary) net of (i) brokerage commissions and other fees,
costs and expenses (including fees and expenses of legal counsel and investment
bankers) related to such Asset Sale, (ii) provisions for all taxes paid or
payable as a result of such Asset Sale, (iii) amounts required to be paid to any
Person (other than the Company or any Restricted Subsidiary) owning a beneficial
interest in or having a Lien on the assets subject to the Asset Sale, (iv) with
respect to Asset Sales by Restricted Subsidiaries, the portion of such cash and
Cash Equivalents attributable to any Persons holding a minority interest in such
Restricted Subsidiary and (v) appropriate amounts to be provided by the Company
or any Restricted Subsidiary, as the case may be, as a reserve required in
accordance with GAAP against any liabilities associated with such Asset Sale and
retained by the Company or any Restricted Subsidiary, as the case may be, after
such Asset Sale, including, without limitation, pension and other
post-employment benefit liabilities, liabilities related to environmental
matters and liabilities under any indemnification obligations associated with
such Asset Sale, all as reflected in an Officers' Certificate delivered to the
Trustee.
"Permitted Business" means any of the following: (i) transmitting, providing
services relating to or developing network and software applications for the
transmission and management of voice, data, video or other information through
owned or leased wireline or wireless transmission facilities or over the
internet; (ii) creating, developing, constructing, installing, integrating,
repairing, maintaining or marketing communications-related systems, network
equipment and wireless and wireline transmission facilities, software and other
related products; and (iii) evaluating, owning, operating, participating in or
pursuing any other business that is primarily related to those identified in the
foregoing clauses (i) and (ii).
"Permitted Business Assets" has the meaning set forth in the covenant
described under "--Certain Covenants--DISPOSITION OF PROCEEDS OF ASSET SALES."
"Permitted Business Investments" means an Investment in any Person the
primary business of which consists of a Permitted Business.
"Permitted Credit Facility" means any senior secured or unsecured commercial
term loan and/or revolving credit facilities (including any letter of credit
subfacility) entered into principally with commercial banks and/or other
financial institutions.
"Permitted Holders" means Brentwood Venture Capital, Enterprise Partners,
Kleiner Perkins Caulfield & Byers, The Sprout Group and Catherine M. Hapka, and
their respective Affiliates.
"Permitted Indebtedness" means the following Indebtedness (each of which
shall be given independent effect):
(a) Indebtedness under the notes and the Indenture;
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(b) Indebtedness (including Disqualified Stock) of the Company and/or any
Restricted Subsidiary outstanding, or committed but undrawn, on the Issue
Date and identified on a schedule to the Indenture (including any
increase in the accreted value thereof after the Issue Date pursuant to
the terms of the instrument governing such Indebtedness as of the Issue
Date);
(c) (i) Indebtedness of any Restricted Subsidiary owed to and held by the
Company or a Wholly Owned Restricted Subsidiary and (ii) Indebtedness of
the Company, which is not secured by any Lien and is subordinated to the
Company's obligations with respect to the notes, owed to and held by any
Restricted Subsidiary; PROVIDED that an incurrence of Indebtedness shall
be deemed to have occurred upon (x) any sale or other disposition of any
Indebtedness of the Company or a Restricted Subsidiary referred to in
this clause (c) to a Person other than the Company or a Restricted
Subsidiary, (y) any sale or other disposition of Capital Stock of a
Restricted Subsidiary which holds Indebtedness of the Company or another
Restricted Subsidiary such that such Restricted Subsidiary ceases to be a
Restricted Subsidiary or (z) the Designation of a Restricted Subsidiary
which holds Indebtedness of the Company or another Restricted Subsidiary
as an Unrestricted Subsidiary;
(d) Interest Rate Obligations of the Company and/or any Restricted
Subsidiary relating to Indebtedness of the Company and/or such Restricted
Subsidiary, as the case may be (which Indebtedness (i) bears interest at
fluctuating interest rates and (ii) is otherwise permitted to be incurred
under the "Limitation on Additional Indebtedness" covenant), but only to
the extent that the notional amount of such Interest Rate Obligations
does not exceed the principal amount of the Indebtedness (and/or
Indebtedness subject to commitments) to which such Interest Rate
Obligations relate;
(e) Indebtedness of the Company and/or any Restricted Subsidiary in respect
of performance bonds of the Company or any Restricted Subsidiary or
surety bonds provided by the Company or any Restricted Subsidiary, in
each case incurred in the ordinary course of business;
(f) Indebtedness of the Company and/or any Restricted Subsidiary to the
extent it represents a replacement, renewal, refinancing or extension (a
"refinancing") of the notes (during the periods for which redemption is
permitted under the terms of the Indenture) or other outstanding
Indebtedness of the Company and/or of any Restricted Subsidiary incurred
or outstanding pursuant to clause (a), (b), (g) or (h) of this definition
or the proviso in the first paragraph of the covenant described under
"--Certain Covenants--LIMITATION ON ADDITIONAL INDEBTEDNESS"; provided
that (i) no Restricted Subsidiary may incur Indebtedness to refinance
Indebtedness of the Company (except for Guarantees issued in accordance
with the covenant described under "--Certain Covenants--LIMITATION ON
ISSUANCES OF GUARANTEES OF INDEBTEDNESS BY RESTRICTED SUBSIDIARIES");
(ii) if such Indebtedness being refinanced has an Average Life to Stated
Maturity equal to or longer than the Average Life to Stated Maturity of
the notes, any such refinancing shall have an Average Life to Stated
Maturity longer than the Average Life to Stated Maturity of the notes and
a final stated maturity for the payment of principal thereof later than
the final stated maturity of the notes; (iii) if such Indebtedness being
refinanced has an Average Life to Stated Maturity shorter than the
Average Life to Stated Maturity of the notes, any such refinancing shall
have an Average Life to Stated Maturity longer than, and a final stated
maturity later than, the Indebtedness being refinanced; (iv) any such
refinancing shall not exceed the sum of the principal amount (or, if such
Indebtedness provides for a lesser amount to be due and payable upon a
declaration of acceleration thereof, an amount no greater than such
lesser amount) of the Indebtedness being refinanced, plus the amount of
accrued and unpaid interest thereon, plus the amount of any reasonably
determined prepayment premium necessary to accomplish such refinancing
and such reasonable fees and expenses incurred in connection therewith;
(v) the notes and Indebtedness that ranks PARI PASSU with the notes may
be refinanced only with Indebtedness that is made
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PARI PASSU with or subordinate in right of payment to the notes, and
Subordinated Indebtedness may only be refinanced with Subordinated
Indebtedness; and (vi) the refinancing Indebtedness shall be incurred by
the obligor of the Indebtedness being refinanced or by the Company;
(g) Indebtedness of the Company such that, after giving effect to the
incurrence thereof, the total aggregate principal amount of Indebtedness
incurred under this clause (g) and any refinancings thereof otherwise
incurred in compliance with the Indenture would not exceed 250% of Total
Incremental Equity;
(h) Indebtedness of the Company or any Restricted Subsidiary incurred under
any Permitted Credit Facility, and any refinancings of the foregoing
otherwise incurred in compliance with the Indenture, in an aggregate
principal amount not to exceed the greater of $75.0 million or the
Borrowing Base determined as of the date such Indebtedness is incurred,
at any time outstanding;
(i) Indebtedness of the Company or any Restricted Subsidiary that is
Purchase Money Indebtedness;
(j) Indebtedness in respect of (i) letters of credit, bankers' acceptances
or other similar instruments or obligations, issued in connection with
liabilities incurred in the ordinary course of business or (ii) surety,
judgment, appeal, performance and other similar bonds, instruments or
obligations provided in the ordinary course of business; and
(k) in addition to the items referred to in clauses (a) through (j) above,
Indebtedness of the Company having an aggregate principal amount not to
exceed $50.0 million at any time outstanding.
"Permitted Investments" means (a) any Investment in the Company or in a
Wholly Owned Restricted Subsidiary of the Company or in a Person as a result of
which such Person becomes a Wholly Owned Restricted Subsidiary; (b) Investments
constituting Permitted Business Investments, the sum of which does not exceed
the greater of $40.0 million or 25% of the total stockholders' equity as shown
on the Company's most recent balance sheet determined in accordance with GAAP,
at any one time outstanding; (c) Cash Equivalents; (d) Investments in prepaid
expenses, negotiable instruments held for collection and lease, utility and
workers' compensation, performance and other similar deposits; (e) Interest Rate
Obligations incurred in compliance with the covenant described under "--Certain
Covenants--LIMITATION ON ADDITIONAL INDEBTEDNESS"; (f) loans and advances to
employees made in the ordinary course of business not to exceed $500,000 in the
aggregate at any one time outstanding; (g) bonds, notes, debentures or other
securities (other than Capital Stock of any Restricted Subsidiary that is not a
Wholly Owned Restricted Subsidiary) received as a result of Asset Sales
permitted under "--Certain Covenants--DISPOSITION OF PROCEEDS OF ASSET SALES";
(h) any Investment to the extent that the consideration therefor consists of
Capital Stock (other than Disqualified Stock) of the Company; and (i) the
extension by the Company of (x) trade credit to Subsidiaries of the Company
represented by accounts receivable, extended on usual and customary terms in the
ordinary course of business or (y) Guarantees of commitments for the purchase of
goods or services incurred in the ordinary course of business so long as such
Guarantees, to the extent constituting Indebtedness, are permitted to be
incurred under the covenant described under "--Certain Covenants--LIMITATION ON
ADDITIONAL INDEBTEDNESS."
"Permitted Liens" means (a) Liens on property of a Person existing at the
time such Person is merged into or consolidated with the Company or any
Restricted Subsidiary or becomes a Restricted Subsidiary; provided that such
Liens were in existence prior to the contemplation of such merger, consolidation
or acquisition and do not secure any property or assets of the Company or any
Restricted Subsidiary other than the property or assets subject to the Liens
prior to such merger or consolidation
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or acquisition; (b) Liens imposed by law, such as carriers', warehousemen's and
mechanics' Liens and other similar Liens arising in the ordinary course of
business that secure payment of obligations not more than 60 days past due or
that are being contested in good faith and by appropriate proceedings; (c) Liens
existing on the Issue Date (including Liens securing Indebtedness permitted
under clause (b) of the definition of Permitted Indebtedness); (d) Liens for
taxes, assessments or governmental charges or claims that are not yet delinquent
or that are being contested in good faith by appropriate proceedings promptly
instituted and diligently conducted; PROVIDED that any reserve or other
appropriate provision as shall be required in conformity with GAAP shall have
been made therefor; (e) easements, rights of way, restrictions and other similar
easements, licenses, restrictions on the use of properties, or minor
imperfections of title that, in the aggregate, are not material in amount and do
not in any case materially detract from the properties subject thereto or
interfere with the ordinary conduct of the business of the Company or the
Restricted Subsidiaries; (f) Liens to secure the performance of statutory
obligations, surety or appeal bonds, performance bonds or other obligations of a
like nature incurred in the ordinary course of business (exclusive of
obligations for the payment of borrowed money); (g) Liens securing Indebtedness
incurred under a Permitted Credit Facility; provided, however, that the
incurrence of such Indebtedness is permitted by the covenant described under
"--Certain Covenants--LIMITATION ON ADDITIONAL INDEBTEDNESS" above; (h) Liens to
secure any refinancing of any Indebtedness secured by Liens permitted by the
Indenture, but only to the extent that such Liens do not extend to any other
property or assets (other than improvements thereto); (i) Liens to secure the
notes and Liens created under the Indenture; (j) Liens securing Purchase Money
Indebtedness; (k) Liens on and pledges of Capital Stock of any Unrestricted
Subsidiary securing any Indebtedness of such Unrestricted Subsidiary; (l) 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; (m) Liens to secure Capitalized Lease Obligations
permitted to be incurred under the Indenture; (n) Liens that do not materially
detract from the value of the property subject to such Liens, that do not
materially interfere with the ordinary conduct of the business of the Company or
any of its Restricted Subsidiaries, and that are made on customary and usual
terms applicable to similar assets; (o) pledges or deposits by such Person under
workmen's compensation laws, unemployment insurance laws or similar legislation,
or good faith deposits in connection with bids, tenders, contracts (other than
for the payment of Indebtedness) or leases to which such Person is a party, or
deposits to secure public or statutory obligations of such Person, or deposits
or cash or United States government bonds to secure surety or appeal bonds to
which such Person is a party, or deposits as security for contested taxes or
import duties or for the payment of rent, in each case incurred in the ordinary
course of business; (p) Liens customary in the industry and incurred in the
ordinary course of business securing Interest Rate Obligations so long as the
related Indebtedness is, and is permitted to be under the Indenture, secured by
a Lien on the same property securing such Interest Rate Obligations; and (q)
Liens held by the Company on the assets or property of a Restricted Subsidiary
of the Company to secure Indebtedness of such Restricted Subsidiary owing to and
held by the Company.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization, government or any agency or political subdivision
thereof or any other entity.
"Pledge and Escrow Agreement" means the Pledge and Escrow Agreement, dated
as of the date of the Indenture, among the Company and the Trustee, as escrow
agent.
"Pledged Securities" means the securities purchased by the Company with a
portion of the net proceeds from the sale of the notes to be deposited in the
Collateral Investments Account.
"Preferred Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated) of such
Person's preferred or preference stock whether now outstanding, or issued after
the Issue Date, and including, without limitation, all classes and series of
preferred or preference stock of such Person.
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"Public Equity Offering" means an underwritten primary public offering of
Common Stock of the Company for cash pursuant to an effective registration
statement filed under the Securities Act.
"Purchase Money Indebtedness" means Indebtedness of the Company or any
Restricted Subsidiary (including Acquired Indebtedness and Indebtedness
represented by Capitalized Lease Obligations, Attributable Debt in respect of
Sale/Leaseback Transactions, mortgage financings and purchase money
obligations), including any related notes, guarantees, collateral documents,
instruments and agreements executed in connection therewith, as the same may be
amended, supplemented, modified or restated from time to time, incurred at any
time for the purpose of financing all or any part of the cost of the
development, construction, expansion, installation, acquisition, lease or
improvement by the Company or any Restricted Subsidiary of any Permitted
Business Assets or not less than 66 2/3 percent of the outstanding Voting Stock
of a Person that becomes a Restricted Subsidiary the assets of which consist
primarily of Permitted Business Assets.
"refinancing" has the meaning set forth in clause (f) of the definition of
"Permitted Indebtedness."
"Restricted Payment" means any of the following: (i) the declaration or
payment of any dividend or any other distribution on any Capital Stock of the
Company or any Restricted Subsidiary or any other payment made to the direct or
indirect holders (in their capacities as such) of Capital Stock of the Company
or any Restricted Subsidiary (other than any dividends, distributions or
payments made to the Company or any Restricted Subsidiary and dividends or
distributions payable solely in Capital Stock (other than Disqualified Stock) of
the Company or in options, warrants or other rights to purchase Capital Stock
(other than Disqualified Stock) of the Company); (ii) the purchase, redemption
or other acquisition or retirement for value of any Capital Stock of the Company
or any Restricted Subsidiary (other than any such Capital Stock owned by the
Company or a Restricted Subsidiary); (iii) the purchase, redemption, defeasance
or other acquisition or retirement for value, or the making of any principal
payment on, prior to any scheduled repayment, scheduled sinking fund payment or
scheduled maturity, of any Subordinated Indebtedness (other than any
Subordinated Indebtedness held by a Wholly Owned Restricted Subsidiary); or (iv)
the making by the Company or any Restricted Subsidiary of any Investment (other
than a Permitted Investment) in any Person.
"Restricted Subsidiary" means any Subsidiary of the Company that has not
been designated by the Board, by a Board Resolution delivered to the Trustee, as
an Unrestricted Subsidiary pursuant to and in compliance with the covenant
described under "--Certain Covenants--LIMITATION ON DESIGNATIONS OF UNRESTRICTED
SUBSIDIARIES." Any such designation may be revoked by a Board Resolution
delivered to the Trustee, subject to the provisions of such covenant.
"Revocation" has the meaning set forth under "--Certain
Covenants--LIMITATION ON DESIGNATIONS OF UNRESTRICTED SUBSIDIARIES."
"S&P" means Standard & Poor's Rating Services, a division of The McGraw-Hill
Companies (and any successor).
"Sale/Leaseback Transaction" of any Person means an arrangement with any
lender or investor or to which such lender or investor is a party providing for
the leasing by such Person of any property or assets of such Person which has
been or is being sold or transferred by such Person after its acquisition
thereof or the completion of construction or commencement of operations thereof
to such lender or investor or to any other Person to whom funds have been or are
to be advanced by such lender or investor on the security of such property or
asset.
"Strategic Equity Investor" means any Person that, as of the date of
determination, has a Market Capitalization or Consolidated Net Worth of at least
$2.0 billion and that derives a substantial portion of its revenues from a
business related to the Permitted Business.
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"Subordinated Indebtedness" means any Indebtedness of the Company which is
expressly subordinated in right of payment to any other Indebtedness of the
Company.
"Subsidiary" means, with respect to any Person, (a) any corporation of which
the outstanding Capital Stock having at least a majority of the votes entitled
to be cast in the election of directors shall at the time be owned, directly or
indirectly, by such Person, or (b) any other Person of which at least a majority
of voting interest is at the time, directly or indirectly, owned by such Person.
"Total Consolidated Indebtedness" means, at any date of determination, an
amount equal to the aggregate amount of all Indebtedness of the Company and the
Restricted Subsidiaries outstanding as of such date of determination.
"Total Incremental Equity" means, at any time of determination, the sum of,
without duplication, (a) the aggregate net cash proceeds received by the Company
from capital contributions in respect of existing Capital Stock (other than
Disqualified Stock) or the issuance and sale of Capital Stock (other than
Disqualified Stock but including Capital Stock issued upon the conversion of
convertible Indebtedness or from the exercise of options, warrants or rights to
purchase Capital Stock (other than Disqualified Stock)) subsequent to May 5,
1998, other than to a Subsidiary of the Company, plus (b) 80 percent of the Fair
Market Value of property (other than cash and Cash Equivalents) received by the
Company after May 5, 1998 as a contribution of capital or from the sale of its
Capital Stock (other than Disqualified Stock) to a Person that is not a
Subsidiary of the Company, minus (c) any amounts included in clause (a) above to
the extent used to make a Restricted Payment pursuant to clauses (2) or
(3)(A)(x) of the covenant described under "--Certain Covenants--LIMITATION ON
RESTRICTED PAYMENTS."
"Unrestricted Subsidiary" means any Subsidiary of the Company designated as
such pursuant to and in compliance with the covenant described under "--Certain
Covenants--LIMITATION ON DESIGNATIONS OF UNRESTRICTED SUBSIDIARIES." Any such
designation may be revoked by a Board Resolution delivered to the Trustee,
subject to the provisions of such covenant.
"Voting Stock" means, with respect to any Person, the Capital Stock of any
class or kind ordinarily having the power to vote for the election of directors
or other members of the governing body of such Person.
"voting power" means, with respect to the Capital Stock of any Person,
relative voting power in any general election of directors or other members of
the governing body of such Person.
"Wholly Owned Restricted Subsidiary" means any Restricted Subsidiary of
which 100% of the outstanding Capital Stock is owned by the Company or another
Wholly Owned Restricted Subsidiary. For the purposes of this definition, any
directors' qualifying shares or investments by foreign nationals mandated by
applicable law shall be disregarded in determining the ownership of a Restricted
Subsidiary.
NOTE REGISTRATION RIGHTS
We entered into a registration rights agreement with the Initial Purchasers
(the "Registration Rights Agreement"), a copy of the form of which is available
to prospective purchasers upon request, pursuant to which we agreed to file with
the Securities and Exchange Commission a registration statement (the "Exchange
Offer Registration Statement") on an appropriate form under the Securities Act
with respect to an offer to exchange the old notes for the new notes. Upon the
effectiveness of the Exchange Offer Registration Statement, we will offer to the
holders of old notes who are able to make certain representations the
opportunity to exchange their old notes for new notes. If (i) we are not
permitted to file the Exchange Offer Registration Statement or to consummate the
exchange offer because the exchange offer is not permitted by applicable law or
Commission policy, (ii) the exchange offer is not for any other reason
consummated within 180 days after the Issue Date, (iii) any holder of
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old notes notifies us within a specified time period that (a) due to a change in
law or policy it is not entitled to participate in the exchange offer, (b) due
to a change in law or policy it may not resell the new notes acquired by it in
the exchange offer to the public without delivering a prospectus and (x) the
prospectus contained in the Exchange Offer Registration Statement is not
appropriate or available for such resales by such holder and (y) such prospectus
is not promptly amended or modified in order to be suitable for use in
connection with such resales for such holder and all similarly situated holders
or (c) it is a broker-dealer and owns old notes acquired directly from us or an
affiliate of ours or (iv) the holders of a majority of the old notes may not
resell the new notes acquired by them in the exchange offer to the public
without restriction under the Securities Act and without restriction under
applicable blue sky or state securities laws, we will file with the Commission
the Shelf Registration Statement to cover resales of the Transfer Restricted
Notes (as defined below) by the holders thereof. We will use our best efforts to
cause the applicable registration statement to be declared effective as promptly
as possible by the Commission. For purposes of the foregoing, "Transfer
Restricted Notes" means each old note until (i) the date on which such old note
has been exchanged by a person other than a broker-dealer for a new note in the
exchange offer, (ii) following the exchange by a broker-dealer in the exchange
offer of an old note for a new note, the date on which such new note is sold to
a purchaser who receives from such broker-dealer on or prior to the date of such
sale a copy of the prospectus contained in the Exchange Offer Registration
Statement, (iii) the date on which such old note has been effectively registered
under the Securities Act and disposed of in accordance with the Shelf
Registration Statement, (iv) the date on which such old note is distributed to
the public pursuant to Rule 144(k) under the Securities Act (or any similar
provision then in force, but not Rule 144A under the Securities Act), (v) such
old note shall have been otherwise transferred by the holder thereof and a new
note not bearing a legend restricting further transfer shall have been delivered
by us and subsequent disposition of such new note shall not require registration
or qualification under the Securities Act or any similar state law then in force
or (vi) such old note ceases to be outstanding.
Under existing Commission interpretations, the new notes would, in general,
be freely transferable after the exchange offer without further registration
under the Securities Act; provided that in the case of broker- dealers
participating in the exchange offer, a prospectus meeting the requirements of
the Securities Act must be delivered upon resale by such broker- dealers in
connection with resales of the new notes. We have agreed, for a period of 180
days after consummation of the exchange offer, to make available a prospectus
meeting the requirements of the Securities Act to any such broker-dealer for use
in connection with any resale of any new notes acquired in the exchange offer. A
broker-dealer which delivers such a prospectus to purchasers in connection with
such resales will be subject to certain of the civil liability provisions under
the Securities Act and will be bound by the provisions of the Registration
Rights Agreement (including certain indemnification rights and obligations).
Each holder of the old notes that wishes to exchange such old notes for the
new notes in the exchange offer will be required to make certain
representations, including representations that (i) any new notes to be received
by it will be acquired in the ordinary course of our business, (ii) it has no
arrangement with any person to participate in the distribution of the new notes
and (iii) it is not an "affiliate," as defined in Rule 405 of the Securities
Act, of ours, or if it is an affiliate, it will comply with the registration and
prospectus delivery requirements of the Securities Act to the extent applicable.
If the holder is not a broker-dealer, it will be required to represent that
it is not engaged in, and does not intend to engage in, the distribution of the
new notes. If the holder is a broker-dealer that will receive new notes for its
own account in exchange for old notes that were acquired as a result of
market-making activities or other trading activities, it will be required to
acknowledge that it will deliver a prospectus in connection with any resale of
such new notes.
We have agreed to pay all expenses incident to the exchange offer and will
indemnify the Initial Purchasers against certain liabilities, including
liabilities under the Securities Act.
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The Registration Rights Agreement provides that: (i) unless the exchange
offer would not be permitted by applicable law or Commission policy, we will
file the Exchange Offer Registration Statement with the Commission on or prior
to the 90th day after the Issue Date, (ii) unless the exchange offer would not
be permitted by applicable law or Commission policy, we will use our best
efforts to have the Exchange Offer Registration Statement declared effective by
the Commission on or prior to the 150th day after the Issue Date (the "Target
Effectiveness Date"), (iii) unless the Exchange Offer would not be permitted by
applicable law or Commission policy, we will commence the exchange offer and use
our best efforts to issue, on or prior to the date which is 30 days after the
date on which the Exchange Offer Registration Statement was declared effective
by the Commission, new notes in exchange for all old notes tendered prior
thereto in the exchange offer and (iv) if obligated to file the Shelf
Registration Statement, we will use our best efforts to file prior to the later
of (a) the 90th day after the Issue Date or (b) the 30th day after such filing
obligation arises and will use its best efforts to cause the Shelf Registration
Statement to be declared effective by the Commission on or prior to the 60th day
after such obligation arises; provided that if we have not consummated the
exchange offer within the date which is 180 days after the Issue Date, then we
will file the Shelf Registration Statement with the Commission on or prior to
the 30th day after such date. We shall use our best efforts to keep such Shelf
Registration Statement continuously effective, supplemented and amended until
the earlier of (i) the second anniversary of the effective date of the Shelf
Registration Statement and (ii) such time as all of the Transfer Restricted
Notes covered by the Shelf Registration Statement have been sold thereunder or
otherwise cease to be Transfer Restricted Notes.
During any 365-day period, if any event occurs as a result of which the
Board determines in good faith that it is necessary to amend a Shelf
Registration Statement or amend or supplement any prospectus or prospectus
supplement thereunder to ensure that each of those documents does not include
any untrue statement of fact or omit to state a material fact necessary to make
the statements therein not misleading, then we will have the ability to suspend
the availability of the Shelf Registration Statement and the use of the related
prospectus for up to 60 consecutive days (except for the consecutive 60-day
period immediately prior to maturity of the notes).
If (i) we fail to file any of the registration statements required by the
Registration Rights Agreement on or before the date specified for such filing,
(ii) any of such registration statements is not declared effective by the
Commission on or prior to the Target Effectiveness Date (subject to certain
limited exceptions), (iii) we fail to consummate the exchange offer within 30
days of the Target Effectiveness Date with respect to the Exchange Offer
Registration Statement, or (iv) the Shelf Registration Statement or the Exchange
Offer Registration Statement is declared effective but thereafter, subject to
certain limited exceptions, ceases to be effective or usable in connection with
the exchange offer or resales of Transfer Restricted Notes, as the case may be,
during the periods specified in the Registration Rights Agreement (each such
event referred to in clauses (i) through (iv) above, a "Registration Default"),
then we shall pay as liquidated damages interest on the Transfer Restricted
Notes as to which any Registration Default exists. If a Registration Default
exists with respect to Transfer Restricted Notes, we will, with respect to the
first 90-day period (or portion thereof) while such Registration Default is
continuing immediately following the occurrence of such Registration Default,
make cash payments at a rate of 0.5% per annum. The rate of such cash payment
shall increase by an additional 0.5% per annum at the beginning of each
subsequent 90-day period (or portion thereof) while such Registration Default is
continuing until such Registration Default is cured, up to a maximum rate of
1.5% per annum. Following the cure of all Registration Defaults, the making of
cash payments with respect to the notes will cease and the interest rate on the
notes will revert to zero.
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, all the provisions of the Registration Rights
Agreement.
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DESCRIPTION OF THE NEW NOTES
The terms of the new notes will be identical in all material respects to
those of the old notes, except that the new notes:
- shall accrue interest from the last date on which interest was paid on the
old notes;
- will have been registered under the Securities Act and therefore will not
be subject to certain restrictions on transfer applicable to the old
notes; and
- will not be entitled to certain registration rights under the Registration
Rights Agreement, including the provision for Additional Interest of up to
1.5% on the old notes. Holders of old notes should review the information
set forth under "Summary--Consequences of Failure to Exchange Old Notes"
and "--Terms of New Notes."
FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a summary of the material United States federal
income tax considerations relevant to the exchange offer and the purchase,
ownership and disposition of the new notes, but does not purport to be a
complete analysis of all the potential tax effects thereof. This summary applies
only to initial investors who held the old notes and will hold the new notes as
capital assets. The Internal Revenue Service may not agree with the following
discussion. Further, the discussion does not address all aspects of taxation
that may be relevant to particular holders in light of their personal
circumstances (including the effect of any foreign, state or local tax laws) or
to certain types of holders (including dealers in securities, insurance
companies, foreign persons, financial institutions, tax-exempt entities and
persons holding the old notes or the new notes as part of a straddle, hedge or
conversion transaction) subject to special treatment under the United States
federal income tax laws. Moreover, the effect of any applicable state, local or
foreign tax laws is not discussed.
The discussion of the United States federal income tax consequences set
forth below is based upon currently existing provisions of the Internal Revenue
Code of 1986, as amended, judicial decisions, and administrative interpretations
all of which are subject to change, possibly with retroactive effect. BECAUSE
INDIVIDUAL CIRCUMSTANCES MAY DIFFER, EACH PROSPECTIVE PARTICIPANT IN THE
EXCHANGE OFFER SHOULD CONSULT ITS OWN TAX ADVISOR WITH RESPECT TO ITS PARTICULAR
TAX SITUATION AND THE PARTICULAR TAX EFFECTS OF ANY STATE, LOCAL, FOREIGN OR
OTHER TAX LAWS AND POSSIBLE CHANGES IN THE TAX LAWS.
EXCHANGE OF NOTES
The exchange of new notes for old notes pursuant to the exchange offer will
not be treated as a significant modification of the old notes under applicable
United States Treasury Regulations. As a result, the exchange will be treated
for United States federal income tax purposes as merely a registration and
continuation of the old notes. As a result, no gain or loss will be recognized
by any holder of the old notes by reason of its participation in the exchange
offer. Each such holder's adjusted basis and holding period in the new notes
will be the same as such holder's adjusted basis and holding period in the old
notes. Similarly, since the new notes and the old notes are treated as one and
the same for United States federal income tax purposes, any acquisition premium,
market discount or other tax attributes associated with the old notes will
continue to apply to the new notes.
SALE OR OTHER DISPOSITION OF NOTES. In general, upon the sale, exchange or
redemption of a new note, a holder will recognize taxable gain or loss equal to
the difference between (i) the amount of cash proceeds and the fair market value
of any property received on the sale, exchange or redemption (not including any
amount attributable to accrued but unpaid interest) and (ii) the holder's
adjusted tax basis in the new note. An initial holder's adjusted tax basis in a
new note generally will be equal to the cost of the old note to such holder
increased by the amount of any market discount previously included
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in income by the holder with respect to such old note or the new note received
in exchange therefor and reduced by the amount of any principal received by the
holder.
Subject to the market discount rules, gain or loss realized on the sale,
exchange or redemption of a new note will be capital gain or loss, which capital
gain or loss will be long term capital gain or loss if the holder held the new
notes for more than one year. Long Term capital gain recognized by individual
holders generally will be subject to a maximum United States federal income tax
rate of 20%. Beginning in 2001, the rate of tax on gains from certain property
held more than five years will be further reduced to 18%. A holder's holding
period with respect to the old notes surrendered in the exchange offer shall be
included in the holder's holding period with respect to the new notes received
in such exchange. The characterization of income as capital gain or loss is also
relevant for purposes of, among other things, limitations with respect to the
deductibility of capital losses.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Backup withholding of United States federal income tax at a rate of 31% may
apply to payments made in respect of a new note to a holder that is not an
"exempt recipient" and that fails to provide certain identifying information
(such as the holder's TIN) in the manner required. Generally, individuals are
not exempt recipients, whereas corporations and certain other entities are
exempt recipients. Payments made in respect of a new note must be reported to
the Internal Revenue Service, unless the holder is an exempt recipient or
otherwise establishes an exemption.
If in connection with the acquisition and ownership of the old notes a
holder provided identifying information (such the holder's TIN) in the manner
required or otherwise established an exemption from backup withholding, such
compliance with the backup withholding and information reporting rules will
continue in respect of the new notes.
Any amounts withheld under the backup withholding rules from a payment to a
holder of a new note will be allowed as a refund or credit against such holder's
United States federal income tax, provided that the required information is
furnished to the Internal Revenue Service.
The Treasury Department has issued the new Treasury Regulations relating to
back-up withholding which are effective for payments made after December 31,
1999. In general, the new Treasury Regulations do not significantly alter the
substantive withholding and information reporting requirements but unify current
certification procedures and forms and clarify reliance standards. Under the new
Treasury 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 new 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 new
Treasury Regulations on payments made with respect to new notes after December
31, 1999.
THE FOREGOING SUMMARY DOES NOT DISCUSS ALL ASPECTS OF UNITED STATES FEDERAL
INCOME TAXATION THAT MAY BE RELEVANT TO A PARTICULAR HOLDER OF NEW NOTES IN
LIGHT OF ITS PARTICULAR CIRCUMSTANCES AND INCOME TAX SITUATION. PROSPECTIVE
HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES
TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE NEW NOTES, INCLUDING
THE APPLICATION AND EFFECT OF STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE
POSSIBLE EFFECTS OF CHANGES IN UNITED STATES AND OTHER TAX LAWS.
PLAN OF DISTRIBUTION
Each Participating Broker-Dealer receiving new notes for its own account in
connection with the exchange offer must acknowledge that it will deliver a
prospectus in connection with any resale of such new notes. Participating
Broker-Dealers may use this prospectus during the period referred to below in
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connection with resales of the new notes received in exchange for old notes if
such old notes were acquired by such Participating Broker-Dealers for their own
accounts. We have agreed that this prospectus may be used by a Participating
Broker-Dealer in connection with resales of such new notes for a period ending
180 days after the effective date of the registration statement (subject to
extension under certain limited circumstances described herein) or, if earlier,
when all such new notes have been disposed of by such Participating
Broker-Dealer. See "The Exchange Offer--Terms of the Exchange Offer."
We will not receive any cash proceeds from the issuance of the new notes
offered by this prospectus. New notes received by Participating Broker-Dealers
for their own accounts in connection with the exchange offer may be sold from
time to time in one or more transactions in the over-the-counter market, in
negotiated transactions, through the writing of options on the new notes or a
combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or at negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer and/or the purchasers of any such new
notes. Any Participating Broker-Dealer that resells new notes that were received
by it for its own account in the exchange offer and any broker or dealer that
participates in a distribution of such new notes may be deemed to be an
"underwriter" within the meaning of the Securities Act. Any profit on any such
resale of new notes and any commissions or concessions received by any such
persons may be deemed to be underwriting compensation under the Securities Act.
The letter of transmittal states that by acknowledging that it will deliver and
by delivering a prospectus, a Participating Broker-Dealer will not be deemed to
admit that it is an "underwriter" within the meaning of the Securities Act.
LEGAL MATTERS
Brobeck, Phleger & Harrison LLP ("BPH"), San Diego, California, will pass
upon the validity of the notes for us. Baker & McKenzie, New York, New York,
will pass upon certain legal matters related to the notes for the Initial
Purchasers. The BPH investment fund and certain BPH attorneys hold in the
aggregate approximately 79,500 shares of common stock.
EXPERTS
The financial statements of the Company as of December 31, 1997 and 1998,
for the period from February 27, 1997 through December 31, 1997 and for the year
ended December 31, 1998, included in this prospectus, have been so included in
reliance on the report of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
Statements contained in this prospectus as to the contents of any contract
or other document referred to herein do not purport to be complete, and where
reference is made to the particular provisions of such contract or document,
such provisions are qualified in all respects by reference to all of the
provisions of such contract or other document, which is available upon request
to us at 6933 South Revere Parkway, Englewood, Colorado 80112.
We file reports, proxy statements and other information with the SEC. You
may read and copy any document we file at the SEC's public reference rooms in
Washington, D.C., New York, New York and Chicago, Illinois. Please call the SEC
at 1-800-SEC-0330 for further information on the public reference rooms. Our SEC
filings are also available to the public on the SEC's website at
http://www.sec.gov.
117
<PAGE>
GLOSSARY OF TERMS
<TABLE>
<S> <C>
Asynchronous Transfer Mode................... High bandwidth, low-delay,
connection-oriented, packet-like switching
and multiplexing technique requiring 53-byte,
fixed-sized cells.
Backbone..................................... An element of the network infrastructure that
provides high-speed, high capacity
connections among the network's physical
points of presence, i.e., connection points
and Metro Service Centers. The backbone is
used to transport end user traffic across the
metropolitan area and across the United
States.
Bandwidth.................................... Refers to the maximum amount of data that can
be transferred through a computer's backbone
or communication channel in a given time. It
is usually measured in Hertz, cycles per
second, for analog communications and bits
per second for digital communications.
Central Office............................... Incumbent carrier facility where subscriber
lines are joined to ILEC switching equipment.
Collocation.................................. A location where a competitive carrier
network interconnects with the network of an
incumbent carrier inside an incumbent
carrier's central office.
Competitive Carrier.......................... Category of telephone service provider, or
carrier, that offers local exchange and other
services similar to and in competition with
those of the incumbent carrier, as allowed by
recent changes in telecommunications law and
regulation. A competitive carrier may also
provide other types of services such as long
distance telephone, data communications,
Internet access and video.
Copper Line or Loop.......................... A pair of traditional copper telephone lines
using electric current to carry signals.
Digital...................................... Describes a method of storing, processing and
transmitting information through the use of
distinct electronic or optical pulses that
represent the binary digits 0 and 1. Digital
transmission and switching technologies
employ a sequence of these pulses to convey
information, as opposed to the continuously
variable analog signal. The precise digital
numbers preclude distortion, such as
graininess or "snow", in the case of video
transmission, or static or other background
distortion in the case of audio transmission.
Downstream................................... Refers to the transmission speed of a
connection between our connection point and
the end user.
</TABLE>
118
<PAGE>
<TABLE>
<S> <C>
DS-0......................................... DIGITAL SERVICE 0. Standard
telecommunications industry digital signal
format, which is distinguishable by bit
rate--the number of binary digits transmitted
per second. DS-0 service has a bit rate of 64
Kilobits per second.
DS-1......................................... DIGITAL SERVICE 1. In the digital hierarchy,
this signaling standard defines a
transmission speed of 1.544 Mbps.
DS-3......................................... DIGITAL SERVICE 3. In the digital hierarchy,
this signaling standard defines a
transmission speed of 44.736 Mbps, equivalent
to 28 T-1 channels. This term is often used
interchangeably with T-3.
DSL.......................................... DIGITAL SUBSCRIBER LINE. A transmission
technology enabling high-speed access in the
local copper loop, often referred to as the
last mile between the network service
provider--I.E., an incumbent carrier,
competitive carrier or an internet service
provider--and end user.
E-Commerce................................... ELECTRONIC COMMERCE. An Internet service that
supports electronic transactions between
customers and vendors to purchase goods and
services.
Encryption................................... Applying a specific algorithm to data so as
to alter the data's appearance and prevent
other devices from reading the information.
Decryption applies the algorithm in reverse
to restore the data to its original form.
Firewall..................................... A computer device that separates a local area
network from a wide area network and prevents
unauthorized access to the local area network
through the use of electronic security
mechanisms.
Frame Relay.................................. A form of packet switching with variable
length frames that may be used with a variety
of communications protocols.
Incumbent Carrier............................ A company providing local exchange services
on the date of enactment of the
Telecommunications Act of 1996. These
companies consist of the Regional Bell
Operating Companies, GTE and numerous
independent telephone companies.
Interconnection Agreement.................... A contract between an incumbent carrier and a
competitive carrier for the connection of a
competitive carrier network to the public
switched telephone network, as well as
competitive carrier access to incumbent
carrier unbundled network elements, e.g.,
copper loops. This agreement sets out some of
the financial agreement and operational
aspects of such interconnection and access.
</TABLE>
119
<PAGE>
<TABLE>
<S> <C>
Internet..................................... An array of interconnected networks using a
common set of protocols defining the
information coding and processing
requirements that can communicate across
hardware platforms and over many links; now
operated by a consortium of
telecommunications service providers and
others.
Internet Protocol............................ A standard for software that keeps track of
the inter-network addresses for different
nodes, routes outgoing messages and
recognizes incoming messages.
ISDN......................................... INTEGRATED SERVICES DIGITAL NETWORK. A
transmission method that provides
circuit-switched access to the public network
at speeds of 64 or 128 Kbps for voice, data
and video transmission.
Internet Service Provider.................... A company that provides direct access to the
Internet.
Interexchange Carrier........................ Usually referred to as a long-distance
service provider. There are many
interexchange carriers, including AT&T, MCI
WorldCom, Sprint and Qwest.
Kbps......................................... KILOBITS PER SECOND. 1,000 bits per second.
Long Distance Carrier........................ A long distance carrier providing services
between local exchanges on an intrastate or
interstate basis, also referred to in the
industry as an "interexchange carrier". A
long distance carrier may also be a long
distance resale company.
Mbps......................................... MEGABITS PER SECOND. Millions of bits per
second.
Modem........................................ An abbreviation of Modulator-Demodulator. An
electronic signal-conversion device used to
convert digital signals from a computer to
analog form for transmission over the
telephone network. At the transmitting end, a
modem working as a modulator converts the
computer's digital signals into analog
signals that can be transmitted over a
telephone line. At the receiving end, another
modem working as a demodulator converts
analog signals back into digital signals and
sends them to the receiving computer.
Multiplexing................................. An electronic or optical process that
combines several lower speed transmission
signals into one higher speed signal.
Network...................................... An integrated system composed of switching
equipment and transmission facilities
designed to provide for the direction,
transport and recording of telecommunications
traffic.
</TABLE>
120
<PAGE>
<TABLE>
<S> <C>
OC-3......................................... OPTICAL CARRIER 3. Standard
telecommunications industry digital single
format, which is distinguishable by bit
rate--the number of binary digits transmitted
per second. OC-3 service has a bit rate of
155.5 Mbps.
OC-12........................................ OPTICAL CARRIER 12. Standard
telecommunications industry digital single
format, which is distinguishable by bit
rate--the number of binary digits transmitted
per second. OC-12 service has a bit rate of
622.8 Mbps.
Packets...................................... Information represented as bytes grouped
together through a communication node with a
common destination address and other
attribute information.
Resellers.................................... Generally used to refer to a
telecommunications provider who does not own
any switching or transmission facilities. In
reality, a large number of providers furnish
services through a combination of owned and
resold facilities.
Router....................................... A device that accepts the Internet Protocol
from a local area network or another wide
area network device and switches/routes
Internet Protocol packets across a network
backbone. Routers also provide protocol
conversion services to transfer Internet
Protocol packets over frame relay,
Asynchronous Transfer Mode, and other
backbone network services.
T-1.......................................... This is a Bell System term for a digital
transmission link with a capacity of 1.544
Mbps.
TCP/IP....................................... TRANSMISSION CONTROL PROTOCOL/INTERNET
PROTOCOL. A set of network protocols that
allow computers with different architectures
and operating system software to communicate
with other computers on the Internet.
Upstream..................................... Refers to the transmission speed of a
connection between the end user and our
connection point.
</TABLE>
121
<PAGE>
RHYTHMS NETCONNECTIONS INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Financial Statements:
Consolidated Balance Sheets........................................................ F-2
Consolidated Statements of Operations.............................................. F-3
Consolidated Statements of Cash Flows.............................................. F-4
Consolidated Statements of Stockholders' Equity.................................... F-5
Notes to Consolidated Financial Statements......................................... F-6
Year End 1998 Financial Statements:
Report of Independent Accountants.................................................. F-9
Consolidated Balance Sheets........................................................ F-10
Consolidated Statements of Operations.............................................. F-11
Consolidated Statements of Cash Flows.............................................. F-12
Consolidated Statements of Stockholders' Equity.................................... F-13
Notes to Consolidated Financial Statements......................................... F-14
</TABLE>
F-1
<PAGE>
RHYTHMS NETCONNECTIONS INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31
1999
--------------
<S> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents....................................................................... $ 33,752,000
Short-term investments.......................................................................... 115,556,000
Accounts, loans, and other receivables, net..................................................... 2,470,000
Inventory....................................................................................... 1,020,000
Prepaid expenses and other current assets....................................................... 147,000
--------------
Total current assets.......................................................................... 152,945,000
Equipment and furniture, net...................................................................... 48,912,000
Collocation fees, net............................................................................. 25,828,000
Deferred business acquisitions costs, net......................................................... 10,119,000
Deferred debt issue costs, net.................................................................... 7,386,000
Other assets...................................................................................... 357,000
--------------
$ 245,547,000
--------------
--------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt............................................................... $ 333,000
Accounts payable................................................................................ 29,622,000
Accrued expenses and other current liabilities.................................................. 3,846,000
--------------
Total current liabilities..................................................................... 33,801,000
Long-term debt.................................................................................... 361,000
13.5% senior discount notes, net.................................................................. 162,990,000
Other liabilities................................................................................. 217,000
--------------
Total liabilities............................................................................. 197,369,000
--------------
Mandatorily redeemable Common Stock warrants...................................................... 6,567,000
--------------
Stockholders' equity:
Series A Convertible Preferred Stock, $0.001 par value; 12,900,000 shares authorized in 1998 and
1999; 12,855,094 shares issued and outstanding in 1998 and 1999............................... 13,000
Series B Convertible Preferred Stock, $0.001 par value; 4,044,943 shares authorized in 1998 and
1999; 4,044,943 shares issued and outstanding in 1998 and 1999................................ 4,000
Series C Convertible Preferred Stock, $0.001 par value; no shares authorized in 1998, 7,462,819
shares in 1999; no shares issued and outstanding in 1998, 7,462,819 shares in 1999............ 7,000
Common Stock, $0.001 par value; 80,049,892 shares authorized in 1998, 89,005,274 shares in 1999;
8,042,530 shares issued in 1998, 9,619,720 shares in 1999..................................... 10,000
Treasury Stock, at cost; 438,115 shares......................................................... (18,000)
Additional paid-in capital...................................................................... 107,543,000
Warrants........................................................................................ 4,714,000
Deferred compensation........................................................................... (8,007,000)
Accumulated deficit............................................................................. (62,655,000)
--------------
Total stockholders' equity (deficit).......................................................... 41,611,000
--------------
$ 245,547,000
--------------
--------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE>
RHYTHMS NETCONNECTIONS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------
MARCH 31 MARCH 31
1998 1999
------------- --------------
(UNAUDITED)
<S> <C> <C>
REVENUE:
Service and installation, net.................................................... $ 10,000 $ 660,000
------------- --------------
OPERATING EXPENSES:
Network and service costs........................................................ 198,000 6,138,000
Selling and marketing............................................................ 284,000 1,685,000
General and administrative....................................................... 2,038,000 12,111,000
Depreciation and amortization.................................................... 16,000 782,000
------------- --------------
Total operating expenses....................................................... 2,536,000 20,716,000
------------- --------------
LOSS FROM OPERATIONS............................................................... (2,526,000) (20,056,000)
------------- --------------
OTHER INCOME AND EXPENSE:
Interest income.................................................................. 158,000 1,749,000
Interest expense (including amortized debt discount and issue costs)............. (12,000) (5,627,000)
Other............................................................................ -- 35,000
------------- --------------
NET LOSS........................................................................... $ (2,380,000) $ (23,899,000)
------------- --------------
------------- --------------
NET LOSS PER SHARE:
Basic............................................................................ $ (1.10) $ (5.38)
------------- --------------
------------- --------------
Diluted.......................................................................... $ (1.10) $ (5.38)
------------- --------------
------------- --------------
SHARES USED IN COMPUTING NET LOSS PER SHARE:
Basic.......................................................................... 2,161,764 4,440,052
------------- --------------
------------- --------------
Diluted........................................................................ 2,161,764 4,440,052
------------- --------------
------------- --------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
RHYTHMS NETCONNECTIONS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(UNAUDITED)
THREE MONTHS ENDED
-------------------------------
MARCH 31 MARCH 31
1998 1999
-------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss....................................................................... $ (2,380,000) $ (23,899,000)
Adjustments to reconcile net loss to net cash used for operating activities:
Depreciation of equipment and furniture...................................... 12,000 564,000
Amortization of collocation fees............................................. 4,000 87,000
Amortization of deferred business acquisition costs.......................... -- 131,000
Amortization of debt discount and deferred debt issue costs.................. -- 5,612,000
Amortization of deferred compensation........................................ 94,000 601,000
Gain on sale of equipment to leasing company................................. -- (35,000)
Changes in assets and liabilities:
Increase in accounts, loans, and other receivables, net.................... (214,000) (94,000)
Increase in inventory...................................................... (226,000) (680,000)
Decrease in prepaid expenses and other current assets...................... 2,000 83,000
Decrease (increase) in other assets........................................ 4,000 (7,000)
Increase (decrease) in accounts payable.................................... 1,261,000 (869,000)
Increase (decrease) in accrued expenses and other current liabilities...... (65,000) 991,000
Increase in other liabilities.............................................. -- 37,000
-------------- ---------------
Net cash used for operating activities..................................... (1,508,000) (17,478,000)
-------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments............................................ -- (34,048,000)
Maturities of short-term investments........................................... -- 33,989,000
Purchases of equipment and furniture........................................... (183,000) (19,796,000)
Payment of collocation fees.................................................... (475,000) (12,111,000)
-------------- ---------------
Net cash used for investing activities..................................... (658,000) (31,966,000)
-------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from leasing company for equipment.................................... -- 1,755,000
Repayments on long-term debt................................................... -- (111,000)
Payment of debt issue costs.................................................... -- (1,169,000)
Proceeds from issuance of Common Stock......................................... 227,000 1,406,000
Proceeds from issuance of Preferred Stock and Warrants......................... 18,292,000 60,000,000
-------------- ---------------
Net cash provided by financing activities.................................. 18,519,000 61,881,000
-------------- ---------------
Net increase in cash and cash equivalents........................................ 16,353,000 12,437,000
Cash and cash equivalents at beginning of period................................. 10,166,000 21,315,000
-------------- ---------------
Cash and cash equivalents at end of period....................................... $ 26,519,000 $ 33,752,000
-------------- ---------------
-------------- ---------------
Supplemental schedule of cash flow information:
Cash paid for interest......................................................... $ 8,000 $ 16,000
-------------- ---------------
-------------- ---------------
Supplemental schedule of non-cash financing activities:
Equipment purchases payable, to be financed through operating leases........... $ 1,576,000 $ 9,541,000
-------------- ---------------
-------------- ---------------
Equipment and furniture purchases payable...................................... $ -- $ 10,349,000
-------------- ---------------
-------------- ---------------
Intangible business acquisition costs arising from issuance of preferred stock
and warrants................................................................. $ -- $ 10,250,000
-------------- ---------------
-------------- ---------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
RHYTHMS NETCONNECTIONS INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SERIES A CONVERTIBLE SERIES B CONVERTIBLE SERIES C CONVERTIBLE COMMON
STOCK
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK $0.001 PAR
$0.001 PAR VALUE $0.001 PAR VALUE $0.001 PAR VALUE VALUE
----------------------- ------------------------ ------------------------ -----------
# SHARES AMOUNT # SHARES AMOUNT # SHARES AMOUNT # SHARES
---------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998............. 12,855,094 $ 13,000 4,044,943 $ 4,000 -- $ -- 8,042,530
Issuance of Common Stock upon exercise of
options ($0.04 to $3.33 per share
exercise price) (unaudited)............ -- -- -- -- -- -- 1,577,190
Issuance of Series C Preferred Stock and
Warrants for cash ($8.04 per share) in
March 1999 (unaudited)................. -- -- -- -- 7,462,819 7,000 --
Business relationship value arising from
issuance of Series C Preferred Stock in
March 1999 (unaudited)................. -- -- -- -- -- -- --
Issuance of Warrants to leasing company
in March 1999 (unaudited).............. -- -- -- -- -- -- --
Deferred compensation from grant of
options to purchase Common Stock
(unaudited)............................ -- -- -- -- -- -- --
Amortization of deferred compensation
(unaudited)............................ -- -- -- -- -- -- --
Reversal of deferred compensation from
cancellation of grants to purchase
Common Stock (unaudited)............... -- -- -- -- -- -- --
Net loss through March 31, 1999
(unaudited)............................ -- -- -- -- -- -- --
---------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at March 31, 1999 (unaudited).... 12,855,094 $ 13,000 4,044,943 $ 4,000 7,462,819 $ 7,000 9,619,720
---------- ----------- ----------- ----------- ----------- ----------- -----------
---------- ----------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
TREASURY STOCK
AT COST ADDITIONAL
---------------------- PAID-IN DEFERRED
AMOUNT # SHARES AMOUNT CAPITAL WARRANTS COMPENSATION
----------- ----------- --------- ------------ ---------- --------------
<S> <C> <C>
Balance at December 31, 1998............. $ 8,000 438,115 $ (18,000) $ 37,212,000 $ -- $ (5,210,000)
Issuance of Common Stock upon exercise of
options ($0.04 to $3.33 per share
exercise price) (unaudited)............ 2,000 -- -- 1,404,000 -- --
Issuance of Series C Preferred Stock and
Warrants for cash ($8.04 per share) in
March 1999 (unaudited)................. -- -- -- 55,529,000 4,464,000 --
Business relationship value arising from
issuance of Series C Preferred Stock in
March 1999 (unaudited)................. -- -- -- 10,000,000 -- --
Issuance of Warrants to leasing company
in March 1999 (unaudited).............. -- -- -- -- 250,000 --
Deferred compensation from grant of
options to purchase Common Stock
(unaudited)............................ -- -- -- 3,897,000 -- (3,897,000)
Amortization of deferred compensation
(unaudited)............................ -- -- -- -- -- 601,000
Reversal of deferred compensation from
cancellation of grants to purchase
Common Stock (unaudited)............... -- -- -- (499,000) -- 499,000
Net loss through March 31, 1999
(unaudited)............................ -- -- -- -- -- --
----------- ----------- --------- ------------ ---------- --------------
Balance at March 31, 1999 (unaudited).... $ 10,000 438,115 $ (18,000) $107,543,000 $4,714,000 $ (8,007,000)
----------- ----------- --------- ------------ ---------- --------------
----------- ----------- --------- ------------ ---------- --------------
<CAPTION>
TOTAL
ACCUMULATED STOCKHOLDERS'
DEFICIT EQUITY
------------- -------------
Balance at December 31, 1998............. $ (38,756,000) $(6,747,000)
Issuance of Common Stock upon exercise of
options ($0.04 to $3.33 per share
exercise price) (unaudited)............ -- 1,406,000
Issuance of Series C Preferred Stock and
Warrants for cash ($8.04 per share) in
March 1999 (unaudited)................. -- 60,000,000
Business relationship value arising from
issuance of Series C Preferred Stock in
March 1999 (unaudited)................. -- 10,000,000
Issuance of Warrants to leasing company
in March 1999 (unaudited).............. -- 250,000
Deferred compensation from grant of
options to purchase Common Stock
(unaudited)............................ -- --
Amortization of deferred compensation
(unaudited)............................ -- 601,000
Reversal of deferred compensation from
cancellation of grants to purchase
Common Stock (unaudited)............... -- --
Net loss through March 31, 1999
(unaudited)............................ (23,899,000) (23,899,000)
------------- -------------
Balance at March 31, 1999 (unaudited).... $ (62,655,000) $41,611,000
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
RHYTHMS NETCONNECTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION:
THE COMPANY: RHYTHMS NetConnections Inc. (the "Company"), a Delaware
corporation, was organized under the name Accelerated Connections Inc. in
February 1997. The Company's name was changed to RHYTHMS NetConnections Inc. in
August 1997. The Company is in the business of providing high-speed data
communications services on an end-to-end basis to business customers and end
users. The Company began service trials in the San Diego, California, market in
December 1997 and began commercial operations in San Diego effective April 1,
1998.
The Company's ultimate success depends upon, among other factors, rapidly
expanding the geographic coverage of its network services; entering into
interconnection agreements with incumbent local exchange carriers, some of which
are competitors or potential competitors of the Company; deploying network
infrastructure; attracting and retaining customers; accurately assessing
potential markets; continuing to develop and integrate its operational support
system and other back office systems; obtaining any required governmental
authorizations; responding to competitive developments; continuing to attract,
retain, and motivate qualified personnel; and continuing to upgrade its
technologies and commercialize its network services incorporating such
technologies. There can be no assurance that the Company will be successful in
addressing these matters and failure to do so could have a material adverse
effect on the Company's business, prospects, operating results, and financial
condition. As the Company continues the development of its business, it will
seek additional sources of financing to fund its development. If unsuccessful in
obtaining such financing, the Company will continue expansion of its operations
on a reduced scale based on its existing capital resources.
INTERIM RESULTS (UNAUDITED): The accompanying consolidated financial
statements (unaudited), which include the transactions and balances of Rhythms
NetConnections Inc. and its wholly owned subsidiaries ACI Corp and ACI
Corp.-Virginia, have been prepared in accordance with generally accepted
accounting principles for interim financial information and, therefore, do not
include all the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, these statements have been prepared on the same basis as the audited
financial statements and include all adjustments, consisting only of normal
recurring accruals, that are necessary for the fair statement of results for the
unaudited interim periods. The data disclosed in these notes to consolidated
financial statements is also unaudited. 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 the disclosure of contingent assets and liabilities at the
financial statement date, as well as the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. The operating results for the interim period are not necessarily
indicative of the results to be expected for a full fiscal year or for any
future periods. All material intercompany transactions and balances have been
eliminated.
NOTE 2 -- NET LOSS PER SHARE:
Basic earnings per share ("EPS") is calculated by dividing the income or
loss available to common stockholders by the weighted average number of common
shares outstanding for the period, without consideration for common stock
equivalents. Diluted EPS is computed by dividing the income or loss available to
common stockholders by the weighted average number of common shares outstanding
for the period in addition to the weighted average number of common stock
equivalents outstanding for the period. Shares subject to repurchase by the
Company are considered Common Stock equivalents for purposes of this
calculation. Shares issuable upon conversion of Preferred Stock, upon the
exercise
F-6
<PAGE>
RHYTHMS NETCONNECTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
NOTE 2 -- NET LOSS PER SHARE: (CONTINUED)
of outstanding stock options and warrants, and shares subject to repurchase by
the Company totaling 61,281,828 and 46,325,054 at March 31, 1999 and 1998,
respectively, have been excluded from the computation since their effect would
be antidilutive.
NOTE 3 -- STOCKHOLDERS' EQUITY:
During the first quarter of 1999, the Company granted options to employees
to purchase a total 2,886,616 shares of Common Stock pursuant to its Stock
Option/Stock Issuance Plan. During this same time, employees exercised
previously granted options to purchase a total of 1,577,190 shares of Common
Stock for total proceeds to the Company of $1,406,000.
Effective March 2, 1999, the Company amended its Certificate of
Incorporation to increase the number of authorized Common shares to 84,527,584
and to authorize 3,731,410 shares of Series C Preferred Stock.
On March 4, 1999, the Company issued Series C Preferred Stock and Warrants
to MCI WorldCom's investment fund for $30,000,000. A total of 3,731,410 shares
of Series C Preferred Stock and Warrants to purchase 720,000 shares of Common
Stock at a price of $6.70 per share were issued in this transaction. Of the
proceeds received, the Company allocated $29,496,000 to the Preferred Stock and
$504,000 to the Warrants. The terms of the transaction also provide for the
Company and MCI WorldCom to enter into various business relationships, including
MCI WorldCom's commitment to sell 100,000 of the Company's DSL lines over a
period of five years, subject to penalties for failure to reach target
commitments.
Effective March 15, 1999, the Company amended its Certificate of
Incorporation to increase the number of authorized Common shares to 74,171,062
and to authroize an additional 3,731,409 shares of Series C Preferred Stock.
On March 16, 1999, the Company issued Series C Preferred Stock and Warrants
to Microsoft Corporation for $30,000,000. A total of 3,731,409 shares of Series
C Preferred Stock and Warrants to purchase 720,000 shares of Common Stock at a
price of $6.70 per share were issued in this transaction. Of the proceeds
received, the Company allocated $26,544,000 to the Preferred Stock and
$3,456,000 to the Warrants. The terms of the transaction also provide for the
Company and Microsoft to enter into various business relationships. In
connection with these business relationships, the Company capitalized
$10,000,000 in business acquisition costs that will be amortized to operating
expense over a three-year period beginning March 1999.
On March 16, 1999 the Company's Board of Directors approved the 1999 Stock
Incentive Plan and the 1999 Employee Stock Purchase Plan, each plan subject to
shareholder approval. The 1999 Stock Incentive Plan serves as the successor
equity incentive program to the 1997 Stock Option/Stock Issuance Plan and became
effective April 6, 1999. An initial reserve of 8,161,944 shares of Common Stock
has been authorized for issuance under the 1999 Stock Incentive Plan. The 1999
Employee Stock Purchase Plan has an initial reserve of 1,200,000 shares of
Common Stock and became effective April 6, 1999.
Effective March 19, 1999, the Company completed a six-for-five split of its
Common Stock. The accompanying consolidated financial statements have been
restated for all periods presented to reflect the stock split.
F-7
<PAGE>
NOTE 3 -- STOCKHOLDERS' EQUITY: (CONTINUED)
On March 31, 1999, the Company entered into a 36-month lease line that
provides for $24,000,000 in equipment on an operating lease basis. In connection
with this lease agreement, the Company issued 45,498 Warrants to purchase Common
Stock at a price of $10.55 per share, exercisable immediately. The value of
these Warrants, estimated to be $250,000, is being amortized over the life of
the lease.
NOTE 4 -- SUBSEQUENT EVENTS:
Effective April 5, 1999, the Company restated its Certificate of
Incorporation to increase the number of authorized Common shares to 81,000,000,
to authorize an additional 932,836 shares of Series C Preferred Stock, to
authorize 441,176 shares of Series D Preferred Stock, and to designate 1,000,000
shares as Series 1 Junior Participating Preferred Stock.
On April 6, 1999, the Company issued 932,836 shares of its Series C
Preferred Stock at a price of $8.04 per share and 441,176 shares of its Series D
Preferred Stock at a price of $17.00 per share to a wholly owned subsidiary of
Qwest Communications Corporation for total proceeds of $15,000,000. In
connections with this investment, Qwest also received warrants to purchase
180,000 shares of Common Stock at a price of $6.70 per share and MCI WorldCom
received an additional warrant to purchase 136,996 shares of Common Stock at a
price of $21.00 per share. In accordance with provisions of the agreement
underlying this investment, the Company and Qwest have entered into certain
business relationships. Although a value has not been finalized for this
business relationship, the Company estimates that approximately $10,500,000 will
be capitalized with respect to the relationship and that the amount capitalized
with be amortized to operating expense over a five-year period.
On April 5, 1999, the Company entered into a 36-month lease line that
provides for $20,000,000 in equipment on an operating lease basis. In connection
with this lease agreement, the Company issued 75,000 warrants to purchase Common
Stock at a price of $10.55 per share, exercisable immediately.
Effective April 12, the Company restated its Certificate of Incorporation to
increase the number of authorized Common shares to 250,000,000 and to decrease
the number of authorized Preferred Shares to 5,000,000.
Effective April 12, 1999, the Company completed an initial public offering
of its Common Stock. A total of 10,781,250 shares were issued at $21.00 per
share; net proceeds to the Company were approximately $211,407,000, after
payment of underwriting fees but before payment of related issue expenses. Upon
completion of the offering, all classes of Preferred Stock automatically
converted to Common Stock, resulting in an additional 51,076,051 shares of
Common Stock being issued and a resulting zero shares of Preferred Stock being
issued and outstanding.
On April 23, 1999, the Company issued 12.75 percent Senior Notes due 2009 in
the principal amount of $325,000,000, due at maturity. Cash proceeds from the
issuance, after payment of underwriting fees but before payment of related issue
expenses, were $315,250,000. Of these proceeds, approximately $113,675,000 was
used to purchase a portfolio of U.S. government securities and will be used for
the first three years' interest payments.
F-8
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Rhythms NetConnections Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of cash flows, and of stockholders'
equity present fairly, in all material respects, the financial position of
Rhythms NetConnections Inc. and subsidiaries at December 31, 1997 and 1998, and
the results of their operations and their cash flows for the period from
February 27, 1997 (inception) through December 31, 1997 and for the year ended
December 31, 1998 in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICEWATERHOUSECOOPERS LLP
Denver, Colorado
March 4, 1999, except for the last paragraph of Note 11 as to which the date
is March 19, 1999
F-9
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
WE HAVE NOT AUTHORIZED ANY DEALER, SALESPERSON OR OTHER PERSON TO GIVE ANY
INFORMATION OR REPRESENT ANYTHING NOT CONTAINED IN THIS PROSPECTUS. YOU MUST NOT
RELY ON ANY UNAUTHORIZED INFORMATION. THIS PROSPECTUS DOES NOT OFFER TO SELL OR
BUY ANY NOTES IN ANY JURISDICTION WHERE IT IS UNLAWFUL. THE INFORMATION IN THIS
PROSPECTUS IS CURRENT AS OF , 1999.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
NOTICE TO INVESTORS.......................................................
AVAILABLE INFORMATION.....................................................
ADDITIONAL INFORMATION....................................................
PROSPECTUS SUMMARY........................................................ 2
RISK FACTORS.............................................................. 10
USE OF PROCEEDS........................................................... 24
DIVIDENDS................................................................. 25
CAPITALIZATION............................................................ 26
SELECTED FINANCIAL DATA................................................... 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.............................................................. 28
BUSINESS.................................................................. 32
MANAGEMENT................................................................ 53
CERTAIN TRANSACTIONS...................................................... 66
PRINCIPAL STOCKHOLDERS.................................................... 71
THE EXCHANGE OFFER........................................................ 74
DESCRIPTION OF THE NOTES.................................................. 83
DESCRIPTION OF THE NEW NOTES.............................................. 116
DESCRIPTION OF THE WARRANTS...............................................
DESCRIPTION OF CAPITAL STOCK..............................................
FEDERAL INCOME TAX CONSIDERATIONS......................................... 116
PLAN OF DISTRIBUTIONS..................................................... 117
LEGAL MATTERS............................................................. 118
EXPERTS...................................................................
GLOSSARY OF TERMS......................................................... 119
INDEX TO FINANCIAL STATEMENTS............................................. F-1
</TABLE>
------------------------
UNTIL , 1999, ALL DEALERS EFFECTING TRANSACTIONS IN THE NEW
NOTES, WHETHER OR NOT PARTICIPATING IN THIS EXCHANGE OFFER, MAY BE REQUIRED TO
DELIVER A PROSPECTUS.
[LOGO]
RHYTHMS
NETCONNECTIONS INC.
OFFER TO EXCHANGE ALL
OUTSTANDING 12 3/4% SENIOR NOTES
DUE 2009 FOR 12 3/4%
SENIOR NOTES DUE 2009,
WHICH HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT
OF 1933
---------------------
PROSPECTUS
---------------------
, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law permits indemnification
of the Registrant's officers and directors under certain conditions and subject
to certain limitations. Section 145 of the Delaware General Corporation Law also
provides that a corporation has the power to purchase and maintain insurance on
behalf of its officers and directors against any liability asserted against such
person and incurred by him or her in such capacity, or arising out of his or her
status as such, whether or not the corporation would have the power to indemnify
him or her against such liability under the provisions of Section 145 of the
Delaware General Corporation Law.
Article VII, Section 1 of the Registrant's Restated Bylaws provides that the
Registrant shall indemnify its directors and executive officers to the fullest
extent not prohibited by the Delaware General Corporation Law. The rights to
indemnity thereunder continue as to a person who has ceased to be a director,
officer, employee or agent and inure to the benefit of the heirs, executors and
administrators of the person. In addition, expenses incurred by a director or
executive officer in defending any civil, criminal, administrative or
investigative action, suit or proceeding by reason of the fact that he or she is
or was a director or officer of the Registrant (or was serving at the
Registrant's request as a director or officer of another corporation) shall be
paid by the Registrant in advance of the final disposition of such action, suit
or proceeding upon receipt of an undertaking by or on behalf of such director or
officer to repay such amount if it shall ultimately be determined that he or she
is not entitled to be indemnified by the Registrant as authorized by the
relevant section of the Delaware General Corporation Law.
As permitted by Section 102(b)(7) of the Delaware General Corporation Law,
Article V, Section (A) of the Registrant's Restated Certificate of Incorporation
provides that a director of the Registrant shall not be personally liable for
monetary damages for breach of fiduciary duty as a director, except for
liability (i) for any breach of the director's duty of loyalty to the Registrant
or its stockholders, (ii) for acts or omissions not in good faith or acts or
omissions that involve intentional misconduct or a knowing violation of law,
(iii) under Section 174 of the Delaware General Corporation Law or (iv) for any
transaction from which the director derived any improper personal benefit.
The Registrant has entered into indemnification agreements with each of its
directors and executive officers. Generally, the indemnification agreements
attempt to provide the maximum protection permitted by Delaware law as it may be
amended from time to time. Moreover, the indemnification agreements provide for
certain additional indemnification. Under such additional indemnification
provisions, however, an individual will not receive indemnification for
judgments, settlements or expenses if he or she is found liable to the
Registrant (except to the extent the court determines he or she is fairly and
reasonably entitled to indemnity for expenses), for settlements not approved by
the Registrant or for settlements and expenses if the settlement is not approved
by the court. The indemnification agreements provide for the Registrant to
advance to the individual any and all reasonable expenses (including legal fees
and expenses) incurred in investigating or defending any such action, suit or
proceeding. In order to receive an advance of expenses, the individual must
submit to the Registrant copies of invoices presented to him or her for such
expenses. Also, the individual must repay such advances upon a final judicial
decision that he or she is not entitled to indemnification.
The Registrant has purchased directors' and officers' liability insurance.
The Registrant intends to enter into additional indemnification agreements with
each of its directors and executive officers to effectuate these indemnity
provisions.
II-1
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<S> <C>
1.1 Purchase Agreement, dated April 16, 1999, by and among the Registrant and Merrill Lynch & Co., Merrill
Lynch, Pierce Fenner & Smith Incorporated, Salomon Smith Barney Inc. and Chase Securities Inc.
3.3* Restated Certificate of Incorporation of the Registrant.
3.5* Restated Bylaws of the Registrant.
4.2* Indenture, dated as of May 5, 1998, by and between the Registrant and State Street Bank and Trust
Company of California, N.A., as trustee, including form of the Registrant's 13 1/2% Senior Discount
Notes due 2008, Series A and form of the Registrant's 13 1/2% Senior Discount Notes due 2008, Series B.
4.3* Warrant Agreement, dated as of May 5, 1998, by and between the Registrant and State Street Bank and
Trust Company of California, N.A.
4.4* Warrant Registration Rights Agreement, dated as of May 5, 1998, by and among the Registrant and Merrill
Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, and Donaldson, Lufkin & Jenrette
Securities Corporation.
4.5* Warrant to Purchase Shares of Common Stock, dated May 19, 1998, by and between the Registrant and Sun
Financial Group, Inc.
4.6* Common Stock Purchase Warrant, dated March 3, 1999, by and between the Registrant and MCI WorldCom
Venture Fund, Inc.
4.7* Common Stock Purchase Warrant, dated March 16, 1999, by and between the Registrant and Microsoft
Corporation.
4.8* Warrant to Purchase Shares of Common Stock, dated March 31, 1999, by and between Registrant and GATX
Capital Corporation.
4.9* Warrant Purchase Agreement, dated as of April 6, 1999, by and between Registrant and MCI WorldCom
Venture Fund, Inc.
4.10* Common Stock Purchase Warrant, dated April 6, 1999, by and among Registrant and MCI WorldCom Venture
Fund, Inc.
4.11* Common Stock Purchase Warrant, dated April 6, 1999, by and among the Registrant and U.S. Telesource,
Inc.
4.12* Common Stock Purchase Warrant, dated April 5, 1999, by and among Registrant and Cisco Systems Capital
Corporation.
4.13* Rights Agreement, dated April 2, 1999, by and among Registrant and American Securities Transfer & Trust,
Inc.
4.14 Indenture, dated as of April 23, 1999, by and between the Registrant and State Street Bank and Trust
Company of California, N.A., as trustee, including form of the Registrant's 12 3/4% Senior Notes due
2009, Series A and form of the Registrant's 12 3/4% Senior Notes due 2009, Series B.
4.15 Notes Registration Rights Agreement, dated as of April 23, 1999, by and among the Registrant and Merrill
Lynch & Co., Merrill Lynch, Pierce Fenner & Smith Incorporated, Salomon Smith Barney Inc. and Chase
Securities Inc.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<S> <C>
4.16 Pledge and Escrow Agreement, dated as of April 23, 1999, from the Registrant as Pledgor to State Street
Bank and Trust Company of California, N.A., as trustee.
5.1 Opinion of Brobeck, Phleger & Harrison LLP.
9.1* Voting Trust Agreement, dated as of May 5, 1998, by and among Sprout Capital VII, L.P., Donaldson Lufkin
& Jenrette Securities Corporation, and First Union Trust Company, National Association, as trustee.
10.1* Series A Preferred Stock Purchase Agreement, dated July 3, 1997, by and among the Registrant and the
Investors listed on Schedule A thereto.
10.2* Subsequent Closing Purchase Agreement, dated December 23, 1997, by and among the Registrant and the
Investors listed on Schedule A thereto.
10.3* Series B Preferred Stock Purchase Agreement, dated March 12, 1998, by and among the Registrant and the
Investors listed on Schedule A thereto.
10.4*+ Enterprise Services Solution Agreement between Cisco Systems, Inc. and the Registrant, dated December 3,
1998
10.5* Series C Preferred Stock Purchase Agreement, dated March 3, 1999, by and among the Registrant and MCI
WorldCom Venture Fund, Inc.
10.6* Amended and Restated Investors' Rights Agreement, dated March 3, 1999, by and among the Registrant and
the Investors listed on Schedule A thereto.
10.7*+ Agreement, dated March 3, 1999, by and between the Registrant and MCI WorldCom, Inc.
10.8* Series C Preferred Stock and Warrant Purchase Agreement, dated March 16, 1999, by and among the
Registrant and Microsoft Corporation.
10.9* Amended and Restated Investors' Rights Agreement, dated March 16, 1999, by and among the Registrant and
the Investors listed on Schedule A thereto.
10.10* Distribution Agreement, dated March 16, 1999, by and among the Registrant and Microsoft Corporation.
10.11* Master Lease Agreement No. 1642 and Addendum thereto, each dated November 19, 1997, and Second Addendum
thereto, dated as of May 19, 1998, between the Registrant and Sun Financial Group, Inc.
10.12* Business Lease (Single Tenant) between the Registrant and BR Venture, LLC dated September 1998.
10.13* Employment Agreement between the Registrant and Catherine M. Hapka, dated June 10, 1997.
10.14* Employment Agreement between the Registrant and Jeffrey Blumenfeld, dated August 10, 1997.
10.15* Employment Agreement between the Registrant and James A. Greenberg, dated July 14, 1997.
10.16* Employment Agreement between the Registrant and Rand A. Kennedy, dated August 22, 1997.
10.17* 1997 Stock Option/Stock Issuance Plan.
10.18* 1999 Stock Incentive Plan.
10.19* 1999 Employee Stock Purchase Plan.
10.20* Form of Indemnification Agreement between the Registrant and each of its directors.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<S> <C>
10.21* Form of Indemnification Agreement between the Registrant and each of its officers.
10.23* Third Addendum, dated March 31, 1999, to Master Lease Agreement, dated November 19, 1997, by and among
Registrant and GATX Capital Corporation.
10.24* Master Lease Agreement, dated March 31, 1999, by and among Registrant and GATX Capital Corporation.
10.25* First Addendum, dated March 31, 1999, to Master Lease Agreement, dated March 31, 1999, by and among
Registrant and GATX Capital Corporation.
10.26* Amendment No. 1, dated April 6, 1999, to Framework Agreement, dated March 3, 1999, by and among the
Registrant and MCI WorldCom, Inc.
10.27* Series C Preferred Stock and Warrant Purchase Agreement, dated April 6, 1999, by and among the
Registrant and U.S Telesource, Inc.
10.28* Series D Preferred Stock Purchase Agreement, dated April 6, 1999, by and among the Registrant and the
Investors listed on Schedule A thereto.
10.29* Amended and Restated Investors' Rights Agreement, dated April 6, 1999, by and among the Registrant and
the Investors listed on Schedule A thereto.
10.30* Lease Agreement, dated April 5, 1999, by and among the Registrant and Cisco Systems Capital Corporation.
10.31 Amendment No. 2, dated May 10, 1999, to Framework Agreement, dated March 3, 1999, by and among the
Registrant and MCI WorldCom, Inc.
21.1* Subsidiaries of the Registrant.
23.1 Consent of Brobeck, Phleger & Harrison LLP (filed with Exhibit 5.1).
23.2 Consent of PricewaterhouseCoopers LLP.
24.1 Powers of Attorney (included on signature page).
25.1 Statement of Eligibility of Trustee on Form T-1.
27.1 Financial Data Schedule.
99.1 Form of Letter of Transmittal
99.2 Form of Notice of Guaranteed Delivery
99.3+ ACI Plus Service Agreement, dated April 6, 1999, by and between the Registrant and Qwest Communications
Corporation.
</TABLE>
- ------------------------
* Incorporated by reference to the exhibit of corresponding number filed with
our Registration Statement on Form S-1 (File No. 333-72409).
+ Certain confidential portions of this Exhibit were omitted by means of
redacting a portion of the text (the "Mark"). This Exhibit has been filed
separately with the Secretary of the Commission without the Mark pursuant to
the Registrant's Application Requesting Confidential Treatment under Rule
406 under the Securities Act.
(b) Financial Statement Schedules included separately in the registration
statement.
All other schedules are omitted because they are not required, are not
applicable or the information is included in the Financial Statements or notes
thereto.
II-4
<PAGE>
ITEM 22. UNDERTAKINGS
1. We hereby undertake to file an application for the purpose of
determining the eligibility of the trustee to act under subsection (a) of
section 310 of the Trust Indenture Act ("Act") in accordance with the rules and
regulations prescribed by the SEC under section 305 (b)(2) of the Act.
2. Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to our directors, officers and controlling persons pursuant
to the foregoing provisions, or otherwise, we have been advised that in the
opinion of the SEC 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 our payment of expenses
incurred or paid by one of our directors, officers or controlling persons 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, we 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.
3. We hereby undertake to respond to requests for information that is
incorporated by reference into this prospectus pursuant to Items 4, 10(b), 11 or
13 of this Form, within one business day of receipt of such request, and to send
the incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of this registration statement through the date of responding to
the request.
4. We hereby undertake to supply by means of a post-effective amendment all
information concerning a transaction, and the company being acquired involved
therein, that was not the subject of and included in this registration statement
when it became effective.
5. We hereby undertake:
(a) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the registration statement. Notwithstanding the foregoing, any increase
or decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering
range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(b) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
(c) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Englewood, State of
Colorado, on the 9th day of July 1999.
RHYTHMS NETCONNECTIONS INC.
BY: /S/ SCOTT C. CHANDLER
-----------------------------------------
Scott C. Chandler
CHIEF FINANCIAL OFFICER
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Catherine M. Hapka and Scott C. Chandler, or
either of them, as his or her true and lawful attorneys-in-fact and agents, with
full power of substitution and resubstitution, for him or her and in his or her
name, place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement and any
registration statement related to this Registration Statement and filed pursuant
to Rule 462 under the Securities Act of 1933, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or their substitute or
substitutes may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ --------------------------------- -------------
/s/ CATHERINE M. HAPKA Chairman, Chief Executive Officer July 9, 1999
- ------------------------------ and Director
Catherine M. Hapka
/s/ SCOTT C. CHANDLER Chief Financial Officer July 9, 1999
- ------------------------------
Scott C. Chandler
/s/ KEVIN R. COMPTON Director July 9, 1999
- ------------------------------
Kevin R. Compton
/s/ KEITH B. GEESLIN Director July 9, 1999
- ------------------------------
Keith B. Geeslin
/s/ KEN L. HARRISON Director July 9, 1999
- ------------------------------
Ken L. Harrison
/s/ SUSAN MAYER Director July 9, 1999
- ------------------------------
Susan Mayer
/s/ WILLIAM R. STENSRUD Director July 9, 1999
- ------------------------------
William R. Stensrud
/s/ JOHN L. WALECKA Director July 9, 1999
- ------------------------------
John L. Walecka
/s/ EDWARD J. ZANDER Director July 9, 1999
- ------------------------------
Edward J. Zander
II-6
<PAGE>
Exhibit 1.1
Execution Copy
RHYTHMS NETCONNECTIONS INC.
(a Delaware corporation)
$325,000,000
12 3/4% Senior Notes due 2009
PURCHASE AGREEMENT
Dated: April 16, 1999
<PAGE>
TABLE OF CONTENTS
SECTION 1. Representations and Warranties 2
(a) Representations and Warranties by the Company 2
(i) Similar Offerings 2
(ii) Offering Memorandum 2
(iii) Independent Accountants 3
(iv) Financial Statements 3
(v) No Material Adverse Change in Business 3
(vi) Good Standing of the Company 3
(vii) Good Standing of Designated Subsidiaries 4
(viii) Capitalization 4
(ix) Authorization of Agreement 4
(x) Authorization of the Indenture 4
(xi) Authorization of the Registration Rights Agreement 4
(xii) Authorization of the Pledge and Escrow Agreement 5
(xiii) Authorization of the Securities 5
(xiv) Description of the Securities and the Agreements 6
(xv) Absence of Defaults and Conflicts 6
(xvi) Absence of Labor Dispute 6
(xvii) Absence of Proceedings 7
(xviii) Possession of Intellectual Property 7
(xix) Absence of Further Requirements 7
(xx) Possession of Licenses and Permits 8
(xxi) Title to Property 9
(xxii) Tax Returns 10
(xxiii) Environmental Laws 10
(xxiv) Investment Company Act 10
(xxv) Rule 144A Eligibility 10
(xxvi) No General Solicitation 11
(xxvii) No Registration Required 11
(xxviii) No Directed Selling Efforts 11
(xxix) Insurance 11
(xxx) Internal Accounting Controls 11
(xxxi) Stabilization and Manipulation 12
(xxxii) Related Party Transactions 12
(xxxiii) Solvency 12
(b) Officer's Certificates 12
-i-
<PAGE>
SECTION 2. Sale and Delivery to Initial Purchasers; Closing 12
(a) Securities 12
(b) Payment 12
(c) Qualified Institutional Buyer 13
(d) Denominations; Registration 13
SECTION 3. Covenants of the Company 13
(a) Offering Memorandum 13
(b) Pledged Securities 13
(c) Notice and Effect of Material Events 14
(d) Amendment to Offering Memorandum and Supplements 14
(e) Qualification of Securities for Offer and Sale 14
(f) DTC 14
(g) Use of Proceeds 15
(h) Restriction on Sale of Securities 15
(i) Press Releases 15
SECTION 4. Payment of Expenses 15
(a) Expenses 15
(b) Termination of Agreement 15
SECTION 5. Conditions of Initial Purchasers' Obligations 16
(a) Opinions of Counsel for Company 16
(b) Opinion of Counsel for Initial Purchasers 16
(c) Officers' Certificate 16
(d) Accountant's Comfort Letter 16
(e) Bring-down Comfort Letter 17
(f) Accountants Opinion 17
(g) PORTAL 17
(h) Registration Rights Agreements and Pledge and Escrow Agreement 17
(i) Additional Documents 17
(j) Termination of Agreement 18
SECTION 6. Subsequent Offers and Resales of the Securities 18
(a) Offer and Sale Procedures 18
(i) Offers and Sales only to Regulation S Purchasers or Qualified
Institutional Buyers 18
(ii) No General Solicitation 18
(iii) Purchases by Non-Bank Fiduciaries 18
(iv) Subsequent Purchaser Notification 18
-ii-
<PAGE>
(v) Restrictions on Transfer 19
(vi) Delivery of Offering Memorandum 19
(vii) Hedging Transactions 19
(b) Covenants of the Company 19
(i) Due Diligence 19
(ii) Integration 20
(iii) Rule 144A Information 20
(iv) Restriction on Repurchases 20
(c) Resale Pursuant to Rule 903 of Regulation S or Rule 144A 20
SECTION 7. Indemnification 21
(a) Indemnification of Initial Purchasers 21
(b) Indemnification of Company, Directors and Officers 22
(c) Actions against Parties; Notification 22
(d) Settlement without Consent if Failure to Reimburse 23
SECTION 8. Contribution 23
SECTION 9. Representations, Warranties and Agreements to Survive Delivery 24
SECTION 10. Termination of Agreement 24
(a) Termination; General 25
(b) Liabilities 25
SECTION 11. Default by One or More of the Initial Purchasers 25
SECTION 12. Notices 25
SECTION 13. Parties 26
SECTION 14. Governing Law and Time 26
SECTION 15. Effect of Headings 26
-ii-
<PAGE>
$325,000,000
RHYTHMS NETCONNECTIONS INC.
(a Delaware corporation)
12 3/4% Senior Notes due 2009
PURCHASE AGREEMENT
April 16, 1999
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
Salomon Smith Barney Inc.
Chase Securities Inc.
as Representatives of the several Initial Purchasers
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
Ladies and Gentlemen:
Rhythms NetConnections Inc., a Delaware corporation (the "Company"),
confirms its agreement with Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("Merrill Lynch") and each of the other Initial Purchasers
named in Schedule A hereto (collectively, the "Initial Purchasers", which term
shall also include any initial purchaser substituted as hereinafter provided in
Section 11 hereof), for whom Merrill Lynch, Salomon Smith Barney Inc. and Chase
Securities Inc. are acting as representatives (in such capacity, the
"Representatives"), with respect to the issue and sale by the Company and the
purchase by the Initial Purchasers, acting severally and not jointly, of the
respective principal amount set forth in said Schedule A of an aggregate of
$325,000,000 of 12 3/4% Senior Notes due 2009 (the "Securities"). The Securities
are to be issued pursuant to an indenture to be dated on or about April 23, 1999
(the "Indenture") between the Company and State Street Bank and Trust Company of
California, N.A., as trustee (the "Trustee"). Securities issued in book-entry
form will be issued to Cede & Co. as nominee of The Depository Trust Company
("DTC") pursuant to one or more letter agreements, to be dated as of the Closing
Time (as defined in Section 2(b)) (collectively, the "DTC Agreement"), among the
Company, the Trustee and DTC.
The Company understands that the Initial Purchasers propose to make an
offering of the Securities on the terms and in the manner set forth herein and
agrees that the Initial Purchasers may resell, subject to the conditions set
forth herein, all or a portion of the Securities to purchasers ("Subsequent
Purchasers") at any time after the date of this Agreement. The
<PAGE>
Securities are to be offered and sold through the Initial Purchasers without
being registered under the Securities Act of 1933, as amended (the "1933 Act"),
in reliance upon exemptions therefrom. Pursuant to the terms of the Securities
and the Indenture, investors that acquire Securities may only resell or
otherwise transfer such Securities if such Securities are hereafter registered
under the 1933 Act or if an exemption from the registration requirements of the
1933 Act is available (including the exemption afforded by Rule 144A ("Rule
144A") or Regulation S ("Regulation S") of the rules and regulations promulgated
under the 1933 Act by the Securities and Exchange Commission (the
"Commission")).
The Company has prepared and delivered to each Initial Purchaser copies of
a preliminary offering memorandum dated April 15, 1999 (the "Preliminary
Offering Memorandum") and has prepared and will deliver to each Initial
Purchaser, on the date hereof or the next succeeding day, copies of a final
offering memorandum dated April 16, 1999 (the "Final Offering Memorandum"), each
for use by such Initial Purchaser in connection with its solicitation of
purchases of, or offering of, the Securities. "Offering Memorandum" means, with
respect to any date or time referred to in this Agreement, the most recent
offering memorandum (whether the Preliminary Offering Memorandum or the Final
Offering Memorandum, or any amendment or supplement to either such document),
which has been prepared and delivered by the Company to the Initial Purchasers
in connection with their solicitation of purchases of, or offering of, the
Securities.
SECTION 1. Representations and Warranties.
(a) Representations and Warranties by the Company. The Company represents
and warrants to each Initial Purchaser as of the date hereof, and will represent
as of the Closing Time referred to in Section 2(b) hereof by means of the
certificate described in Section 5(c) hereof, and agrees with each Initial
Purchaser as follows:
(i) Similar Offerings. The Company has not, directly or indirectly,
solicited any offer to buy or offered to sell, and will not, directly or
indirectly, solicit any offer to buy or offer to sell, in the United
States or to any United States citizen or resident, any security which is
or would be integrated with the sale of the Securities in a manner that
would require the Securities to be registered under the 1933 Act.
(ii) Offering Memorandum. The Offering Memorandum does not, and at
the Closing Time will not, include an untrue statement of a material fact
or omit to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; provided that this representation, warranty and agreement
shall not apply to such statements in or omissions from the Offering
Memorandum made in reliance upon and in conformity with information
furnished to the Company in writing by any Initial Purchaser through the
Representatives expressly for use in the Offering Memorandum. It is
understood that the statements set forth in the Offering Memorandum on
page i with respect to stabilization, under the heading "Plan of
Distribution" and the identity of counsel to the Initial Purchasers under
the heading "Legal Matters" constitute the only information furnished
-2-
<PAGE>
in writing by or on behalf of the Initial Purchasers expressly for use in
the Offering Memorandum.
(iii) Independent Accountants. The accountants who certified the
financial statements included in the Offering Memorandum are independent
certified public accountants with respect to the Company and its
subsidiaries within the meaning of Regulation S-X under the 1933 Act.
(iv) Financial Statements. The financial statements, together with
the related schedules and notes, included in the Offering Memorandum
present fairly the consolidated financial position of the Company and its
subsidiaries at the dates indicated and the statement of operations,
stockholders' equity and cash flows of the Company and its consolidated
subsidiaries for the periods specified; said financial statements have
been prepared in conformity with generally accepted accounting principles
("GAAP") applied on a consistent basis throughout the periods involved.
The selected financial data included in the Offering Memorandum present
fairly the information shown therein and have been compiled on a basis
consistent with that of the audited financial statements included in the
Offering Memorandum. The pro forma and pro forma as adjusted columns of
the selected financial data included in the Offering Memorandum and the
related notes thereto present fairly the information shown therein, have
been prepared in accordance with the Commission's rules and guidelines
with respect to pro forma financial information and have been properly
compiled on the bases described therein, and the assumptions used in the
preparation thereof are reasonable and the adjustments used therein are
appropriate to give effect to the transactions and circumstances referred
to therein.
(v) No Material Adverse Change in Business. Since the respective
dates as of which information is given in the Offering Memorandum, except
as otherwise stated therein, (A) there has been no material adverse change
in the condition, financial or otherwise, or in the earnings, business
affairs or business prospects of the Company and its subsidiaries
considered as one enterprise (a "Material Adverse Effect"), whether or not
arising in the ordinary course of business, (B) there have been no
transactions entered into by the Company or any of its subsidiaries, other
than those in the ordinary course of business, which are material with
respect to the Company and its subsidiaries considered as one enterprise,
and (C) there has been no dividend or distribution of any kind declared,
paid or made by the Company on any class of its capital stock.
(vi) Good Standing of the Company. The Company has been duly
organized and is validly existing as a corporation in good standing under
the laws of the State of Delaware and has corporate power and authority to
own, lease and operate its properties and to conduct its business as
described in the Offering Memorandum and to enter into and perform its
obligations under this Agreement; and the Company is duly qualified as a
foreign corporation to transact business and is in good standing in each
other jurisdiction in which such qualification is required, whether by
reason of the ownership or leasing of
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<PAGE>
property or the conduct of business, except where the failure so to
qualify or to be in good standing would not result in a Material Adverse
Effect.
(vii) Good Standing of Designated Subsidiaries. Each of ACI Corp.
and ACI Corp. -- Virginia (collectively, the "Designated Subsidiaries")
has been duly organized and is validly existing as a corporation (or, in
the case of ACI Corp. -- Virginia, a Virginia public benefit corporation)
in good standing under the laws of the jurisdiction of its incorporation,
has corporate power and authority to own, lease and operate its properties
and to conduct its business as described in the Offering Memorandum and is
duly qualified as a foreign corporation to transact business and is in
good standing, in each jurisdiction in which such qualification is
required, whether by reason of the ownership or leasing of property or the
conduct of business, except where the failure so to qualify or to be in
good standing would not result in a Material Adverse Effect; except as
otherwise disclosed in the Offering Memorandum, all of the issued and
outstanding capital stock of each Designated Subsidiary has been duly
authorized and validly issued, is fully paid and non-assessable and is
directly owned by the Company (or, in the case of ACI Corp. -- Virginia,
by ACI Corp.), free and clear of any security interest, mortgage, pledge,
lien, encumbrance, claim or equity; none of the outstanding shares of
capital stock of any Designated Subsidiary was issued in violation of any
preemptive or similar rights arising by operation of law, or under the
charter or by-laws of such Designated Subsidiary or under any agreement to
which the Company or such Designated Subsidiary is a party. The Company
has no subsidiaries other than the Designated Subsidiaries.
(viii) Capitalization. The authorized, issued and outstanding
capital stock of the Company is as set forth in the Offering Memorandum in
the column entitled "Pro Forma" under the caption "Capitalization" (except
for subsequent issuances, if any, pursuant to this Agreement, pursuant to
employee benefit or stock option plans referred to in the Offering
Memorandum or pursuant to the exercise of convertible securities or
options referred to in the Offering Memorandum).
(ix) Authorization of Agreement. This Agreement has been duly
authorized, executed and delivered by the Company.
(x) Authorization of the Indenture. The Indenture has been duly
authorized by the Company and, at the Closing Time, will have been duly
executed and delivered by the Company and will constitute the valid and
binding agreement of the Company, enforceable against the Company in
accordance with its terms, except as the enforcement thereof may be
limited by bankruptcy, insolvency (including, without limitation, all laws
relating to fraudulent transfers), reorganization, moratorium or other
similar laws relating to or affecting enforcement of creditors' rights
generally, or by general principles of equity (regardless of whether
enforcement is considered in a proceeding in equity or at law).
(xi) Authorization of the Registration Rights Agreement. The
Registration Rights Agreement has been duly authorized by the Company and,
at the Closing Time, will have been duly executed and delivered by the
Company and will constitute the valid
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<PAGE>
and binding agreement of the Company, enforceable against the Company in
accordance with its terms, except as the enforcement thereof may be
limited by bankruptcy, insolvency (including, without limitation, all laws
relating to fraudulent transfers), reorganization, moratorium or other
similar laws relating to or affecting enforcement of creditors' rights
generally, or by general principles of equity (regardless of whether
enforcement is considered in a proceeding in equity or at law).
(xii) Authorization of the Pledge and Escrow Agreement. The Pledge
and Escrow Agreement has been duly authorized by the Company and, at the
Closing Time, will have been duly executed and delivered by the Company
and will constitute the valid and binding agreement of the Company,
enforceable against the Company in accordance with its terms, except as
the enforcement thereof may be limited by bankruptcy, insolvency
(including, without limitation, all laws relating to fraudulent
transfers), reorganization, moratorium or other similar laws relating to
or affecting enforcement of creditors' rights generally, or by general
principles of equity (regardless of whether enforcement is considered in a
proceeding in equity or at law). Upon the Company's purchase of the
Pledged Securities (as defined in the Offering Memorandum), the Company
will be the sole beneficial owner of the Pledged Securities and no lien
will exist upon the Pledged Securities or the Collateral Investments
Account (as defined herein) (and no right or option to acquire the same
will exist in favor any other person or entity), except for the pledge and
security interest in favor of the Trustee, for the benefit of the holders
of the Notes and the Company's 13 1/2% Senior Discount Notes due 2008 (the
"Discount Notes"), to be created or provided in the Pledge and Escrow
Agreement, which pledge and security interest constitutes a first priority
perfected pledge and security interest in and to all of the Pledged
Securities and the Collateral Investments Account. Pursuant to the Pledge
and Escrow Agreement, the Company will pledge and escrow approximately
$113.6 million of the net proceeds of the Offering as security for all
obligations of the Company under the Notes and the Indenture. The Pledged
Securities will be deposited in the Collateral Investments Account under
the Trustee's exclusive dominion and control pending application of such
funds by the Company for the payment pursuant to the terms of the Pledge
and Escrow Agreement.
(xiii) Authorization of the Securities. The Securities have been
duly authorized and, at the Closing Time, will have been duly executed by
the Company and, when authenticated in the manner provided for in the
Indenture and delivered against payment of the purchase price therefor
will constitute valid and binding obligations of the Company, enforceable
against the Company in accordance with their terms, except as the
enforcement thereof may be limited by bankruptcy, insolvency (including,
without limitation, all laws relating to fraudulent transfers),
reorganization, moratorium or other similar laws relating, to or affecting
enforcement of creditors' rights generally, or by general principles of
equity (regardless of whether enforcement is considered in a proceeding,
in equity or at law), and will be in the form contemplated by, and
entitled to the benefits of, the Indenture. All of the outstanding shares
of capital stock of the Company have been duly authorized and validly
issued, are fully paid and nonassessable, are not subject to any
preemptive or similar rights and have been issued in compliance
-5-
<PAGE>
with or in reliance upon an exemption from all applicable state and
federal securities laws.
(xiv) Description of the Securities and the Agreements. The
Securities, the Indenture, the Registration Rights Agreement and the
Pledge and Escrow Agreement will conform in all material respects to the
respective statements relating thereto contained in the Offering
Memorandum and will be in substantially the respective forms previously
delivered to the Initial Purchasers.
(xv) Absence of Defaults and Conflicts. Neither the Company nor any
of its subsidiaries is in violation of its charter or by-laws or in
default in the performance or observance of any obligation, agreement,
covenant or condition contained in any contract, indenture, mortgage, deed
of trust, loan or credit agreement, note, lease or other agreement or
instrument to which the Company or any of its subsidiaries is a party or
by which any of them may be bound, or to which any of the property or
assets of the Company or any of its subsidiaries is subject (collectively,
"Agreements and Instruments") except for such defaults that would not
result in a Material Adverse Effect, and the execution, delivery and
performance of this Agreement, the Indenture, the Registration Rights
Agreement, the Pledge and Escrow Agreement and the Securities and any
other agreement or instrument entered into or issued or to be entered into
or issued by the Company in connection with the transactions contemplated
hereby or thereby or in the Offering Memorandum and the consummation of
the transactions contemplated herein and in the Offering Memorandum
(including the issuance and sale of the Securities and the use of the
proceeds from the sale of the Securities as described in the Offering
Memorandum under the caption "Use of Proceeds") and compliance by the
Company with its obligations hereunder have been duly authorized by all
necessary corporate action and do not and will not, whether with or
without the giving of notice or passage of time or both, conflict with or
constitute a breach of, default or a Repayment Event (as defined below)
under, or result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of the Company or any of its
subsidiaries pursuant to, the Agreements and Instruments except for such
conflicts, breaches or defaults or liens, charges or encumbrances that,
singly or in the aggregate, would not result in a Material Adverse Effect,
nor will such action result in any violation of the provisions of the
charter or by-laws of the Company or any of its subsidiaries or any
applicable law, statute, rule, regulation, judgment, order, writ or decree
of any government, government instrumentality or court, domestic or
foreign, having jurisdiction over the Company or any of its subsidiaries
or any of their assets or properties. As used herein, a "Repayment Event"
means any event or condition which gives the holder of any note,
debenture, other evidence of indebtedness or preferred stock (or any
person acting on such holder's behalf) the right to require the
repurchase, redemption or repayment of all or a portion of such
indebtedness or preferred stock by the Company or any of its subsidiaries.
(xvi) Absence of Labor Dispute. No labor dispute with the employees
of the Company or any of its subsidiaries exists or, to the knowledge of
the Company, is
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<PAGE>
imminent, and the Company is not aware of any existing or imminent labor
disturbance by the employees of any of its or any of its subsidiaries'
principal suppliers, manufacturers, customers or contractors, which, in
either case, may reasonably be expected to result in a Material Adverse
Effect.
(xvii) Absence of Proceedings. Except as disclosed in the Offering
Memorandum, there is no action, suit, proceeding, inquiry or investigation
before or by any court or governmental agency or body, domestic or
foreign, now pending, or, to the knowledge of the Company, threatened,
against or affecting the Company or any subsidiary thereof which might
reasonably be expected to result in a Material Adverse Effect, or which
might reasonably be expected to materially and adversely affect the
properties or assets of the Company or any of its subsidiaries or the
consummation of this Agreement or the performance by the Company of its
obligations hereunder. The aggregate of all pending legal or governmental
proceedings to which the Company or any subsidiary thereof is a party or
of which any of their respective property or assets is the subject which
are not described in the Offering Memorandum, including ordinary routine
litigation incidental to the business, could not reasonably be expected to
result in a Material Adverse Effect.
(xviii) Possession of Intellectual Property. Except as disclosed in
the Offering Memorandum, (A) the Company and its subsidiaries own or
possess, or can acquire on reasonable terms, adequate 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, trade names or other intellectual property (collectively,
"Intellectual Property") necessary to carry on the business now operated
by them, except that the Company and its subsidiaries may fail to so own,
possess or have the ability to acquire on reasonable terms any
Intellectual Property if such failure would not result, singly or in the
aggregate, in a Material Adverse Effect, and (B) neither the Company nor
any of its subsidiaries has received any notice or is otherwise aware of
any infringement of or conflict with asserted rights of others with
respect to any Intellectual Property or of any facts or circumstances
which would render any Intellectual Property invalid or inadequate to
protect the interest of the Company or any of its subsidiaries therein,
and which infringement or conflict (if the subject of any unfavorable
decision, ruling or finding) or invalidity or inadequacy, singly or in the
aggregate, would result in a Material Adverse Effect.
(xix) Absence of Further Requirements. No filing with, or
authorization, approval, consent, license, order, registration,
qualification or decree of, any court or governmental authority or agency
is necessary or required for the performance by the Company of its
obligations hereunder, in connection with the offering, issuance or sale
of the Securities hereunder or the consummation of the transactions
contemplated by this Agreement, except as may be required under the 1933
Act or state securities or "blue sky" laws in connection with the Exchange
Offer (as defined in the Offering Memorandum).
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<PAGE>
(xx) Possession of Licenses and Permits. Except as disclosed in the
Offering Memorandum, the Company and its subsidiaries possess such
permits, licenses, approvals, consents and other authorizations issued by
the appropriate federal, state, local or foreign regulatory agencies or
bodies necessary to conduct the business now operated by them
(collectively, "Governmental Licenses"); the Company and its subsidiaries
are in compliance with the terms and conditions of all such Governmental
Licenses, except where the failure so to comply would not, singly or in
the aggregate, have a Material Adverse Effect; all of the Governmental
Licenses are valid and in full force and effect, except where the
invalidity of such Governmental Licenses or the failure of such
Governmental Licenses to be in full force and effect would not have a
Material Adverse Effect; and neither the Company nor any of its
subsidiaries has received any notice of proceedings relating to the
revocation or modification of any such Governmental Licenses which, singly
or in the aggregate, if the subject of an unfavorable decision, ruling or
finding, would result in a Material Adverse Effect. The Company has not
been informed of any fact, event or circumstance that is reasonably likely
to impair the Company's (or its subsidiaries') ability to obtain any
Governmental Licenses necessary or advisable in order to effectuate the
Company's future plans and strategies described in the Offering
Memorandum. Without limiting the generality of this paragraph (xix):
(A) The Company and each of its subsidiaries hold all
telecommunications regulatory licenses, permits, authorizations,
consents and approvals (the "Telecommunications Licenses") required
from the Federal Communications Commission (the "FCC") for the
Company and its subsidiaries to conduct their business on and as of
the date hereof in the manner described in the Offering Memorandum,
except as would not have, individually or in the aggregate, a
Material Adverse Effect; the Telecommunications Licenses have been
duly and validly issued and are in full force and effect, except
where the failure to be in full force and effect would not have,
individually or in the aggregate, a Material Adverse Effect; no
proceedings to revoke or restrict the Telecommunications Licenses
are pending or, to the best of the Company's knowledge, threatened;
neither the Company nor its subsidiaries are in violation of any of
the terms and conditions of any of the Telecommunications Licenses,
are in violation of the Communications Act of 1934, as amended (the
"Communications Act"), or are in violation of any FCC rules and
regulations, except as would not have, individually or in the
aggregate, a Material Adverse Effect; and the Company and its
subsidiaries have in effect with the FCC all international and
domestic service tariffs necessary to conduct their business on and
as of the date hereof in the manner described in the Offering
Memorandum except as would not have, individually or in the
aggregate, a Material Adverse Effect;
(B) The Company and its subsidiaries have obtained all state
and municipal Telecommunications Licenses and filed all tariffs
required for the provision of telecommunications services in any
state to conduct their business on and as of the date hereof in the
manner described in the Offering Memorandum,
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<PAGE>
except where the failure to do so would not have, individually or in
the aggregate, a Material Adverse Effect;
(C) There is no outstanding adverse judgment, injunction,
decree or order that has been issued by the FCC or any state utility
commission or similar state agency ("PUC") or municipality against
the Company or its subsidiaries or any action, proceeding or
investigation pending before the FCC or any state PUC or
municipality, or, to the Company's knowledge, threatened by the FCC
or any state PUC or municipality against the Company or its
subsidiaries which, if the subject of any unfavorable decision,
ruling or finding, would have a Material Adverse Effect on the
Company or its subsidiaries;
(D) No license, permit, consent, approval, order or
authorization of, or filing with, the FCC or with any state PUC or
municipal authority on the part of the Company or its subsidiaries
is required in connection with the issuance or sale of the
Securities; and
(E) Neither the issuance and sale of the Securities nor the
performance by the Company or its subsidiaries of their obligations
under this Agreement, the Registration Rights Agreements (as defined
herein), the Indenture or the Pledge and Escrow Agreement (as
defined herein) (collectively, the "Purchase Documents") will result
in a violation in any material respect of: (1) the Communications
Act or the applicable rules or regulations, or any order, writ,
judgment, injunction, decree or award of the FCC binding on the
Company or its subsidiaries; (2) any state telecommunications laws
or any applicable state PUC rules or regulations, or any order,
writ, judgment, injunction, decree or award of any state PUC binding
on the Company or its subsidiaries; or (3) any municipal rules or
regulations applicable to the Company or its subsidiaries.
(xxi) Title to Property. The Company and its subsidiaries have good
and marketable title to all real property owned by the Company and its
subsidiaries and good title to all other properties owned by them, in each
case, free and clear of all mortgages, pledges, liens, security interests,
claims, restrictions or encumbrances of any kind except such as (a) are
described in the Offering Memorandum or (b) do not, singly or in the
aggregate, 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 or any of its subsidiaries; and all of the leases and
subleases material to the business of the Company and its subsidiaries,
considered as one enterprise, and under which the Company or any of its
subsidiaries holds properties described in the Offering Memorandum, are in
full force and effect, and neither the Company nor any of its subsidiaries
has any notice of any material claim of any sort that has been asserted by
anyone adverse to the rights of the Company or any of its subsidiaries
under any of the leases or subleases mentioned above, or affecting or
questioning the rights of the Company or any subsidiary thereof to the
continued possession of the leased or subleased premises under any such
lease or sublease.
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<PAGE>
(xxii) Tax Returns. The Company and its subsidiaries have filed all
federal, state, local and foreign tax returns that are required to be
filed or have duly requested extensions thereof and have paid all taxes
required to be paid by any of them and any related assessments, fines or
penalties, except for any such tax, assessment, fine or penalty that is
being contested in good faith and by appropriate proceedings, and adequate
charges, accruals and reserves have been provided for in the financial
statements referred to in Section l(a)(v) above in respect of all federal,
state, local and foreign taxes for all periods as to which the tax
liability of the Company or any of its subsidiaries has not been finally
determined or remains open to examination by applicable taxing
authorities, except for such failures to file, request extensions, make
payments and provide for adequate charges, accruals and reserves as would
not, singly or in the aggregate, result in a Material Adverse Effect.
(xxiii) Environmental Laws. Except as described in the Offering
Memorandum and except such matters as would not, singly or in the
aggregate, result in a Material Adverse Effect, (A) neither the Company
nor any of its subsidiaries is in violation of any federal, state, local
or foreign statute, law, rule, regulation, ordinance, code, policy or rule
of common law or any judicial or administrative interpretation thereof,
including any judicial or administrative order, consent, decree or
judgment, relating to pollution or protection of human health, the
environment (including, without limitation, ambient air, surface water,
groundwater, land surface or subsurface strata) or wildlife, including,
without limitation, laws and regulations relating to the release or
threatened release of chemicals, pollutants, contaminants, wastes, toxic
substances, hazardous substances, petroleum or petroleum products
(collectively, "Hazardous Materials") or to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of
Hazardous Materials (collectively, "Environmental Laws"), (B) the Company
and its subsidiaries have all permits, authorizations and approvals
required under any applicable Environmental Laws and are each in
compliance with their requirements, (C) there are no pending or threatened
administrative, regulatory or judicial actions, suits, demands, demand
letters, claims, liens, notices of noncompliance or violation,
investigation or proceedings relating to any Environmental Law against the
Company or any of its subsidiaries and (D) there are no events or
circumstances that might reasonably be expected to form the basis of an
order for clean-up or remediation, or an action, suit or proceeding by any
private party or governmental body or agency, against or affecting the
Company or any of its subsidiaries relating to Hazardous Materials or
Environmental Laws.
(xxiv) Investment Company Act. The Company is not, and upon the
issuance and sale of the Securities as herein contemplated and the
application of the net proceeds therefrom as described in the Offering
Memorandum will not be, an "investment company" or an entity "controlled"
by an "investment company" as such terms are defined in the Investment
Company Act of 1940, as amended (the "1940 Act").
(xxv) Rule 144A Eligibility. The Securities are eligible for resale
pursuant to Rule 144A and will not be, at the Closing Time, of the same
class as securities listed on a
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<PAGE>
national securities exchange registered under Section 6 of the 1934 Act,
or quoted in a U.S. automated interdealer quotation system.
(xxvi) No General Solicitation. None of the Company, its affiliates,
as such term is defined in Rule 501(b) under the 1933 Act ("Affiliates"),
or any person acting on its or any of their behalf (other than the Initial
Purchasers, as to whom the Company makes no representation) has engaged or
will engage, in connection with the offering of the Securities, in any
form of general solicitation or general advertising within the meaning of
Rule 502(c) under the 1933 Act.
(xxvii) No Registration Required. Subject to compliance by the
Initial Purchasers with the representations and warranties set forth in
Section 2 and the procedures set forth in Section 6 hereof, it is not
necessary in connection with the offer, sale and delivery of the
Securities to the Initial Purchasers and to each Subsequent Purchaser in
the manner contemplated by this Agreement and the Offering Memorandum to
register the Securities under the 1933 Act or to qualify the Indenture
under the Trust Indenture Act of 1939, as amended (the "1939 Act").
(xxviii) No Directed Selling Efforts. With respect to those
Securities sold in reliance on Regulation S, (A) none of the Company, its
Affiliates or any person acting on its or their behalf (other than the
Initial Purchasers, as to whom the Company makes no representation) has
engaged or will engage in any directed selling efforts within the meaning
of Regulation S and (B) each of the Company and its Affiliates and any
person acting on its or their behalf (other than the Initial Purchasers,
as to whom the Company makes no representation) has complied and will
comply with the offering restrictions requirement of Regulation S.
(xxix) Insurance. The Company and each of its subsidiaries maintains
insurance covering its properties, operations, personnel and business.
Such insurance insures against such losses and risks as are adequate in
accordance with customary industry practice to protect the Company, each
of its subsidiaries and their businesses. Neither the Company or any of
its subsidiaries has received notice from any insurer or agent of such
insurer that substantial capital improvement or other expenditures will
have to be made in order to continue such insurance. All such insurance is
outstanding and duly in force on the date hereof.
(xxx) Internal Accounting Controls. The Company maintains a system
of internal accounting controls sufficient to provide reasonable
assurances that (a) transactions are executed in accordance with
management's general or specific authorization; (b) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to maintain
accountability for assets; (c) access to assets is permitted only in
accordance with management's general or specific authorization; and (d)
the recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
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(xxxi) Stabilization and Manipulation. None of the Company or any of
its subsidiaries has (a) taken, directly or indirectly, any action
designed to, or that might reasonably be expected to, cause or result in
stabilization or manipulation of the price of any security of the Company
to facilitate the sale or resale of the Notes or (b) since the date of the
Preliminary Offering Memorandum (I) sold, bid for, purchased or paid any
person any compensation for soliciting purchases of, the Notes or (II)
paid or agreed to pay to any person any compensation for soliciting
another to purchase any securities of the Company.
(xxxii) Related Party Transactions. Except as disclosed in the
Offering Memorandum, there are no business relationships or related party
transactions required to be disclosed therein pursuant to Item 404 of
Regulation S-K of the Commission (assuming for purposes of this paragraph
(xxx) that Regulation S-K is applicable to the Offering Memorandum).
(xxxiii) Solvency. The Company is, and immediately after the Closing
Time will be, Solvent. As used herein, the term "Solvent" means, with
respect to the Company on a particular date, that on such date (A) the
fair market value of the assets of the Company is greater than the total
amount of liabilities (including contingent liabilities) of the Company,
(B) the present fair salable value of the assets of the Company is greater
than the amount that will be required to pay the probable liabilities of
the Company on its debts as they become absolute and mature, (C) the
Company is able to realize upon its assets and pay its debts and other
liabilities, including contingent obligations, as they mature, and (D) the
Company does not have unreasonably small capital.
(b) Officer's Certificates. Any certificate signed by any officer of the
Company or any of its subsidiaries delivered to the Representatives or to
counsel for the Initial Purchasers shall be deemed a representation and warranty
by the Company to each Initial Purchaser as to the matters covered thereby.
SECTION 2. Sale and Delivery to Initial Purchasers; Closing.
(a) Securities. On the basis of the representations and warranties herein
contained and subject to the terms and conditions herein set forth, the Company
agrees to sell to each Initial Purchaser, severally and not jointly, and each
Initial Purchaser, severally and not jointly, agrees to purchase from the
Company, at the price set forth in Schedule B, the principal amount of
Securities set forth in Schedule A opposite the name of such Initial Purchaser,
plus any additional principal amount of Securities which such Initial Purchaser
may become obligated to purchase pursuant to the provisions of Section 11
hereof.
(b) Payment. Payment of the purchase price for, and delivery of
certificates for, the Securities shall be made at the office of Baker &
McKenzie, 805 Third Avenue, New York, New York 10022, or at such other place as
shall be agreed upon by the Representatives and the Company, at 10:00 A.M. on
the fifth business day after the date hereof (unless postponed in accordance
with the provisions of Section 11), or such other time not later than ten
business days
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after such date as shall be agreed upon by the Representatives and the Company
(such time and date of payment and delivery being herein called the "Closing
Time").
Payment shall be made to the Company by wire transfer of immediately
available funds to a bank account designated by the Company against delivery to
the Representatives for the respective accounts of the Initial Purchasers of
certificates for the Securities to be purchased by them. It is understood that
each Initial Purchaser has authorized the Representatives, for its account, to
accept delivery of, receipt for, and make payment of the purchase price for, the
Securities which it has agreed to purchase. Merrill Lynch, individually and not
as representative of the Initial Purchasers, may (but shall not be obligated to)
make payment of the purchase price for the Securities to be purchased by any
Initial Purchaser whose funds have not been received by the Closing Time, but
such payment shall not relieve such Initial Purchaser from its obligations
hereunder. The certificates representing the Securities shall be registered in
the name of Cede & Co. pursuant to the DTC Agreement and shall be made available
for examination and packaging by the Initial Purchasers in The City of New York
not later than 10:00 A.M. on the last business day prior to the Closing Time.
(c) Qualified Institutional Buyer. Each Initial Purchaser severally and
not jointly represents and warrants to, and agrees with, the Company that, as of
the date hereof and as of the Closing Date, it is a "qualified institutional
buyer" within the meaning, of Rule 144A under the 1933 Act (a "Qualified
Institutional Buyer") and an "accredited investor" within the meaning of Rule
501(a) under the 1933 Act (an "Accredited Investor").
(d) Denominations; Registration. Certificates for the Securities shall be
in such denominations and registered in such names as the Representatives may
request in writing at least one full business day before the Closing Time.
SECTION 3. Covenants of the Company. The Company covenants with each
Initial Purchaser as follows:
(a) Offering Memorandum. The Company, as promptly as possible, will
furnish to each Initial Purchaser, without charge, such number of copies of the
Preliminary Offering Memorandum, the Final Offering Memorandum and any
amendments and supplements thereto and documents incorporated by reference
therein as such Initial Purchaser may reasonably request.
(b) Pledged Securities On the Closing Date, the Company will purchase and
pledge to the Trustee, for the benefit of the holders of the Notes and the
Discount Notes (on an equal and ratable basis), Government Securities (as
defined in the Indenture) in such amount as will be sufficient to provide for
payment in full of the first six scheduled interest payments on the Notes. The
Government Securities will be pledged by the Company to the Trustee, for the
benefit of the holders of the Notes and the Discount Notes (on an equal and
ratable basis), pursuant to the Pledge and Escrow Agreement (the "Pledge and
Escrow Agreement"), to be dated the Closing Date, and will be held by the
Trustee in an account (the "Collateral Investments Account") established with
the Trustee pursuant to the Pledge and Escrow Agreement.
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(c) Notice and Effect of Material Events. The Company will immediately
notify each Initial Purchaser, and confirm such notice in writing, of (x) any
filing made by the Company of information relating to the offering of the
Securities with any securities exchange or any other regulatory body in the
United States or any other jurisdiction, and (y) prior to the completion of the
placement of the Securities by the Initial Purchasers as evidenced by a notice
in writing from the Initial Purchasers to the Company, any material changes in
or affecting the earnings, business affairs or business prospects of the Company
and its subsidiaries which (i) make any statement in the Offering Memorandum
false or misleading or (ii) are not disclosed in the Offering Memorandum. In
such event or if during such time any event shall occur as a result of which it
is necessary, in the reasonable opinion of the Company, its counsel, the Initial
Purchasers or counsel for the Initial Purchasers, to amend or supplement the
Final Offering Memorandum in order that the Final Offering Memorandum not
include any untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein not misleading in the light of
the circumstances then existing, the Company will forthwith amend or supplement
the Final Offering Memorandum by preparing and furnishing to each Initial
Purchaser an amendment or amendments of, or a supplement or supplements to, the
Final Offering Memorandum (in form and substance satisfactory in the reasonable
opinion of counsel for the Initial Purchasers) so that, as so amended or
supplemented, the Final Offering Memorandum will not include an untrue statement
of a material fact or omit to state a material fact necessary in order to make
the statements therein, in the light of the circumstances existing at the time
it is delivered to a Subsequent Purchaser, not misleading.
(d) Amendment to Offering Memorandum and Supplements. The Company will
advise each initial Purchaser promptly of any proposal to amend or supplement
the Offering Memorandum and will not effect such amendment or supplement without
the consent of the Initial Purchasers. Neither the consent of the Initial
Purchasers, nor the Initial Purchasers' delivery of any such amendment or
supplement, shall constitute a waiver of any of the conditions set forth in
Section 5 hereof.
(e) Qualification of Securities for Offer and Sale. The Company will use
its best efforts, in cooperation with the Initial Purchasers, to qualify the
Securities for offering and sale by the Initial Purchasers to any Subsequent
Purchasers under the applicable securities laws of such jurisdictions as the
Representatives may reasonably designate and will maintain such qualifications
in effect as long as required for the sale of the Securities; provided, however,
that the Company shall not be obligated to file any general consent to service
of process or to qualify as a foreign corporation or as a dealer in securities
in any jurisdiction in which it is not so qualified or to subject itself to
taxation in respect of doing business in any jurisdiction in which it is not
otherwise so subject.
(f) DTC. The Company will cooperate with the Representatives and use its
best efforts to permit the Securities to be eligible for clearance and
settlement through the facilities of DTC.
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(g) Use of Proceeds. The Company will use the net proceeds received by it
from the sale of the Securities in the manner specified in the Offering
Memorandum under "Use of Proceeds".
(h) Restriction on Sale of Securities. During a period of 180 days from
the date of the Offering Memorandum, the Company will not, without the prior
written consent of Merrill Lynch, directly or indirectly, issue, sell, offer or
agree to sell, grant any option for the sale of, or otherwise dispose of, any
other debt securities of the Company or securities of the Company that are
convertible into, or exchangeable for, the Securities or such other debt
securities.
(i) Press Releases. From the date hereof to the Closing Time, without the
prior consent of the Initial Purchasers, the Company will not issue directly or
indirectly any press release or other public communication or hold any press
conference with respect to the Company or the business, financial condition,
assets, results of operations or prospects of the Company, unless in the
judgment of the Company and its counsel, and after notification to the Initial
Purchasers, such press release, communication or conference is required by law.
SECTION 4. Payment of Expenses.
(a) Expenses. The Company will pay all expenses incident to the
performance of its obligations under this Agreement, including (i) the
preparation, printing and any filing of the Offering Memorandum (including
financial statements and any schedules or exhibits and any document incorporated
therein by reference) and of each amendment or supplement thereto, (ii) the
preparation, printing and delivery to the Initial Purchasers of this Agreement
and any Agreement among Initial Purchasers, the Indenture and such other
documents as may be required in connection with the offering, purchase, sale and
delivery of the Securities, (iii) the preparation, issuance and delivery of the
certificates for the Securities to the Initial Purchasers, including any charges
of DTC in connection therewith, (iv) the fees and disbursements of the Company's
counsel, accountants and other advisors, (v) the qualification of the Securities
under securities laws in accordance with the provisions of Section 3(e) hereof,
including filing fees and the reasonable fees and disbursements of counsel for
the Initial Purchasers in connection therewith and in connection with the
preparation of the Blue Sky Survey, any supplement thereto and any Legal
Investment Survey, which amounts shall not exceed $2,500, (vi) the fees and
expenses of the Trustee, including the fees and disbursements of counsel for the
Trustee in connection with the Indenture and the Securities, (vii) any fees
payable in connection with the rating of the Securities and (viii) any fees
payable to the review by the National Association of Securities Dealers, Inc.
(the "NASD") in connection with the initial and continued designation of the
Securities as PORTAL securities under the PORTAL Market Rules pursuant to NASD
Rule 5322.
(b) Termination of Agreement. If this Agreement is terminated by the
Representatives in accordance with the provisions of Section 5 or Section
10(a)(i) hereof, the Company shall reimburse the Initial Purchasers for all of
their out-of-pocket expenses, including the reasonable fees and disbursements of
counsel for the Initial Purchasers.
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SECTION 5. Conditions of Initial Purchasers' Obligations. The obligations
of the several Initial Purchasers hereunder are subject to the accuracy of the
representations and warranties of the Company contained in Section 1 hereof or
in certificates of any officer of the Company or any of its subsidiaries
delivered pursuant to the provisions hereof, to the performance by the Company
of its covenants and other obligations hereunder, and to the following further
conditions:
(a) Opinions of Counsel for Company. At the Closing Time, the
Representatives shall have received the opinions, dated as of the Closing Time,
together with signed or reproduced copies of such letters for each of the other
Initial Purchasers, (i) of Brobeck, Phleger & Harrison LLP, counsel for the
Company, to the effect set forth in Exhibit A-1 hereto, (ii) of Hale and Dorr
LLP, counsel for the Company, to the effect set forth in Exhibit A-2 hereto,
(iii) of Blumenfeld & Cohen, counsel for the Company, to the effect set forth in
Exhibit A-3 hereto, (iv) of Leboeuf, Lamb, Greene & MacRae L.L.P., counsel for
the Company, to the effect set forth on Exhibit A-4 hereto and (v) of Jeffrey
Blumenfeld, General Counsel of the Company, to the effect set forth on Exhibit
A-5 hereto. In giving the opinion described in clause (i) above such counsel may
rely, as to all matters governed by the laws of jurisdictions other than the law
of the State of New York, the federal law of the United States and the General
Corporation Law of the State of Delaware, upon the opinions of counsel
satisfactory to the Representatives.
(b) Opinion of Counsel for Initial Purchasers. At the Closing Time, the
Representatives shall have received the favorable opinion, dated as of the
Closing Time, of Baker & McKenzie, counsel for the Initial Purchasers, together
with signed or reproduced copies of such letter for each of the other Initial
Purchasers, substantially to the effect set forth in Exhibit A-6 hereto. In
giving such opinion such counsel may rely, as to all matters governed by the
laws of jurisdictions other than the law of the State of New York, the federal
law of the United States and the General Corporation Law of the State of
Delaware, upon the opinions of counsel satisfactory to the Representatives.
(c) Officers' Certificate. At the Closing Time, there shall not have been,
since the date hereof or since the respective dates as of which information is
given in the Offering Memorandum, any material adverse change in the condition,
financial or otherwise, or in the earnings, business affairs or business
prospects of the Company and its subsidiaries considered as one enterprise,
whether or not arising in the ordinary course of business, and the
Representatives shall have received a certificate of the President or a Vice
President of the Company and of the chief financial or chief accounting officer
of the Company, dated as of the Closing Time, to the effect that (i) there has
been no such material adverse change, (ii) the representations and warranties in
Section 1 hereof are true and correct with the same force and effect as though
expressly made at and as of the Closing Time, and (iii) the Company has complied
with all agreements and satisfied all conditions on its part to be performed or
satisfied at or prior to the Closing Time.
(d) Accountant's Comfort Letter. At the time of the execution of this
Agreement, the Representatives shall have received from PricewaterhouseCoopers
LLP a letter dated such date, in form and substance satisfactory to the
Representatives, together with signed or reproduced
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copies of such letter for each of the other Initial Purchasers containing
statements and information of the type ordinarily included in accountants'
"comfort letters" to Initial Purchasers with respect to the financial statements
and certain financial information contained in the Offering Memorandum.
(e) Bring-down Comfort Letter. At the Closing Time, the Representatives
shall have received from PricewaterhouseCoopers LLP a letter, dated as of the
Closing Time, to the effect that they reaffirm the statements made in the letter
furnished pursuant to subsection (d) of this Section, except that the specified
date referred to shall be a date not more than three business days prior to the
Closing Time.
(f) Accountants Opinion. The Representatives shall have received the
opinion of PricewaterhouseCoopers LLP (or another internationally recognized
firm of independent public accountants or nationally recognized investment
banking firm selected by the Company) that the amount of Pledged Securities,
upon receipt of scheduled interest and principal payments of such securities,
will be sufficient to provide for payment in full of the first six scheduled
interest payments due on the Notes.
(g) PORTAL. At the Closing Time, the Securities shall have been designated
for trading on PORTAL.
(h) Registration Rights Agreements and Pledge and Escrow Agreement. The
Issuer and the Initial Purchasers shall have entered into a registration rights
agreement (the "Registration Rights Agreement"), dated as of the Closing Time,
substantially in form and substance as described in the Offering Memorandum
under the heading "Description of the Notes--Exchange Offer; Registration
Rights." The Issuer and the Trustee shall have entered into the Pledge and
Escrow Agreement, dated as of the Closing Date, substantially in the form and
substance as described in the Offering Memorandum under the heading "Description
of the Notes--Security." The Company shall have prepared financing statements
naming the Company as debtor and the Trustee, on behalf and for the benefit of
the holders of the Notes and the Discount Notes, together with all schedules
thereto, on the appropriate forms and shall have filed such financing statements
with the appropriate filing offices along with payment of all related filing
fees. Confirmation of such filings and payments shall be provided to the Initial
Purchasers and counsel to the Initial Purchasers.
(i) Additional Documents. At the Closing Time, counsel for the Initial
Purchasers shall have been furnished with such other documents and opinions as
they may reasonably require for the purpose of enabling them to pass upon the
issuance and sale of the Securities as herein contemplated, or in order to
evidence the accuracy of any of the representations or warranties, or the
fulfillment of any of the conditions, herein contained; and all proceedings
taken by the Company in connection with the issuance and sale of the Securities
as herein contemplated shall be satisfactory in form and substance to the
Representatives and counsel for the Initial Purchasers.
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(j) Termination of Agreement. If any condition specified in this Section
shall not have been fulfilled when and as required to be fulfilled, this
Agreement may be terminated by the Representatives by notice to the Company at
any time at or prior to the Closing Time, and such termination shall be without
liability of any party to any other party except as provided in Section 4 and
except that Sections 1, 7 and 8 shall survive any such termination and remain in
full force and effect.
SECTION 6. Subsequent Offers and Resales of the Securities.
(a) Offer and Sale Procedures. Each of the Initial Purchasers and the
Company hereby acknowledge and agree to observe the following procedures in
connection with the offer and sale of the Securities:
(i) Offers and Sales only to Regulation S Purchasers or Qualified
Institutional Buyers. Offers and sales of the Securities will be made only
by the Initial Purchasers or Affiliates thereof qualified to do so in the
jurisdictions in which such offers or sales are made. Each such offer or
sale shall only be made (A) to persons whom the offeror or seller
reasonably believes to be qualified institutional buyers (as defined in
Rule 144A under the Securities Act) or (B) to non-U.S. persons outside the
United States to whom the offeror or seller reasonably believes offers and
sales of the Securities may be made in reliance upon Rules 903 and 904 of
Regulation S under the 1933 Act.
(ii) No General Solicitation. The Securities will be offered by
approaching prospective Subsequent Purchasers on an individual basis. No
general solicitation or general advertising (within the meaning of Rule
502(c) under the 1933 Act) will be used in the United States in connection
with the offering of the Securities.
(iii) Purchases by Non-Bank Fiduciaries. In the case of a non-bank
Subsequent Purchaser of a Security acting as a fiduciary for one or more
third parties, in connection with an offer and sale to such purchaser
pursuant to clause (a) above, each third party shall, in the judgment of
the applicable Initial Purchaser, be an Institutional Accredited Investor
or a Qualified Institutional Buyer or a non-U.S. person outside the United
States.
(iv) Subsequent Purchaser Notification. Each Initial Purchaser will
take reasonable steps to inform, and cause each of its U.S. Affiliates to
take reasonable steps to inform, persons acquiring Securities from such
Initial Purchaser or Affiliate, as the case may be, in the United States
that the Securities (A) have not been and will not be registered under the
1933 Act and have not been registered under any state securities laws, (B)
are being sold to them without registration under the 1933 Act in reliance
on Rule 144A or in accordance with another exemption from registration
under the 1933 Act, as the case may be, and (C) may not be offered, sold
or otherwise transferred except (1) to the Company, (2) outside the United
States in accordance with Rule 904 of Regulation S, or (3) inside the
United States in accordance with (x) Rule 144A to a person whom the seller
reasonably believes is a Qualified Institutional Buyer that is
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purchasing such Securities for its own account or for the account of a
Qualified Institutional Buyer to whom notice is given that the offer, sale
or transfer is being made in reliance on Rule 144A or (y) the exemption
from registration under the 1933 Act provided by Rule 144, if available.
(v) Restrictions on Transfer. The transfer restrictions and the
other provisions set forth in Section 3.17 of the Indenture, including the
legends required thereby, shall apply to the Securities except as
otherwise agreed by the Company and the Initial Purchasers. The Company
shall refuse to register any transfer of securities not made in accordance
with Regulation S under the Securities Act, pursuant to registration under
the Securities Act, or pursuant to an available exemption from such
registration. Following the sale of the Securities by the Initial
Purchasers to Subsequent Purchasers pursuant to the terms hereof, the
Initial Purchasers shall not be liable or responsible to the Company for
any losses, damages or liabilities suffered or incurred by the Company,
including any losses, damages or liabilities under the 1933 Act, arising
from or relating to any resale or transfer by any Subsequent Purchaser of
any Security; provided, that nothing contained in this sentence shall
limit the Initial Purchasers' rights and obligations under Section 7
hereof.
(vi) Delivery of Offering Memorandum. Each Initial Purchaser will
deliver to each purchaser of the Securities from such Initial Purchaser,
in connection with its original distribution of the Securities, a copy of
the Offering Memorandum, as amended and supplemented at the date of such
delivery.
(vii) Hedging Transactions. The Initial Purchasers will not engage
in hedging transactions with respect to the Securities prior to the
expiration of the applicable distribution compliance period specified in
Rule 903 of Regulation S under the Securities Act, unless in compliance
with the Securities Act.
(b) Covenants of the Company. The Company covenants with each Initial
Purchaser as follows:
(i) Due Diligence. In connection with the original distribution of
the Securities, the Company agrees that, prior to any offer or resale of
the Securities by the Initial Purchasers, the Initial Purchasers and
counsel for the Initial Purchasers shall have the right to make reasonable
inquiries into the business of the Company and its subsidiaries. The
Company also agrees to provide answers to each prospective Subsequent
Purchaser of Securities who so requests concerning the Company and its
subsidiaries (to the extent that such information is available or can be
acquired and made available to prospective Subsequent Purchasers without
unreasonable effort or expense and to the extent the provision thereof is
not prohibited by applicable law) and the terms and conditions of the
offering of the Securities, as provided in the Offering Memorandum.
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(ii) Integration. The Company agrees that it will not and will cause
its Affiliates not to make any offer or sale of securities of the Company
of any class if, as a result of the doctrine of "integration" referred to
in Rule 502 under the 1933 Act, such offer or sale would render invalid
(for the purpose of (i) the sale of the Securities by the Company to the
Initial Purchasers, (ii) the resale of the Securities by the Initial
Purchasers to Subsequent Purchasers or (iii) the resale of the Securities
by such Subsequent Purchasers to others, in each case in accordance with
the terms and conditions herein set forth) the exemption from the
registration requirements of the 1933 Act provided by Section 4(2) thereof
or by Rule 144A or by Regulation S thereunder or otherwise.
(iii) Rule 144A Information. The Company agrees that, in order to
render the Securities eligible for resale pursuant to Rule 144A under the
1933 Act, while any of the Securities remain outstanding, it will make
available, upon request, to any holder of Securities or prospective
purchasers of Securities the information specified in Rule 144A(d)(4),
unless the Company furnishes information to the Commission pursuant to
Section 13 or 15(d) of the 1934 Act (such information, whether made
available to holders or prospective purchasers or furnished to the
Commission, is herein referred to as "Additional Information").
(iv) Restriction on Repurchases. Until the expiration of three years
after the original issuance of the Securities, the Company will not, and
will cause its Affiliates not to, purchase or agree to purchase or
otherwise acquire any Securities which are "restricted securities" (as
such term is defined under Rule 144(a)(3) under the 1933 Act), whether as
beneficial owner or otherwise (except as agent acting as a securities
broker on behalf of and for the account of customers in the ordinary
course of business in unsolicited broker's transactions) unless,
immediately upon any such purchase, the Company or any Affiliate shall
submit such Securities to the Trustee for cancellation.
(c) Resale Pursuant to Rule 903 of Regulation S or Rule 144A. Each Initial
Purchaser represents and agrees, that, except as permitted by Section 6(a)
above, it has offered and sold Securities and will offer and sell Securities (i)
as part of their distribution at any time and (ii) otherwise until forty days
after the later of the date upon which the offering of the Securities commences
and the Closing Time, only in accordance with Rule 903 of Regulation S or Rule
144A under the 1933 Act. Accordingly, neither the Initial Purchasers, their
affiliates nor any persons acting on their behalf have engaged or will engage in
any directed selling efforts with respect to Securities, and the Initial
Purchasers, their affiliates and any person acting on their behalf have complied
and will comply with the offering restriction requirements of Regulation S. Each
Initial Purchaser agrees that, at or prior to confirmation of a sale of
Securities (other than a sale of Securities pursuant to Rule 144A), it will have
sent to each distributor, dealer or person receiving a selling concession, fee
or other remuneration that purchases Securities from it or through it during the
restricted period a confirmation or notice to substantially the following
effect:
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"The Securities covered hereby have not been registered under the
United States Securities Act of 1933 (the "Securities Act") and may
not be offered or sold within the United States or to or for the
account or benefit of U.S. persons (i) as part of their distribution
at any time and (ii) otherwise until forty days after the later of
the date upon which the offering of the Securities commenced and the
date of closing, except in either case in accordance with Regulation
S or Rule 144A under the Securities Act. Terms used above have the
meaning given to them by Regulation S."
Terms used in the above paragraph have the meanings given to them by Regulation
S.
Each Initial Purchaser severally represents and agrees that it has not entered
and will not enter into any contractual arrangements with respect to the
distribution of the Securities, except with its affiliates or with the prior
written consent of the Company.
SECTION 7. Indemnification.
(a) Indemnification of Initial Purchasers. The Company agrees to indemnify
and hold harmless each Initial Purchaser and each person, if any, who controls
any Initial Purchaser within the meaning of Section 15 of the 1933 Act or
Section 20 of the 1934 Act as follows:
(i) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, arising out of any untrue statement or alleged
untrue statement of a material fact contained in any Preliminary Offering
Memorandum or the Final Offering Memorandum (or any amendment or
supplement thereto), or the omission or alleged omission therefrom of a
material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading;
(ii) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, to the extent of the aggregate amount paid in
settlement of any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or of any claim
whatsoever based upon any such untrue statement or omission, or any such
alleged untrue statement or omission; provided that (subject to Section
7(d) below) any such settlement is effected with the written consent of
the Company; and
(iii) against any and all expense whatsoever, as incurred (including
the fees and disbursements of counsel chosen by Merrill Lynch), reasonably
incurred in investigating, preparing or defending against any litigation,
or any investigation or proceeding by any governmental agency or body,
commenced or threatened, or any claim whatsoever based upon any such
untrue statement or omission, or any such alleged untrue statement or
omission, to the extent that any such expense is not paid under (i) or
(ii) above;
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provided, however, that this indemnity agreement shall not apply to any loss,
liability, claim, damage or expense to the extent arising out of any untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with written information furnished to the Company by any
Initial Purchaser through the Representative expressly for use in the Offering
tMemorandum (or any amendment thereto), which information is described in
Section 1(a)(ii) hereof; and provided further that the Company will not be
liable to an Initial Purchaser with respect to any Preliminary Offering
Memorandum to the extent that the Company shall sustain the burden of proof of
proving that any such loss, liability, claim, damage or expense resulted from
the fact that such Initial Purchaser, in contravention of a requirement of this
Agreement or applicable law, sold Securities to a person to whom such Initial
Purchaser failed to send or give, at or prior to the Closing Date, a copy of the
Final Offering Memorandum as then amended or supplemented if (i) the Company has
previously furnished copies thereof (sufficiently in advance of the Closing Date
to allow for the distribution by the Closing Date) to the Initial Purchasers and
the loss, liability, claim, damage or expense of such Initial Purchaser resulted
from an untrue statement or omission or alleged untrue statement or omission of
a material fact contained in or omitted from the Preliminary Offering Memorandum
which was corrected in the Final Offering Memorandum as, if applicable, amended
or supplemented prior to the Closing Date and (ii) giving or sending such Final
Offering Memorandum by the Closing Date to the party or parties asserting such
loss, liability, claim, damage or expense would have constituted a complete
defense to the claim asserted by such person.
(b) Indemnification of Company, Directors and Officers. Each Initial
Purchaser severally agrees to indemnify and hold harmless the Company, its
directors, each of its officers who would be required to sign the Offering
Memorandum if it were a registration statement on Form S-1, and each person, if
any, who controls the Company within the meaning of Section 15 of the 1933 Act
or Section 20 of the 1934 Act against any and all loss, liability, claim, damage
and expense described in the indemnity contained in subsection (a) of this
Section, as incurred, but only with respect to untrue statements or omissions,
or alleged untrue statements or omissions, made in the Offering Memorandum in
reliance upon and in conformity with written information furnished to the
Company by such Initial Purchaser through the Representatives expressly for use
in the Offering Memorandum.
(c) Actions against Parties; Notification. Each indemnified party shall
give notice as promptly as reasonably practicable to each indemnifying party of
any action commenced against it in respect of which indemnity may be sought
hereunder, but failure to so notify an indemnifying party shall not relieve such
indemnifying party from any liability hereunder to the extent it is not
materially prejudiced as a result thereof and in any event shall not relieve it
from any liability which it may have otherwise than on account of this indemnity
agreement. In the case of parties indemnified pursuant to Section 7(a) above,
counsel to the indemnified parties shall be selected by Merrill Lynch, and, in
the case of parties indemnified pursuant to Section 7(b) above, counsel to the
indemnified parties shall be selected by the Company. An indemnifying party may
participate at its own expense in the defense of any such action; provided,
however, that counsel to the indemnifying party shall not (except with the
consent of the indemnified party) also be counsel to the indemnified party. In
no event shall the indemnifying parties be liable for fees and expenses of more
than one counsel (in addition to any
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<PAGE>
local counsel) separate from their own counsel for all indemnified parties in
connection with any one action or separate but similar or related actions in the
same jurisdiction arising out of the same general allegations or circumstances.
No indemnifying party shall, without the prior written consent of the
indemnified parties, settle or compromise or consent to the entry of any
judgment with respect to any litigation, or any investigation or proceeding by
any governmental agency or body, commenced or threatened, or any claim
whatsoever in respect of which indemnification or contribution could be sought
under this Section 7 or Section 8 hereof (whether or not the indemnified parties
are actual or potential parties thereto), unless such settlement, compromise or
consent (i) includes an unconditional release of each indemnified party from all
liability arising out of such litigation, investigation, proceeding or claim and
(ii) does not include a statement as to or an admission of fault, culpability or
a failure to act by or on behalf of any indemnified party.
(d) Settlement without Consent if Failure to Reimburse. If at any time an
indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel, such indemnifying party
agrees that it shall be liable for any settlement of the nature contemplated by
Section 7(a)(ii) effected without its written consent if (i) such settlement is
entered into more than 45 days after receipt by such indemnifying party of the
aforesaid request, (ii) such indemnifying party shall have received notice of
the terms of such settlement at least 30 days prior to such settlement being
entered into and (iii) such indemnifying party shall not have reimbursed such
indemnified party in accordance with such request prior to the date of such
settlement.
SECTION 8. Contribution. If the indemnification provided for in Section 7
hereof is for any reason unavailable to or insufficient to hold harmless an
indemnified party in respect of any losses, liabilities, claims, damages or
expenses referred to therein, then each indemnifying party shall contribute to
the aggregate amount of such losses, liabilities, claims, damages and expenses
incurred by such indemnified party, as incurred, (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company on the one
hand and the Initial Purchasers on the other hand from the offering of the
Securities pursuant to this Agreement or (ii) if the allocation provided by
clause (i) is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the Company on the one hand and of the
Initial Purchasers on the other hand in connection with the statements or
omissions which resulted in such losses, liabilities, claims, damages or
expenses, as well as any other relevant equitable considerations.
The relative benefits received by the Company on the one hand and the
Initial Purchasers on the other hand in connection with the offering of the
Securities pursuant to this Agreement shall be deemed to be in the same
respective proportions as the total net proceeds from the offering of the
Securities pursuant to this Agreement (before deducting expenses) received by
the Company and the total underwriting discount received by the Initial
Purchasers, bear to the aggregate initial offering price of the Securities.
The relative fault of the Company on the one hand and the Initial
Purchasers on the other hand shall be determined by reference to, among other
things, whether any such untrue or
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<PAGE>
alleged untrue statement of a material fact or omission or alleged omission to
state a material fact relates to information supplied by the Company or by the
Initial Purchasers and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Company and the Initial Purchasers agree that it would not be just and
equitable if contribution pursuant to this Section 8 were determined by pro rata
allocation (even if the Initial Purchasers were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to above in this Section 8. The aggregate
amount of losses, liabilities, claims, damages and expenses incurred by an
indemnified party and referred to above in this Section 8 shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in investigating, preparing or defending against any litigation, or any
investigation or proceeding by any governmental agency or body, commenced or
threatened, or any claim whatsoever based upon any such untrue or alleged untrue
statement or omission or alleged omission.
Notwithstanding the provisions of this Section 8, no Initial Purchaser
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 pursuant
to this Agreement were offered to the Subsequent Purchasers exceeds the amount
of any damages which such Initial Purchaser 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 1933 Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 8, each person, if any, who controls an
Initial Purchaser within the meaning of Section 15 of the 1933 Act or Section 20
of the 1934 Act shall have the same rights to contribution as such Initial
Purchaser, and each director of the Company, each officer of the Company who
would be required to sign the Offering Memorandum if it were a registration
statement on Form S-1, and each person, if any, who controls the Company within
the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall
have the same rights to contribution as the Company. The Initial Purchasers'
respective obligations to contribute pursuant to this Section 8 are several in
proportion to the principal amount of Securities set forth opposite their
respective names in Schedule A hereto and not joint.
SECTION 9. Representations, Warranties and Agreements to Survive Delivery.
All representations, warranties and agreements contained in this Agreement or in
certificates of officers of the Company submitted pursuant hereto, shall remain
operative and in full force and effect, regardless of any investigation made by
or on behalf of any Initial Purchaser or controlling person, or by or on behalf
of the Company, and shall survive delivery of the Securities to the Initial
Purchasers.
SECTION 10. Termination of Agreement.
-24-
<PAGE>
(a) Termination; General. The Representatives may terminate this
Agreement, by notice to the Company, at any time at or prior to the Closing Time
(i) if there has been, since the time of execution of this Agreement or since
the respective dates as of which information is given in the Offering
Memorandum, any material adverse change in the condition, financial or
otherwise, or in the earnings, business affairs or business prospects of the
Company and its subsidiaries considered as one enterprise, whether or not
arising in the ordinary course of business, or (ii) if there has occurred any
material adverse change in the financial markets in the United States or the
international financial markets, any outbreak of hostilities or escalation
thereof or other calamity or crisis or any change or development involving a
prospective change in national or international political, financial or economic
conditions, in each case the effect of which is such as to make it, in the
judgment of the Representatives, impracticable to market the Securities or to
enforce contracts for the sale of the Securities, or (iii) if trading in any
securities of the Company has been suspended or limited by the Commission, or if
trading generally on the American Stock Exchange or the New York Stock Exchange
or in the Nasdaq National Market has been suspended or limited, or minimum or
maximum prices for trading have been fixed, or maximum ranges for prices have
been required, by any of said exchanges or by such system or by order of the
Commission, the National Association of Securities Dealers, Inc. or any other
governmental authority, or (iv) if a banking moratorium has been declared by
either Federal or New York authorities.
(b) Liabilities. If this Agreement is terminated pursuant to this Section,
such termination shall be without liability of any party to any other party
except as provided in Section 4 hereof, and provided further that Sections 1, 7
and 8 shall survive such termination and remain in full force and effect.
SECTION 11. Default by One or More of the Initial Purchasers. If one or
more of the Initial Purchasers shall fail at the Closing Time to purchase the
Securities which it or they are obligated to purchase under this Agreement (the
"Defaulted Securities"), the Representatives shall have the right, but not the
obligation, within 24 hours thereafter, to make arrangements, for one or more of
the non-defaulting Initial Purchasers, or any other Initial Purchasers, to
purchase all, but not less than all, of the Defaulted Securities in such amounts
as may be agreed upon and upon the terms herein set forth; if, however, the
Representatives shall not have completed such arrangements within such 24-hour
period, then this Agreement shall terminate without liability on the part of any
non-defaulting Initial Purchaser.
No action pursuant to this Section shall relieve any defaulting Initial
Purchaser from liability in respect of its default.
In the event of any such default which does not result in a termination of
this Agreement, either the Representatives or the Company shall have the right
to postpone the Closing Time for a period not exceeding seven days in order to
effect any required changes in the Offering Memorandum or in any other documents
or arrangement.
SECTION 12. Notices. All notices and other communications hereunder shall
be in writing and shall be deemed to have been duly given if mailed or
transmitted by any standard
-25-
<PAGE>
form of telecommunication. Notices to the Initial Purchasers shall be directed
to the Representatives at North Tower, World Financial Center, New York, New
York 10281-11201, attention of Marcey Becker, with a courtesy copy to Malcolm I.
Ross, Baker & McKenzie, 805 Third Avenue, New York, New York 10022; notices to
the Company shall be directed to it at 6933 South Revere Parkway, Englewood,
Colorado 80112, attention of Scott Chandler, with a courtesy copy to John
Denniston, Brobeck Phleger & Harrison LLP, 550 West "C" Street, Suite 1300, San
Diego, California 92101.
SECTION 13. Parties. This Agreement shall inure to the benefit of and be
binding upon the Initial Purchasers and the Company and their respective
successors. Nothing expressed or mentioned in this Agreement is intended or
shall be construed to give any person, firm or corporation, other than the
Initial Purchasers and the Company and their respective successors and the
controlling persons and officers and directors referred to in Sections 7 and 8
and their heirs and legal representatives, any legal or equitable right, remedy
or claim under or in respect of this Agreement or any provision herein
contained. This Agreement and all conditions and provisions hereof are intended
to be for the sole and exclusive benefit of the Initial Purchasers and the
Company and their respective successors, and said controlling persons and
officers and directors and their heirs and legal representatives, and for the
benefit of no other person, firm or corporation. No purchaser of Securities from
any Initial Purchaser shall be deemed to be a successor by reason merely of such
purchase.
SECTION 14. Governing Law and Time. THIS AGREEMENT SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. SPECIFIED
TIMES OF DAY REFER TO NEW YORK CITY TIME.
SECTION 15. Effect of Headings. The Article and Section headings herein
and the Table of Contents are for convenience only and shall not affect the
construction hereof.
[signature page follows]
-26-
<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Company a counterpart hereof, whereupon
this instrument, along with all counterparts, will become a binding agreement
between the Initial Purchasers and the Company in accordance with its terms.
Very truly yours,
RHYTHMS NETCONNECTIONS, INC.
By: /s/ SCOTT CHANDLER
-----------------------
Scott Chandler
Chief Financial Officer
CONFIRMED AND ACCEPTED,
as of the date first above written:
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
SALOMON SMITH BARNEY INC.
CHASE SECURITIES INC.
By: MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By /s/ MARCY BECKER
---------------------------------------
Authorized Signatory
For themselves and as Representatives of the other Initial Purchasers named in
Schedule A hereto.
-27-
<PAGE>
SCHEDULE A
Name of Initial Purchaser Principal Amount
------------------------- ----------------
Merrill Lynch, Pierce, Fenner & Smith Incorporated.... $162,500,000
Salomon Smith Barney Inc.............................. 81,250,000
Chase Securities Inc.................................. 81,250,000
Total................................................. $325,000,000
============
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<PAGE>
SCHEDULE B
RHYTHMS NETCONNECTIONS, INC.
12 3/4% Senior Notes due 2009
1. The initial public offering price of the Securities shall be 100.0% of
the principal amount of the Notes.
2. The purchase price to be paid by the Initial Purchasers for the
Securities shall be 97.0% of the principal amount of the Notes.
3. The interest rate on the Notes shall be 12 3/4% per annum commencing
October 15, 1999.
4. The further terms and conditions of the Securities are as set forth in
the Offering Memorandum.
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<PAGE>
Exhibit A-1
FORM OF OPINION OF COMPANY'S LEGAL COUNSEL
TO BE DELIVERED PURSUANT TO
SECTION 5(a)(i)
[Form of Brobeck Phleger opinion follows]
A-1
<PAGE>
Exhibit A-2
FORM OF OPINION OF COMPANY'S LEGAL COUNSEL
TO BE DELIVERED PURSUANT TO
SECTION 5(a)(ii)
[form of Hale and Dorr opinion follows]
A-2
<PAGE>
Exhibit A-3
FORM OF OPINION OF COMPANY'S LEGAL COUNSEL
TO BE DELIVERED PURSUANT TO
SECTION 5(a)(iii)
[form of Blumenfeld & Cohen opinion follows]
A-3
<PAGE>
Exhibit A-4
FORM OF OPINION OF COMPANY'S LEGAL COUNSEL
TO BE DELIVERED PURSUANT TO
SECTION 5(a)(iv)
[Form of LeBoeuf Lamb opinion follows.]
A-4
<PAGE>
Exhibit A-5
FORM OF OPINION OF THE COMPANY'S LEGAL COUNSEL
TO BE DELIVERED PURSUANT TO
SECTION 5(a)(v)
[form of General Counsel opinion follows]
A-5
<PAGE>
Exhibit A-6
FORM OF OPINION OF INITIAL PURCHASERS' LEGAL COUNSEL
TO BE DELIVERED PURSUANT TO
SECTION 5(b)
[form of Baker & McKenzie opinion follows]
A-6
<PAGE>
Exhibit 4.14
RHYTHMS NETCONNECTIONS INC., as Issuer,
and
STATE STREET BANK AND TRUST COMPANY OF CALIFORNIA, N.A., as Trustee
INDENTURE
Dated as of April 23, 1999
$325,000,000 principal amount
12 3/4% Senior Notes due 2009, Series A
12 3/4% Senior Notes due 2009, Series B
<PAGE>
Reconciliation and tie between Trust Indenture Act of 1939,
as amended, and Indenture, dated as of April 23, 1999
Trust Indenture Indenture
Act Section Section
----------- -------
ss. 310 (a) (1) .................................. 6.09
(a) (2) .................................. 6.09
(a) (3) .................................. Not Applicable
(a) (4) .................................. 6.05
(b) .................................. 6.05, 6.08
6.10
ss.311 (a) .................................. 6.07
(b) .................................. 6.07
(c) .................................. Not Applicable
ss.312 (a) .................................. 3.05, 7.01
(b) .................................. 7.02
(c) .................................. 7.02
ss.313 (a) .................................. 7.03
(b) .................................. 7.03
(c) .................................. 7.03
(d) .................................. 7.03
ss.314 (a) .................................. 10.09
(b) .................................. 10.24
(c) (1).................................... 1.04, 4.04(10), 10.21,
12.01
(c) (2).................................... 1.04, 4.04(10), 10.21,
12.01
(c) (3).................................... Not Applicable
(d) .................................. 10.24
(e) .................................. 1.04
ss.315 (a) .................................. 6.01(a)
(b) .................................. 6.02
(c) .................................. 6.01(b)
(d) .................................. 6.01(c)
(e) .................................. 5.14
ss.316 (a) (last sentence)........................ 3.14
(a) (1) (A)................................ 5.12
(a) (1) (B)................................ 5.13
(a) (2) .................................. Not Applicable
(b) .................................. 5.08
(c) .................................. Not Applicable
ss.317 (a) (1).................................... 5.03
(a) (2).................................... 5.04
(b) .................................. 10.03
ss.318 (a) .................................. 1.08
<PAGE>
TABLE OF CONTENTS
Page
RECITALS 1
ARTICLE ONE. DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION
Section 1.01. Definitions. 1
Section 1.02. Other Definitions. 18
Section 1.03. Rules of Construction. 19
Section 1.04. Form of Documents Delivered to Trustee. 19
Section 1.05. Acts of Holders. 20
Section 1.06. Notices, etc., to the Trustee and the Company. 20
Section 1.07. Notice to Holders; Waiver. 21
Section 1.08. Conflict with Trust Indenture Act. 21
Section 1.09. Effect of Headings and Table of Contents. 21
Section 1.10. Successors and Assigns. 21
Section 1.11. Separability Clause. 21
Section 1.12. Benefits of Indenture. 22
Section 1.13. GOVERNING LAW. 22
Section 1.14. No Recourse Against Others. 22
Section 1.15. Independence of Covenants. 22
Section 1.16. Exhibits and Schedules. 22
Section 1.17. Counterparts. 22
Section 1.18. Duplicate Originals. 22
ARTICLE TWO. FORM OF NOTES
Section 2.01. Form and Dating. 22
ARTICLE THREE. THE NOTES
Section 3.01. Title and Terms. 23
Section 3.02. Registrar and Paying Agent. 23
Section 3.03. Execution and Authentication. 24
Section 3.04. Temporary Notes. 25
Section 3.05. Transfer and Exchange. 25
Section 3.06. Mutilated, Destroyed, Lost and Stolen Notes. 26
Section 3.07. Payment of Interest; Interest Rights Preserved. 27
Section 3.08. Persons Deemed Owners. 27
Section 3.09. Cancellation. 28
Section 3.10. Computation of Interest. 28
Section 3.11. Legal Holidays. 28
Section 3.12. CUSIP and CINS Numbers. 28
Section 3.13. Paying Agent To Hold Money in Trust. 28
Section 3.14. [Intentionally Omitted]. 29
Section 3.15. Deposits of Monies. 29
Section 3.16. Book-Entry Provisions for Global Notes. 29
Section 3.17. Special Transfer Provisions. 30
ARTICLE FOUR. DEFEASANCE OR COVENANT DEFEASANCE
Section 4.01. Company's Option To Effect Defeasance or Covenant
Defeasance. 32
Section 4.02. Defeasance and Discharge. 33
Section 4.03. Covenant Defeasance. 33
Section 4.04. Conditions to Defeasance or Covenant Defeasance. 33
Section 4.05. Deposited Money and Government Securities To Be Held in
Trust; Other Miscellaneous Provisions 35
Section 4.06. Reinstatement. 35
ARTICLE FIVE. REMEDIES
Section 5.01. Events of Default. 36
ii
<PAGE>
Section 5.02. Acceleration of Maturity, Rescission and Annulment. 37
Section 5.03. Collection of Indebtedness and Suits for Enforcement by
Trustee. 37
Section 5.04. Trustee May File Proofs of Claims. 38
Section 5.05. Trustee May Enforce Claims Without Possession of Notes. 39
Section 5.06. Application of Money Collected. 39
Section 5.07. Limitation on Suits. 39
Section 5.08. Unconditional Right of Holders To Receive Principal,
Premium and Interest 40
Section 5.09. Restoration of Rights and Remedies. 40
Section 5.10. Rights and Remedies Cumulative. 40
Section 5.11. Delay or Omission Not Waiver. 40
Section 5.12. Control by Majority. 40
Section 5.13. Waiver of Past Defaults. 41
Section 5.14. Undertaking for Costs. 41
Section 5.15. Waiver of Stay, Extension or Usury Laws. 41
ARTICLE SIX. THE TRUSTEE
Section 6.01. Certain Duties and Responsibilities. 42
Section 6.02. Notice of Defaults. 42
Section 6.03. Certain Rights of Trustee. 42
Section 6.04. Trustee Not Responsible for Recitals, Dispositions of
Notes or Application of Proceeds Thereof 43
Section 6.05. Trustee and Agents May Hold Notes; Collections; Etc. 44
Section 6.06. Money Held in Trust. 44
Section 6.07. Compensation and Indemnification of Trustee and Its
Prior Claim. 44
Section 6.08. Conflicting Interests. 44
Section 6.09. Corporate Trustee Required; Eligibility. 45
Section 6.10. Resignation and Removal; Appointment of Successor
Trustee. 45
Section 6.11. Acceptance of Appointment by Successor. 46
Section 6.12. Merger, Conversion, Amalgamation, Consolidation or
Succession to Business 47
ARTICLE SEVEN. HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY
Section 7.01. Preservation of Information; Company To Furnish Trustee
Names and Addresses of Holders 47
Section 7.02. Communications of Holders. 47
Section 7.03. Reports by Trustee. 48
ARTICLE EIGHT. CONSOLIDATION, MERGER, SALE OF ASSETS, ETC.
Section 8.01. Company May Consolidate, etc., Only on Certain Terms. 48
Section 8.02. Successor Substituted. 48
ARTICLE NINE. SUPPLEMENTAL INDENTURES AND WAIVERS
Section 9.01. Supplemental Indentures, Agreements and Waivers Without
Consent of Holders 49
Section 9.02. Supplemental Indentures, Agreements and Waivers with
Consent of Holders 50
Section 9.03. Execution of Supplemental Indentures, Agreements and
Waivers. 51
Section 9.04. Effect of Supplemental Indentures. 51
Section 9.05. Conformity with Trust Indenture Act. 51
Section 9.06. Reference in Notes to Supplemental Indentures. 51
Section 9.07. Record Date. 51
Section 9.08. Revocation and Effect of Consents. 52
ARTICLE TEN. COVENANTS
Section 10.01. Payment of Principal, Premium and Interest. 52
Section 10.02. Maintenance of Office or Agency. 52
Section 10.03. Money for Note Payments To Be Held in Trust. 52
Section 10.04. Corporate Existence. 53
Section 10.05. Payment of Taxes and Other Claims. 54
Section 10.06. Maintenance of Properties. 54
iii
<PAGE>
Section 10.07. Insurance. 54
Section 10.08. Books and Records. 54
Section 10.09. Provision of Commission Reports. 54
Section 10.10. Change of Control. 55
Section 10.11. Limitation on Additional Indebtedness. 57
Section 10.12. Statement by Officers as to Default. 57
Section 10.13. Limitation on Restricted Payments. 58
Section 10.14. Limitation on Transactions with Affiliates. 60
Section 10.15. Disposition of Proceeds of Asset Sales 60
Section 10.16. Limitation on Liens Securing Certain Indebtedness. 63
Section 10.17. Limitation on Status as Investment Company. 63
Section 10.18. Limitation on Issuances and Sales of Capital Stock of
Restricted Subsidiaries 64
Section 10.19. Limitation on Dividends and Other Payment Restrictions
Affecting Restricted Subsidiaries 64
Section 10.20. Limitation on Designations of Unrestricted Subsidiaries 65
Section 10.21. Compliance Certificates and Opinions. 65
Section 10.22. Limitation on Issuances of Guarantees by Restricted
Subsidiaries 66
Section 10.23. Registration Rights 66
Section 10.24. Security. 67
Section 10.25. Business Activities. 69
Section 10.26. Limitation on Sale/Leaseback Transactions. 69
ARTICLE ELEVEN. SATISFACTION AND DISCHARGE
Section 11.01. Satisfaction and Discharge of Indenture. 69
Section 11.02. Application of Trust Money. 70
ARTICLE TWELVE. REDEMPTION
Section 12.01. Notices to the Trustee. 70
Section 12.02. Selection of Notes To Be Redeemed. 70
Section 12.03. Notice of Redemption. 71
Section 12.04. Effect of Notice of Redemption. 71
Section 12.05. Deposit of Redemption Price. 71
Section 12.06. Notes Redeemed or Purchased in Part. 72
EXHIBIT A-1 - Form of Rhythms NetConnections Inc. 12 3/4% Senior Notes due
2009, Series A
EXHIBIT A-2 - Form of Rhythms NetConnections Inc. 12 3/4% Senior Notes due
2009, Series B
EXHIBIT B - Form of Supplemental Indenture
EXHIBIT C - Form of Legend for Book-Entry Securities
EXHIBIT D - Form of Certificate To Be Delivered in Connection with
Transfers to Non-QIB Accredited Investors
EXHIBIT E - Form of Certificate To Be Delivered in Connection with
Transfers Pursuant to Regulation S
SCHEDULE A - Existing and Committed Indebtedness
iv
<PAGE>
INDENTURE
INDENTURE (this "Indenture"), dated as of April 23, 1999, between
RHYTHMS NETCONNECTIONS INC., a corporation incorporated under the laws of the
State of Delaware, as issuer (the "Company"), and STATE STREET BANK AND TRUST
COMPANY OF CALIFORNIA, N.A., a national banking association, as trustee (the
"Trustee").
RECITALS
The Company has duly authorized the creation of an issue of (i) 12
3/4% Senior Notes due 2009, Series A, and (ii) 12 3/4% Senior Notes due 2009,
Series B, to be issued in exchange for the 12 3/4% Senior Notes due 2009, Series
A, pursuant to the Registration Rights Agreement (as hereinafter defined)
(collectively, the "Notes"; such term to include the Initial Notes (as
hereinafter defined) and the Unrestricted Notes (as hereinafter defined), if
any, including the Exchange Notes (as hereinafter defined), if any, treated as a
single class of securities under this Indenture), of substantially the tenor and
amount hereinafter set forth, and to provide therefor the Company has duly
authorized the execution and delivery of this Indenture.
All things necessary have been done to make the Notes, when executed
by the Company, and authenticated and delivered hereunder and duly issued by the
Company, the valid obligations of the Company and to make this Indenture a valid
agreement of each of the Company and the Trustee in accordance with the terms
hereof.
NOW, THEREFORE, THIS INDENTURE WITNESSETH:
For and in consideration of the premises and the purchase of the
Notes by the Holders (as hereinafter defined) thereof, it is mutually covenanted
and agreed, for the equal and proportionate benefit of all Holders of the Notes,
as follows:
ARTICLE ONE
DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION
Section 1.01. Definitions.
"1998 Notes" means the Company's 13 1/2% Senior Discount Notes due
2008.
"1998 Warrants" means the warrants issued in connection with the
Company's 1998 Notes.
"1998 Warrant Agreement" means the Warrant Agreement dated May 5,
1998, between the Company and State Street Bank and Trust Company of California,
N.A.
"Acquired Indebtedness" means Indebtedness of a Person (i) assumed
in connection with an Asset Acquisition from such Person or (ii) existing at the
time such Person is merged or consolidated with or into the Company or any
Restricted Subsidiary or becomes a Restricted Subsidiary, in each case not
incurred in connection with, or in anticipation of, such Asset Acquisition or
merger or consolidation or such Person becoming a Restricted Subsidiary;
provided that Indebtedness of such Person which is redeemed, defeased, retired
or otherwise repaid at the time of or immediately upon consummation of such
Asset Acquisition or the transactions by which such Person is merged or
consolidated with or into the Company or any Restricted Subsidiary or becomes a
Restricted Subsidiary shall not constitute Acquired Indebtedness.
"Affiliate" of any specified Person means (i) any other Person
which, directly or indirectly, controls, is controlled by or is under direct or
indirect common control with, the specified Person, (ii) any other
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Person that owns, directly or indirectly, 10% or more of the specified Person's
Voting Stock or (iii) any executive officer or director of the specified Person;
provided that Donaldson, Lufkin & Jenrette, Inc. and its Affiliates shall not be
deemed to be Affiliates of the Company solely as a result of such entities
holding the 1998 Notes, the 1998 Warrants or the Company's Common Stock (or any
security which is convertible into or exchangeable for any of the foregoing).
For the purposes of this definition, "control" when used with respect to any
Person means the power to direct the management and policies of such Person,
directly or indirectly, whether through the ownership of voting securities, by
contract or otherwise, and the terms "affiliated," "controlling" and
"controlled" have meanings correlative to the foregoing.
"Asset Acquisition" means (i) any capital contribution (by means of
transfers of cash or other property to others or payments for property or
services for the account or use of others, or otherwise) by the Company or any
Restricted Subsidiary in any other Person, or any acquisition or purchase of
Capital Stock of any other Person by the Company or any Restricted Subsidiary,
in either case pursuant to which such Person shall (a) become a Restricted
Subsidiary or (b) shall be merged or consolidated with or into the Company or
any Restricted Subsidiary or (ii) any acquisition by the Company or any
Restricted Subsidiary of the assets of any Person which constitute substantially
all of an operating unit or line of business of such Person or which is
otherwise outside of the ordinary course of business.
"Asset Sale" means any direct or indirect sale, conveyance, transfer
or lease (that has the effect of a disposition and is not for security purposes)
or other disposition (that is not for security purposes) (including by way of a
Sale/Leaseback Transaction) to any Person other than the Company or a Restricted
Subsidiary, in one transaction or a series of related transactions, of (i) any
Capital Stock of any Restricted Subsidiary, (ii) any assets of the Company or
any Restricted Subsidiary which constitute substantially all of an operating
unit or line of business of the Company and the Restricted Subsidiaries or (iii)
any other property or asset of the Company or any Restricted Subsidiary outside
of the ordinary course of business. For the purposes of this definition, the
term "Asset Sale" shall not include (i) any disposition of properties and assets
of the Company that is governed under Article Eight hereof, (ii) sales of
property or equipment that have become worn out, obsolete or damaged or
otherwise unsuitable for use in connection with the business of the Company or
any Restricted Subsidiary, as the case may be, and (iii) for purposes of Section
10.15 hereof, (a) sales, conveyances, transfers, leases or other dispositions of
property or assets, whether in one transaction or a series of related
transactions occurring within one year, involving assets with a Fair Market
Value not in excess of $500,000 in any 12 month period and (b) any asset of the
Company or a Restricted Subsidiary that is the subject of a Sale/Leaseback
Transaction with a Person (other than the Company or an Affiliate of the
Company) made in accordance with Section 10.26 hereof and that was acquired by
the Company or such Restricted Subsidiary no more than 120 days prior to the
transfer to a third party in a Sale/Leaseback Transaction.
"Attributable Debt" in respect of a Sale/Leaseback Transaction
means, as at the time of determination, the present value (discounted at the
interest rate implicit in the terms of the lease included in such Sale/Leaseback
Transaction) of the total obligations of the lessee for rental payments during
the remaining term of the lease included in such Sale/Leaseback Transaction
(including any period for which such lease has been extended).
"Average Life to Stated Maturity" means, with respect to any
Indebtedness, as at any date of determination, the quotient obtained by dividing
(i) the sum of the products of (a) the number of years from such date to the
date or dates of each successive scheduled principal payment (including, without
limitation, any sinking fund requirements) of such Indebtedness multiplied by
(b) the amount of each such principal payment by (ii) the sum of all such
principal payments; provided that, in the case of any Capitalized Lease
Obligation, all calculations hereunder shall give effect to any applicable
options to renew in favor of the Company or any Restricted Subsidiary.
"Bankruptcy Law" means Title 11, United States Code or any similar
federal, state or foreign law relating to bankruptcy, insolvency, receivership,
winding-up, liquidation, reorganization or relief of debtors.
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"Bankruptcy Order" means any binding court order made in a
proceeding pursuant to or within the meaning of any Bankruptcy Law, containing
an adjudication of bankruptcy or insolvency, or providing for liquidation,
receivership, winding-up, dissolution or reorganization, or appointing a
Custodian of a debtor or of all or any substantial part of a debtor's property,
or providing for the staying, arrangement, adjustment or composition of
indebtedness or other relief of a debtor.
"Board" means the Board of Directors of the Company.
"Board Resolution" means a copy of a resolution certified by the
Secretary or an Assistant Secretary of the Company to have been duly adopted by
the Board and to be in full force and effect on the date of such certification,
and delivered to the Trustee.
"Borrowing Base" means, as of any date, an amount equal to 85% of
the book value of the accounts, loans and other receivables (before giving
effect to any related allowances and reserves) as shown on the Company's most
recent consolidated balance sheet determined in accordance with GAAP not more
than 90 days past due.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and
Friday which is not a day on which banking institutions in The City of New York,
New York, or the city in which the Corporate Trust Office of the Trustee is
located, are authorized or obligated by law, regulation or executive order to
close.
"Capital Stock" means, with respect to any Person, any and all
shares, interests, participations, rights in, or other equivalents (however
designated and whether voting and/or non-voting) of, such Person's capital
stock, including Preferred Stock, whether outstanding on the Issue Date or
issued after the Issue Date, and any and all rights (other than any evidence of
Indebtedness), warrants or options exchangeable for or convertible into such
capital stock.
"Capitalized Lease Obligation" means any obligation to pay rent or
other amounts under a lease of (or other agreement conveying the right to use)
any property (whether real, personal or mixed, immovable or movable) that is
required to be classified and accounted for as a capitalized lease obligation
under GAAP, and for the purpose of this Indenture, the amount of such obligation
at any date shall be the capitalized amount thereof at such date, determined in
accordance with GAAP.
"Cash Equivalents" means (i) any evidence of Indebtedness which
matures 365 days or less from the date of purchase or acquisition issued or
directly and fully guaranteed or insured by the United States Government or any
agency or instrumentality thereof (provided that the full faith and credit of
the United States Government is pledged in support thereof or such Indebtedness
constitutes a general obligation of such country); (ii) deposits, certificates
of deposit or acceptances with a maturity of 365 days or less of any financial
institution that is a member of the Federal Reserve System, in each case having
combined capital and surplus and undivided profits (or any similar capital
concept) of not less than $500.0 million and whose senior unsecured debt is
rated at least "A-l" by S&P or "P-l" by Moody's; (iii) commercial paper with a
maturity of 365 days or less issued by a corporation (other than an Affiliate of
the Company) organized under the laws of the United States or any State thereof
and rated at least "A-l" by S&P or "P-1" by Moody's; (iv) repurchase agreements
and reverse repurchase agreements relating to marketable direct obligations
issued or unconditionally guaranteed by the United States Government or issued
by any agency thereof and backed by the full faith and credit of the United
States Government maturing within 365 days from the date of acquisition; and (v)
money market funds in the United States which invest substantially all of their
assets in securities of the type described in any of the preceding clauses (i)
through (iv).
"Cedel" means Cedel Bank, Societe Anonyme.
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"Change of Control" means the occurrence of any of the following
events: (a) any "person" or "group" (as such terms are used in Sections 13(d) or
14(d) of the Exchange Act), excluding Permitted Holders, is or becomes the
"beneficial owner" (as defined in Rules 13d-3 or 13d-5 under the Exchange Act,
except that a person shall be deemed to have "beneficial ownership" of all
securities that such person has or acquires the right to acquire, whether such
right is exercisable immediately or only after the passage of time), directly or
indirectly, of more than 50% of the total voting power of all Voting Stock of
the Company (except that the person or group shall not be deemed the "beneficial
owner" of shares tendered pursuant to a tender or exchange offer made by that
person or group or any of their Affiliates until the tendered shares are
accepted for purchase or exchange) or has, directly or indirectly, the right to
elect or designate a majority of the Board or (b) the Company consolidates with,
or merges with or into, another person or sells, assigns, conveys, transfers,
leases or otherwise disposes of all or substantially all of its assets to any
person, or any person consolidates with, or merges with or into, the Company, in
any such event pursuant to a transaction in which the outstanding Voting Stock
of the Company is converted into or exchanged for cash, securities or other
property, other than any such transaction where (i) the outstanding Voting Stock
of the Company is converted into or exchanged for (1) Voting Stock (other than
Disqualified Stock) of the surviving or transferee corporation or its parent
corporation and/or (2) cash, securities and other property in any amount which
could be paid by the Company as a Restricted Payment under this Indenture, (ii)
the "beneficial owners" (as so defined) of the Voting Stock of the Company
immediately before such transaction own, directly or indirectly, immediately
after such transaction, at least a majority of the voting power of all Voting
Stock of the surviving or transferee corporation or its parent corporation
immediately after such transaction, as applicable, or (iii) immediately after
such transaction, no "person" or "group" (as such terms are defined above),
excluding the Permitted Holders, is the "beneficial owner" (as defined above),
directly or indirectly, of more than 50% of the Voting Stock of such surviving
or transferee corporation or its parent corporation, as applicable, or has,
directly or indirectly, the right to elect or designate a majority of the board
of directors of the surviving or transferee corporation or its parent
corporation, as applicable, or (c) during any consecutive two-year period,
individuals who at the beginning of such period constituted the Board (together
with any new directors whose election by the Board or whose nomination for
election by the stockholders of the Company was approved by a vote of a majority
of the directors then still in office who were either directors at the beginning
of such period or whose election or nomination for election was previously so
approved) cease for any reason to constitute a majority of the Board then in
office. The good faith determination by the Board, based upon advice of outside
counsel, of the beneficial ownership of securities of the Company within the
meaning of Rules 13d-3 or 13d-5 under the Exchange Act shall be conclusive,
absent contrary controlling precedent or contrary written interpretation
published by the Commission. No inference shall be created that officers or
employees of the Company are acting as a "person" or "group" (as such terms are
used in Sections 13(d) or 14(d) of the Exchange Act) with the power to designate
a majority of the members of the Board solely because such officers or employees
constitute a majority of the members of the Board.
"Closing Time" has the meaning specified in the Purchase Agreement.
"Collateral Investments Account" means an account established in the
United States with the Trustee pursuant to the terms of the Pledge and Escrow
Agreement for the deposit of the Pledged Securities purchased by the Company
with a portion of the net proceeds from the sale of the Notes.
"Commission" means the United States Securities and Exchange
Commission, or any successor agency.
"Common Stock" means, with respect to any Person, any and all
shares, interests, participations or rights in, or other equivalents (however
designated and whether voting and/or non-voting) of, such Person's common stock
and includes, without limitation, all series and classes of such common stock.
"Company" means the Person named as the "Company" in the first
paragraph of this Indenture, until a successor Person shall have replaced such
Person pursuant to the applicable provisions of this Indenture, and thereafter
"Company" shall mean such successor Person.
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"Company Request" or "Company Order" means a written request or
order signed in the name of the Company by any one of its Chairman of the Board,
its Vice-Chairman, its Chief Executive Officer, its President or a Vice
President, and by its Secretary or an Assistant Secretary or the Treasurer or an
Assistant Treasurer, and delivered to the Trustee.
"Consolidated Income Tax Expense" means, with respect to any period,
the provision for federal, state, local, foreign and other income taxes of the
Company and the Restricted Subsidiaries for such period as determined on a
consolidated basis in accordance with GAAP.
"Consolidated Interest Expense" means, with respect to any period,
without duplication, the sum of (i) the interest expense of the Company and the
Restricted Subsidiaries for such period as determined on a consolidated basis in
accordance with GAAP, including, without limitation, (a) any amortization of
debt discount, (b) the net cost under Interest Rate Obligations (including any
amortization of discounts), (c) the interest portion of any deferred payment
obligation, (d) all commissions, discounts and other fees and charges owed with
respect to letters of credit and bankers' acceptance financing and similar
transactions and (e) all capitalized interest and accrued interest, (ii) the
interest component of Capitalized Lease Obligations paid, accrued and/or
scheduled to be paid or accrued by the Company and the Restricted Subsidiaries
during such period as determined on a consolidated basis in accordance with
GAAP, (iii) the portion of any rental obligation in respect of any
Sale/Leaseback Transaction allocable to interest expense (determined as if such
were treated as a Capital Lease Obligation), and (iv) the amount of dividends
and distributions in respect of Preferred Stock or Disqualified Stock paid by
the Restricted Subsidiaries to a Person other than the Company or a Restricted
Subsidiary or by the Company during such period.
"Consolidated Net Income" means, with respect to any period, the net
income (or loss) of the Company and the Restricted Subsidiaries for such period
determined on a consolidated basis in accordance with GAAP, adjusted, to the
extent included in calculating such consolidated net income (or loss), by
excluding, without duplication, (i) all extraordinary, unusual or nonrecurring
gains or losses and all gains or losses from sales or other dispositions of
assets (including Asset Sales) out of the ordinary course of business (net of
taxes, fees and expenses relating to the transaction giving rise thereto) for
such period, (ii) that portion of such net income (or loss) derived from or in
respect of Investments in Persons other than Restricted Subsidiaries, except to
the extent of any cash dividends actually received by the Company or any
Restricted Subsidiary (subject, in the case of any Restricted Subsidiary, to the
provisions of clause (vi) of this definition), (iii) any gain or loss, net of
taxes, realized upon the termination of any employee pension benefit plan during
such period, (iv) that portion of such net income (or loss) allocable to
minority interests in any Restricted Subsidiary for such period, (v) net income
(or loss) of any other Person combined with the Company or any Restricted
Subsidiary on a "pooling of interests" basis attributable to any period prior to
the date of combination and (vi) the net income of any Restricted Subsidiary for
such period to the extent that the declaration of dividends or similar
distributions by that Restricted Subsidiary of that income is not at the time
permitted, directly or indirectly, by operation of the terms of its charter or
any agreement, instrument, judgment, decree, order, statute, rule or
governmental regulations applicable to that Restricted Subsidiary or its
stockholders.
"Consolidated Net Worth" means, with respect to any Person, the
consolidated stockholders' or partners' equity of such Person reflected on the
most recent balance sheet of such Person, determined in accordance with GAAP,
less any amounts attributable to redeemable capital stock (as determined under
applicable accounting standards promulgated by the Commission) of such Person.
"Consolidated Operating Cash Flow" means, with respect to any
period, Consolidated Net Income for such period (a) increased (without
duplication), to the extent deducted in arriving at such Consolidated Net
Income, by the sum of (i) Consolidated Income Tax Expense for such period; (ii)
Consolidated Interest Expense for such period; and (iii) depreciation,
amortization and any other non-cash items for such period of the Company and the
Restricted Subsidiaries (other than any non-cash item which requires the accrual
of, or a reserve for, cash charges for any future period), including, without
limitation, amortization of capitalized debt issuance costs for such
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period, all determined on a consolidated basis in accordance with GAAP, and (b)
decreased by any non-cash items (including non-recurring gains and non-recurring
items of income) to the extent they increased Consolidated Net Income for such
period (including any partial or complete reversal of reserves taken in a prior
period).
"Corporate Trust Office" means the office of the Trustee at which at
any particular time the trust created by this Indenture shall be principally
administered, which office at the date of execution of this Indenture is located
at Library Tower, 633 West 5th Street, Twelfth Floor, Los Angeles, California
90071, Attention: Corporate Trust Department, except for purposes of Sections
3.02 and 10.02 hereof. For purposes of such Sections, such office is located at
the office of State Street Bank and Trust Company, N.A., 61 Broadway, 15th
Floor, New York, New York 10006.
"Custodian" means any receiver, interim receiver, receiver and
manager, receiver-manager, trustee, assignee, liquidator, sequestrator or
similar official under any Bankruptcy Law or any other Person with like powers
whether appointed judicially or out of court and whether pursuant to an interim
or final appointment.
"Debt Securities" means any debt securities issued by the Company in
a public offering or in a private placement to institutional "accredited
investors" (as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities
Act).
"Default" means any event that is, or after notice or passage of
time or both would be, an Event of Default.
"Default Amount" means the principal amount of the Notes (and any
applicable premium thereon) and any accrued and unpaid interest thereon.
"Depository" means The Depository Trust Company, its nominees and
their respective successors until a successor Depositary shall have become such
pursuant to the applicable provisions of this Indenture, and thereafter
"Depositary" shall mean or include each Person who is then a Depositary
hereunder.
"Disinterested Director" means, with respect to any transaction or
series of related transactions, a member of the Board other than a director who
(i) has any material direct or indirect financial interest in or with respect to
such transaction or series of related transactions or (ii) is an employee or
officer of the Company or an Affiliate that is itself a party to such
transaction or series of transactions or an Affiliate of a party to such
transaction or series of related transactions.
"Disqualified Stock" means, with respect to any Person, any Capital
Stock which, by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable), or upon the happening of any
event, matures or becomes mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or becomes exchangeable for Indebtedness at the option
of the holder thereof, or becomes redeemable at the option of the holder
thereof, in whole or in part, on or prior to the final maturity date of the
Notes; provided that any Capital Stock that would not constitute Disqualified
Stock but for provisions thereof giving holders thereof the right to require
such Person to repurchase or redeem such Capital Stock upon the occurrence of an
"asset sale" or "change of control" occurring prior to the final maturity date
of the Notes will not constitute Disqualified Stock so long as the "asset sale"
or "change of control" provisions applicable to such Capital Stock are no more
favorable to the holders thereof than Sections 10.10 and 10.15 hereof and such
Capital Stock specifically provides that such Person will not repurchase or
redeem any such stock pursuant to such provision prior to the Company's
repurchase of such Notes as are required to be repurchased pursuant to Sections
10.10 and 10.15 hereof.
"Euroclear" means Morgan Guaranty Trust Company of New York,
Brussels Office, as operator of the Euroclear System.
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"Exchange Act" means the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated by the Commission thereunder.
"Exchange Notes" means the 12 3/4% Senior Notes due 2009, Series B,
of the Company, to be issued in exchange for the Initial Notes pursuant to the
Registration Rights Agreement.
"Exchange Offer" shall have the meaning specified in the
Registration Rights Agreement.
"Fair Market Value" means, with respect to any asset or property,
the price (after taking into account any liabilities relating to such asset or
property) that could be negotiated in an arms-length free market transaction,
for cash, between a willing seller and a willing buyer, neither of whom is under
pressure or compulsion to complete the transaction. Unless otherwise specified
in the Indenture, Fair Market Value shall be determined by the Board acting in
good faith and shall be evidenced by a Board Resolution.
"GAAP" means, as of any date of determination, generally accepted
accounting principles 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, the Commission or in such other statements by such other entity
as may be approved by a significant segment of the accounting profession of the
United States, which are in effect as of such date of determination and which
are consistently applied for all applicable periods.
"Global Notes" means one or more Regulation S Global Notes and 144A
Global Notes.
"Government Securities" means direct obligations of, or obligations
guaranteed by, the United States of America for the payment of which obligations
or guarantee the full faith and credit of the United States is pledged.
"Guarantee" means, as applied to any obligation, (i) a guarantee
(other than by endorsement of negotiable instruments for collection in the
ordinary course of business), direct or indirect, in any manner, of any part or
all of such obligation and (ii) an agreement, direct or indirect, contingent or
otherwise, the practical effect of which is to assure in any way the payment or
performance (or payment of damages in the event of non-performance) of all or
any part of such obligation, including, without limiting the foregoing, any
obligation (A) to pay amounts drawn down by letters of credit, (B) to purchase
or pay (or advance or supply funds for the purchase or payment of) such
obligation (whether arising by virtue of partnership arrangement, agreements to
keep-well, to purchase assets, goods, securities or services, to take-or-pay, or
to maintain financial statement conditions or otherwise) or (C) entered into for
purposes of assuring in any other manner the obligee of such obligation 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.
"Holder" means a Person in whose name a Note is registered in the
Note Register.
"Indebtedness" means, with respect to any Person, without
duplication (whether or not the recourse of the lender is to the whole of the
assets of such Person or only to a portion thereof), (i) every liability of such
Person, whether or not contingent, (A) for borrowed money, (B) evidenced by
notes, bonds, debenture or other similar instruments (whether or not
negotiable), (C) for reimbursement of amounts expended under letters of credit,
bankers' acceptances or similar facilities issued for the account of such
Person, (D) issued or assumed as the deferred purchase price of property or
services, (E) relating to a Capitalized Lease Obligation and all Attributable
Debt in respect of Sale/Leaseback Transactions of such Person and (F) in respect
of an Interest Rate Obligation of such Person; (ii) every liability of others of
the kind described in the preceding clause (i) which such Person has Guaranteed
or which is otherwise its legal liability; or (iii) every obligation secured by
a Lien (other than (x)
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Permitted Liens of the types described in clauses (b), (d) or (e) of the
definition of Permitted Liens; provided that the obligations secured would not
constitute Indebtedness under clauses (i) or (ii) or (iii) of this definition,
and (y) Liens on Capital Stock or Indebtedness of any Unrestricted Subsidiary)
to which the property or assets of such Person are subject, whether or not the
obligations secured thereby shall have been assumed by or shall otherwise be
such Person's legal liability (the amount of such obligation being deemed to be
the lesser of the Fair Market Value of such property or asset or the amount of
the obligation so secured); (iv) all Disqualified Stock of such Person, valued
at the greater of its voluntary or involuntary maximum fixed repurchase or
redemption price (plus accrued and unpaid dividends to the date of
determination); and (v) any and all deferrals, renewals, extensions and
refundings of, or amendments, modifications or supplements to, any liability of
the kind described in any of the preceding clauses (i), (ii), (iii) or (iv). In
no event shall "Indebtedness" include trade payables and accrued liabilities
that are current liabilities incurred in the ordinary course of business,
excluding the current maturity of any obligation which would otherwise
constitute Indebtedness. For purposes of Section 10.11 and Section 10.13 hereof
and the definition of "Events of Default," in determining the principal amount
of any Indebtedness to be incurred by the Company or a Restricted Subsidiary or
which is outstanding at any date, (A) the principal amount of any Indebtedness
which provides that an amount less than the principal amount at maturity thereof
shall be due upon any declaration of acceleration thereof shall be the accreted
value thereof at the date of determination; (B) the principal amount of any
Indebtedness shall be reduced by any amount of cash, Government Securities or
Cash Equivalent collateral securing on a perfected basis, and dedicated for
disbursement to the payment of principal of or interest on, such Indebtedness;
and (C) the amount of Indebtedness of any Person at any date shall be the
outstanding balance at such date of all unconditional obligations as described
above and the maximum liability of any Guarantees at such date.
"Indebtedness to EBITDA Ratio" means, as at any date of
determination (the "Transaction Date"), the ratio of (i) Total Consolidated
Indebtedness as at the Transaction Date to (ii) two times the Consolidated
Operating Cash Flow for the two full fiscal quarters immediately preceding the
Transaction Date for which financial statements are available (such two full
fiscal quarter period being referred to herein as the "Measurement Period"). For
purposes of calculating Consolidated Operating Cash Flow for the relevant
Measurement Period prior to a Transaction Date, (A) any Person that is a
Restricted Subsidiary on the Transaction Date (or would become a Restricted
Subsidiary on such Transaction Date in connection with the transaction that
requires the calculation of such Consolidated Operating Cash Flow) shall be
deemed to have been a Restricted Subsidiary at all times during the Measurement
Period, (B) any Person that is not a Restricted Subsidiary on such Transaction
Date (or would cease to be a Restricted Subsidiary on such Transaction Date in
connection with the transaction that requires the calculation of Consolidated
Operating Cash Flow) will be deemed not to have been a Restricted Subsidiary at
any time during the Measurement Period, and (C) if the Company or any Restricted
Subsidiary shall have in any manner (x) acquired through an Asset Acquisition or
(y) disposed of (including by way of an Asset Sale or the termination or
discontinuance of activities constituting such operating business) any operating
business during such Measurement Period or after the end of such period and on
or prior to the Transaction Date, such calculation will be made on a pro forma
basis in accordance with GAAP as if, in the case of an Asset Acquisition, such
transaction had been consummated on the first day of the Measurement Period and,
in the case of an Asset Sale or other disposition, termination or discontinuance
of activities constituting such an operating business, such transaction had been
consummated prior to the first day of the Measurement Period; provided, however
that such pro forma adjustment shall not give effect to the operating cash flow
of any Person that would become a Restricted Subsidiary on the Transaction Date
in connection with the transaction that requires the calculation of Consolidated
Operating Cash Flow to the extent that such Person's net income would be
excluded from the calculation of Consolidated Net Income pursuant to clause (vi)
of the definition of Consolidated Net Income.
"Indenture" means this instrument as originally executed (including
all exhibits and schedules hereto) and as it may from time to time be
supplemented or amended by one or more indentures supplemental hereto entered
into pursuant to the applicable provisions hereof.
"Indenture Obligations" means the obligations of the Company and any
other obligor under this Indenture or under the Notes, to pay principal of,
premium, if any, and interest on the Notes when due and payable, whether at
maturity, by acceleration, call for redemption or repurchase or otherwise, and
all other amounts due or to
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become due under or in connection with this Indenture or the Notes and the
performance of all other obligations to the Trustee (including, but not limited
to, payment of all amounts due the Trustee under Section 6.07 hereof) and the
Holders of the Notes under this Indenture and the Notes, according to the terms
thereof.
"Independent Financial Advisor" means a United States investment
banking firm of national or regional standing in the United States (i) which
does not, and whose directors, officers and employees or Affiliates do not have,
a direct or indirect financial interest in the Company and (ii) which, in the
judgment of the Board, is otherwise independent and qualified to perform the
task for which it is to be engaged.
"Initial Notes" means the 12 3/4% Senior Notes due 2009, Series A,
of the Company.
"Initial Purchasers" means Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Salomon Smith Barney Inc. and Chase Securities Inc.
"Institutional Accredited Investor" means an institution that is an
"accredited investor" as that term is defined in Rule 501(a)(1), (2), (3) or (7)
under the Securities Act.
"interest" means, when used with respect to any Note, the amount of
all interest accruing on such Note, including all additional interest payable on
the Notes pursuant to the Registration Rights Agreement and all interest
accruing subsequent to the occurrence of any events specified in Sections
5.01(vii), (viii) and (ix) hereof or which would have accrued but for any such
event, whether or not such claims are allowable under applicable law.
"Interest Payment Date" means, when used with respect to any Note,
the Stated Maturity of an installment of cash interest on such Note, as set
forth in such Note.
"Interest Rate Obligations" means the obligations of any Person
pursuant to any arrangement with any other Person whereby, directly or
indirectly, such Person is entitled to receive from time to time periodic
payments calculated by applying either a floating or a fixed rate of interest on
a stated notional amount and shall include, without limitation, interest rate
swaps, caps, floors, collars, forward interest rate agreements and similar
agreements.
"Investment" means, with respect to any Person, any direct or
indirect advance, loan, account receivable (other than an account receivable
arising in the ordinary course of business), or other extension of credit
(including, without limitation, by means of any Guarantee) or any capital
contribution to (by means of transfers of cash or other property or assets to
others, payments for property or services for the account or use of others, or
otherwise), or any purchase or acquisition of capital stock, bonds, notes,
debentures or other securities or evidences of Indebtedness of any other Person.
The amount of any Investment shall be the original cost of such Investment, plus
the cost of all additions thereto, and minus the amount of any portion of such
Investment repaid to such Person in cash as a repayment of principal or a return
of capital, as the case may be, but without any other adjustments for increases
or decreases in value, or write-ups, write-downs or write-offs with respect to
such Investment. In determining the amount of any Investment involving a
transfer of any property or assets other than cash, such property shall be
valued at its Fair Market Value at the time of transfer.
"Issue Date" means the original date of issuance of the Notes.
"Lien" means any mortgage, charge, pledge, lien (statutory or
other), security interest, hypothecation, assignment for security, claim, or
preference or priority or other encumbrance upon or with respect to any property
of any kind whether or not filed, recorded or otherwise perfected under
applicable law (including any conditional sale or other title retention
agreement, any lease in the nature thereof, any option or other agreement to
sell or give a security interest and any filing of or agreement to give any
financing statement under the Uniform Commercial Code (or equivalent statutes)
of any jurisdiction). A Person shall be deemed to own subject to a Lien
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any property which such Person has acquired or holds subject to the interest of
a vendor or lessor under any conditional sale agreement, capital lease or other
title retention agreement.
"Marketable U.S. Securities" means (i) any Cash Equivalents or (ii)
any fund investing primarily in investments that are Cash Equivalents.
"Market Capitalization" of any Person means, as of any day of
determination, the product of (i) the average Closing Price of a share of such
Person's Common Stock over the 20 consecutive trading days immediately preceding
such date and (ii) the number of shares of such Common Stock issued and
outstanding on such date. "Closing Price" on any trading day with respect to the
per share price of any shares of Common Stock means the last reported sale price
regular way or, in case no such reported sale takes place on such day, the
average of the reported closing bid and asked prices regular way, in either case
on the New York Stock Exchange or, if such shares of Common Stock are not listed
or admitted to trading on such exchange, on the principal national securities
exchange on which such shares are listed or admitted to trading or, if not
listed or admitted to trading on any national securities exchange, on the Nasdaq
National Market or, if such shares are not listed or admitted to trading on any
national securities exchange or quoted on The Nasdaq National Market but such
Person is a "Foreign Issuer" (as defined in Rule 3b-4(b) under the Exchange Act)
and the principal securities exchange on which such shares are listed or
admitted to trading is a "designated offshore securities market" (as defined in
Rule 902(b) under the Securities Act), the average of the reported closing bid
and asked prices regular way on such principal exchange or, if such shares are
not listed or admitted to trading on any national securities exchange or quoted
on the Nasdaq National Market and such Person and any securities markets in
which such Person's Common Stock trades does not meet any of the foregoing such
requirements, the average of the closing bid and asked prices in the
over-the-counter market as furnished by any New York Stock Exchange member firm
that is selected from time to time by the Company for the purpose and is
reasonably acceptable to the Trustee.
"Maturity Date" means, with respect to any Note, the date specified
in such Note as the fixed date on which the principal of such Note is due and
payable.
"Moody's" means Moody's Investors Service, Inc. (and any successor).
"Net Cash Proceeds" means, with respect to any Asset Sale, the
proceeds thereof received by the Company or any Restricted Subsidiary in the
form of cash (including assumed Indebtedness (other than Subordinated
Indebtedness) and other items deemed to be cash under the proviso to the first
sentence of Section 10.15 hereof) or Cash Equivalents including payments in
respect of deferred payment obligations when received in the form of cash or
Cash Equivalents (except to the extent that such obligations are financed or
sold with recourse to the Company or any Restricted Subsidiary) net of (i)
brokerage commissions and other fees, costs and expenses (including fees and
expenses of legal counsel and investment bankers) related to such Asset Sale,
(ii) provisions for all taxes paid or payable as a result of such Asset Sale,
(iii) amounts required to be paid to any Person (other than the Company or any
Restricted Subsidiary) owning a beneficial interest in or having a Lien on the
assets subject to the Asset Sale, (iv) with respect to Asset Sales by Restricted
Subsidiaries, the portion of such cash and Cash Equivalents attributable to any
Persons holding a minority interest in such Restricted Subsidiary and (v)
appropriate amounts to be provided by the Company or any Restricted Subsidiary,
as the case may be, as a reserve required in accordance with GAAP against any
liabilities associated with such Asset Sale and retained by the Company or any
Restricted Subsidiary, as the case may be, after such Asset Sale, including,
without limitation, pension and other post-employment benefit liabilities,
liabilities related to environmental matters and liabilities under any
indemnification obligations associated with such Asset Sale, all as reflected in
an Officers' Certificate delivered to the Trustee.
"Non-U.S. Person" means any Person that is not a U.S. Person, as
such term is defined in Regulation S.
"Notes" shall have the meaning specified in the recitals of this
Indenture.
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"Offering Memorandum" means the Offering Memorandum of the Company,
dated April 28, 1999, pursuant to which the Initial Notes were offered, and any
supplement thereto.
"Officer" means, with respect to the Company, the Chairman of the
Board, a Vice Chairman, the President, a Vice President, the Secretary, an
Assistant Secretary, the Treasurer or an Assistant Treasurer.
"Officers' Certificate" means, with respect to the Company, a
certificate signed by the Chairman of the Board, a Vice Chairman, the President
or a Vice President, and by the Secretary, an Assistant Secretary, the Treasurer
or an Assistant Treasurer, of the Company and delivered to the Trustee.
"144A Global Note" means a permanent global note in registered form
representing the aggregate principal amount of Notes sold in reliance on Rule
144A.
"Opinion of Counsel" means a written opinion of legal counsel who
may be counsel for the Company, the Trustee or any Subsidiary Guarantor, as
applicable, and who shall be reasonably acceptable to the Trustee.
"Outstanding" means, as of the date of determination, all Notes
theretofore authenticated and delivered under this Indenture, except:
(i) Notes theretofore canceled by the Trustee or delivered to the
Trustee for cancellation;
(ii) Notes, or portions thereof, for whose payment or redemption
money in the necessary amount has been theretofore deposited with the Trustee or
any Paying Agent (other than the Company or any Affiliate thereof) in trust or
set aside and segregated in trust by the Company or any Affiliate thereof (if
the Company or such Affiliate shall act as Paying Agent) for the Holders of such
Notes; provided, however, that if such Notes are to be redeemed, notice of such
redemption has been duly given pursuant to this Indenture or provision therefor
satisfactory to the Trustee has been made;
(iii) Notes with respect to which the Company has effected
defeasance or covenant defeasance as provided in Article Four, to the extent
provided in Sections 4.02 and 4.03 hereof; and
(iv) Notes in exchange for or in lieu of which other Notes have been
authenticated and delivered pursuant to this Indenture, other than any such
Notes in respect of which there shall have been presented to the Trustee proof
satisfactory to it that such Notes are held by a bona fide purchaser in whose
hands the Notes are valid obligations of the Company;
provided, however, that in determining whether the Holders of the requisite
aggregate principal amount of Outstanding Notes have given any request, demand,
authorization, direction, notice, consent or waiver hereunder, Notes owned by
the Company, any other obligor upon the Notes or any Affiliate of the Company or
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 that a Responsible Officer of the Trustee knows to be so owned shall be so
disregarded. The Company shall notify the Trustee, in writing, when it purchases
or otherwise acquires Notes, of the aggregate principal amount of such Notes so
purchased or otherwise acquired; provided that any failure on the part of the
Company to provide the aforesaid notice to the Trustee shall not constitute a
Default under this Indenture. 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 such other obligor. If the Paying Agent
holds, in its capacity as such, on any Maturity Date or on any optional
redemption date money sufficient to pay all accrued interest and principal with
respect to such Notes payable on that date and is not prohibited from paying
such money to the
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Holders thereof pursuant to the terms of this Indenture, then on and after that
date such Notes cease to be Outstanding and interest on them ceases to accrue.
Notes may also cease to be outstanding to the extent expressly provided in
Article Four.
"Permitted Business" means any of the following: (i) transmitting,
providing services relating to or developing network and software applications
for the transmission and management of voice, data, video or other information
through owned or leased wireline or wireless transmission facilities or over the
internet; (ii) creating, developing, constructing, installing, integrating,
repairing, maintaining or marketing communications-related systems, network
equipment and wireless and wireline transmission facilities, software and other
related products; and (iii) evaluating, owning, operating, participating in or
pursuing any other business that is primarily related to those identified in the
foregoing clauses (i) and (ii).
"Permitted Business Investments" means an Investment in any Person
the primary business of which consists of a Permitted Business.
"Permitted Credit Facility" means any senior secured or unsecured
commercial term loan and/or revolving credit facilities (including any letter of
credit subfacility) entered into principally with commercial banks and/or other
financial institutions.
"Permitted Holders" means Brentwood Venture Capital, Enterprise
Partners, Kleiner Perkins Caulfield & Byers, The Sprout Group and Catherine M.
Hapka, and their respective Affiliates.
"Permitted Indebtedness" means the following Indebtedness (each of
which shall be given independent effect):
(a) Indebtedness under the Notes and the Indenture;
(b) Indebtedness (including Disqualified Stock) of the Company
and/or any Restricted Subsidiary outstanding, or committed but undrawn, on
the Issue Date and identified on Schedule A to this Indenture (including
any increase in the accreted value thereof after the Issue Date pursuant
to the terms of the instrument governing such Indebtedness as of the Issue
Date);
(c) (i) Indebtedness of any Restricted Subsidiary owed to and held
by the Company or a Wholly Owned Restricted Subsidiary and (ii)
Indebtedness of the Company, which is not secured by any Lien and is
subordinated to the Company's obligations with respect to the Notes, owed
to and held by any Restricted Subsidiary; provided that an incurrence of
Indebtedness shall be deemed to have occurred upon (x) any sale or other
disposition of any Indebtedness of the Company or a Restricted Subsidiary
referred to in this clause (c) to a Person other than the Company or a
Restricted Subsidiary, (y) any sale or other disposition of Capital Stock
of a Restricted Subsidiary which holds Indebtedness of the Company or
another Restricted Subsidiary such that such Restricted Subsidiary ceases
to be a Restricted Subsidiary or (z) the Designation of a Restricted
Subsidiary which holds Indebtedness of the Company or another Restricted
Subsidiary as an Unrestricted Subsidiary;
(d) Interest Rate Obligations of the Company and/or any Restricted
Subsidiary relating to Indebtedness of the Company and/or such Restricted
Subsidiary, as the case may be (which Indebtedness (i) bears interest at
fluctuating interest rates and (ii) is otherwise permitted to be incurred
under Section 10.11 hereof), but only to the extent that the notional
amount of such Interest Rate Obligations does not exceed the principal
amount of the Indebtedness (and/or Indebtedness subject to commitments) to
which such Interest Rate Obligations relate;
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(e) Indebtedness of the Company and/or any Restricted Subsidiary in
respect of performance bonds of the Company or any Restricted Subsidiary
or surety bonds provided by the Company or any Restricted Subsidiary, in
each case incurred in the ordinary course of business;
(f) Indebtedness of the Company and/or any Restricted Subsidiary to
the extent it represents a replacement, renewal, refinancing or extension
(a "refinancing") of the Notes (during the periods for which redemption is
permitted under the terms of the Indenture) or other outstanding
Indebtedness of the Company and/or of any Restricted Subsidiary incurred
or outstanding pursuant to clause (a), (b), (g) or (h) of this definition
or the proviso in the first paragraph of Section 10.11 hereof; provided
that (i) no Restricted Subsidiary may incur Indebtedness to refinance
Indebtedness of the Company (except for Guarantees issued in accordance
with Section 10.22 hereof); (ii) if such Indebtedness being refinanced has
an Average Life to Stated Maturity equal to or longer than the Average
Life to Stated Maturity of the Notes, any such refinancing shall have an
Average Life to Stated Maturity longer than the Average Life to Stated
Maturity of the Notes and a final stated maturity for the payment of
principal thereof later than the final stated maturity of the Notes; (iii)
if such Indebtedness being refinanced has an Average Life to Stated
Maturity shorter than the Average Life to Stated Maturity of the Notes,
any such refinancing shall have an Average Life to Stated Maturity longer
than, and a final stated maturity later than, the Indebtedness being
refinanced; (iv) any such refinancing shall not exceed the sum of the
principal amount (or, if such Indebtedness provides for a lesser amount to
be due and payable upon a declaration of acceleration thereof, an amount
no greater than such lesser amount) of the Indebtedness being refinanced,
plus the amount of accrued and unpaid interest thereon, plus the amount of
any reasonably determined prepayment premium necessary to accomplish such
refinancing and such reasonable fees and expenses incurred in connection
therewith; (v) the Notes and Indebtedness that ranks pari passu with the
Notes may be refinanced only with Indebtedness that is made pari passu
with or subordinate in right of payment to the Notes, and Subordinated
Indebtedness may only be refinanced with Subordinated Indebtedness; and
(vi) the refinancing Indebtedness shall be incurred by the obligor of the
Indebtedness being refinanced or by the Company;
(g) Indebtedness of the Company such that, after giving effect to
the incurrence thereof, the total aggregate principal amount of
Indebtedness incurred under this clause (g) and any refinancings thereof
otherwise incurred in compliance with this Indenture would not exceed 250%
of Total Incremental Equity;
(h) Indebtedness of the Company or any Restricted Subsidiary
incurred under any Permitted Credit Facility, and any refinancings of the
foregoing otherwise incurred in compliance with this Indenture, in an
aggregate principal amount not to exceed the greater of $75 million or the
Borrowing Base determined as of the date such Indebtedness is incurred, at
any time outstanding;
(i) Indebtedness of the Company or any Restricted Subsidiary that is
Purchase Money Indebtedness;
(j) Indebtedness in respect of (i) letters of credit, bankers'
acceptances or other similar instruments or obligations, issued in
connection with liabilities incurred in the ordinary course of business or
(ii) surety, judgment, appeal, performance and other similar bonds,
instruments or obligations provided in the ordinary course of business;
and
(k) in addition to the items referred to in clauses (a) through (j)
above, Indebtedness of the Company having an aggregate principal amount
not to exceed $50 million at any time outstanding.
"Permitted Investments" means (a) any Investment in the Company or
in a Wholly Owned Restricted Subsidiary of the Company or in a Person as a
result of which such Person becomes a Wholly Owned Restricted Subsidiary; (b)
Investments constituting Permitted Business Investments, the sum of which does
not
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exceed the greater of $40 million or 25% of the total stockholders' equity as
shown on the Company's most recent balance sheet determined in accordance with
GAAP, at any one time outstanding; (c) Cash Equivalents; (d) Investments in
prepaid expenses, negotiable instruments held for collection and lease, utility
and workers' compensation, performance and other similar deposits; (e) Interest
Rate Obligations incurred in compliance with Section 10.11 hereof; (f) loans and
advances to employees made in the ordinary course of business not to exceed
$500,000 in the aggregate at any one time outstanding; (g) bonds, notes,
debentures or other securities (other than Capital Stock of any Restricted
Subsidiary that is not a Wholly Owned Restricted Subsidiary) received as a
result of Asset Sales permitted under Section 10.15 hereof; (h) any Investment
to the extent that the consideration therefor consists of Capital Stock (other
than Disqualified Stock) of the Company; and (i) the extension by the Company of
(x) trade credit to Subsidiaries of the Company represented by accounts
receivable, extended on usual and customary terms in the ordinary course of
business or (y) Guarantees of commitments for the purchase of goods or services
incurred in the ordinary course of business so long as such Guarantees, to the
extent constituting Indebtedness, are permitted to be incurred under Section
10.11 hereof.
"Permitted Liens" means (a) Liens on property of a Person existing
at the time such Person is merged into or consolidated with the Company or any
Restricted Subsidiary or becomes a Restricted Subsidiary; provided that such
Liens were in existence prior to the contemplation of such merger, consolidation
or acquisition and do not secure any property or assets of the Company or any
Restricted Subsidiary other than the property or assets subject to the Liens
prior to such merger or consolidation or acquisition; (b) Liens imposed by law,
such as carriers', warehousemen's and mechanics' Liens and other similar Liens
arising in the ordinary course of business that secure payment of obligations
not more than 60 days past due or that are being contested in good faith and by
appropriate proceedings; (c) Liens existing on the Issue Date (including Liens
securing Indebtedness permitted under clause (b) of the definition of Permitted
Indebtedness); (d) Liens for taxes, assessments or governmental charges or
claims that are not yet delinquent or that are being contested in good faith by
appropriate proceedings promptly instituted and diligently conducted; provided
that any reserve or other appropriate provision as shall be required in
conformity with GAAP shall have been made therefor; (e) easements, rights of
way, restrictions and other similar easements, licenses, restrictions on the use
of properties, or minor imperfections of title that, in the aggregate, are not
material in amount and do not in any case materially detract from the properties
subject thereto or interfere with the ordinary conduct of the business of the
Company or the Restricted Subsidiaries; (f) Liens to secure the performance of
statutory obligations, surety or appeal bonds, performance bonds or other
obligations of a like nature incurred in the ordinary course of business
(exclusive of obligations for the payment of borrowed money); (g) Liens securing
Indebtedness incurred under a Permitted Credit Facility; provided, however, that
the incurrence of such Indebtedness is permitted by Section 10.11 hereof; (h)
Liens to secure any refinancing of any Indebtedness secured by Liens permitted
by this Indenture, but only to the extent that such Liens do not extend to any
other property or assets (other than improvements thereto); (i) Liens to secure
the Notes and Liens created under this Indenture; (j) Liens securing Purchase
Money Indebtedness; (k) Liens on and pledges of Capital Stock of any
Unrestricted Subsidiary securing any Indebtedness of such Unrestricted
Subsidiary; (l) 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; (m) Liens to secure Capitalized
Lease Obligations permitted to be incurred under the Indenture; (n) Liens that
do not materially detract from the value of the property subject to such Liens,
that do not materially interfere with the ordinary conduct of the business of
the Company or any of its Restricted Subsidiaries, and that are made on
customary and usual terms applicable to similar assets; (o) pledges or deposits
by a Person under workmen's compensation laws, unemployment insurance laws or
similar legislation, or good faith deposits in connection with bids, tenders,
contracts (other than for the payment of Indebtedness) or leases to which such
Person is a party, or deposits to secure public or statutory obligations of such
Person, or deposits or cash or United States government bonds to secure surety
or appeal bonds to which such Person is a party, or deposits as security for
contested taxes or import duties or for the payment of rent, in each case
incurred in the ordinary course of business; (p) Liens customary in the industry
and incurred in the ordinary course of business securing Interest Rate
Obligations so long as the related Indebtedness is, and is permitted to be under
the Indenture, secured by a Lien on the same property securing such Interest
Rate Obligations; and (q) Liens held by the Company on the assets or property of
a Restricted Subsidiary of the Company to secure Indebtedness of such Restricted
Subsidiary owing to and held by the Company.
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"Person" means any individual, corporation, limited liability
company, partnership, joint venture, association, joint-stock company, trust,
unincorporated organization, government or any agency or political subdivision
thereof or any other entity.
"Pledge and Escrow Agreement" means the Pledge and Escrow Agreement,
dated as of the date hereof, among the Company and the Trustee, as escrow agent.
"Pledged Securities" means the securities purchased by the Company
with a portion of the net proceeds from the sale of the Notes to be deposited in
the Collateral Investments Account.
"Predecessor Note" means, with respect to any particular Note, every
previous Note evidencing all or a portion of the same debt as that evidenced by
such particular Note; and, for the purposes of this definition, any Note
authenticated and delivered under Section 3.06 hereof in exchange for a
mutilated Note or in lieu of a lost, destroyed or stolen Note shall be deemed to
evidence the same debt as the mutilated, lost, destroyed or stolen Note.
"Preferred Stock" means, with respect to any Person, any and all
shares, interests, participations or other equivalents (however designated) of
such Person's preferred or preference stock whether now outstanding or issued
after the Issue Date, and including, without limitation, all classes and series
of preferred or preference stock of such Person.
"Private Placement Legend" shall mean the first paragraph of the
legend initially set forth in the Initial Notes in the form set forth on Exhibit
A-1.
"Public Equity Offering" means an underwritten primary public
offering of Common Stock of the Company for cash pursuant to an effective
registration statement filed under the Securities Act.
"Purchase Agreement" means the Purchase Agreement, dated as of April
16, 1999, by and among the Company and the Initial Purchasers, as the same may
be amended, supplemented or otherwise modified from time to time in accordance
with the terms thereof.
"Purchase Money Indebtedness" means Indebtedness of the Company or
any Restricted Subsidiary (including Acquired Indebtedness and Indebtedness
represented by Capitalized Lease Obligations, Attributable Debt in respect of
Sale/Leaseback Transactions, mortgage financings and purchase money
obligations), including any related notes, guarantees, collateral documents,
instruments and agreements executed in connection therewith, as the same may be
amended, supplemented, modified or restated from time to time, incurred at any
time for the purpose of financing all or any part of the cost of the
development, construction, expansion, installation, acquisition, lease or
improvement by the Company or any Restricted Subsidiary of any Permitted
Business Assets or not less than 66 2/3 percent of the outstanding Voting Stock
of a Person that becomes a Restricted Subsidiary the assets of which consist
primarily of Permitted Business Assets.
"Qualified Institutional Buyer" or "QIB" shall have the meaning
specified in Rule 144A.
"Redemption Date" means, with respect to any Note to be redeemed,
the date fixed by the Company for such redemption pursuant to this Indenture and
the Notes.
"Redemption Price" means, with respect to any Note to be redeemed,
the price fixed for such redemption pursuant to the terms of this Indenture and
the Notes.
"refinancing" has the meaning set forth in clause (f) of the
definition of "Permitted Indebtedness."
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"Registrable Securities" means Transfer Restricted Notes, as defined
in the Registration Rights Agreement.
"Registration Rights Agreement" means the Notes Registration Rights
Agreement, dated as of April 23, 1999, between the Company and the Initial
Purchasers, as the same may be amended, supplemented or otherwise modified from
time to time in accordance with the terms thereof.
"Regular Record Date" means the Regular Record Date specified in the
Notes.
"Regulation S" means Regulation S under the Securities Act.
"Regulation S Global Note" means a permanent global note in
registered form representing the aggregate principal amount of Notes sold in
reliance on Regulation S.
"Responsible Officer" means, with respect to the Trustee, any
officer in the Corporate Trust Office of the Trustee 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 of the Trustee to whom any corporate
trust matter is referred because of his or her knowledge of and familiarity with
the particular subject.
"Restricted Note" means a Note that constitutes a "restricted
security" within the meaning of Rule 144(a)(3) under the Securities Act;
provided, however, that the Trustee shall be entitled to request and
conclusively rely on an Opinion of Counsel with respect to whether any Note
constitutes a Restricted Note.
"Restricted Payment" means any of the following: (i) the declaration
or payment of any dividend or any other distribution on any Capital Stock of the
Company or any Restricted Subsidiary or any other payment made to the direct or
indirect holders (in their capacities as such) of Capital Stock of the Company
or any Restricted Subsidiary (other than any dividends, distributions or
payments made to the Company or any Restricted Subsidiary and dividends or
distributions payable solely in Capital Stock (other than Disqualified Stock) of
the Company or in options, warrants or other rights to purchase Capital Stock
(other than Disqualified Stock) of the Company); (ii) the purchase, redemption
or other acquisition or retirement for value of any Capital Stock of the Company
or any Restricted Subsidiary (other than any such Capital Stock owned by the
Company or a Restricted Subsidiary); (iii) the purchase, redemption, defeasance
or other acquisition or retirement for value, or the making of any principal
payment on, prior to any scheduled repayment, scheduled sinking fund payment or
scheduled maturity, of any Subordinated Indebtedness (other than any
Subordinated Indebtedness held by a Wholly Owned Restricted Subsidiary); or (iv)
the making by the Company or any Restricted Subsidiary of any Investment (other
than a Permitted Investment) in any Person.
"Restricted Subsidiary" means any Subsidiary of the Company that has
not been designated by the Board, by a Board Resolution delivered to the
Trustee, as an Unrestricted Subsidiary pursuant to and in compliance with
Section 10.20 hereof. Any such designation may be revoked by a Board Resolution
delivered to the Trustee, subject to the provisions of such covenant.
"Rule 144A" means Rule 144A under the Securities Act.
"S&P" means Standard & Poor's Rating Services, a division of The
McGraw-Hill Companies (and any successor).
"Sale/Leaseback Transaction" of any Person means an arrangement with
any lender or investor or to which such lender or investor is a party providing
for the leasing by such Person of any property or assets of such Person which
has been or is being sold or transferred by such Person after its acquisition
thereof or the completion
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of construction or commencement of operations thereof to such lender or investor
or to any other Person to whom funds have been or are to be advanced by such
lender or investor on the security of such property or asset.
"Securities Act" means the Securities Act of 1933, as amended, and
the rules and regulations promulgated by the Commission thereunder.
"Shelf Registration Statement" shall have the meaning specified in
the Registration Rights Agreement.
"Special Record Date" means, with respect to the payment of any
Defaulted Interest, a date fixed by the Trustee pursuant to Section 3.07 hereof.
"Stated Maturity" means, with respect to any Note or any installment
of interest thereon, the dates specified in such Note as the fixed date on which
the principal of such Note or such installment of interest is due and payable
and, when used with respect to any other Indebtedness, means the date specified
in the instrument governing such Indebtedness as the fixed date on which the
principal of such Indebtedness, or any installment of interest, is due and
payable.
"Strategic Equity Investor" means any Person that, as of the date of
determination, has a Market Capitalization or Consolidated Net Worth of at least
$2.0 billion and derives a substantial portion of its revenues from a business
related to the Permitted Business.
"Subordinated Indebtedness" means any Indebtedness of the Company
which is expressly subordinated in right of payment to any other Indebtedness of
the Company.
"Subsidiary" means, with respect to any Person, (a) any corporation
of which the outstanding Capital Stock having at least a majority of the votes
entitled to be cast in the election of directors shall at the time be owned,
directly or indirectly, by such Person, or (b) any other Person of which at
least a majority of voting interest is at the time, directly or indirectly,
owned by such Person.
"Subsidiary Guarantor" means each Restricted Subsidiary that becomes
a guarantor of the Notes pursuant to the provisions of Section 10.22 hereof, in
each case until it is released from its Subsidiary Guarantee pursuant to the
terms thereof.
"Total Consolidated Indebtedness" means, at any date of
determination, an amount equal to the aggregate amount of all Indebtedness of
the Company and the Restricted Subsidiaries outstanding as of such date of
determination.
"Total Incremental Equity" means, at any time of determination, the
sum of, without duplication, (a) the aggregate net cash proceeds received by the
Company from capital contributions in respect of existing Capital Stock (other
than Disqualified Stock) or the issuance and sale of Capital Stock (other than
Disqualified Stock but including Capital Stock issued upon the conversion of
convertible Indebtedness or from the exercise of options, warrants or rights to
purchase Capital Stock (other than Disqualified Stock)) subsequent to May 5,
1998, other than to a Subsidiary of the Company, plus (b) 80 percent of the Fair
Market Value of property (other than cash and Cash Equivalents) received by the
Company after May 5, 1998 as a contribution of capital or from the sale of its
Capital Stock (other than Disqualified Stock) to a Person that is not a
Subsidiary of the Company, minus (c) any amounts included in clause (a) above to
the extent used to make a Restricted Payment pursuant to clauses (2) or
(3)(A)(x) of Section 10.13 hereof.
"Trust Indenture Act" or "TIA" means the Trust Indenture Act of
1939, as amended, as in force at the date as of which this Indenture was
executed, except as provided in Section 9.05 hereof; provided, however, that
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in the event the Trust Indenture Act of 1939 is amended after such date, "Trust
Indenture Act" means, to the extent required by any such amendment, the Trust
Indenture Act of 1939, as so amended.
"Trustee" means the Person named as the "Trustee" in the first
paragraph of this Indenture, until a successor Person shall have replaced such
Person pursuant to the applicable provisions of this Indenture, and thereafter
"Trustee" shall mean such successor Person.
"Unrestricted Notes" means one or more Notes that do not and are not
required to bear the Private Placement Legend in the form set forth in Exhibit
A, including, without limitation, the Exchange Notes.
"Unrestricted Subsidiary" means any Subsidiary of the Company
designated as such pursuant to and in compliance with Section 10.20 hereof. Any
such designation may be revoked by a Board Resolution delivered to the Trustee,
subject to the provisions of such covenant.
"Voting Stock" means, with respect to any Person, the Capital Stock
of any class or kind ordinarily having the power to vote for the election of
directors or other members of the governing body of such Person.
"voting power" means, with respect to the Capital Stock of any
Person, the relative voting power in any general election of directors or other
members of the governing body of such Person.
"Wholly Owned Restricted Subsidiary" means any Restricted Subsidiary
of which 100% of the outstanding Capital Stock is owned by the Company or
another Wholly Owned Restricted Subsidiary. For the purposes of this definition,
any directors' qualifying shares or investments by foreign nationals mandated by
applicable law shall be disregarded in determining the ownership of a Restricted
Subsidiary.
Section 1.02. Other Definitions.
Defined in
Term Section
---- -------
"Act" 1.05
"Additional Interest" 10.23
"Additional Interest Payment Date" 10.23
"Affiliate Transaction" 10.14
"Agent" 3.02
"Agent Members" 3.16
"Asset Sale Offer" 10.15
"Asset Sale Offer Purchase
Date" 10.15
"Assumed Indebtedness" 10.15
"assumed liabilities" 10.15
"Change of Control Date" 10.10
"Change of Control Offer" 10.10
"Change of Control Payment Date" 10.10
"covenant defeasance" 4.03
"Defaulted Interest" 3.07
"defeasance" 4.02
"Defeased Notes" 4.01
"Designation" 10.20
"Designation Amount" 10.20
"Event of Default" 5.01
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Defined in
Term Section
---- -------
"incur" 10.11
"Investment Company Act" 4.04
"Note Amount" 10.15
"Note Pro Rate Share of Unutilized
Net Cash Proceeds" 10.15
"Note Register" 3.05
"Other Indebtedness" 10.15
"Paying Agent" 3.02
"Permitted Business Assets" 10.15
"Physical Notes" 2.01
"Registrar" 3.02
"Registration Default" 10.23
"Restricted Period" 3.17
"Revocation" 10.20
"Subsidiary Guarantee" 10.22
"surviving entity" 8.01
"Unutilized Net Cash Proceeds" 10.15
Section 1.03. Rules of Construction.
For all purposes of this Indenture, except as otherwise expressly
provided or unless the context otherwise requires:
(a) the terms defined in this Article (including terms referred to
in Section 1.02 hereof) have the meanings assigned to them in this Article, and
include the plural as well as the singular;
(b) all other terms used herein which are defined in the Trust
Indenture Act, either directly or by reference therein, have the meanings
assigned to them therein;
(c) all accounting terms not otherwise defined herein have the
meanings assigned to them in accordance with GAAP as in effect on the Issue
Date;
(d) the words "herein" "hereof" and "hereunder" and other words of
similar import refer to this Indenture as a whole and not to any particular
Article, Section or other subdivision;
(e) all references to "$" or "dollars" refer to the lawful currency
of the United States of America; and
(f) the words "include," "included" and "including" as used herein
are deemed in each case to be followed by the phrase "without limitation."
Section 1.04. Form of Documents Delivered to Trustee.
In any case where several matters are required to be certified by,
or covered by an opinion of, any specified Person, it is not necessary that all
such matters be certified by, or covered by the opinion of, only one such
Person, or that they be so certified or covered by only one document, but one
such Person may certify or give an opinion with respect to some matters and one
or more other Persons as to other matters, and any such Person may certify or
give an opinion as to such matters in one or several documents.
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Any certificate or opinion of an Officer may be based, insofar as it
relates to legal matters, upon a certificate or opinion of, or representations
by, counsel, unless such Officer knows that the certificate or opinion or
representations with respect to the matters upon which his certificate or
opinion is based are erroneous. Any such certificate or opinion may be based,
insofar as it relates to factual matters, upon a certificate or opinion of, or
representations by, an Officer or Officers of the Company, stating that the
information with respect to such factual matters is in the possession of the
Company, unless such counsel knows that the certificate or opinion or
representations with respect to such matters are erroneous.
Where any Person is required to make, give or execute two or more
applications, requests, consents, certificates, statements, opinions or other
instruments under this Indenture, they may, but need not, be consolidated, with
proper identification of each matter covered therein, and form one instrument.
Section 1.05. Acts of Holders.
Any request, demand, authorization, direction, notice, consent,
waiver or other action provided by this Indenture to be given or taken by
Holders may be embodied in and evidenced by one or more instruments of
substantially similar tenor signed by such Holders in person or by an agent duly
appointed in writing; and, except as herein otherwise expressly provided, such
action shall become effective when such instrument or instruments are delivered
to the Trustee and, where it is hereby expressly required, to the Company. Such
instrument or instruments (and the action embodied therein and evidenced
thereby) are herein sometimes referred to as the "Act" of the Holders signing
such instrument or instruments. Proof of execution (as provided below in this
Section 1.05) of any such instrument or of a writing appointing any such agent
shall be sufficient for any purpose of this Indenture and (subject to Section
6.01 hereof) conclusive in favor of the Trustee and the Company, if made in the
manner provided in this Section.
The fact and date of the execution by any Person of any such
instrument or writing may be proved in any reasonable manner which the Trustee
deems sufficient.
The ownership of Notes shall be proved by the Note Register.
Any request, demand, authorization, direction, notice, consent,
waiver or other action by the Holder of any Note shall bind every future Holder
of the same Note or the Holder of every Note issued upon the transfer thereof or
in exchange therefor or in lieu thereof to the same extent as the original
Holder, in respect of anything done, suffered or omitted to be done by the
Trustee, any Paying Agent, the Company or any other obligor upon the Notes in
reliance thereon, whether or not notation of such action is made upon such Note.
Section 1.06. Notices, etc., to the Trustee and the Company.
Any request, demand, authorization, direction, notice, consent,
waiver or other action of Holders or other document provided or permitted by
this Indenture to be made upon, given or furnished to, or filed with:
(a) the Trustee by any Holder or by the Company shall be sufficient
for every purpose hereunder if made, given, furnished or filed, in writing, to
or with the Trustee at: State Street Bank and Trust Company of California, N.A.,
Library Tower, 633 West 5th Street, 12th Floor, Los Angeles, California 90071,
Attention: Corporate Trust Department (Rhythms NetConnections Inc. 12 3/4%
Senior Notes due 2009), or at any other address previously furnished in writing
to the Holders and the Company by the Trustee; or
(b) the Company by the Trustee or by any Holder shall be sufficient
for every purpose (except as otherwise expressly provided herein) hereunder if
in writing and mailed, first-class postage prepaid, to the Company addressed to
it at Rhythms NetConnections Inc., 6933 South Revere Parkway, Englewood,
Colorado
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80112, Attention: Chief Executive Officer, or at any other address previously
furnished in writing to the Trustee by the Company.
Section 1.07. Notice to Holders; Waiver.
Where this Indenture provides for notice to Holders of any event,
such notice shall be sufficiently given (unless otherwise expressly provided
herein) if in writing and mailed, first-class postage prepaid, to each Holder
affected by such event, at the address of such Holder as it appears in the Note
Register, not later than the latest date, and not earlier than the earliest
date, prescribed for the giving of such notice. In any case where notice to
Holders is given by mail, neither the failure to mail such notice, nor any
defect in any notice so mailed, to any particular Holder shall affect the
sufficiency of such notice with respect to other Holders. Any notice when mailed
to a Holder in the aforesaid manner shall be conclusively deemed to have been
received by such Holder whether or not actually received by such Holder. 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 mail notice of any event
as required by any provision of this Indenture, then any method of giving such
notice as shall be satisfactory to the Trustee shall be deemed to be a
sufficient giving of such notice.
Section 1.08. Conflict with Trust Indenture Act.
If any provision hereof limits, qualifies or conflicts with any
provision of the Trust Indenture Act or another provision which is required or
deemed to be included in this Indenture by any of the provisions of the Trust
Indenture Act, such provision or requirement of the Trust Indenture Act shall
control.
If any provision of this Indenture modifies or excludes any
provision of the Trust Indenture Act that may be so modified or excluded, the
latter provision shall be deemed to apply to this Indenture as so modified or
excluded, as the case may be.
Section 1.09. Effect of Headings and Table of Contents.
The Article and Section headings herein and the Table of Contents
are for convenience only and shall not affect the construction hereof.
Section 1.10. Successors and Assigns.
All covenants and agreements in this Indenture by the Company shall
bind its respective successors and assigns, whether so expressed or not.
Section 1.11. Separability Clause.
In case any provision in this Indenture or in the Notes issued
pursuant hereto 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.
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Section 1.12. Benefits of Indenture.
Nothing in this Indenture or in the Notes issued pursuant hereto,
express or implied, shall give to any Person (other than the parties hereto and
their successors hereunder, any Paying Agent and the Holders) any benefit or any
legal or equitable right, remedy or claim under this Indenture.
Section 1.13. GOVERNING LAW.
THIS INDENTURE, THE NOTES AND EACH SUBSIDIARY GUARANTEE, IF ANY,
SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF
NEW YORK WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW.
Section 1.14. No Recourse Against Others.
A director, officer, employee or stockholder, as such, of the
Company or any Subsidiary Guarantor shall not have any liability for any
obligations of the Company or such Subsidiary Guarantor under the Notes, any
Subsidiary Guarantee or this Indenture or for any claim based on, in respect of
or by reason of such obligations or their creation.
Section 1.15. Independence of Covenants.
Except as otherwise expressly provided herein, all covenants and
agreements in this Indenture shall be given independent effect so that if a
particular action or condition is not permitted by any of such covenants, the
fact that it would be permitted by an exception to, or be otherwise within the
limitations of, another covenant shall not avoid the occurrence of a Default if
such action is taken or condition exists.
Section 1.16. Exhibits and Schedules.
All exhibits and schedules attached hereto are by this reference
made a part hereof with the same effect as if herein set forth in full.
Section 1.17. Counterparts.
This Indenture may be executed in any number of counterparts and by
telecopier, each of which shall be an original; but such counterparts shall
together constitute but one and the same instrument.
Section 1.18. 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.
ARTICLE TWO
FORM OF NOTES
Section 2.01. Form and Dating.
The Notes and the Trustee's certificate of authentication with
respect thereto shall be as required by Section 3.03 hereof.
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The definitive Notes shall be printed, typewritten, 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 Note shall be dated the date of its issuance and shall show the
date of its authentication.
Notes offered and sold in reliance on Rule 144A and Notes offered
and sold in reliance on Regulation S shall be issued initially in the form of
one or more Global Notes, substantially in the form set forth in Exhibit A-1,
deposited with the Trustee, as custodian for the Depository, duly executed by
the Company and authenticated by the Trustee as hereinafter provided and shall
bear the legend set forth in Exhibit C. The aggregate principal amount of the
Global Notes may from time to time be increased or decreased by adjustments made
on the records of the Trustee, as custodian for the Depository, as hereinafter
provided.
Notes issued in exchange for interests in a Global Note pursuant to
Section 3.17 hereof may be issued in the form of permanent certificated Notes in
registered form in substantially the form set forth in Exhibit A-1 with respect
to the Initial Notes and Exhibit A-2 with respect to Exchange Notes (in each
case, the "Physical Notes").
The Notes shall have notated thereon evidence of each Subsidiary
Guarantee, if any, in the form set forth in Annex A to Exhibit B; provided,
however, that the failure of any Note to include such notation shall not affect
the validity or enforceability of such Subsidiary Guarantee or such Note against
any Subsidiary Guarantor.
ARTICLE THREE
THE NOTES
Section 3.01. Title and Terms.
The aggregate principal amount of Notes which may be authenticated
and delivered under this Indenture is limited to $325,000,000 in aggregate
principal amount of Notes, except for Notes authenticated and delivered upon
registration of transfer of, or in exchange for, or in lieu of, other Notes
pursuant to Section 3.03, 3.04, 3.05, 3.06, 9.06, 10.10 or 10.15 hereof or the
optional redemption provisions of the Notes.
The Stated Maturity of the principal of the Notes shall be April 15,
2009. Cash interest on the Notes shall accrue at the rate of 12 3/4% per annum
from April 23, 1999 or from the most recent Interest Payment Date to which
interest has been paid or duly provided for, payable semi-annually on April 15
and October 15, in each year, commencing on October 15, 1999, to the registered
Holders at the close of business on the April 1 or October 1, respectively,
immediately preceding such Interest Payment Dates, until the principal thereof
is paid or duly provided for.
At the election of the Company, the entire Indebtedness on the Notes
or certain of the Company's obligations and covenants and certain Events of
Default thereunder may be defeased as provided in Article Four.
Section 3.02. Registrar and Paying Agent.
The Company shall maintain an office or agency (which shall be
located in the Borough of Manhattan in The City of New York, State of New York)
where Notes may be presented or surrendered for registration of transfer or for
exchange (the "Registrar"), an office or agency (which shall be located in the
Borough of Manhattan in The City of New York, State of New York) where Notes may
be presented or surrendered for payment (the "Paying Agent" or "Agent") and an
office or agency where notices and demands to or upon the
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Company in respect of the Notes and this Indenture may be served. The Registrar
and any co-Registrar shall keep a register of the Notes and of their transfer
and exchange. The Company may have one or more co-registrars and one or more
additional paying agents. The term "Paying Agent" or "Agent" includes any
additional paying agent. The Company may act as its own Paying Agent. The
Company may change the Paying Agent or Registrar without notice to any Holder.
The Company shall enter into an appropriate agency agreement with
any Agent not a party to this Indenture, which shall incorporate the provisions
of the Trust Indenture Act. The agreement shall implement the provisions of this
Indenture that relate to such Agent. The Company shall notify the Trustee of the
name and address of any such Agent. If the Company fails to maintain a Registrar
or Paying Agent, or fails to give the foregoing notice, the Trustee shall act as
such and shall be entitled to appropriate compensation in accordance with
Section 6.07 hereof.
The Company initially appoints the Trustee as the Registrar and
Paying Agent and agent for service of notices and demands in connection with the
Notes, until such time as the Trustee has resigned or a successor has been
appointed.
Section 3.03. Execution and Authentication.
The Initial Notes and the Trustee's certificate of authentication
shall be substantially in the form of Exhibit A-1 hereto, and the Exchange Notes
and the Trustee's certificate of authentication relating thereto shall be
substantially in the form of Exhibit A-2 hereto, in each case with such
appropriate insertions, omissions, substitutions and other variations as are
permitted or required by this Indenture. The Notes may have such letters,
numbers or other marks of identification and such notations, legends or
endorsements required by law, stock exchange rule, rule of the Depository or any
clearing agency or usage. The Company shall approve the form of the Notes and
any notation, legend or endorsement thereon. Each Note shall be dated the date
of issuance and shall show the date of its authentication.
The terms and provisions contained in the Notes annexed hereto as
Exhibit A-1 and Exhibit A-2 shall constitute, and are hereby expressly made, a
part of this Indenture and, to the extent applicable, the Company and the
Trustee, by their execution and delivery of this Indenture, expressly agree to
such terms and provisions and to be bound thereby.
Two Officers, or an Officer and an Assistant Secretary, of the
Company shall sign, or one Officer of the Company shall sign, and one Officer or
an Assistant Secretary of the Company (each of whom shall, in each case, have
been duly authorized by all requisite corporate actions) shall attest to, the
Notes for the Company by manual or facsimile signature and may be imprinted or
otherwise reproduced.
An officer of a Subsidiary Guarantor (who shall have been duly
authorized by all requisite corporate actions) shall sign by manual or facsimile
signature, which may be imprinted or otherwise reproduced, a notation, in the
form of Annex A to Exhibit B, in respect of the Subsidiary Guarantee of such
Subsidiary Guarantor, on the Notes transferred and exchanged subsequent to the
issuance of such Subsidiary Guarantee for so long as it remains outstanding.
If an Officer or Assistant Secretary of the Company or an officer of
a Subsidiary Guarantor whose signature is on a Note or a notation, as the case
may be, was an officer or (in the case of the Company) Officer or Assistant
Secretary at the time of such execution but no longer holds that office or
position at the time the Trustee authenticates the Note, then the Note, the
Subsidiary Guarantee, if any, and any notation thereon shall nevertheless be
valid.
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A Note shall not be valid until an authorized signatory of the
Trustee manually signs the certificate of authentication on the Note. The
signature of such representative of the Trustee shall be conclusive evidence
that the Note has been authenticated under this Indenture.
The Trustee shall authenticate (i) Initial Notes for original issue
in an aggregate principal amount not to exceed $325,000,000 and (ii)
Unrestricted Notes from time to time only in exchange for a like principal
amount of Initial Notes, upon a written order of the Company in the form of an
Officers' Certificate of the Company. Each such written order shall specify the
amount of Notes to be authenticated and the date on which the Notes are to be
authenticated, whether the Notes are to be Initial Notes or Unrestricted Notes
and whether (subject to Section 2.01 and this Section 3.03) the Notes are to be
issued as Physical Notes or Global Notes and such other information as the
Trustee may reasonably request. The aggregate principal amount of Notes
Outstanding at any time may not exceed $325,000,000, except as provided in
Section 3.06 hereof.
Notwithstanding the foregoing, all Notes issued under this Indenture
shall vote and consent together on all matters (as to which any of such Notes
may vote or consent) as one class and no series of Notes will have the right to
vote or consent as a separate class on any matter.
The Trustee may appoint an authenticating agent reasonably
acceptable to the Company to authenticate Notes. Unless otherwise provided in
the appointment, 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 agent. An authenticating agent has the
same rights as an Agent to deal with the Company and Affiliates of the Company.
The Notes shall be issuable in fully registered form only, without
coupons, in denominations of $1,000 and any integral multiple thereof.
Section 3.04. Temporary Notes.
Until definitive Notes are prepared and ready for delivery, the
Company may execute and upon a Company Order the Trustee shall authenticate and
deliver temporary Notes. The Company Order shall specify the amount of temporary
Notes to be authenticated and the date on which the temporary Notes are to be
authenticated. Temporary Notes shall be substantially in the form of definitive
Notes, in any authorized denominations, but may have variations that the Company
reasonably considers appropriate for temporary Notes as conclusively evidenced
by the Company's execution of such temporary Notes.
If temporary Notes are issued, the Company will cause definitive
Notes to be prepared without unreasonable delay but in no event later than the
date that the Exchange Offer is consummated. 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 10.02 hereof, 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 deliver in
exchange therefor a like principal amount of definitive Notes of like tenor and
of authorized denominations. Until so exchanged the temporary Notes shall in all
respects be entitled to the same benefits under this Indenture as definitive
Notes.
Section 3.05. Transfer and Exchange.
The Company shall cause to be kept at the Corporate Trust Office of
the Trustee a register (the register maintained in such office and in any other
office or agency designated pursuant to Section 10.02 hereof being sometimes
referred to herein as the "Note Register") in which, subject to such reasonable
regulations as the Registrar may prescribe, the Company shall provide for the
registration of Notes and of transfers and exchanges of
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Notes. The Trustee is hereby initially appointed Registrar for the purpose of
registering Notes and transfers of Notes as herein provided.
Subject to Sections 3.16 and 3.17, when Notes are presented to the
Registrar or a co-Registrar with a request from the Holder of such Notes to
register the transfer or exchange for an equal principal amount of Notes of
other authorized denominations, such Registrar or co-Registrar shall register
the transfer or make the exchange as requested if its requirements for such
transaction are met; provided, however, that every Note presented or surrendered
for registration of transfer or exchange shall be duly endorsed or be
accompanied by a written instrument of transfer or exchange in form satisfactory
to the Company and the Registrar or co-Registrar, duly executed by the Holder
thereof or his attorney duly authorized in writing. Whenever any Notes are so
presented for exchange, at the Registrar's or co-Registrar's written request,
the Company shall execute, and the Trustee shall authenticate and deliver, the
Notes which the Holder making the exchange is entitled to receive, and each
Subsidiary Guarantor, if any, shall execute a notation on such Notes with
respect to its Subsidiary Guarantee. No service charge shall be made to the
Holder for any registration of transfer or exchange. The Company may require
from the Holder payment of a sum sufficient to cover any transfer taxes or other
governmental charge that may be imposed in relation to a transfer or exchange,
but this provision shall not apply to any exchange pursuant to Section 10.10,
10.15 or 9.06 hereof (in which events the Company will be responsible for the
payment of all such taxes which arise solely as a result of the transfer or
exchange and do not depend on the tax status of the Holder). The Trustee shall
not be required to exchange or register the transfer of any Note for a period of
15 days immediately preceding the first mailing of notice of redemption of Notes
to be redeemed or of any Note selected, called or being called for redemption
except, in the case of any Note where public notice has been given that such
Note is to be redeemed in part, the portion thereof not to be redeemed.
All Notes issued upon any registration of transfer or exchange of
Notes shall be the valid obligations of the Company and each Subsidiary
Guarantor, if any, evidencing the same Indebtedness, and entitled to the same
benefits under this Indenture, as the Notes surrendered upon such registration
of transfer or exchange.
Any Holder of a beneficial interest in a Global Note shall, by
acceptance of such beneficial interest, agree that transfers of beneficial
interests in such Global Notes 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 system.
Section 3.06. Mutilated, Destroyed, Lost and Stolen Notes.
If a mutilated Note is surrendered to the Trustee or if the Holder
of a Note of any series claims that the Note has been lost, destroyed or stolen,
the Company and each Subsidiary Guarantor, if any, shall execute and upon a
Company Order, the Trustee shall authenticate and deliver a replacement Note of
like tenor and principal amount, bearing a number not contemporaneously
outstanding if the Holder of such Note furnishes to the Company, each Subsidiary
Guarantor, if any, and to the Trustee evidence reasonably acceptable to them of
the ownership and the destruction, loss or theft of such Note and an indemnity
bond shall be posted by such Holder, sufficient in the judgment of the Company
or the Trustee, as the case may be, to protect the Company, each Subsidiary
Guarantor, if any, the Trustee or any Agent from any loss that any of them may
suffer if such Note is replaced. The Company may charge such Holder for the
Company's expenses in replacing such Note (including (i) expenses of the Trustee
charged to the Company and (ii) any tax or other governmental charge that may be
imposed) and the Trustee may charge the Company for the Trustee's expenses in
replacing such Note.
Every replacement Note issued pursuant to this Section in lieu of
any destroyed, lost or stolen Note shall constitute an original additional
contractual obligation of the Company and each Subsidiary Guarantor, if any,
whether or not the destroyed, lost or stolen Note shall be at any time
enforceable by anyone, and shall be entitled to all benefits of this Indenture
equally and proportionately with any and all other Notes duly issued hereunder.
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The provisions of this Section are exclusive and shall preclude (to
the extent lawful) all other rights and remedies with respect to the replacement
or payment of mutilated, destroyed, lost or stolen Notes.
Section 3.07. Payment of Interest; Interest Rights Preserved.
Interest on any Note which is payable, and is punctually paid or
duly provided for, on any Interest Payment Date shall be paid to the Person in
whose name that Note (or one or more Predecessor Notes) is registered at the
close of business on the Regular Record Date for such interest.
Any interest on any Note which is payable, but is not punctually
paid or duly provided for, on any Interest Payment Date and interest on such
defaulted interest at the then applicable interest rate borne by the Notes, to
the extent lawful (such defaulted interest and interest thereon herein
collectively called "Defaulted Interest") shall forthwith cease to be payable to
the Holder on the Regular Record Date; and such Defaulted Interest may be paid
by the Company, at its election in each case, as provided in subsection (a) or
(b) below:
(a) The Company may elect to make payment of any Defaulted Interest
to the Persons in whose names the Notes (or their respective Predecessor Notes)
are registered at the close of business on a Special Record Date for the payment
of such Defaulted Interest, which shall be fixed in the following manner. The
Company shall notify the Trustee in writing of the amount of Defaulted Interest
proposed to be paid on each Note and the date of the proposed payment, and at
the same time the Company shall deposit with the Trustee an amount of money
equal to the aggregate amount proposed to be paid in respect of such Defaulted
Interest or shall make arrangements satisfactory to the Trustee for such deposit
prior to the date of the proposed payment, such money when deposited to be held
in trust for the benefit of the Persons entitled to such Defaulted Interest as
provided in this subsection (a). Thereupon the Trustee shall fix a Special
Record Date for the payment of such Defaulted Interest which shall be not more
than 15 days and not less than 10 days prior to the date of the proposed payment
and not less than 10 days after the receipt by the Trustee of the notice of the
proposed payment. The Trustee shall promptly notify the Company in writing of
such Special Record Date. In the name and at the expense of the Company, the
Trustee shall cause notice of the proposed payment of such Defaulted Interest
and the Special Record Date therefor to be mailed, first-class postage prepaid,
to each Holder at its address as it appears in the Note Register, not less than
10 days prior to such Special Record Date. Notice of the proposed payment of
such Defaulted Interest and the Special Record Date therefor having been so
mailed, such Defaulted Interest shall be paid to the Persons in whose names the
Notes (or their respective Predecessor Notes) are registered on such Special
Record Date and shall no longer be payable pursuant to the following subsection
(b).
(b) The Company may make payment of any Defaulted Interest in any
other lawful manner not inconsistent with the requirements of any securities
exchange or market on which the Notes may be listed, and upon such notice as may
be required by such exchange or market, if, after written notice given by the
Company to the Trustee of the proposed payment pursuant to this subsection (b),
such payment shall be deemed practicable by the Trustee.
Subject to the foregoing provisions of this Section, each Note
delivered under this Indenture upon registration of transfer of or in exchange
for or in lieu of any other Note shall carry the rights to interest accrued and
unpaid, and to accrue, which were carried by such other Note.
Section 3.08. Persons Deemed Owners.
Prior to and at the time of due presentment for registration of
transfer, the Company, the Trustee and any agent of the Company or the Trustee
may treat the Person in whose name any Note is registered in the Note Register
as the owner of such Note for the purpose of receiving payment of principal of,
premium, if any, and (subject to Section 3.07 hereof) interest on such Note and
for all other purposes whatsoever, whether or not such
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Note shall be overdue, and none of the Company, the Trustee or any agent of the
Company or the Trustee shall be affected by notice to the contrary.
Section 3.09. Cancellation.
All Notes surrendered for payment, redemption, registration of
transfer or exchange shall be delivered to the Trustee and, if not already
canceled, shall be promptly canceled by it. The Company may at any time deliver
to the Trustee for cancellation any Notes previously authenticated and delivered
hereunder which the Company may have acquired in any manner whatsoever, and all
Notes so delivered shall be promptly canceled by the Trustee. The Registrar, any
co-Registrar and the Paying Agent shall forward to the Trustee any Notes
surrendered to them for registration of transfer or exchange, redemption or
payment. The Trustee and no one else shall cancel all Notes surrendered for
registration of transfer, exchange, payment, replacement or cancellation. No
Notes shall be authenticated in lieu of or in exchange for any Notes canceled as
provided in this Section 3.09, except as expressly permitted by this Indenture.
All canceled Notes held by the Trustee shall be destroyed and certification of
their destruction delivered to the Company unless by a Company Order the Company
shall direct that the canceled Notes be returned to it. The Trustee shall
provide the Company a list of all Notes that have been canceled from time to
time as requested by the Company.
Section 3.10. Computation of Interest.
Interest on the Notes shall be computed on the basis of a 360-day
year of twelve 30-day months and, in the case of a partial month, the actual
number of days elapsed.
Section 3.11. Legal Holidays.
In any case where any Interest Payment Date, Redemption Date, date
established for the payment of Defaulted Interest or Stated Maturity of any Note
shall not be a Business Day, then (notwithstanding any other provision of this
Indenture or of the Notes) payment of principal, premium, if any, or interest
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,
Redemption Date, date established for the payment of Defaulted Interest or at
the Stated Maturity, as the case may be. In such event, no interest shall accrue
with respect to such payment for the period from and after such Interest Payment
Date, Redemption Date, date established for the payment of Defaulted Interest or
Stated Maturity, as the case may be, to the next succeeding Business Day and,
with respect to any Interest Payment Date, interest for the period from and
after such Interest Payment Date shall accrue with respect to the next
succeeding Interest Payment Date.
Section 3.12. CUSIP and CINS Numbers.
The Company in issuing the Notes may use "CUSIP" and "CINS" numbers
(if then generally in use), and, if so, the Trustee shall use the CUSIP or CINS
numbers, as the case may be, in notices of redemption or exchange as a
convenience to Holders; provided, however, that any such notice may state that
no representation is made as to the correctness or accuracy of the CUSIP or CINS
number, as the case may be, printed in the notice or on the Notes, and that
reliance may be placed only on the other identification numbers printed on the
Notes. The Company shall promptly notify the Trustee in writing of any change in
the CUSIP or CINS number of any series of Notes.
Section 3.13. Paying Agent To Hold Money in Trust.
Each 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, or interest on the Notes, and shall notify the Trustee of
any default by the Company in making any such payment. Money held in trust by
the Paying Agent need
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not be segregated except as required by law, and in no event shall the Paying
Agent be liable for any interest on any money received by it hereunder. The
Company at any time may require the 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 Event of Default, upon a Company Order to the
Paying Agent, require such Paying Agent to pay forthwith all money so held by it
to the Trustee and to account for any funds disbursed. Upon making such payment,
the Paying Agent shall have no further liability for the money delivered to the
Trustee.
Section 3.14. [Intentionally Omitted].
Section 3.15. Deposits of Monies.
Prior to 11:00 a.m. New York City time on each Interest Payment
Date, maturity date, Redemption Date, Change of Control Payment Date, date for
the payment of Defaulted Interest and Asset Sale Offer Purchase Date, the
Company shall have deposited with the Paying Agent in immediately available
funds money sufficient to make cash payments, if any, due on such Interest
Payment Date, maturity date, Redemption Date, Change of Control Payment Date,
date for the payment of Defaulted Interest or Asset Sale Offer Purchase Date, as
the case may be, in a timely manner which permits the Paying Agent to remit
payment to the Holders on such Interest Payment Date, maturity date, Redemption
Date, Change of Control Payment Date, date for the payment of Defaulted Interest
or Asset Sale Offer Purchase Date, as the case may be.
Section 3.16. Book-Entry Provisions for Global Notes.
(a) The Global Notes initially shall (i) be registered in the name
of the Depository or the nominee of such Depository, (ii) be delivered to the
Trustee as custodian for such Depository and (iii) bear legends as set forth in
Exhibit C.
Members of, or participants in, the Depository ("Agent Members")
shall have no rights under this Indenture with respect to any Global Note held
on their behalf by the Depository, or the Trustee as its custodian, or under the
Global Note, and the Depository may be treated by the Company, the Trustee and
any agent of the Company or the Trustee as the absolute owner of the 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 Depository or impair, as between the Depository and its Agent
Members, the operation of customary practices governing the exercise of the
rights of a Holder of any Note.
(b) Transfers of Global Notes shall be limited to transfers in
whole, but not in part, to the Depository, its successors or their respective
nominees. Interests of beneficial owners in the Global Notes may be transferred
or exchanged for Physical Notes in accordance with the rules and procedures of
the Depository and the provisions of Sections 3.03 and 3.17 hereof. In addition,
Physical Notes shall be transferred to all beneficial owners in exchange for
their beneficial interests in Global Notes if (i) the Depository notifies the
Company that it is unwilling or unable to continue as Depository for any Global
Note, or that it will cease to be a "Clearing Agency" under the Exchange Act,
and in either case a successor Depository is not appointed by the Company within
90 days of such notice or (ii) an Event of Default has occurred and is
continuing and the Registrar or co-Registrar has received a written request from
the Depository to issue Physical Notes.
(c) In connection with any transfer or exchange of a portion of the
beneficial interest in any Global Note to beneficial owners pursuant to
paragraph (b) of this Section 3.16, the Registrar or co-Registrar shall (if one
or more Physical Notes are to be issued) reflect on its books and records the
date and a decrease in the principal amount of the Global Note in an amount
equal to the principal amount of the beneficial interest in the Global Note to
be transferred, and the Company shall execute, and upon receipt of a Company
Order the Trustee shall authenticate and deliver, one or more Physical Notes of
like tenor and principal amount of authorized
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denominations, and each Subsidiary Guarantor, if any, shall execute a notation
thereon in respect of its Subsidiary Guarantee.
(d) In connection with the transfer of Global Notes as an entirety
to beneficial owners pursuant to paragraph (b) of this Section 3.16, the Global
Notes shall be deemed to be surrendered to the Trustee for cancellation, and the
Company shall execute, and upon receipt of a Company Order the Trustee shall
authenticate and deliver, to each beneficial owner identified by the Depository
in exchange for its beneficial interest in the Global Notes, an equal aggregate
principal amount of Physical Notes of like tenor of authorized denominations,
and each Subsidiary Guarantor, if any, shall execute a notation thereon in
respect of its Subsidiary Guarantee.
(e) Any Physical Note constituting a Restricted Note delivered in
exchange for an interest in a Global Note pursuant to subparagraph (b), (c) or
(d) of this Section 3.16 shall, except as otherwise provided by Section 3.17
hereof, bear the Private Placement Legend.
(f) The Holder of any 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 3.17. Special Transfer Provisions.
(a) Transfers to Non-QIB Institutional Accredited Investors. The
following additional provisions shall apply with respect to the registration of
any proposed transfer of an Initial Note to any Institutional Accredited
Investor which is not a QIB:
(i) the Registrar or co-Registrar shall register the transfer of any
Initial Note, whether or not such Note bears the Private Placement Legend, if
(x) the requested transfer is after the second anniversary of the Issue Date;
provided, however, that neither the Company nor any Affiliate of the Company has
held any beneficial interest in such Note, or portion thereof, at any time on or
prior to the second anniversary of the Issue Date and such transfer can
otherwise be lawfully made under the Securities Act without registering such
Initial Notes thereunder or (y) the proposed transferee has delivered to the
Registrar or co-Registrar a certificate substantially in the form of Exhibit D
hereto and any legal opinions and certifications required thereby;
(ii) if the proposed transferor is an Agent Member seeking to
transfer an interest in a Global Note, upon receipt by the Registrar or
co-Registrar of (x) written instructions given in accordance with the
Depository's and the Registrar's or co-Registrar's procedures and (y) the
appropriate certificate, if any, required by clause (y) of paragraph (i) above,
together with any required legal opinions and certifications, the Registrar or
co-Registrar shall register the transfer and reflect on its books and records
the date and a decrease in the principal amount of the Global Note from which
such interests are to be transferred in an amount equal to the principal amount
of the Notes to be transferred and the Company shall execute, each Subsidiary
Guarantor, if any, shall execute a notation on and, upon a Company Order, the
Trustee shall authenticate Physical Notes in a principal amount equal to the
principal amount of the Global Note to be transferred.
(b) Transfers to Non-U.S. Persons. The following additional
provisions shall apply with respect to the registration of any proposed transfer
of an Initial Note to any Non-U.S. Person:
(i) the Registrar or co-Registrar shall register the transfer of any
Initial Note, whether or not such Note bears the Private Placement Legend, if
(x) the requested transfer is after the second anniversary of the Issue Date;
provided, however, that neither the Company nor any Affiliate of the Company has
held any beneficial interest in such Note, or portion thereof, at any time on or
prior to the second anniversary of the Issue Date and such transfer can
otherwise be lawfully made under the Securities Act without registering such
Initial Notes thereunder or
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(y) the proposed transferor has delivered to the Registrar or co-Registrar a
certificate substantially in the form of Exhibit E hereto;
(ii) if the proposed transferee is an Agent Member and the Notes to
be transferred consist of Physical Notes which after transfer are to be
evidenced by an interest in the Regulation S Global Note, upon receipt by the
Registrar or co-Registrar of (x) written instructions given in accordance with
the Depository's and the Registrar's or co-Registrar's procedures and (y) the
appropriate certificate, if any, required by clause (y) of paragraph (i) above,
together with any required legal opinions and certifications, the Registrar or
co-Registrar shall register the transfer and reflect on its books and records
the date and an increase in the principal amount of the Regulation S Global Note
in an amount equal to the principal amount of Physical Notes to be transferred,
and the Trustee shall cancel the Physical Notes so transferred;
(iii) if the proposed transferor is an Agent Member seeking to
transfer an interest in the 144A Global Note, upon receipt by the Registrar or
co-Registrar of (x) written instructions given in accordance with the
Depository's and the Registrar's or co-Registrar's procedures and (y) the
appropriate certificate, if any, required by clause (y) of paragraph (i) above,
together with any required legal opinions and certifications, the Registrar or
co-Registrar shall register the transfer and reflect on its books and records
the date and (A) a decrease in the principal amount of the 144A Global Note from
which such interests are to be transferred in an amount equal to the principal
amount of the Notes to be transferred and (B) an increase in the principal
amount of the Regulation S Global Note in an amount equal to the principal
amount of the 144A Global Note to be transferred; and
(iv) until the 41st day after the Issue Date (the "Restricted
Period"), an owner of a beneficial interest in the Regulation S Global Note may
not transfer such interest to a transferee that is a U.S. Person or for the
account or benefit of a U.S. Person within the meaning of Rule 902(k) of the
Securities Act. During the Restricted Period, all beneficial interests in the
Regulation S Global Note shall be transferred only through Cedel or Euroclear,
either directly if the transferor and transferee are participants in such
systems, or indirectly through organizations that are participants.
(c) Transfers to QIBs. The following provisions shall apply with
respect to the registration of any proposed transfer of an Initial Note to a QIB
(excluding Non-U.S. Persons):
(i) the Registrar or co-Registrar shall register the transfer of any
Initial Note, whether or not such Note bears the Private Placement Legend, if
(x) the requested transfer is after the second anniversary of the Issue Date;
provided, however, that neither the Company nor any Affiliate of the Company has
held any beneficial interest in such Note, or portion thereof, at any time on or
prior to the second anniversary of the Issue Date and such transfer can
otherwise be lawfully made under the Securities Act without registering such
Initial Note thereunder or (y) such transfer is being made by a proposed
transferor who has checked the box provided for on the form of Note stating, or
has otherwise advised the Company and the Registrar or co-Registrar in writing,
that the sale has been made in compliance with the provisions of Rule 144A to a
transferee who has signed the certification provided for on the form of Note
stating, or has otherwise advised the Company and the Registrar or co-Registrar
in writing, that it is purchasing the Note for its own account or an account
with respect to which it exercises sole investment discretion and that it and
any such account is a QIB within the meaning of Rule 144A, and is aware that the
sale to it is being made in reliance on Rule 144A and acknowledges that it has
received such information regarding the Company as it has requested pursuant to
Rule 144A or has determined not to request such information and that it is aware
that the transferor is relying upon its foregoing representations in order to
claim the exemption from registration provided by Rule 144A;
(ii) if the proposed transferee is an Agent Member and the Notes to
be transferred consist of Physical Notes which after transfer are to be
evidenced by an interest in the 144A Global Note, upon receipt by the Registrar
or co-Registrar of written instructions given in accordance with the
Depository's and the Registrar's or co-Registrar's procedures, the Registrar or
co-Registrar shall register the transfer and reflect on its book and records the
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date and an increase in the principal amount of the 144A Global Note in an
amount equal to the principal amount of Physical Notes to be transferred, and
the Trustee shall cancel the Physical Note so transferred; and
(iii) if the proposed transferor is an Agent Member seeking to
transfer an interest in the Regulation S Global Note following the expiration of
the Restricted Period, upon receipt by the Registrar or co-Registrar of written
instructions given in accordance with the Depository's and the Registrar's or
co-Registrar's procedures, the Registrar or co-Registrar shall register the
transfer and reflect on its books and records the date and (A) a decrease in the
principal amount of the Regulation S Global Note in an amount equal to the
principal amount of the Notes to be transferred and (B) an increase in the
principal amount of the 144A Global Note in an amount equal to the principal
amount of the Regulation S Global Note to be transferred.
(d) Private Placement Legend. Upon the registration of transfer,
exchange or replacement of Notes not bearing the Private Placement Legend, the
Registrar or co-Registrar shall deliver Notes that do not bear the Private
Placement Legend. Upon the registration of transfer, exchange or replacement of
Notes bearing the Private Placement Legend, the Registrar or co-Registrar shall
deliver only Notes that bear the Private Placement Legend unless (i) the
circumstances contemplated by paragraph (a)(i)(x) of this Section 3.17 exist,
(ii) there is delivered to the Registrar or co-Registrar an Opinion of Counsel
reasonably satisfactory to the Company and the Trustee to the effect that
neither such legend nor the related restrictions on transfer are required in
order to maintain compliance with the provisions of the Securities Act or (iii)
such Note has been sold pursuant to an effective registration statement under
the Securities Act.
(e) Other Transfers. If a Holder proposes to transfer a Note
constituting a Restricted Note pursuant to any exemption from the registration
requirements of the Securities Act other than as provided for by Section
3.17(a), (b) and (c) hereof, the Registrar or co-Registrar shall only register
such transfer or exchange if such transferor delivers an Opinion of Counsel
satisfactory to the Company and the Registrar or co-Registrar that such transfer
is in compliance with the Securities Act and the terms of this Indenture;
provided, however, that the Company may, based upon the opinion of its counsel,
instruct the Registrar or co-Registrar by a Company Order not to register such
transfer in any case where the proposed transferee is not a QIB, Non-U.S. Person
or Institutional Accredited Investor.
(f) General. By its acceptance of any Note bearing the Private
Placement Legend, each Holder of such a Note acknowledges the restrictions on
transfer of such Note set forth in this Indenture and in the Private Placement
Legend and agrees that it will transfer such Note only as provided in this
Indenture.
The Registrar and each co-Registrar shall retain copies of all
letters, notices and other written communications received pursuant to Section
3.16 hereof or this Section 3.17. The Company shall have the right to inspect
and make copies of all such letters, notices or other written communications at
any reasonable time upon the giving of reasonable prior written notice to the
Registrar or co-Registrar.
ARTICLE FOUR
DEFEASANCE OR COVENANT DEFEASANCE
Section 4.01. Company's Option To Effect Defeasance or Covenant
Defeasance.
The Company may, at its option by Board Resolution, at any time,
with respect to the Notes, elect to have either Section 4.02 or Section 4.03
hereof be applied to all of the Outstanding Notes (the "Defeased Notes"), upon
compliance with the conditions set forth below in this Article Four.
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Section 4.02. Defeasance and Discharge.
Upon the Company's exercise under Section 4.01 hereof of the option
applicable to the Defeased Notes pursuant to this Section 4.02, the Company
shall be deemed to have been discharged from its obligations with respect to the
Defeased Notes on the date the conditions set forth below are satisfied
(hereinafter, "defeasance"). For this purpose, such defeasance means that the
Company shall be deemed to have paid and discharged the entire indebtedness
represented by the Defeased Notes, which shall thereafter be deemed to be
"Outstanding" only for the purposes of Section 4.05 and the other Sections of
this Indenture referred to in (a) and (b) below, and to have satisfied all its
other obligations under such Notes and this Indenture insofar as such Notes are
concerned (and the Trustee, at the expense of the Company and upon Company
Request, shall execute proper instruments acknowledging the same), except for
the following, which shall survive until otherwise terminated or discharged
hereunder: (a) the rights of Holders of Defeased Notes to receive, solely from
the trust fund described in Section 4.04 hereof and as more fully set forth in
such Section, payments in respect of the principal of, premium, if any, and
interest on such Notes when such payments are due, (b) the Company's obligations
with respect to such Defeased Notes under Sections 3.04, 3.05, 3.06, 10.02 and
10.03 hereof, (c) the rights, powers, trusts, duties and immunities of the
Trustee hereunder, including, without limitation, the Trustee's rights under
Section 6.07 hereof, and (d) this Article Four. Subject to compliance with this
Article Four, the Company may exercise its option applicable to this Section
4.02 notwithstanding the prior exercise of its option applicable to Section 4.03
hereof with respect to the Notes.
Section 4.03. Covenant Defeasance.
Upon the Company's exercise under Section 4.01 hereof of the option
applicable to the Defeased Notes pursuant to this Section 4.03, the Company
shall be released from its obligations under any covenant or provision contained
in Sections 10.06 through 10.22, 10.25 and 10.26 hereof and the provisions of
Article Eight shall not apply, with respect to the Defeased Notes, on and after
the date the conditions set forth below are satisfied (hereinafter, "covenant
defeasance"), and the Defeased Notes shall thereafter be deemed not to be
"Outstanding" for the purposes of any direction, waiver, consent or declaration
or Act of Holders (and the consequences of any thereof) in connection with such
covenants, but shall continue to be deemed "Outstanding" for all other purposes
hereunder. For this purpose, such covenant defeasance means that, with respect
to the Defeased Notes, the Company may omit to comply with and shall have no
liability in respect of any term, condition or limitation set forth in any such
Sections or Article, whether directly or indirectly, by reason of any reference
elsewhere herein to any such Section or Article or by reason of any reference in
any such Section or Article to any other provision herein or in any other
document and such omission to comply shall not constitute a Default or an Event
of Default under Section 5.01(iii) or (iv) hereof, but, except as specified
above, the remainder of this Indenture and such Defeased Notes shall be
unaffected thereby.
Section 4.04. Conditions to Defeasance or Covenant Defeasance.
The following shall be the conditions to application of either
Section 4.02 or Section 4.03 hereof to the Defeased Notes:
(1) The Company shall irrevocably have deposited or caused to be
deposited with the Trustee (or another trustee satisfying the requirements
of Section 6.09 hereof who shall agree to comply with the provisions of
this Article Four applicable to it) as trust funds in trust for the
purpose of making the following payments, specifically pledged as security
for, and dedicated solely to, the benefit of the Holders of such Notes,
(a) cash (in United States dollars) in an amount, or (b) Government
Securities (denominated in United States dollars) which through the
scheduled payment of principal, premium, if any, and interest in respect
thereof in accordance with their terms will provide, not later than one
day before the due date of any payment, money in an amount, or (c) a
combination thereof, in any such case, sufficient, in the opinion of a
nationally recognized firm of independent public accountants expressed in
a written certification
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thereof delivered to the Trustee, to pay and discharge, and which shall be
applied by the Trustee (or other qualifying trustee) to pay and discharge,
the principal of, premium, if any, and interest on the Defeased Notes at
the Stated Maturity of such principal or installment of principal,
premium, if any, or interest; provided, however, that the Trustee shall
have been irrevocably instructed to apply such cash or the proceeds of
such Government Securities to said payments with respect to the Notes;
(2) No Default shall have occurred and be continuing on the date of
such deposit (other than a Default or Event of Default with respect to
this Indenture resulting from the incurrence of Indebtedness all or a
portion of which will be used to defease the Notes concurrently with such
incurrence) or, insofar as Section 5.01(vii), (viii) or (ix) hereof is
concerned, at any time during the period ending on the ninety-first day
after the date of such deposit;
(3) Neither the Company nor any Subsidiary of the Company is an
"insolvent person" within the meaning of any applicable Bankruptcy Law on
the date of such deposit or at any time during the period ending on the
ninety-first day after the date of such deposit;
(4) Such defeasance or covenant defeasance shall not cause the
Trustee for the Notes to have a conflicting interest in violation of
Section 6.08 hereof and for purposes of the Trust Indenture Act with
respect to any securities of the Company;
(5) Such defeasance or covenant defeasance shall not result in a
breach or violation of, or constitute a default under, this Indenture
(other than as permitted by clause (2) above) or any other material
agreement or instrument to which the Company is a party or by which it is
bound;
(6) In the case of an election under Section 4.02 hereof, the
Company shall have delivered to the Trustee an Opinion of Counsel stating
that (x) the Company has received from, or there has been published by,
the Internal Revenue Service a ruling or (y) since the date hereof, there
has been a change in the applicable Federal income tax law, in either case
to the effect that, and based thereon such opinion shall confirm that, the
Holders of the Outstanding Notes will not recognize income, gain or loss
for Federal income tax purposes as a result of such defeasance and will be
subject to Federal income tax on the same amounts, in the same manner and
at the same times as would have been the case if such defeasance had not
occurred;
(7) In the case of an election under Section 4.03 hereof, the
Company shall have delivered to the Trustee an Opinion of Counsel to the
effect that the Holders of the Outstanding Notes will not recognize
income, gain or loss for Federal income tax purposes as a result of such
covenant defeasance and will be subject to Federal income tax on the same
amounts, in the same manner and at the same times as would have been the
case if such covenant defeasance had not occurred;
(8) The Company shall have delivered to the Trustee an Opinion of
Counsel to the effect that, immediately following the ninety-first day
after the deposit, the trust funds established pursuant to this Article
will not be subject to the effect of any applicable bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights
generally under any applicable U.S. Federal or state law;
(9) The Company shall have delivered to the Trustee an Officers'
Certificate stating that the deposit made by the Company pursuant to its
election applicable to Section 4.02 or 4.03 hereof was not made by the
Company with the intent of preferring the Holders over the other creditors
of the Company or with the intent of defeating, hindering, delaying or
defrauding creditors of the Company or others;
(10) The Company shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that (i) all
conditions precedent (other than conditions requiring the passage of
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time) provided for relating to either the defeasance under Section 4.02 or
the covenant defeasance under Section 4.03 (as the case may be) have been
complied with as contemplated by this Section 4.04 and (ii) if any other
Indebtedness of the Company shall then be outstanding or committed, such
defeasance or covenant defeasance will not violate the provisions of the
agreements or instruments evidencing such Indebtedness; and
(11) Such defeasance or covenant defeasance shall not result in a
trust arising from such deposit constituting an "investment company"
within the meaning of the Investment Company Act of 1940, as amended (the
"Investment Company Act").
Opinions required to be delivered under this Section may have such
qualifications as are customary for opinions of the type required and reasonably
acceptable to the Trustee.
Section 4.05. Deposited Money and Government Securities To Be Held
in Trust; Other Miscellaneous Provisions
Subject to the last paragraph of Section 10.03, all money and
Government Securities (including the proceeds thereof) deposited with the
Trustee (or other qualifying trustee, collectively for purposes of this Section
4.05, the "Trustee") pursuant to Section 4.04 in respect of the Defeased Notes
shall be held in trust and applied by the Trustee, in accordance with the
provisions of such Notes and this Indenture, to the payment, either directly or
through any Paying Agent (other than the Company) as the Trustee may determine,
to the Holders of such Notes of all sums due and to become due thereon in
respect of principal, premium, if any, and interest, but such money need not be
segregated from other funds except to the extent required by law.
The Company shall pay and indemnify the Trustee and hold it harmless
against any tax, fee or other charge imposed on or assessed against the
Government Securities deposited pursuant to Section 4.04 or the principal,
premium, if any, and interest received in respect thereof other than any such
tax, fee or other charge which by law is for the account of the Holders of the
Defeased Notes.
Anything in this Article Four to the contrary notwithstanding, the
Trustee shall deliver or pay to the Company from time to time upon Company
Request any money or Government Securities held by it as provided in Section
4.04 which, in the opinion of an internationally recognized firm of independent
public accountants expressed in a written certification thereof delivered to the
Trustee, are in excess of the amount thereof which would then be required to be
deposited to effect an equivalent defeasance or covenant defeasance.
Section 4.06. Reinstatement.
If the Trustee or Paying Agent is unable to apply any money or
Government Securities in accordance with Section 4.02 or 4.03 hereof, as the
case may be, by reason of any order or judgment of any court or governmental
authority enjoining, restraining or otherwise prohibiting such application, then
the obligations of the Company under this Indenture and the Notes shall be
revived and reinstated as though no deposit had occurred pursuant to Section
4.02 or 4.03 hereof, as the case may be, until such time as the Trustee or
Paying Agent is permitted to apply all such money and Government Securities in
accordance with Section 4.02 or 4.03 hereof, as the case may be; provided,
however, that if the Company makes any payment of principal, premium, if any, or
interest on any Note following 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 and Government Securities held by the Trustee or Paying
Agent.
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ARTICLE FIVE
REMEDIES
Section 5.01. Events of Default.
"Event of Default," wherever used herein, means any one of the
following events (whatever the reason for such Event of Default and whether it
shall be voluntary or involuntary or be effected by operation of law or pursuant
to any judgment, decree or order of any court or any order, rule or regulation
of any administrative or governmental body):
(i) default in the payment of interest on the Notes when it becomes
due and payable and, with respect to any installment of interest after the
first six scheduled interest payments, continuance of such default for a
period of 30 days or more, and, with respect to any of the first six
scheduled interest payments, continuance of such default for a period of
five days or more; or
(ii) default in the payment of the principal of, or premium, if any,
on the Notes when due at maturity, upon redemption or otherwise; or
(iii) default in the performance, or breach, of any covenant
described under Section 10.10, Section 10.15 or Article Eight; or
(iv) default in the performance, or breach, of any covenant in the
Notes, this Indenture (other than defaults specified in clause (i), (ii)
or (iii) above), and continuance of such default or breach for a period of
30 days or more after written notice to the Company by the Trustee or to
the Company and the Trustee by the holders of at least 25% in aggregate
principal amount of the outstanding Notes (in each case, when such notice
is deemed given in accordance with this Indenture); or
(v) (a) failure to pay, following any applicable grace period, any
installment of principal due (whether at maturity or otherwise) under one
or more classes or issues of Indebtedness in an aggregate principal amount
of $7.5 million or more under which the Company or any Restricted
Subsidiary is obligated or (b) failure by the Company or any Restricted
Subsidiary to perform any other term, covenant, condition or provision of
one or more classes or issues of Indebtedness in an aggregate principal
amount of $7.5 million or more under which the Company or such Restricted
Subsidiary is obligated and, in the case of this clause (b), such failure
results in an acceleration of the maturity thereof; or
(vi) one or more judgments, orders or decrees for the payment of
money of $7.5 million or more, either individually or in the aggregate,
shall be entered against the Company or any Restricted Subsidiary or any
of their respective properties and shall not be discharged and there shall
have been a period of 60 consecutive days or more during which a stay of
enforcement of such judgment or order, by reason of pending appeal or
otherwise, shall not be in effect; or
(vii) the Company or any Restricted Subsidiary pursuant to or under
or within the meaning of any Bankruptcy Law:
(A) commences a voluntary case or proceeding;
(B) consents to the entry of a Bankruptcy Order in an
involuntary case or proceeding or the commencement of any case
against it;
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(C) consents to the appointment of a Custodian of it or for
any substantial part of its property;
(D) makes a general assignment for the benefit of its
creditors;
(E) files an answer or consent seeking reorganization or
relief;
(F) shall admit in writing its inability to pay its debts
generally; or
(G) consents to the filing of a petition in bankruptcy; or
(viii) a court of competent jurisdiction in any involuntary case or
proceeding enters a Bankruptcy Order against the Company or any Restricted
Subsidiary, and such Bankruptcy Order remains unstayed and in effect for
60 consecutive days; or
(ix) a Custodian shall be appointed out of court with respect to the
Company or any Restricted Subsidiary with respect to all or any
substantial part of the assets or properties of the Company or any
Restricted Subsidiary; or
(x) this Indenture or the Registration Rights Agreement ceases to be
in force and effect in all material respects (other than with respect to
the invalidity or alleged invalidity of any provision in the Registration
Rights Agreement regarding indemnification for matters arising under the
federal securities laws) or is declared null and void or the Company
denies that it has any further obligation or liability thereunder or gives
notice to that effect (other than by reason of termination or release in
accordance with the terms thereof).
Section 5.02. Acceleration of Maturity, Rescission and Annulment.
If an Event of Default (other than an Event of Default specified in
clause (vi), (vii), or (viii) of Section 5.01 hereof with respect to the Company
or any Restricted Subsidiary) occurs and is continuing, then the Trustee or the
holders of at least 25% in principal amount of the then Outstanding Notes may,
by written notice, and the Trustee upon the request of the holders of not less
than 25% in principal amount of the then Outstanding Notes shall, declare the
Default Amount of all Outstanding Notes to be immediately due and payable and
upon any such declaration such amount shall become immediately due and payable.
If an Event of Default specified in clause (vi), (vii), or (viii) above with
respect to the Company or any Restricted Subsidiary occurs and is continuing,
then the Default Amount of all outstanding Notes 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.
After a declaration of acceleration, the holders of a majority in
aggregate principal amount of the then Outstanding Notes may, by notice to the
Trustee, rescind such declaration of acceleration if all existing Events of
Default, other than nonpayment of the Default Amount of the Notes that has
become due solely as a result of such acceleration, have been cured or waived
and if the rescission of acceleration would not conflict with any judgment or
decree.
Section 5.03. Collection of Indebtedness and Suits for Enforcement
by Trustee.
The Company covenants that, if an Event of Default specified in
Section 5.01(i) or 5.01(ii) shall have occurred and be continuing, then the
Company will, upon demand of the Trustee, pay to the Trustee, for the benefit of
the Holders of such Notes, the whole amount then due and payable on such Notes
for principal, premium, if any, and interest, with interest upon the overdue
principal, premium, if any, and, to the extent that payment of such interest
shall be legally enforceable, upon overdue installments of interest, at the rate
then borne by the Notes;
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and, in addition thereto, such further amount as shall be sufficient to cover
the costs and expenses of collection, including the reasonable compensation,
expenses, disbursements and advances of the Trustee, its agents and counsel.
If the Company fails to pay such amounts forthwith upon such demand,
the Trustee, in its own name and as trustee of an express trust, may, but is not
obligated under this paragraph to, institute a judicial proceeding for the
collection of the sums so due and unpaid and may, but is not obligated under
this paragraph to, prosecute such proceeding to judgment or final decree, and
may, but is not obligated under this paragraph to, enforce the same against the
Company, any Subsidiary Guarantor or any other obligor upon the Notes and
collect the moneys adjudged or decreed to be payable in the manner provided by
law out of the property of the Company, any Subsidiary Guarantor or any other
obligor upon the Notes, wherever situated.
If an Event of Default occurs and is continuing, the Trustee may in
its discretion, but is not obligated under this paragraph to, (i) proceed to
protect and enforce its rights and the rights of the Holders under this
Indenture by such appropriate private or judicial proceedings as the Trustee
shall deem most effectual to protect and enforce such rights, whether for the
specific enforcement of any covenant or agreement contained in this Indenture or
in aid of the exercise of any power granted herein or (ii) proceed to protect
and enforce any other proper remedy. No recovery of any such judgment upon any
property of the Company shall affect or impair any rights, powers or remedies of
the Trustee or the Holders.
Section 5.04. Trustee May File Proofs of Claims.
In case of the pendency of any receivership, insolvency,
liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or
other judicial proceeding relative to the Company, any Subsidiary Guarantor or
any other obligor upon the Notes or the property of the Company, any Subsidiary
Guarantor or of such other obligor or their creditors, the Trustee (irrespective
of whether the principal of the Notes shall then be due and payable as therein
expressed or by declaration or otherwise and irrespective of whether the Trustee
shall have made any demand on the Company or any Subsidiary Guarantor for the
payment of overdue principal or interest) shall be entitled and empowered, by
intervention in such proceeding or otherwise:
(a) to file and prove a claim for the whole amount of principal,
premium, if any, and interest owing and unpaid in respect of the Notes and to
file such 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, fees, expenses, disbursements and advances of the Trustee, its
agents and counsel) and of the Holders allowed in such judicial proceeding, and
(b) to collect and receive any moneys or other property payable or
deliverable on any such claims and to distribute the same; and any Custodian, 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 the Trustee any amount
due it for the reasonable compensation, expenses, disbursements and advances of
the Trustee, its agents and counsel, and any other amounts due the Trustee under
Section 6.07 hereof.
Nothing herein contained shall be deemed to authorize 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.
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Section 5.05. Trustee May Enforce Claims Without Possession of
Notes.
All rights of action and claims under this Indenture or the Notes
may be prosecuted and enforced by the Trustee without the possession of any of
the Notes or the production thereof in any proceeding relating thereto, and any
such proceeding instituted by the Trustee shall be brought in its own name and
as trustee of an express trust, and any recovery of judgment shall, after
provision for the payment of the reasonable compensation, fees, expenses,
disbursements and advances of the Trustee, its agents and counsel, be for the
ratable benefit of the Holders of the Notes in respect of which such judgment
has been recovered.
Section 5.06. Application of Money Collected.
Any money collected by the Trustee pursuant to this Article shall be
applied in the following order, at the date or dates fixed by the Trustee and,
in case of the distribution of such money on account of principal, premium, if
any, or interest, upon presentation of the Notes and the notation thereon of the
payment if only partially paid and upon surrender thereof if fully paid:
First: to the Trustee for amounts due under Section 6.07;
Second: to Holders for interest accrued on the Notes, ratably,
without preference or priority of any kind, according to the amounts due
and payable on the Notes for interest;
Third: to Holders for principal and premium, if any, amounts owing
under the Notes, ratably, without preference or priority of any kind,
according to the amounts due and payable on the Notes for principal and
premium, if any; and
Fourth: the balance, if any, to the Company or any other obligor on
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
5.06.
Section 5.07. Limitation on Suits.
No Holder of any Notes shall have any right to institute any
proceeding, judicial or otherwise, with respect to this Indenture, or for the
appointment of a receiver or trustee, or for any other remedy hereunder, unless
(a) such Holder has previously given written notice to the Trustee
of a continuing Event of Default;
(b) the Holders of not less than 25% in aggregate principal amount
of the then Outstanding Notes shall have made written request to the Trustee to
institute proceedings in respect of such Event of Default in its own name as
Trustee hereunder;
(c) such Holder or Holders have offered to the Trustee reasonable
indemnity against the costs, expenses and liabilities to be incurred in
compliance with such request which is satisfactory to the Trustee;
(d) the Trustee for 60 days after its receipt of such notice,
request and offer of indemnity has failed to institute any such proceeding; and
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(e) no direction inconsistent with such written request has been
given to the Trustee during such 60-day period by the Holders of a majority in
aggregate principal amount of the then Outstanding Notes;
it being understood and intended that no one or more Holders shall have any
right in any manner whatever by virtue of, or by availing of, any provision of
this Indenture, any Note or any Subsidiary Guarantee to affect, disturb or
prejudice the rights of any other Holders, or to obtain or to seek to obtain
priority or preference over any other Holders or to enforce any right under this
Indenture, any Note or any Subsidiary Guarantee, except in the manner provided
in this Indenture and for the equal and ratable benefit of all the Holders.
Section 5.08. Unconditional Right of Holders To Receive Principal,
Premium and Interest
Notwithstanding any other provision in this Indenture, the Holder of
any Note shall have the right, which is absolute and unconditional, to receive
cash payment of the principal of, premium, if any, and (subject to Section 3.07
hereof) interest on such Note on the respective Stated Maturities expressed in
such Note (or, in the case of redemption, on the respective Redemption Date) and
to institute suit for the enforcement of any such payment, and such rights shall
not be impaired without the consent of such Holder.
Section 5.09. Restoration of Rights and Remedies.
If the Trustee or any Holder has instituted any proceeding to
enforce any right or remedy under this Indenture or any Note 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 the
Company, each Subsidiary Guarantor, if any, the Trustee and the Holders shall,
subject to any determination in such proceeding, be restored severally and
respectively to their former positions hereunder, and thereafter all rights and
remedies of the Trustee and the Holders shall continue as though no such
proceeding had been instituted.
Section 5.10. Rights and Remedies Cumulative.
Except as provided in Section 3.06, 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 5.11. Delay or Omission Not Waiver.
No delay or omission of the Trustee or of any Holder of any Note 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 Five 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.
Section 5.12. Control by Majority.
The Holders of a majority in aggregate principal amount of the then
Outstanding Notes shall have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee, or exercising
any trust or power conferred on the Trustee, provided, however, that:
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(a) such direction shall not be in conflict with any rule of law or
with this Indenture or any Note or expose the Trustee to personal liability;
(b) such direction shall not be unduly prejudicial to the rights of
another Holder; and
(c) the Trustee may take any other action deemed proper by the
Trustee, in its discretion, which is not inconsistent with such direction.
Section 5.13. Waiver of Past Defaults.
The Holders of not less than a majority in aggregate principal
amount of the then Outstanding Notes by notice to the Trustee may on behalf of
the Holders of all the Notes waive any past Default or Event of Default
hereunder and its consequences, except a Default or Event of Default
(a) in the payment of the principal of, premium, if any, or interest
on any Note, or
(b) in respect of a covenant or provision hereof which under Article
Nine cannot be modified or amended without the consent of the Holder of each
Outstanding Note affected thereby.
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 thereon.
Section 5.14. Undertaking for Costs.
All parties to this Indenture agree, and each Holder of any Note by
his acceptance thereof shall be deemed to have agreed, that any court may in its
discretion require, 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,
suffered or omitted by it as Trustee, the filing by any party litigant in such
suit of an undertaking to pay the costs of such suit, and that such court may in
its discretion assess reasonable costs, including reasonable attorneys' fees,
against any party litigant in such suit, having due regard to the merits and
good faith of the claims or defenses made by such party litigant; but the
provisions of this Section 5.14 shall not apply to any suit instituted by the
Trustee, to any suit instituted by any Holder, or group of Holders, holding in
the aggregate more than 10% in aggregate principal amount of the then
Outstanding Notes, or to any suit instituted by any Holder for the enforcement
of the payment of the principal of, premium, if any, or interest on any Note on
or after the respective Stated Maturities expressed in such Note (or, in the
case of redemption, on or after the respective Redemption Dates).
Section 5.15. 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 or other law wherever enacted, now or at any time hereafter in force,
which would prohibit or forgive the Company from paying all or any portion of
the principal of, premium, if any, or interest on the Notes contemplated herein
or in the Notes or which may affect the covenants or the performance of this
Indenture; and the Company (to the extent that it may lawfully do so) 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.
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ARTICLE SIX
THE TRUSTEE
Section 6.01. Certain Duties and Responsibilities.
(a) Except during the continuance of an Event of Default:
(1) the Trustee undertakes to perform such duties and only such
duties as are specifically set forth in this Indenture and the TIA, and no
implied covenants or obligations shall be read into this Indenture against
the Trustee; and
(2) in the absence of bad faith on its part, the Trustee may
conclusively rely, as to the truth of the statements and the correctness
of the opinions expressed therein, upon certificates (including Officers'
Certificates) or opinions (including Opinions of Counsel) furnished to the
Trustee and conforming to the requirements of this Indenture; but in the
case of any such certificates or opinions which by provision hereof are
specifically required to be furnished to the Trustee, the Trustee shall be
under a duty to examine the same to determine whether or not they conform
to the requirements of this Indenture.
(b) During the continuance of an Event of Default, the Trustee is
required to exercise such rights and powers vested in it under this Indenture
and use the same degree of care and skill in its exercise thereof as a prudent
person would exercise under the circumstances in the conduct of such person's
own affairs.
(c) No provision of this Indenture shall be construed to relieve the
Trustee from liability for its own negligent action, its own negligent failure
to act, or its own willful misconduct, except that 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.
(d) Whether or not therein expressly so provided, every provision of
this Indenture relating to the conduct or affecting the liability of or
affording protection to the Trustee shall be subject to the provisions of this
Section 6.01.
Section 6.02. Notice of Defaults.
Within 30 days after the occurrence of any Default, the Trustee
shall transmit by mail to all Holders, as their names and addresses appear in
the Note Register, notice of such Default hereunder known to the Trustee, unless
such Default shall have been cured or waived; provided, however, that, except in
the case of a Default or Event of Default in the payment of the principal of,
premium, if any, or interest on any Note or in respect of Article Eight hereof,
the Trustee shall be protected in withholding such notice if and so long as a
trust committee of Responsible Officers of the Trustee in good faith determines
that the withholding of such notice is in the interest of the Holders.
Section 6.03. Certain Rights of Trustee.
Subject to Section 6.01 hereof and the provisions of Section 315 of
the Trust Indenture Act:
(a) the Trustee may 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,
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debenture, note, other evidence of indebtedness or other paper or document
believed by it to be genuine and to have been signed or presented by the proper
party or parties;
(b) the Trustee may request that any request or direction of the
Company mentioned herein be sufficiently evidenced by a Company Request or
Company Order and that any resolution of the Board be sufficiently evidenced by
a Board Resolution thereof;
(c) the Trustee may consult with counsel and any written advice of
such counsel or any Opinion of Counsel 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 in accordance with such advice
or Opinion of Counsel;
(d) 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 pursuant to this Indenture, unless such Holders shall have
offered to the Trustee reasonable security or indemnity against the costs,
expenses and liabilities which might be incurred by the Trustee in compliance
with such request or direction;
(e) the Trustee shall not be liable for any action taken or omitted
by it in good faith and believed by it to be authorized or within the
discretion, rights or powers conferred upon it by this Indenture other than any
liabilities arising out of its own negligence;
(f) 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,
approval, appraisal, bond, debenture, note, coupon, security, other evidence of
indebtedness or other paper or document unless requested in writing so to do by
the Holders of not less than a majority in aggregate principal amount of the
Notes then Outstanding; provided, however, that, if the payment within a
reasonable time to the Trustee of the costs, expenses or liabilities likely to
be incurred by it in the making of such investigation is, in the opinion of the
Trustee, not reasonably assured to the Trustee by the security afforded to it by
the terms of this Indenture, the Trustee may require reasonable indemnity
against such expenses or liabilities as a condition to proceeding; the
reasonable expenses of every such investigation shall be paid by the Company or,
if paid by the Trustee or any predecessor Trustee, shall be repaid by the
Company upon demand; provided, further, the Trustee in its discretion may make
such further inquiry or investigation into such facts or matters as it may deem
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;
(g) the Trustee may execute any of the trusts or powers hereunder or
perform any duties hereunder either directly or by or through agents or
attorneys and the Trustee shall not be responsible for any misconduct or
negligence on the part of any agent or attorney appointed with due care by it
hereunder; and
(h) except with respect to Section 10.01, the Trustee shall have no
duty to inquire as to the performance of the Company's covenants in Article Ten.
In addition, the Trustee shall not be deemed to have knowledge of any Default or
Event of Default hereunder or any default or event of default under the Pledge
and Escrow Agreement except (i) any Event of Default occurring pursuant to
Sections 5.01(i), 5.01(ii) or 10.01 or (ii) any Default or Event of Default of
which a Responsible Officer shall have received written notification or obtained
actual knowledge.
Section 6.04. Trustee Not Responsible for Recitals, Dispositions
of Notes or Application of Proceeds Thereof
The recitals contained herein and in the Notes, except the Trustee's
certificates of authentication, shall be taken as the statements of the Company,
and the Trustee assumes no responsibility for their correctness.
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The Trustee makes no representations as to the validity or sufficiency of this
Indenture or of the Notes, except that the Trustee represents that it is duly
authorized to execute and deliver this Indenture, authenticate the Notes and
perform its obligations hereunder and that the statements to be made by it in
any Statement of Eligibility and Qualification on Form T-1 supplied to the
Company will be true and accurate subject to the qualifications set forth
therein. The Trustee shall not be accountable for the use or application by the
Company of Notes or the proceeds thereof.
Section 6.05. Trustee and Agents May Hold Notes; Collections; Etc.
The Trustee, any Paying Agent, Registrar or co-Registrar or any
other agent of the Company, in its individual or any other capacity, may become
the owner or pledgee of Notes, with the same rights it would have if it were not
the Trustee, Paying Agent, Registrar or co-Registrar or such other agent and,
subject to Section 6.08 hereof and Sections 310 and 311 of the Trust Indenture
Act, may otherwise deal with the Company and receive, collect, hold and retain
collections from the Company with the same rights it would have if it were not
the Trustee, Paying Agent, Registrar or co-Registrar or such other agent.
Section 6.06. Money Held in Trust.
All moneys received by the Trustee shall, until used or applied as
herein provided, be held in trust for the purposes for which they were received,
but need not be segregated from other funds except to the extent required herein
or by law. The Trustee shall not be under any liability for interest on any
moneys received by it hereunder.
Section 6.07. Compensation and Indemnification of Trustee and Its
Prior Claim.
The Company covenants and agrees: (a) to pay to the Trustee from
time to time, and the Trustee shall be entitled to, reasonable compensation for
all services rendered by it hereunder (which shall not be limited by any
provision of law in regard to the compensation of a trustee of an express
trust); (b) to reimburse the Trustee and each predecessor Trustee upon its
request for all reasonable expenses, fees, disbursements and advances incurred
or made by or on behalf of it in accordance with any of the provisions of this
Indenture (including the reasonable compensation, fees, and the expenses and
disbursements of its counsel and of all agents and other Persons not regularly
in its employ), except any such expense, disbursement or advance as may arise
from its negligence or bad faith; and (c) to indemnify the Trustee and each
predecessor Trustee for, and to hold it harmless against, any loss, liability or
expense incurred without negligence or bad faith on its part, arising out of or
in connection with the acceptance or administration of this Indenture or the
trusts hereunder and its duties hereunder, including enforcement of this Section
6.07. The obligations of the Company under this Section to compensate and
indemnify the Trustee and each predecessor Trustee and to pay or reimburse the
Trustee and each predecessor Trustee for expenses, fees, disbursements and
advances shall constitute an additional obligation hereunder and shall survive
the satisfaction and discharge of this Indenture. To secure the obligations of
the Company to the Trustee under this Section 6.07, the Trustee shall have a
prior Lien upon all property and funds held or collected by the Trustee as such,
except funds and property paid by the Company and held in trust for the benefit
of the Holders of particular Notes.
Section 6.08. Conflicting Interests.
The Trustee shall be subject to and comply with the provisions of
Section 310(b) of the Trust Indenture Act.
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Section 6.09. Corporate Trustee Required; Eligibility.
There shall at all times be a Trustee hereunder which shall be
eligible to act as Trustee under Trust Indenture Act Sections 310(a)(1) and (2)
and which shall have (or, in the case of a Trustee that is an Affiliate of a
bank holding company, its Affiliated bank holding company shall have) a combined
capital and surplus of at least $25,000,000 and a corporate trust office or
agency in the Borough of Manhattan in The City of New York, State of New York.
If such corporation publishes reports of condition at least annually, pursuant
to law or to the requirements of any Federal, state, territorial or District of
Columbia supervising or examining authority, then for the purposes of this
Section, the combined capital and surplus of such corporation shall be deemed to
be its combined capital and surplus as set forth in its most recent report of
condition so published. If at any time the Trustee shall cease to be eligible in
accordance with the provisions of this Section, the Trustee shall resign
immediately in the manner and with the effect hereinafter specified in this
Article.
Section 6.10. Resignation and Removal; Appointment of Successor
Trustee.
(a) No resignation or removal of the Trustee and no appointment of a
successor Trustee pursuant to this Article shall become effective until the
acceptance of appointment by the successor Trustee under Section 6.11.
(b) The Trustee, or any trustee or trustees hereinafter appointed,
may at any time resign by giving written notice thereof to the Company at least
20 Business Days prior to the date of such proposed resignation. Upon receiving
such notice of resignation, the Company shall promptly appoint a successor
trustee by written instrument executed by authority of the Board, a copy of
which shall be delivered to the resigning Trustee and a copy to the successor
Trustee. If an instrument of acceptance by a successor Trustee shall not have
been delivered to the Trustee within 20 Business Days after the giving of such
notice of resignation, the resigning Trustee may, or (if an instrument of
acceptance by a successor Trustee shall not have been delivered to the Trustee
within 30 Business Days after the giving of such notice of resignation) any
Holder who has been a bona fide Holder of a Note for at least six months may, on
behalf of himself and all others similarly situated, petition any court of
competent jurisdiction for the appointment of a successor Trustee. Such court
may thereupon, after such notice, if any, as it may deem proper, appoint a
successor Trustee.
(c) The Trustee may be removed at any time by an Act of the Holders
of a majority in aggregate principal amount of the then Outstanding Notes,
delivered to the Trustee and to the Company.
(d) If at any time:
(1) the Trustee shall fail to comply with the provisions of Section
310(b) of the Trust Indenture Act in accordance with Section 6.08 hereof
after written request therefor by the Company or by any Holder who has
been a bona fide Holder of a Note for at least six months, or
(2) the Trustee shall cease to be eligible under Section 6.09 hereof
and shall fail to resign after written request therefor by the Company or
by any Holder who has been a bona fide Holder of a Note for at least six
months, or
(3) the Trustee shall become incapable of acting or shall be
adjudged a bankrupt or insolvent, or a receiver of the Trustee or of its
property shall be appointed or any public officer shall take charge or
control of the Trustee or of its property or affairs for the purpose or
rehabilitation, conservation or liquidation,
then, in any case, (i) the Company by a Board Resolution may remove the Trustee,
or (ii) subject to Section 5.14, the Holder of any Note who has been a bona fide
Holder of a Note for at least six months may, on behalf of himself and
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all others similarly situated, petition any court of competent jurisdiction for
the removal of the Trustee and the appointment of a successor Trustee. Such
court may thereupon, after such notice, if any, as it may deem proper and
prescribe, remove the Trustee and appoint a successor Trustee.
(e) If the Trustee shall resign, be removed or become incapable of
acting, or if a vacancy shall occur in the office of Trustee for any cause, the
Company, by a Board Resolution, shall promptly appoint a successor Trustee. If,
within one year after such resignation, removal or incapability, or the
occurrence of such vacancy, a successor Trustee shall be appointed by Act of the
Holders of a majority in aggregate principal amount of the then Outstanding
Notes delivered to the Company and the retiring Trustee, the successor Trustee
so appointed shall, forthwith upon its acceptance of such appointment, become
the successor Trustee and supersede the successor Trustee appointed by the
Company. If no successor Trustee shall have been so appointed by the Company or
the Holders of the Notes and accepted appointment in the manner hereinafter
provided, the Holder of any Note who has been a bona fide Holder for at least
six months may, subject to Section 5.14, on behalf of himself and all others
similarly situated, or the resigning Trustee may, petition any court of
competent jurisdiction for the appointment of a successor Trustee.
(f) The Company shall give notice of each resignation and each
removal of the Trustee and each appointment of a successor Trustee by mailing
written notice of such event by first-class mail, postage prepaid, to the
Holders of Notes as their names and addresses appear in the Note Register. Each
notice shall include the name of the successor Trustee and the address of its
Corporate Trust Office.
Section 6.11. Acceptance of Appointment by Successor.
Every successor Trustee appointed hereunder shall execute,
acknowledge and deliver to the Company and to the retiring Trustee an instrument
accepting such appointment, and thereupon the resignation or removal of the
retiring Trustee shall become effective and such successor Trustee, without any
further act, deed or conveyance, shall become vested with all the rights,
powers, trusts and duties of the retiring Trustee as if originally named as
Trustee hereunder; but, nevertheless, on the written request of the Company or
the successor Trustee, upon payment of amounts due it pursuant to Section 6.07,
such retiring Trustee shall duly assign, transfer and deliver to the successor
Trustee all moneys and property at the time held by it hereunder and shall
execute and deliver an instrument transferring to such successor Trustee all the
rights, powers, duties and obligations of the retiring Trustee. Upon request of
any such successor Trustee, the Company shall execute any and all instruments
for more fully and certainly vesting in and confirming to such successor Trustee
all such rights and powers. Any Trustee ceasing to act shall, nevertheless,
retain a prior claim upon all property or funds held or collected by such
Trustee to secure any amounts then due it pursuant to the provisions of Section
6.07.
No successor Trustee with respect to the Notes shall accept
appointment as provided in this Section 6.11 unless at the time of such
acceptance such successor Trustee shall be eligible to act as Trustee under this
Article.
Upon acceptance of appointment by any successor Trustee as provided
in this Section 6.11, the successor shall give notice thereof to the Holders of
the Notes, by mailing such notice to such Holders at their addresses as they
shall appear on the Note Register. If the acceptance of appointment is
substantially contemporaneous with the resignation, then the notice called for
by the preceding sentence may be combined with the notice called for by Section
6.10. If the Company fails to give such notice within 10 days after acceptance
of appointment by the successor Trustee, the successor Trustee shall cause such
notice to be given at the expense of the Company.
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Section 6.12. Merger, Conversion, Amalgamation, Consolidation or
Succession to Business
Any corporation into which the Trustee may be merged or converted or
with which it may be consolidated or amalgamated, or any corporation resulting
from any merger, conversion, amalgamation or consolidation to which the Trustee
shall be a party, or any corporation succeeding to all or substantially all of
the corporate trust business of the Trustee (including the trust created by this
Indenture), shall be the successor of the Trustee hereunder without the
execution or filing of any paper or any further act on the part of any of the
parties hereto, provided such corporation shall be eligible under this Article
Six to serve as Trustee hereunder.
In case at the time such successor to the Trustee under this Section
6.12 shall succeed to the trusts created by this Indenture any of the Notes
shall have been authenticated but not delivered, any such successor to the
Trustee may adopt the certificate of authentication of any predecessor Trustee
and deliver such Notes so authenticated; and, in case at that time any of the
Notes shall not have been authenticated, any successor to the Trustee under this
Section 6.12 may authenticate such Notes either in the name of any predecessor
hereunder or in the name of the successor Trustee; and in all such cases such
certificate shall have the full force which it is anywhere in the Notes or in
this Indenture provided that the certificate of the Trustee shall have been
authenticated.
ARTICLE SEVEN
HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY
Section 7.01. Preservation of Information; Company To Furnish
Trustee Names and Addresses of Holders
(a) The Trustee shall preserve the names and addresses of the
Holders and otherwise comply with TIA Section 312(a). If the Trustee is not the
Registrar or co-Registrar, the Company shall furnish or cause the Registrar or
co-Registrar to furnish to the Trustee before each Interest Payment Date, and at
such other times as the Trustee may reasonably request in writing, a list in
such form and as of such date as the Trustee may reasonably require of the names
and addresses of the Holders. Neither the Company nor the Trustee shall be under
any responsibility with regard to the accuracy of such list.
(b) The Company will furnish or cause to be furnished to the
Trustee:
(i) semi-annually, not more than 15 days after each Regular Record
Date, a list, in such form as the Trustee may reasonably require, of the
names and addresses of the Holders as of such Regular Record Date; and
(ii) at such other times as the Trustee may reasonably request in
writing, within 30 days after receipt by the Company of any such request,
a list of similar form and content as of a date not more than 15 days
prior to the time such list is furnished;
provided, however, that if and so long as the Trustee shall be the Registrar or
co-Registrar, no such list need be furnished pursuant to this Subsection
7.01(b).
Section 7.02. Communications of Holders.
Holders may communicate with other Holders with respect to their
rights under this Indenture or under the Notes pursuant to Section 312(b) of the
Trust Indenture Act. The Company and the Trustee and any and all other Persons
benefited by this Indenture shall have the protection afforded by Section 312(c)
of the Trust Indenture Act.
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Section 7.03. Reports by Trustee.
Within 60 days after April 15th of each year commencing with the
first April 15th following the date of this Indenture, the Trustee shall mail to
all Holders, as their names and addresses appear in the Note Register, a brief
report dated as of such April 15th, in accordance with and to the extent
required under Section 313 of the Trust Indenture Act. At the time of its
mailing to Holders, a copy of each such report shall be filed by the Trustee
with the Company, the Commission and, if required by the rules of any such stock
exchange or market, with each stock exchange or market on which the Notes are
listed. The Company shall notify the Trustee when the Notes are listed on any
stock exchange or market.
ARTICLE EIGHT
CONSOLIDATION, MERGER, SALE OF ASSETS, ETC.
Section 8.01. Company May Consolidate, etc., Only on Certain Terms.
The Company will not (i) consolidate or combine with or merge with
or into or, directly or indirectly, sell, assign, convey, lease, transfer or
otherwise dispose of all or substantially all of its properties and assets to
any Person or Persons in a single transaction or through a series of
transactions, or (ii) permit any of the Restricted Subsidiaries to enter into
any such transaction or series of transactions if it would result in the
disposition of all or substantially all of the properties or assets of the
Company and the Restricted Subsidiaries on a consolidated basis, unless, in the
case of either (i) or (ii), (a) the Company shall be the continuing Person or,
if the Company is not the continuing Person, the resulting, surviving or
transferee Person (the "surviving entity") shall be a company organized and
existing under the laws of the United States or any State or territory thereof;
(b) the surviving entity (if other than the Company) shall expressly assume all
of the obligations of the Company under the Notes and this Indenture, and shall
execute a supplemental indenture to effect such assumption which supplemental
indenture shall be delivered to the Trustee and shall be in form and substance
reasonably satisfactory to the Trustee; (c) immediately after giving effect to
such transaction or series of transactions on a pro forma basis (including,
without limitation, any Indebtedness incurred or anticipated to be incurred in
connection with or in respect of such transaction or series of transactions),
(I) the Company or the surviving entity (assuming such surviving entity's
assumption of the Company's obligations under the Notes and this Indenture), as
the case may be, would be able to incur $1.00 of Indebtedness (other than
Permitted Indebtedness) under the proviso of Section 10.11, and (II) the Company
or the surviving entity, as the case may be, would have a Consolidated Net Worth
equal to or greater than the Consolidated Net Worth of the Company immediately
prior to such transaction or series of transactions; (d) immediately after
giving effect to such transaction or series of transactions on a pro forma basis
(including, without limitation, any Indebtedness incurred or anticipated to be
incurred in connection with or in respect of such transaction or series of
transactions), no Default shall have occurred and be continuing; and (e) the
Company or the surviving entity, as the case may be, shall have delivered to the
Trustee an Officers' Certificate and an Opinion of Counsel stating that such
transaction or series of transactions, and, if a supplemental indenture is
required in connection with such transaction or series of transactions to
effectuate such assumption, such supplemental indenture, complies with this
covenant and that all conditions precedent in this Indenture relating to the
transaction or series of transactions have been satisfied.
Section 8.02. Successor Substituted.
Upon any consolidation or merger or any sale, assignment,
conveyance, lease, transfer or other disposition of all or substantially all of
the assets of the Company in accordance with the foregoing in which the Company
or the Restricted Subsidiary, as the case may be, is not the continuing
corporation, then the successor corporation formed by such a consolidation or
into which the Company or such Restricted Subsidiary is merged or to which such
transfer is made, will succeed to, and be substituted for, and may exercise
every right and power of, the Company or such Restricted Subsidiary, as the case
may be, under this Indenture and the Notes with the same
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effect as if such successor corporation had been named as the Company or such
Restricted Subsidiary therein; and thereafter, except in the case of (i) any
lease or (ii) any sale, assignment, conveyance, transfer, lease or other
disposition to a Restricted Subsidiary of the Company, the Company shall be
discharged from all obligations and covenants under this Indenture and the
Notes.
For all purposes of this Indenture (including the provisions of this
Article Eight and Sections 10.11, 10.13 and 10.16 hereof) and the Notes,
Subsidiaries of any surviving entity will, upon such transaction or series of
related transactions, become Restricted Subsidiaries or Unrestricted
Subsidiaries as provided pursuant to Section 10.20 hereof, and all Indebtedness,
and all Liens on property or assets, of the surviving entity and the Restricted
Subsidiaries (except Indebtedness, or Liens on property or assets, of the
Company and the Restricted Subsidiaries in existence immediately prior to such
transaction or series of related transactions) shall be deemed to have been
incurred upon such transaction or series of related transactions.
ARTICLE NINE
SUPPLEMENTAL INDENTURES AND WAIVERS
Section 9.01. Supplemental Indentures, Agreements and Waivers
Without Consent of Holders
Without the consent of any Holders, the Company and any Subsidiary
Guarantor, when authorized by a Board Resolution, and the Trustee, together, at
any time and from time to time, may amend, waive, modify or supplement this
Indenture or the Notes for any of the following purposes:
(a) to evidence the succession of another Person to the Company, and
the assumption by any such successor of the covenants of the Company in the
Notes and this Indenture;
(b) to add to the covenants of the Company for the benefit of the
Holders, or to surrender any right or power herein conferred upon the Company in
the Notes or this Indenture;
(c) to cure any ambiguity, or to correct or supplement any provision
in this Indenture or in the Notes which may be defective or inconsistent with
any other provision herein or to make any other provisions with respect to
matters or questions arising under this Indenture or the Notes; provided,
however, that, in each case, such provisions shall not adversely affect the
legal rights of the Holders;
(d) to comply with the requirements of the Commission in order to
effect or maintain the qualification of this Indenture under the Trust Indenture
Act, as contemplated by Section 9.05 hereof or otherwise;
(e) to evidence and provide the acceptance of the appointment of a
successor Trustee hereunder;
(f) to mortgage, pledge, hypothecate or grant a security interest in
any property or assets in favor of the Trustee for the benefit of the Holders as
security for the payment and performance of the Indenture Obligations;
(g) to provide for issuance of the Exchange Notes, which will have
terms substantially identical in all material respects to the Initial Notes
(except that the transfer restrictions contained in the Initial Notes will be
modified or eliminated, as appropriate), and which will be treated together with
any outstanding Initial Notes, as a single issue of securities;
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(h) to add or release a Subsidiary Guarantor in compliance with the
provisions of Section 10.22 hereof; or
(i) to make any other change that does not adversely affect in any
material respect the legal rights of any Holder;
provided, however, that the Company has delivered to the Trustee an Opinion of
Counsel stating that such change, agreement or waiver complies with the
provisions of this Section 9.01.
Section 9.02. Supplemental Indentures, Agreements and Waivers with
Consent of Holders
With the written consent of the Holders of not less than a majority
in aggregate principal amount of the Outstanding Notes delivered to the Company
and the Trustee, the Company, when authorized by a Board Resolution, together
with the Trustee, may amend, waive, modify or supplement any other provision of
this Indenture or the Notes; provided, however, that no such amendment, waiver,
modification or supplement may, without the written consent of the Holder of
each Outstanding Note affected thereby:
(i) reduce the principal amount of, change the fixed maturity of, or
alter the redemption provisions of, the Notes,
(ii) change the currency in which any Notes or amounts owing thereon
is payable,
(iii) reduce the percentage of the aggregate principal amount
Outstanding of Notes which must consent to an amendment, supplement or
waiver or consent to take any action under this Indenture or the Notes,
(iv) impair the right to institute suit for the enforcement of any
payment on or with respect to the Notes,
(v) waive a Default in payment with respect to the Notes, other than
a waiver consisting of the rescission of any declaration of acceleration
with respect to the Notes effected in compliance with Section 5.02,
(vi) reduce the rate or change the time for payment of interest on
the Notes,
(vii) following the occurrence of a Change of Control or an Asset
Sale, alter the Company's obligation to purchase the Notes in accordance
with this Indenture or waive any Default in the performance thereof, or
(viii) affect the ranking of the Notes in a manner adverse to the
Holders of the Notes.
Upon the written request of the Company accompanied by a Board
Resolution authorizing the execution of any such supplemental indenture or other
agreement, instrument or waiver, and upon the filing with the Trustee of
evidence of the consent of Holders as aforesaid, the Trustee shall join with the
Company in the execution of such supplemental indenture or other agreement,
instrument or waiver.
It shall not be necessary for any Act of Holders under this Section
to approve the particular form of any proposed supplemental indenture or other
agreement, instrument or waiver, but it shall be sufficient if such Act shall
approve the substance thereof.
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Section 9.03. Execution of Supplemental Indentures, Agreements and
Waivers.
In executing, or accepting the additional trusts created by, any
supplemental indenture, agreement, instrument or waiver permitted by this
Article Nine or the modifications thereby of the trusts created by this
Indenture, the Trustee shall be entitled to receive, and (subject to Section
6.01 hereof) shall be fully protected in relying upon, an Opinion of Counsel and
an Officers' Certificate from each obligor under the Notes entering into such
supplemental indenture, agreement, instrument or waiver, each stating that the
execution of such supplemental indenture, agreement, instrument or waiver (a) is
authorized or permitted by this Indenture and (b) does not violate the
provisions of any agreement or instrument evidencing any other Indebtedness of
the Company or any other Subsidiary of the Company. The Trustee may, but shall
not be obligated to, enter into any such supplemental indenture, agreement,
instrument or waiver which affects the Trustee's own rights, duties or
immunities under this Indenture, the Notes or otherwise.
Section 9.04. Effect of Supplemental Indentures.
Upon the execution of any supplemental indenture under this Article
Nine, this Indenture and/or the Notes, if applicable, shall be modified in
accordance therewith, and such supplemental indenture shall form a part of this
Indenture and/or the Notes, if applicable, as the case may be, for all purposes;
and every Holder of Notes theretofore or thereafter authenticated and delivered
hereunder shall be bound thereby.
Section 9.05. Conformity with Trust Indenture Act.
Every supplemental indenture executed pursuant to this Article Nine
shall conform to the requirements of the Trust Indenture Act as then in effect.
Section 9.06. Reference in Notes to Supplemental Indentures.
Notes authenticated and delivered after the execution of any
supplemental indenture pursuant to this Article, may, and shall if required by
the Trustee, bear a notation in form approved by the Trustee as to any matter
provided for in such supplemental indenture. If the Company shall so determine,
new Notes so modified as to conform, in the opinion of the Trustee and the
Board, to any such supplemental indenture may be prepared and executed by the
Company and authenticated and delivered by the Trustee upon a Company Order in
exchange for Outstanding Notes.
In addition, Notes authenticated and delivered after the execution
of any supplemental indenture in compliance with Section 10.22 and this Article
shall, if required by the Trustee, bear a notation substantially in the form
annexed hereto as Annex A to Exhibit B, and new Notes bearing such notation
shall be prepared and executed by the Company, with such notation executed by
the Subsidiary Guarantors, if any . The Trustee, upon a Company Order, shall
thereafter authenticate and deliver such Notes in exchange for Outstanding
Notes.
Section 9.07. Record Date.
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
supplemental indenture, agreement or instrument or any waiver, and shall
promptly notify the Trustee of any such record date. If a record date is fixed
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
supplemental indenture, agreement or instrument 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.
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Section 9.08. Revocation and Effect of Consents.
Until an amendment or waiver becomes effective, a consent to it by a
Holder of a Note 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
consenting Holder's Note, even if a notation of the consent is not made on any
Note. However, any such Holder, or subsequent Holder, may revoke the consent as
to his Note or portion of a Note if the Trustee receives the notice of
revocation before the date the amendment or waiver becomes effective. An
amendment or waiver shall become effective in accordance with its terms and
thereafter bind every Holder.
ARTICLE TEN
COVENANTS
Section 10.01. Payment of Principal, Premium and Interest.
The Company will duly and punctually pay the principal of, premium,
if any, and interest on the Notes in accordance with the terms of the Notes,
this Indenture and the Registration Rights Agreement.
Notwithstanding anything to the contrary contained in this
Indenture, the Company may, to the extent it is required to do so by law, deduct
or withhold income or other similar taxes imposed by the United States of
America from principal, premium or interest payments hereunder.
Section 10.02. Maintenance of Office or Agency.
The Company will maintain in the Borough of Manhattan in The City of
New York, State of New York, an office or agency where Notes may be presented or
surrendered for payment, where Notes may be surrendered for registration of
transfer or exchange and where notices and demands to or upon the Company in
respect of the Notes and this Indenture may be served. The office of State
Street Bank and Trust Company, N.A., an Affiliate of the Trustee, at its
Corporate Trust Office will be such office or agency of the Company, unless the
Company shall designate and maintain some other office or agency for one or more
of such purposes. The Company will give prompt written notice to the Trustee of
any change in the location of any 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 Corporate Trust Office of the
Trustee, and the Company hereby appoints the Trustee as its agent to receive all
such presentations, surrenders, notices and demands.
The Company may also from time to time designate one or more other
offices or agencies (in or outside of The City of New York, State of New York)
where the Notes may be presented or surrendered for any or all such purposes,
and may from time to time rescind such designation; provided, however, that no
such designation or rescission shall in any manner relieve the Company of its
obligation to maintain an office or agency in The City of New York, State of New
York for such purposes. The Company will give prompt written notice to the
Trustee of any such designation or rescission and any change in the location of
any such other office or agency.
Section 10.03. Money for Note Payments To Be Held in Trust.
If the Company shall at any time act as its own Paying Agent, it
will, on or before each due date of the principal of, premium, if any, or
interest on any of the Notes, segregate and hold in trust for the benefit of the
Holders entitled thereto a sum sufficient to pay the principal, premium, if any,
or interest so becoming due until such sums shall be paid to such Persons or
otherwise disposed of as herein provided, and will promptly notify the Trustee
of its action or failure so to act.
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If the Company is not acting as Paying Agent, the Company will, on
or before each due date of the principal of, premium, if any, or interest on,
any Notes, deposit with a Paying Agent a sum in same day funds sufficient to pay
the principal, premium, if any, or interest so becoming due, such sum to be held
in trust for the benefit of the Holders entitled to such principal, premium or
interest, and (unless such Paying Agent is the Trustee) the Company will
promptly notify the Trustee of such action or any failure so to act.
If the Company is not acting as Paying Agent, the Company will cause
each Paying Agent other than the Trustee to execute and deliver to the Trustee
an instrument in which such Paying Agent will agree with the Trustee, subject to
the provisions of this Section 10.03, that such Paying Agent will:
(a) hold all sums held by it for the payment of the principal of,
premium, if any, or interest on Notes in trust for the benefit of the Holders
entitled thereto until such sums shall be paid to such Holders or otherwise
disposed of as herein provided;
(b) give the Trustee notice of any Default by the Company (or any
other obligor upon the Notes) in the making of any payment of principal of,
premium, if any, or interest on the Notes;
(c) at any time during the continuance of any such payment Default,
upon the written request of the Trustee, forthwith pay to the Trustee all sums
so held in trust by such Paying Agent; and
(d) acknowledge, accept and agree to comply in all aspects with the
provisions of this Indenture relating to the duties, rights and liabilities of
such Paying Agent.
The Company may at any time, for the purpose of obtaining the
satisfaction and discharge of this Indenture or for any other purpose, pay, or
by Company Order direct any Paying Agent to pay, to the Trustee all sums held in
trust by the Company or such Paying Agent, such sums to be held by the Trustee
upon the same trusts as those upon which such sums were held by the Company or
such Paying Agent; and, upon such payment by any Paying Agent to the Trustee,
such Paying Agent will be released from all further liability with respect to
such money.
Any money deposited with the Trustee or any Paying Agent, or then
held by the Company, in trust for the payment of the principal of, premium, if
any, or interest on any Note and remaining unclaimed for two years after such
principal, premium, if any, or interest has become due and payable shall be paid
to the Company upon receipt of a Company Request therefor, or (if then held by
the Company) will be discharged from such trust; and the Holder of such Note
will thereafter, as an unsecured general creditor, look only to the Company for
payment thereof, and all liability of the Trustee or such Paying Agent with
respect to such trust money, and all liability of the Company as trustee
thereof, will thereupon cease; provided, however, that the Trustee or such
Paying Agent, before being required to make any such repayment, may at the
expense of the Company cause to be published once, at the option of the Company
in the New York Times or the Wall Street Journal (national edition), notice that
such money remains unclaimed and that, after a date specified therein, which
shall not be less than 30 days from the date of such publication, any unclaimed
balance of such money then remaining shall be repaid to the Company.
Section 10.04. Corporate Existence.
Subject to Article Eight, the Company will do or cause to be done
all things necessary to preserve and keep in full force and effect the corporate
existence, rights (charter and statutory), licenses and franchises of the
Company and each of the Restricted Subsidiaries; provided, however, that the
Company will not be required to preserve any such right, license or franchise if
the Board shall determine that the preservation thereof is no longer desirable
in the conduct of the business of the Company and the Restricted Subsidiaries as
a whole and that the loss thereof is not adverse in any material respect to the
Holders; provided, further, that the foregoing will not prohibit a
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sale, transfer or conveyance of a Restricted Subsidiary of the Company or any of
its assets in compliance with the terms of this Indenture.
Section 10.05. Payment of Taxes and Other Claims.
The Company will pay or discharge or cause to be paid or discharged,
before the same shall become delinquent, (a) all material taxes, assessments and
governmental charges levied or imposed (i) upon the Company or any of the
Restricted Subsidiaries or (ii) upon the income, profits or property of the
Company or any of the Restricted Subsidiaries and (b) all material lawful claims
for labor, materials and supplies, which, if unpaid, could reasonably be
expected to become a Lien upon the property of the Company or any of the
Restricted Subsidiaries; provided, however, that the Company will not be
required to pay or discharge or cause to be paid or discharged any such tax,
assessment, charge or claim (x) whose amount, applicability or validity is being
contested in good faith by appropriate proceedings properly instituted and
diligently conducted or (y) if the failure to so pay, discharge or cause to be
paid or discharged could not reasonably be expected to have a Material Adverse
Effect (as such term is defined in the Purchase Agreement).
Section 10.06. Maintenance of Properties.
The Company will cause all material properties owned by the Company
or any of the Restricted Subsidiaries that are used or held for use in the
conduct of their respective businesses to be maintained and kept in good
condition, repair and working order (subject to ordinary wear and tear) 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 and advantageously conducted at all times;
provided, however, that nothing in this Section 10.06 will prevent the Company
from discontinuing the maintenance of any of such properties if such
discontinuance is, in the judgment of the Company, desirable in the conduct of
its business or the business of any of the Restricted Subsidiaries and is not
disadvantageous in any material respect to the Holders.
Section 10.07. Insurance.
The Company will at all times keep all of its and the Restricted
Subsidiaries' properties which are of an insurable nature insured with insurers
(including appropriate self-insurance), believed by the Company in good faith to
be financially sound and responsible, against loss or damage to the extent that,
in the good faith judgment of the Board, property of similar character is
usually and customarily so insured by corporations similarly situated and owning
like properties.
Section 10.08. Books and Records.
The Company will keep proper books of record and account, in which
full and correct entries will be made of all financial transactions and the
assets and business of the Company and each Restricted Subsidiary of the Company
in compliance with GAAP.
Section 10.09. Provision of Commission Reports.
Whether or not the Company is subject to Section 13(a) or 15(d) of
the Exchange Act or any successor provision of law, the Company shall furnish
without cost to each Holder, and file with the Trustee, (i) within 135 days
after the end of each fiscal year of the Company, financial information with
respect to the Company that would be required to be contained in an Annual
Report on Form 10-K for such year filed by the Company with the Commission
(whether or not the Company is then required to file such Form with the
Commission), including (x) audited financial statements of the Company,
including the report of the Company's independent auditors thereon, and (y) a
discussion of the Company's financial condition and results of operations that
complies with Item
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303 of Regulation S-K of the Commission, (ii) within 60 days after the end of
each of the first three fiscal quarters of each fiscal year of the Company,
financial information with respect to the Company that would be required to be
contained in a Quarterly Report on Form 10-Q filed by the Company with the
Commission (whether or not the Company is then required to file such Form with
the Commission), including a discussion of the Company's financial condition and
results of operations that complies with Item 303 of Regulation S-K of the
Commission and (iii) on a timely basis, any information concerning the Company
or any Restricted Subsidiary required to be contained in a Current Report on
Form 8-K (whether or not the Company is then required to file such Form with the
Commission), and, unless such information is included or incorporated in a Form
10-K, Form 10-Q or Form 8-K filed by the Company with the Commission, the
Company shall file a copy of all such information described in clauses (i), (ii)
and (iii) above with the Commission (if permitted by Commission practice and
applicable law and regulations).
For so long as any Notes remain Outstanding, the Company shall
furnish to securities analysts and prospective investors, upon their request,
information of the type required to be delivered pursuant to Rule 144A(d)(4)
under the Securities Act, and, to any beneficial holder of Notes, if not
obtainable from the Commission, information of the type that would be filed with
the Commission pursuant to the foregoing provisions, upon the request of any
such Holder.
Delivery of the foregoing 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 the Trustee of any information
contained therein or determinable from information 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 will also comply with the other provisions of Section
314(a) of the Trust Indenture Act.
Section 10.10. Change of Control.
Upon the occurrence of a Change of Control (the date of such
occurrence being the "Change of Control Date"), the Company shall make an offer
to purchase (the "Change of Control Offer"), on a Business Day (the "Change of
Control Payment Date") not later than 60 days following the Change of Control
Date, all Notes then outstanding at a purchase price equal to 101% of the
principal amount thereof, plus accrued and unpaid interest thereon, if any, to,
such Change of Control Payment Date. Notice of a Change of Control Offer shall
be mailed to holders of Notes not less than 30 days nor more than 60 days before
the Change of Control Payment Date.
Notice of a Change of Control Offer shall be mailed by the Company
to the Holders at their last registered addresses with a copy to the Trustee and
the Paying Agent. The Change of Control Offer shall remain open from the time of
mailing for at least 20 Business Days and until 5:00 p.m., New York City time,
on the Change of Control Payment Date. The notice, which shall govern the terms
of the Change of Control Offer, shall include such disclosures as are required
by law and shall state:
(a) that the Change of Control Offer is being made pursuant to this
Section 10.10 and that all Notes validly tendered into the Change of Control
Offer and not withdrawn will be accepted for payment;
(b) the purchase price (including the amount of accrued interest, if
any) for each Note, the Change of Control Payment Date and the date on which the
Change of Control Offer expires;
(c) that any Note not tendered for payment will remain Outstanding
and continue to accrue interest in accordance with the terms thereof;
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(d) that, unless the Company shall default in the payment of the
purchase price, any Note accepted for payment pursuant to the Change of Control
Offer shall cease to accrue interest after the Change of Control Payment Date;
(e) that Holders electing to have Notes purchased pursuant to a
Change of Control Offer will be required to surrender their Notes to the Paying
Agent at the address specified in the notice prior to 5:00 p.m., New York City
time, on the Change of Control Payment Date and must complete any form letter of
transmittal proposed by the Company and acceptable to the Trustee and the Paying
Agent;
(f) that a Holder that tenders a Note pursuant to a Change of
Control Offer will be entitled to withdraw such Note if the Paying Agent
receives, not later than 5:00 p.m., New York City time, on the Change of Control
Payment Date, a facsimile transmission or letter setting forth the name of such
Holder, the principal amount of Note the Holder tendered for purchase, the Note
certificate number (if any) and a statement that such Holder is withdrawing his
election to have such Note purchased;
(g) that a Holder may tender all or any portion of a Note owned by
such Holder pursuant to the Change of Control Offer, subject to the requirement
that any portion of a Note tendered must be tendered in an integral multiple of
$1,000 in principal amount, and that any Holder that tenders a portion of a Note
will be issued a Note of like tenor equal in principal amount to the portion of
the Note not tendered;
(h) the instructions that Holders must follow in order to tender
their Notes; and
(i) information concerning the business of the Company, the most
recent annual and quarterly reports of the Company filed with the Commission
pursuant to the Exchange Act (or, if the Company is not required to file any
such reports with the Commission at that time, the comparable information
prepared pursuant to Section 10.09), a description of material developments in
the Company's business and such other information concerning the circumstances
and relevant facts regarding such Change of Control and Change of Control Offer
(including, without limitation, pro forma financial information giving effect to
such Change of Control) as would, in the good faith judgment of the Company, be
material to a Holder in connection with the decision of such Holder as to
whether or not it should tender Notes pursuant to the Change of Control Offer.
On the Change of Control Payment Date, the Company shall (i) accept
for payment all Notes, or portions thereof, validly tendered and not withdrawn
pursuant to the Change of Control Offer, (ii) deposit with the Paying Agent
money, in immediately available funds, sufficient to pay the purchase price of
all Notes, or portions thereof, so tendered and accepted and (iii) deliver to
the Trustee the Notes so accepted together with an Officers' Certificate setting
forth the registered numbers of such Notes. The Paying Agent shall, with the
funds so deposited with it by the Company, promptly mail or deliver to each
Holder that validly tendered and did not withdraw Notes, or any portion thereof,
an amount equal to the purchase price for the portion so tendered, and the
Trustee shall promptly authenticate and mail or deliver to such Holder a new
Note of like tenor equal in principal amount to that portion, if any, of any
Note surrendered by such Holder but not tendered pursuant to the Change of
Control Offer. The Company will publicly announce or otherwise notify the
Holders of the results of the Change of Control Offer as soon as practicable
following the Change of Control Payment Date. The Company shall not be required
to make a Change of Control Offer following a Change of Control if a third party
makes the Change of Control Offer in the manner, at the times and otherwise in
compliance with the requirements applicable to a Change of Control Offer
otherwise required to be made by the Company and purchases all Notes validly
tendered and not withdrawn under such Change of Control Offer.
If the Company is required to make a Change of Control Offer, the
Company (or any such third party) shall comply with all applicable tender offer
laws and regulations, including, to the extent applicable, Section 14(e) and
Rule 14e-1 under the Exchange Act, and any other applicable securities laws and
regulations. To the extent that the provisions of any such securities laws or
regulations conflict with the provisions of this Section
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10.10, the Company will comply with the applicable securities laws and
regulations and shall not be deemed to have breached its obligations under this
Section 10.10 solely by virtue of such compliance.
Section 10.11. Limitation on Additional Indebtedness.
The Company will not, and will not permit any Restricted Subsidiary
to, directly or indirectly, create, incur, assume, issue, Guarantee or in any
manner become directly or indirectly liable for or with respect to, contingently
or otherwise, the payment of (collectively, to "incur") any Indebtedness
(including any Acquired Indebtedness), except for Permitted Indebtedness
(including Acquired Indebtedness to the extent it would constitute Permitted
Indebtedness); provided, that (i) the Company will be permitted to incur
Indebtedness (including Acquired Indebtedness) and (ii) a Restricted Subsidiary
will be permitted to incur Acquired Indebtedness, if, in either case, after
giving pro forma effect to such incurrence (including the application of the net
proceeds therefrom), the Indebtedness to EBITDA Ratio would be less than or
equal to 6 to 1.
Indebtedness of any Person or any of its Subsidiaries existing at
the time such Person becomes a Restricted Subsidiary (or is merged into or
consolidated with the Company or any Restricted Subsidiary), whether or not such
Indebtedness was incurred in connection with, or in contemplation of, such
Person becoming a Restricted Subsidiary (or being merged into or consolidated
with the Company or any Restricted Subsidiary) shall be deemed incurred at the
time such Person becomes a Restricted Subsidiary or merges into or consolidates
with the Company or any Restricted Subsidiary.
For purposes of determining compliance with this Section 10.11, in
the event that an item of Indebtedness may be incurred by meeting the criteria
of one or more items of Permitted Indebtedness, the Company may, in its sole
discretion, classify and divide such item of Indebtedness among more than one of
such items of Permitted Indebtedness.
Accrual of interest, accretion or amortization of original issue
discount and reductions in any collateral described in clause (B) of the
definition of "Indebtedness" by reason of payments of interest on the
Indebtedness secured by such collateral will not be deemed to be an incurrence
of Indebtedness for purposes of this Section 10.11.
Section 10.12. Statement by Officers as to Default.
The Company will deliver to the Trustee, within 120 days after the
end of each fiscal year of the Company ending after the date hereof, a written
statement signed by the chairman or the chief executive officer and by the
principal financial officer or principal accounting officer of the Company,
stating (i) that a review of the activities of the Company during the preceding
fiscal year has been made under the supervision of the signing Officers with a
view to determining whether the Company has kept, observed, performed and
fulfilled its obligations under this Indenture, and (ii) that, to the knowledge
of each Officer signing such certificate, the Company has kept, observed,
performed and fulfilled in all material respects each and every covenant and
condition contained in this Indenture and is not in default in the performance
or observance of any of the terms, provisions, conditions and covenants hereof
(or, if a Default shall have occurred, describing all such Defaults of which
such Officers have knowledge, their status and what action the Company is taking
or proposes to take with respect thereto). When any Default under this Indenture
has occurred and is continuing, or if the Trustee or any Holder or the trustee
for or the holder of any other evidence of Indebtedness of the Company or any
Restricted Subsidiary gives any notice or takes any other action with respect to
a claimed Default (other than with respect to Indebtedness (other than
Indebtedness evidenced by the Notes) in the principal amount of less than $5
million), the Company will promptly notify the Trustee of such Default, notice
or action and will deliver to the Trustee by registered or certified mail or by
telegram, or facsimile transmission followed by hard copy by registered or
certified mail an Officers' Certificate specifying such event, notice or other
action within five Business Days after the Company becomes aware of such
occurrence and what action the Company is taking or proposes to take with
respect thereto.
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Section 10.13. Limitation on Restricted Payments.
The Company will not, and will not permit any of the Restricted
Subsidiaries to, make, directly or indirectly, any Restricted Payment unless:
(i) no Default shall have occurred and be continuing at the time of
or upon giving effect to such Restricted Payment;
(ii) immediately after giving effect to such Restricted Payment, the
Company would be able to incur $1.00 of Indebtedness under the proviso of
Section 10.11 hereof; and
(iii) immediately after giving effect to such Restricted Payment,
the aggregate amount of all Restricted Payments declared or made on or
after the Issue Date does not exceed an amount equal to the sum of,
without duplication, (a) 50% of Consolidated Net Income accrued on a
cumulative basis during the period beginning on the first day of the first
fiscal quarter immediately subsequent to the Issue Date and ending on the
last day of the fiscal quarter of the Company immediately preceding the
date of such proposed Restricted Payment (or, if such cumulative
Consolidated Net Income of the Company for such period is a deficit, minus
100% of such deficit) for which financial statements are available, in any
event determined by excluding income resulting from transfers of assets by
the Company or a Restricted Subsidiary to an Unrestricted Subsidiary, plus
(b) the aggregate net cash proceeds received by the Company either (x) as
capital contributions to the Company after May 5, 1998 or (y) from the
issuance and sale of its Capital Stock (other than Disqualified Stock) or
options, warrants or other rights to acquire its Capital Stock (other than
Disqualified Stock), in each case on or after May 5, 1998 to a Person who
is not a Subsidiary of the Company, plus (c) the aggregate net proceeds
received by the Company from the issuance (other than to a Subsidiary of
the Company) on or after May 5, 1998 of its Capital Stock (other than
Disqualified Stock) upon the conversion of, or in exchange for,
Indebtedness of the Company or upon the exercise of options, warrants or
other rights of the Company, plus (d) in the case of the disposition or
repayment (in whole or in part) of any Investment constituting a
Restricted Payment made after the Issue Date, an amount equal to the
lesser of the return of capital with respect to the applicable portion of
such Investment and the cost of the applicable portion of such Investment,
in either case, less the cost of the disposition of such Investment, plus
(e) in the case of any Revocation with respect to a Subsidiary of the
Company that was made subject to a Designation after the Issue Date, an
amount equal to the lesser of the Designation Amount with respect to such
Subsidiary or the Fair Market Value of the Investment of the Company and
the Restricted Subsidiaries in such Subsidiary at the time of Revocation.
For purposes of the preceding clauses (b) (y) and (c), as applicable, (A)
the value of the aggregate net proceeds received by the Company upon the
issuance of Capital Stock either upon the conversion of convertible
Indebtedness or in exchange for outstanding Indebtedness or upon the
exercise of options, warrants or rights will be the net cash proceeds
received upon the issuance of such Indebtedness, options, warrants or
rights plus the incremental amount received, if any, by the Company upon
the conversion, exchange or exercise thereof, (B) there shall be excluded
in all cases any issuance and sale of Capital Stock financed, directly or
indirectly, using funds (I) borrowed from the Company or any Subsidiary
until and to the extent such borrowing is repaid or (II) contributed,
extended, Guaranteed or advanced by the Company or any Subsidiary
(including, without limitation, direct contributions by the Company in
respect of any employee stock ownership or benefit plan) and (C) there
shall be excluded in all cases any issuance and sale of Capital Stock in
one or more Public Equity Offerings or to Strategic Equity Investors to
the extent the net cash proceeds are used, prior to April 15, 2002, to
redeem Notes as permitted under the optional redemption provisions of the
Notes. The Company may not redeem Notes pursuant to the optional
redemption provisions of the Notes referred to in the immediately
preceding sentence from net cash proceeds received by the Company from the
issuance on or after the Issue Date of its Capital Stock if such net cash
proceeds have ever been included in a determination of the amount of
Restricted Payments that
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may be made by the Company pursuant to this Section 10.13, unless the
Company would have been able to make such Restricted Payment without
including such net cash proceeds in such determination.
For purposes of determining the amount expended for Restricted
Payments, cash distributed shall be valued at the face amount thereof and
property other than cash shall be valued at its Fair Market Value.
The provisions of this Section 10.13 shall not prohibit the
following (each of which shall be given independent effect):
(1) the payment of any dividend or other distribution within 60 days
after the date of declaration thereof if at such date of declaration such
payment would be permitted by the provisions of this Indenture;
(2) the purchase, redemption, retirement or other acquisition of any
shares of Capital Stock of the Company in exchange for, or out of the net cash
proceeds of the substantially concurrent issue and sale (other than to a
Subsidiary of the Company) of, shares of Capital Stock of the Company (other
than Disqualified Stock); provided that any such net cash proceeds are excluded
from clause (iii)(b) above;
(3) so long as no Default shall have occurred and be continuing, the
purchase, redemption, retirement, defeasance or other acquisition of
Subordinated Indebtedness (A) made by exchange for, or out of the net cash
proceeds of, a substantially concurrent issue and sale (other than to a
Subsidiary of the Company) of (x) Capital Stock (other than Disqualified Stock)
of the Company, provided that any such net cash proceeds are excluded from
clause (iii) (b) above; or (y) other Subordinated Indebtedness to the extent
that (I) its stated maturity for the payment of principal thereof is not prior
to the 91st day after the final Stated Maturity of the Notes, (II) its principal
amount does not exceed the principal amount (or, if such Subordinated
Indebtedness being refinanced provides for an amount less than the principal
amount thereof to be due and payable upon an acceleration thereof, such lesser
amount) of the Subordinated Indebtedness being refinanced, plus any premium
required to be paid in connection with such refinancing pursuant to the terms of
such Subordinated Indebtedness being refinanced, plus the amount of expenses of
the Company incurred in connection with such refinancing, and (III) such new
Subordinated Indebtedness is subordinated to the Notes to the same extent as the
Subordinated Indebtedness being refinanced, or (B) with Unutilized Cash Proceeds
remaining after completion of an Asset Sale pursuant to the fifth paragraph of
Section 10.15 hereof;
(4) so long as no Default shall have occurred and be continuing,
purchases or redemptions of Capital Stock (including cash settlements of stock
options) held by employees, officers or directors upon or following termination
(whether by reason of death, disability or otherwise) of their employment with
the Company or one of its Subsidiaries; provided that payments shall not exceed
$500,000 in any fiscal year in the aggregate;
(5) payments or distributions to dissenting stockholders pursuant to
applicable law, pursuant to or in contemplation of merger, consolidation or
transfer of assets that complies with the provisions of the Indenture relating
to mergers, consolidations or transfers of substantially all of the assets of
the Company;
(6) any purchase of any fractional share of Common Stock of the
Company in connection with an exercise of the 1998 Warrants and any repurchase
of 1998 Warrants pursuant to a Repurchase Offer (as defined in the 1998 Warrant
Agreement); and
(7) Restricted Payments in addition to those otherwise permitted
pursuant to this Section 10.13 in an aggregate amount not to exceed $10.0
million.
In determining the amount of Restricted Payments permissible under
this Section 10.13, amounts expended pursuant to clauses (1), (4) and (7) above
shall be included, without duplication, as Restricted Payments.
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Section 10.14. Limitation on Transactions with Affiliates.
The Company shall not, and shall not permit, cause or suffer any
Restricted Subsidiary to, directly or indirectly, conduct any business, sell,
lease, transfer or otherwise dispose of any of its properties or assets to, or
purchase any property or assets from, or enter into any contract, agreement,
loan, advance or Guarantee or engage in any other transaction (or series of
related transactions which are similar or part of a common plan) with or for the
benefit of any of their respective Affiliates or any beneficial owner of 10% or
more of the Common Stock of the Company or any officer or director of the
Company or any Subsidiary (each, an "Affiliate Transaction"), unless the terms
of the Affiliate Transaction are set forth in writing and are no less favorable
to the Company or such Restricted Subsidiary, as the case may be, than would be
available in a comparable transaction with an unaffiliated third party. Each
Affiliate Transaction (or series of related Affiliate Transactions) involving
aggregate payments and/or other consideration having Fair Market Value (i) in
excess of $1 million shall be approved by a majority of the Board, such approval
to be evidenced by a Board Resolution stating that the Board has determined that
such transaction or transactions comply with the foregoing provisions, (ii) in
excess of $5 million shall further require the approval of a majority of the
Disinterested Directors and (iii) in excess of $10 million shall further require
that the Company obtain a written opinion from an Independent Financial Advisor
stating that the terms of such Affiliate Transaction (or series of related
Affiliate Transactions) are fair to the Company or the Restricted Subsidiary, as
the case may be, from a financial point of view; provided, that this clause
(iii) shall not apply to purchases of goods and/or services in the ordinary
course of the Company's business, and on terms no less favorable to the Company
than those customarily granted to purchasers of such goods and/or services, from
Paradyne Corporation or Xylan Corporation. For purposes of this Section 10.14,
any Affiliate Transaction approved by a majority of the Disinterested Directors
or as to which a written opinion has been obtained from an Independent Financial
Advisor, on the basis set forth in the preceding sentence, shall be deemed to be
on terms that are no less favorable to the Company or such Restricted
Subsidiary, as the case may be, than would be available in a comparable
transaction with an unaffiliated third party and, therefore, shall be permitted
under this Section 10.14.
Notwithstanding the foregoing, the restrictions set forth in this
Section 10.14 shall not apply to (i) transactions with or among, or solely for
the benefit of, the Company and/or any of the Restricted Subsidiaries, provided
that in any such case, no officer, director or beneficial owner of 10% or more
of any class of Capital Stock of the Company shall beneficially own any Capital
Stock of any such Restricted Subsidiary, (ii) transactions pursuant to
agreements and arrangements existing on the Issue Date and specified on a
schedule to the Indenture, (iii) any Restricted Payment made in compliance with
Section 10.13, (iv) the payment of reasonable and customary regular fees to
directors of the Company or any Restricted Subsidiary who are not employees of
the Company or any Restricted Subsidiary, (v) employment agreements, stock
option agreements and indemnification arrangements entered into by the Company
or any of its Restricted Subsidiaries in the ordinary course of business and
consistent with industry practice, (vi) the granting and performance of
registration rights for securities of the Company, (vii) loans and advances to
officers, directors and employees of the Company or any Restricted Subsidiary
for travel, entertainment, moving and other relocation expenses, in each case
made in the ordinary course of business and consistent with industry practice,
and (viii) any Permitted Investment.
Section 10.15. Disposition of Proceeds of Asset Sales
The Company will not, and will not permit any Restricted Subsidiary
to, make any Asset Sale unless (a) the Company or such Restricted Subsidiary, as
the case may be, receives consideration at the time of such Asset Sale at least
equal to the Fair Market Value of the shares or assets sold or otherwise
disposed of and (b) at least 75% of such consideration consists of cash or Cash
Equivalents; provided that the following shall be treated as cash for purposes
of this Section 10.15: (x) the amount of any Indebtedness (other than
Subordinated Indebtedness) of the Company or any Restricted Subsidiary that is
actually assumed by the transferee of assets disposed of in such Asset Sale
pursuant to an agreement that fully and unconditionally releases the Company or
such Restricted Subsidiary from further liability ("Assumed Indebtedness") and
(y) the amount of any notes or other obligations that within 30 days of receipt
are converted into cash (to the extent of the cash (after payment of any costs
of disposition)
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so received). Notwithstanding the immediately preceding sentence, the Company
and its Restricted Subsidiaries may consummate an Asset Sale without complying
with clause (b) of the immediately preceding sentence if at least 75% of the
consideration for such Asset Sale consists of any combination of cash, Cash
Equivalents and Permitted Business Assets (or in Capital Stock of any Person
that will become a Restricted Subsidiary as a result of such investment if all
or substantially all of the properties and assets of such Person are Permitted
Business Assets); provided that any non-cash consideration (other than Permitted
Business Assets received by the Company or any of its Restricted Subsidiaries in
connection with such Asset Sale) that is converted into or sold or otherwise
disposed of for cash or Cash Equivalents within 365 days after such Asset Sale
and any Permitted Business Assets constituting cash or Cash Equivalents received
by the Company or any Restricted Subsidiary shall constitute Net Cash Proceeds
subject to the provisions of this Section 10.15. The Company or the applicable
Restricted Subsidiary, as the case may be, may (i) apply the Net Cash Proceeds
from such Asset Sale, within 365 days of the receipt thereof, to the permanent
reduction (whether by means of repayment, release pursuant to clause (x) of the
first sentence of this Section 10.15 or otherwise) of (A) Indebtedness of any
Restricted Subsidiary and/or (B) Indebtedness of the Company ranking senior to
or pari passu with the Notes, and, in each case, permanently reduce the amount
of the commitments thereunder by the amount of the Indebtedness so repaid,
and/or (ii) apply such Net Cash Proceeds, within 365 days of the receipt
thereof, to an investment in properties and assets (including leases of such
properties or assets) that will be used or are usable in the same or a related
line of business as that being conducted by the Company or any Restricted
Subsidiary at the time of such Asset Sale or such investment therein
(collectively, "Permitted Business Assets") (or in Capital Stock of any Person
that will become a Restricted Subsidiary as a result of such investment if all
or substantially all of the properties and assets of such Person are Permitted
Business Assets).
To the extent all or part of the Net Cash Proceeds of any Asset Sale
are not applied within 365 days of such Asset Sale as described in clause (i) or
(ii) of the preceding paragraph (such Net Cash Proceeds, the "Unutilized Net
Cash Proceeds"), the Company shall, within 20 Business Days after such 365th
day, make an offer to purchase (an "Asset Sale Offer") all outstanding Notes up
to a maximum principal amount (expressed as a multiple of $1,000) equal to the
Note Pro Rata Share of Unutilized Net Cash Proceeds, at a purchase price in cash
equal to 100% of the principal amount thereof, plus accrued and unpaid interest,
if any, to such purchase date; provided, however, that an Asset Sale Offer may
be deferred by the Company until there are Unutilized Net Cash Proceeds equal to
at least $5.0 million, at which time the entire amount of such Unutilized Net
Cash Proceeds (and not just the amount in excess of $5.0 million) shall be
applied as required pursuant to this paragraph and the next following paragraph.
If any other Indebtedness of the Company which ranks pari passu with
the Notes (the "Other Indebtedness"), including the 1998 Notes, requires that an
offer to repurchase such Indebtedness be made upon the consummation of an Asset
Sale, then the Company may apply the Unutilized Net Cash Proceeds otherwise
required to be applied to an Asset Sale Offer to offer to purchase such Other
Indebtedness and to an Asset Sale Offer so long as the amount of such Unutilized
Net Cash Proceeds applied to repurchase the Notes is not less than the Note Pro
Rata Share of Unutilized Net Cash Proceeds. Any offer to purchase such Other
Indebtedness shall be made at the same time as the Asset Sale Offer, and the
purchase date in respect of any such offer to purchase and the Asset Sale Offer
shall occur on the same day.
For purposes of this Section 10.15, "Note Pro Rata Share of
Unutilized Net Cash Proceeds" means the amount of the Unutilized Net Cash
Proceeds equal to the product of (x) the Unutilized Net Cash Proceeds and (y) a
fraction, the numerator of which is the aggregate principal amount of, and all
accrued interest thereon to the purchase date on, all Notes (or portions
thereof) validly tendered and not withdrawn pursuant to an Asset Sale Offer
related to such Unutilized Net Cash Proceeds (the "Note Amount") and the
denominator of which is the sum of the Note Amount and the lesser of (i) the
aggregate principal face amount, and all accrued interest thereon to the
purchase date, or (ii) the accreted value as of the purchase date of all Other
Indebtedness (or portions thereof) validly tendered and not withdrawn pursuant
to a concurrent offer to purchase such Other Indebtedness made at the time of
such Asset Sale Offer.
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Each Asset Sale Offer shall remain open for a period of 20 Business
Days or such longer period as may be required by law. To the extent that the
principal amount, plus accrued interest thereon, if any, to the payment date, of
Notes validly tendered and not withdrawn pursuant to an Asset Sale Offer is less
than the Unutilized Net Cash Proceeds or the Note Pro Rata Share of Unutilized
Net Cash Proceeds, as the case may be, the Company or any Restricted Subsidiary
may use such excess for general corporate purposes, including the repayment or
repurchase of Indebtedness. If the principal amount, plus accrued interest
thereon, if any, to the payment date, of Notes validly tendered and not
withdrawn by holders thereof exceeds the amount of Notes which can be purchased
with the Unutilized Net Cash Proceeds or the Note Pro Rata Share of Unutilized
Net Cash Proceeds, as the case may be, then the Notes to be purchased will be
selected on a pro rata basis. Upon completion of such Asset Sale Offer and offer
for any Other Indebtedness, the amount of Unutilized Net Cash Proceeds shall be
reset to zero.
Notice of an Asset Sale Offer shall be mailed by the Company not
more than 20 Business Days after the obligation to make such Asset Sale Offer
arises to the Holders of Notes at their last registered addresses with a copy to
the Trustee and the Paying Agent. The Asset Sale Offer shall remain open from
the time of mailing for at least 20 Business Days and until 5:00 p.m., New York
City time, on the date fixed for purchase of Notes validly tendered and not
withdrawn, which date shall be not later than the 30th Business Day following
the mailing of such Asset Sale Offer (the "Asset Sale Offer Purchase Date"). The
notice, which shall govern the terms of the Asset Sale Offer, shall include such
disclosures as are required by law and shall state:
(a) that the Asset Sale Offer is being made pursuant to this Section
10.15 and that all Notes validly tendered into the Asset Sale Offer and
not withdrawn will be accepted for payment; provided, however, that if the
aggregate principal amount of Notes tendered in an Asset Sale Offer, plus
accrued interest, if any, thereon to the Asset Sale Offer Purchase Date of
such offer exceeds the aggregate amount of the Note Pro Rata Share of
Unutilized Net Cash Proceeds, the Trustee shall select the Notes to be
purchased on a pro rata basis (with such adjustments as may be deemed
appropriate by the Trustee so that only Notes in denominations of $1,000
or multiples thereof shall be purchased);
(b) the purchase price (including the amount of accrued interest, if
any) for each Note, the Asset Sale Offer Purchase Date and the date on
which the Asset Sale Offer expires;
(c) that any Note not tendered for payment will remain Outstanding
and continue to accrue interest in accordance with the terms thereof;
(d) that, unless the Company shall default in the payment of the
purchase price, any Note accepted for payment pursuant to the Asset Sale
Offer shall cease to accrue interest after the Asset Sale Offer Purchase
Date;
(e) that Holders electing to have Notes purchased pursuant to the
Asset Sale Offer will be required to surrender their Notes to the Paying
Agent at the address specified in the notice prior to 5:00 p.m., New York
City time, on the Asset Sale Offer Purchase Date and must complete any
form letter of transmittal proposed by the Company and acceptable to the
Trustee and the Paying Agent;
(f) that a Holder of Notes will be entitled to withdraw its Notes
from the Asset Sale Offer if the Paying Agent receives, not later than
5:00 p.m., New York City time, on the Asset Sale Offer Purchase Date, a
facsimile transmission or letter setting forth the name of such Holder,
the principal amount of each Note such Holder delivered for purchase that
such Holder elects to withdraw, the Note certificate number (if any) and a
statement that such Holder is withdrawing his election to have such Notes
(or a specified portion thereof) purchased;
(g) that Holders whose Notes are purchased only in part will be
issued Notes of like tenor equal in principal amount to the unpurchased
portion of the Notes surrendered;
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(h) the instructions that Holders must follow in order to validly
tender their Notes; and
(i) information concerning the business of the Company, the most
recent annual and quarterly reports of the Company filed with the
Commission pursuant to the Exchange Act (or, if the Company is not
required to file any such reports with the Commission at that time, the
comparable information prepared pursuant to Section 10.09), a description
of material developments in the Company's business, and such other
information concerning the circumstances and relevant facts regarding such
Asset Sale (including, without limitation, pro forma financial information
giving effect to such Asset Sale) and Asset Sale Offer as would, in the
good faith judgment of the Company, be material to a Holder of Notes in
connection with the decision of such Holder as to whether or not it should
tender Notes pursuant to the Asset Sale Offer.
On the Asset Sale Offer Purchase Date, the Company shall (i) accept
for payment Notes or portions thereof validly tendered and not withdrawn
pursuant to the Asset Sale Offer, subject to pro ration under the circumstances
and in the manner described in clause (a) of the preceding paragraph, (ii)
deposit with the Paying Agent money, in immediately available funds, sufficient
to pay the purchase price of all Notes or portions thereof so accepted by the
Company and (iii) deliver to the Trustee the Notes so accepted (in whole or in
part) together with an Officers' Certificate setting forth the registered
numbers of such Notes. The Paying Agent shall, with the funds so deposited with
it by the Company, promptly mail or deliver to the Holders of Notes so accepted
payment in an amount equal to the purchase price therefor, and the Trustee shall
promptly authenticate and mail or deliver to such Holders new Notes of like
tenor equal in principal amount to the unpurchased portion of the Notes
surrendered in the Asset Sale Offer and not purchased by the Company. The
Company will publicly announce or otherwise notify the Holders of the results of
the Asset Sale Offer as promptly as practicable following the Asset Sale Offer
Purchase Date.
If the Company is required to make an Asset Sale Offer, the Company
shall comply with all applicable tender offer rules, including to the extent
applicable, Section 14(e) and Rule 14e-1 under the Exchange Act, and any other
applicable securities laws and regulations. To the extent that the provisions of
any such securities laws or regulations conflict with the provisions of this
Section 10.15, the Company will comply with the applicable securities laws and
regulations and shall not be deemed to have breached its obligations under this
Section 10.15 solely by virtue of such compliance.
Section 10.16. Limitation on Liens Securing Certain Indebtedness.
The Company will not, and will not permit any Restricted Subsidiary
to, create, incur, assume or suffer to exist any Liens of any kind against or
upon any of the property or assets of the Company or any Restricted Subsidiary,
whether now owned or hereafter acquired, or any proceeds therefrom, which secure
either (x) Subordinated Indebtedness, unless the Notes are secured by a Lien on
such property, assets or proceeds that is senior in priority to the Liens
securing such Subordinated Indebtedness, or (y) Indebtedness of (A) the Company
that is not Subordinated Indebtedness, or (B) any Restricted Subsidiary, unless
in each case the Notes are equally and ratably secured with the Liens securing
such other Indebtedness, except, in the case of clauses (x) and (y), for
Permitted Liens and for Liens to secure Debt Securities on cash representing the
proceeds of such Debt Securities or on Government Securities acquired with such
cash and pledged for the purpose of providing for the payment of principal of,
and/or interest on, such Debt Securities.
Section 10.17. Limitation on Status as Investment Company.
The Company will not, and will not permit any of its Subsidiaries or
Affiliates to, conduct its business in a fashion that would cause the Company to
be required to register as an "investment company" (as that term is defined in
the Investment Company Act), or otherwise become subject to regulation under the
Investment Company Act. For purposes of establishing the Company's compliance
with this provision, any exemption that is or
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would become available under Section 3(c)(1) or Section 3(c)(7) of the
Investment Company Act will be disregarded.
Section 10.18. Limitation on Issuances and Sales 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
(or any options, warrants or other rights to purchase such Capital Stock) of a
Restricted Subsidiary, except (i) any sale or issuance of Capital Stock to the
Company or a Wholly Owned Restricted Subsidiary, (ii) any sale or issuance of
Common Stock to directors as director qualifying shares, but only to the extent
required under applicable law, (iii) any sale or other disposition of all, but
not less than all, of the issued and outstanding Capital Stock of any Restricted
Subsidiary owned by the Company and the Restricted Subsidiaries or (iv) any sale
or issuance of Capital Stock of a Restricted Subsidiary (other than pursuant to
clauses (i) or (ii)) if such Restricted Subsidiary would no longer be a
Restricted Subsidiary immediately after such transaction and any Investment in
such Person remaining after giving effect to such sale or issuance would have
been permitted to be made under Section 10.13 hereof, and, in the case of both
(iii) and (iv), in compliance with Section 10.15 hereof.
Section 10.19. Limitation on Dividends and Other Payment
Restrictions Affecting Restricted Subsidiaries
The Company will not, and will not permit any Restricted Subsidiary
to, directly or indirectly, create or otherwise enter into or cause to become
effective any encumbrance or restriction of any kind on the ability of any
Restricted Subsidiary to (a) pay dividends, in cash or otherwise, or make any
other distributions on its Capital Stock or any other interest or participation
in, or measured by, its profits to the extent owned by the Company or any
Restricted Subsidiary, (b) pay any Indebtedness owed to the Company or any
Restricted Subsidiary, (c) make any Investment in the Company or any Restricted
Subsidiary or (d) transfer any of its properties or assets to the Company or to
any Restricted Subsidiary, except for (i) any encumbrance or restriction in
existence on the Issue Date, (ii) customary non-assignment provisions, (iii) any
encumbrances or restriction pertaining to an asset subject to a Lien to the
extent set forth in the security documentation governing such Lien, (iv) any
encumbrance or restriction applicable to a Restricted Subsidiary at the time
that it becomes a Restricted Subsidiary that is not created in contemplation
thereof, (v) any encumbrance or restriction existing under any agreement that
refinances or replaces an agreement containing a restriction permitted by clause
(iv) above; provided that the terms and conditions of any such encumbrance or
restriction are not materially less favorable to the holders of Notes than those
under or pursuant to the agreement being replaced or the agreement evidencing
the Indebtedness refinanced, (vi) any encumbrance or restriction imposed upon a
Restricted Subsidiary pursuant to an agreement which has been entered into for
the sale or disposition of all or substantially all of the Capital Stock or
assets of such Restricted Subsidiary or any Asset Sale to the extent limited to
the Capital Stock or assets in question, and (vii) any customary encumbrance or
restriction applicable to a Restricted Subsidiary that is contained in an
agreement or instrument governing or relating to Permitted Indebtedness
contained in any Debt Securities or Permitted Credit Facility; provided that the
terms and conditions of any such encumbrance or restriction contained in any
Debt Securities are no more restrictive than those contained in this Indenture;
provided, further, that (subject to customary net worth, leverage, invested
capital and other financial covenants and the absence of default under such
agreement or instrument) the provisions of such agreement or instrument permit
the payment of interest and principal and mandatory repurchases pursuant to the
terms of this Indenture and the Notes and other Indebtedness (other than
Subordinated Indebtedness) that is solely an obligation of the Company; and
provided, further, that such agreement or instrument may contain customary
covenants regarding the merger of or sale of all or any substantial part of the
assets of the Company or any Restricted Subsidiary, customary restrictions on
transactions with affiliates and customary subordination provisions governing
indebtedness owed to the Company or any Restricted Subsidiary.
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Section 10.20. Limitation on Designations of Unrestricted
Subsidiaries
The Company will not designate any Subsidiary of the Company (other
than a newly created Subsidiary in which the Company has made an Investment of
$1,000 or less) as an "Unrestricted Subsidiary" under this Indenture (a
"Designation") unless:
(a) no Default shall have occurred and be continuing at the time of
or after giving effect to such Designation; and
(b) the Company would be permitted under this Indenture to make an
Investment at the time of such Designation (assuming the effectiveness of
such Designation) in an amount (the "Designation Amount") equal to the
Fair Market Value of the interest of the Company and its Restricted
Subsidiaries in such Subsidiary on such date.
In the event of any such Designation, the Company shall be deemed to
have made an Investment constituting a Restricted Payment pursuant to Section
10.13 hereof for all purposes of this Indenture in an amount equal to the
Designation Amount. Neither the Company nor any Restricted Subsidiary shall at
any time (x) provide a Guarantee of, or similar credit support for, or subject
any of its properties or assets (other than the Capital Stock of any
Unrestricted Subsidiary) to the satisfaction of, any Indebtedness of any
Unrestricted Subsidiary (including any undertaking, agreement or instrument
evidencing such Indebtedness), (y) be directly or indirectly liable for any
Indebtedness of any Unrestricted Subsidiary or (z) be directly or indirectly
liable for any other Indebtedness which provides that the holder thereof may
(upon notice, lapse of time or both) declare a default thereon (or cause the
payment thereof to be accelerated or payable prior to its final scheduled
maturity) upon the occurrence of a default with respect to any other
Indebtedness that is Indebtedness of an Unrestricted Subsidiary (including any
corresponding right to take enforcement action against such Unrestricted
Subsidiary), except in the case of clause (x) or (y) to the extent otherwise
permitted under this Indenture, including without limitation under Section 10.13
hereof.
The Company will not revoke any Designation of a Subsidiary as an
Unrestricted Subsidiary (a "Revocation") unless:
(a) no Default shall have occurred and be continuing at the time of
and after giving effect to such Revocation; and
(b) all Liens and Indebtedness of such Unrestricted Subsidiary
outstanding immediately following such Revocation would, if incurred at
such time, have been permitted to be incurred for all purposes of this
Indenture.
All Designations and Revocations must be evidenced by Board
Resolutions and Officers' Certificates delivered to the Trustee certifying
compliance with the foregoing provisions.
Section 10.21. Compliance Certificates and Opinions.
Upon any application or request by the Company to the Trustee to
take any action under any provision of this Indenture, the Company, each
Subsidiary Guarantor, if any, and any other obligor on the Notes will furnish to
the Trustee an Officers' Certificate stating that all conditions precedent, if
any, provided for in this Indenture (including any covenants compliance with
which constitutes a condition precedent) relating to the proposed action have
been complied with, and an Opinion of Counsel stating that in the opinion of
such counsel all such conditions precedent, if any, have been complied with,
except that, in the case of any such application or request as to which the
furnishing of such documents, certificates and/or opinions is specifically
required by any
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provision of this Indenture relating to such particular application or request,
no additional certificate or opinion need be furnished.
Every Officers' Certificate or Opinion of Counsel with respect to
compliance with a condition or covenant provided for in this Indenture will
include:
(i) a statement that each individual signing such certificate or
opinion 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 or opinions contained in such
certificate or opinion are based;
(iii) a statement that, in the opinion of each such individual, he
has made such examination or investigation as is necessary to enable him
to express an informed opinion as to whether such covenant or condition
has been complied with; and
(iv) a statement as to whether, in the opinion of each such
individual, such condition or covenant has been complied with.
Section 10.22. Limitation on Issuances of Guarantees by Restricted
Subsidiaries
The Company will not permit any Restricted Subsidiary, directly or
indirectly, to Guarantee the payment of any other Indebtedness of the Company
unless such Restricted Subsidiary simultaneously executes and delivers a
supplemental indenture to the Indenture providing for the Guarantee of the
payment of the Notes by such Restricted Subsidiary (a "Subsidiary Guarantee"),
which Subsidiary Guarantee shall be senior to or pari passu with such Restricted
Subsidiary's Guarantee of such other Indebtedness; provided that this paragraph
shall not apply to any Guarantee of Indebtedness described in clause (h) of the
definition of "Permitted Indebtedness." Notwithstanding the foregoing, any such
Subsidiary Guarantee shall provide by its terms that it shall be automatically
and unconditionally released and discharged upon (i) any sale, exchange or
transfer, to any Person not an Affiliate of the Company, of all of the Company's
stock in, or all or substantially all the assets of, such Restricted Subsidiary,
which sale, exchange or transfer is made in compliance with the applicable
provisions of the Indenture, (ii) the Designation of such Restricted Subsidiary
as an Unrestricted Subsidiary in compliance with Section 10.20 hereof or (iii)
the release of such Restricted Subsidiary from all of its obligations under all
of its Guarantees of Indebtedness of the Company. A form of such Subsidiary
Guarantee is set forth as Exhibit B hereto.
At the time of the delivery to the Trustee of a Subsidiary Guarantee
by a Restricted Subsidiary pursuant to this Section 10.22, such Restricted
Subsidiary shall also deliver to the Trustee an Opinion of Counsel and Officers'
Certificate to the effect that such Subsidiary Guarantee has been duly
authorized and executed by such Restricted Subsidiary and constitutes the legal,
valid, binding and enforceable obligations of such Restricted Subsidiary
(subject to applicable bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium and similar laws affecting creditors' rights and
remedies generally).
Section 10.23. Registration Rights
(a) Simultaneously with the execution and delivery of this
Indenture, the Company shall enter into the Registration Rights Agreement.
(b) In the event that (a) the Exchange Offer Registration Statement
is not filed with the Commission on or prior to the 90th calendar day following
the Closing Time, (b) the Exchange Offer Registration Statement is not declared
effective on or prior to the 150th calendar day following the Closing Time, (c)
the Exchange Offer is not consummated on or prior to the 30th calendar day after
the date on which the Exchange Offer
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Registration Statement is declared effective, (d) if required under the
Registration Rights Agreement, a Shelf Registration Statement with respect to
the Notes is not declared effective on or prior to the 60th calendar day
following the date on which the obligation to file such registration statement
arises or (e) the Exchange Offer Registration Statement or the Shelf
Registration Statement is declared effective but thereafter ceases to be
effective or usable except in accordance with Section 2(d)(iii) of the
Registration Rights Agreement (each such event referred to in clauses (a)
through (e) above, a "Registration Default"), then the Company shall pay as
liquidated damages interest ("Additional Interest") on the Restricted Notes as
to which the Registration Default exists. If a Registration Default exists with
respect to Restricted Notes, the Company will, with respect to the first 90-day
period (or portion thereof) while such Registration Default is continuing
immediately following the occurrence of such Registration Default, make cash
payments at a rate of 0.50% per annum multiplied by the principal amount of the
Restricted Notes as of the date such payment is required to be made. The rate of
such cash payment shall increase by an additional 0.50% per annum at the
beginning of each subsequent 90-day period (or portion thereof) while such
Registration Default is continuing until such Registration Default is cured, up
to a maximum rate of 1.5% per annum. Upon the cure of a Registration Default in
accordance with Section 2(e) of the Registration Rights Agreement, the accrual
of Additional Interest on the Restricted Notes with respect to such Registration
Default will cease.
Additional Interest shall be computed based on the actual number of
days elapsed in each 90-day period in which Additional Interest accrues on the
Notes.
The Company shall notify the Trustee within three Business Days
after the occurrence of each Registration Default. Additional Interest payable
with respect to any Restricted Note shall be due and payable on each April 15
and October 15 (each an "Additional Interest Payment Date") if Additional
Interest has accrued on such Restricted Note during the semi-annual period
immediately preceding such Additional Interest Payment Date, to the Person in
whose name such Restricted Note (or one or more Predecessor Notes) is registered
at the close of business on the April 1 or October 1, whether or not a Business
Day, next preceding such Additional Interest Payment Date. Each obligation to
pay Additional Interest shall be deemed to accrue from and including the day
following the occurrence of the applicable Registration Default. Additional
Interest shall be paid by depositing with the Trustee, in trust for the benefit
of the Holders of Notes, prior to 11:00 a.m. New York City time on the
applicable Additional Interest Payment Date, immediately available funds
sufficient to pay the Additional Interest then due.
Section 10.24. Security.
(a) At the Closing Time, the Company, using a portion of the
proceeds of the Notes, shall promptly deposit, or cause to be deposited, for the
equal and ratable benefit of the Holders of the Notes and the 1998 Notes, a
portfolio of securities initially consisting of Government Securities in such
amount and with such maturities as will be sufficient upon receipt of scheduled
interest and/or principal payments of such Pledged Securities, based on the
report of a nationally recognized firm of independent public accountants or a
nationally recognized investment banking firm, in either case selected by the
Company, to provide for payment in full of the first six scheduled interest
payments (excluding liquidated damages, if any) due on the outstanding Notes and
shall be held by the Trustee in the Collateral Investments Account pending
disposition pursuant to the Pledge and Escrow Agreement.
(b) Each Holder, by its acceptance of a Note, consents and agrees to
the terms of the Pledge and Escrow 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 and
Escrow Agreement and to perform its obligations and exercise its 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, as may be required by the
provisions of the Pledge and Escrow Agreement, to assure and confirm to the
Trustee the security interest in the Pledged Securities contemplated hereby
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and by the Pledge and Escrow Agreement, 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 and the 1998 Notes secured thereby, according to the intent and
purposes therein expressed. The Company shall take, or shall cause to be taken,
any and all actions reasonably required (and any action reasonably requested by
the Trustee) to cause the Pledge and Escrow Agreement to create and maintain, as
security for the obligations of the Company under this Indenture, the Notes and
the 1998 Notes, valid and enforceable first priority Liens in and on all the
Pledged Securities and on the other collateral described in the Pledge and
Escrow Agreement, in favor of the Trustee as trustee for the Notes and the 1998
Notes, superior to and prior to the rights of third Persons and subject to no
other Liens. The Trustee shall not be liable for the validity, sufficiency or
priority of the funds or Pledged Securities held under the Pledge and Escrow
Agreement or for the maintenance of the perfection of any funds or securities
held therein.
(c) The release of any Pledged Securities pursuant to the Pledge and
Escrow 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 and Escrow
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 and Escrow Agreement and relating to the substitution
therefor of any property or securities to be subjected to the Lien and security
interest of the Pledge and Escrow Agreement to be complied with. Any certificate
or opinion required by TIA Section 314(d) may be made by an Officer of the
Company, except in 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 Trustee, in its sole discretion and without the consent of
the Holders, may, and at the request of the Holders of at least 25% in aggregate
principal amount of Securities then outstanding and upon receipt of indemnity
satisfactory to it shall, 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
and Escrow Agreement and (ii) collect and receive any and all amounts payable in
respect of the obligations of the Issuers 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).
(e) Promptly after the execution and delivery of this Indenture, and
on or before April 15th of each calendar year, commencing April 15, 2000, the
Company shall furnish to the Trustee an Opinion of Counsel stating that, in the
opinion of such counsel, either (i) such action has been taken with respect to
the recording, filing, rerecording and refiling of this Indenture and the Pledge
and Escrow Agreement as is necessary to create (in the case of the opinion
delivered in connection with the execution and delivery of this Indenture) or
maintain (in the case of each opinion delivered thereafter) the Lien of this
Indenture described in subsection (b) above on the Pledged Securities and on the
other collateral described in the Pledge and Escrow Agreement in existence as of
the date of such opinion and reciting the details of such action or (ii) as of
the date of such opinion, no such action is necessary to create (in the case of
the opinion delivered in connection with the execution and delivery of this
Indenture) or maintain (in the case of each opinion delivered thereafter) such
Lien. Such Opinion of Counsel shall also describe, subject to the assumptions,
qualifications and limitations set forth therein, the recording, filing,
rerecording and refiling of this Indenture and the Pledge and Escrow Agreement
that, in the opinion of such counsel as of the date of such opinion, is required
to maintain such Lien with respect to the Pledged Securities and on the other
collateral described in the Pledge and Escrow Agreement in existence as of the
date of such opinion until June 15 in the following calendar year.
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Section 10.25. Business Activities.
The Company shall not, and shall not permit any Restricted
Subsidiary to, engage in any business other than the Permitted Business.
Section 10.26. Limitation on Sale/Leaseback Transactions.
The Company shall not, and shall not permit its Restricted
Subsidiaries to, directly or indirectly, enter into, assume, Guarantee or
otherwise become liable with respect to any Sale/Leaseback Transaction. However,
the Company or any Restricted Subsidiary may enter into any such transaction if
(i) the Company or such Restricted Subsidiary would be permitted under Sections
10.11 and 10.16 hereof to incur secured Indebtedness in an amount equal to the
Attributable Debt with respect to such transaction; (ii) the consideration
received by the Company or such Restricted Subsidiary from such transaction is
at least equal to the Fair Market Value of the property being transferred; and
(iii) to the extent that such transaction constitutes an Asset Sale, the Net
Cash Proceeds received by the Company or such Restricted Subsidiary from such
transaction are applied in accordance with Section 10.15 hereof.
ARTICLE ELEVEN
SATISFACTION AND DISCHARGE
Section 11.01. Satisfaction and Discharge of Indenture.
This Indenture shall be discharged and will cease to be of further
effect (except as to surviving rights or registration of transfer or exchange of
Notes herein expressly provided for) as to all outstanding Notes and the
Trustee, on written demand of and at the expense of the Company, shall execute
proper instruments acknowledging satisfaction and discharge of this Indenture,
when either
(a) all Notes theretofore authenticated and delivered (other than
(A) Notes which have been destroyed, lost or stolen and which have been
replaced or paid as provided in Section 3.06 hereof and (B) Notes for
whose payment money has theretofore been deposited in trust or segregated
and held in trust by the Company and thereafter repaid to the Company or
discharged from such trust, as provided in Section 10.03) have been
delivered to the Trustee for cancellation; or
(b) (i) all such Notes not theretofore delivered to the Trustee for
cancellation have become due and payable and the Company has irrevocably
deposited or caused to be deposited with the Trustee in trust an amount of
money in dollars sufficient to pay and discharge the entire Indebtedness
on such Notes not theretofore delivered to the Trustee for cancellation,
for the principal of, premium, if any, and interest to the date of such
deposit;
(ii) the Company has paid or caused to be paid all other sums
payable hereunder by the Company; and
(iii) the Company has delivered to the Trustee (A) irrevocable
instructions to apply the deposited money toward payment of the Notes at
the Stated Maturities and the Redemption Dates thereof, and (B) an
Officers' Certificate and an Opinion of Counsel each stating that all
conditions precedent herein provided for relating to the satisfaction and
discharge of this Indenture have been complied with.
Notwithstanding the satisfaction and discharge of this Indenture,
the obligations of the Company to the Trustee under Section 6.07 and, if money
shall have been deposited with the Trustee pursuant to subclause
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(b)(ii) of this Section 11.01, the obligations of the Trustee under Section
11.02 and the last paragraph of Section 10.03, shall survive.
Section 11.02. Application of Trust Money.
Subject to the provisions of the last paragraph of Section 10.03,
all money deposited with the Trustee pursuant to Section 11.01 shall be held in
trust and applied by it, in accordance with the provisions of the Notes and this
Indenture, to the payment, either directly or through any Paying Agent
(including the Company acting as its own Paying Agent) as the Trustee may
determine, to the Persons entitled thereto, of the principal of, premium, if
any, on and interest on the Notes for whose payment such money has been
deposited with the Trustee.
ARTICLE TWELVE
REDEMPTION
Section 12.01. Notices to the Trustee.
If the Company elects to redeem Notes pursuant to Paragraph 3 of the
reverse side of the Initial Notes or Paragraph 2 of the reverse side of the
Exchange Notes, it shall notify the Trustee of the Redemption Date, the
Redemption Price and the principal amount of Notes to be redeemed.
The Company shall notify the Trustee of any redemption at least 45
days before the Redemption Date (or such shorter time as may be acceptable to
the Trustee) by an Officers' Certificate, stating that such redemption will
comply with the provisions hereof and of the Notes; provided that, if both the
Notes and the 1998 Notes are to be redeemed simultaneously, any notice given in
compliance with the indenture governing the 1998 Notes shall be acceptable to
the Trustee.
Section 12.02. Selection of Notes To Be Redeemed.
In the event that less than all of the Notes are to be redeemed at
any time, selection of such Notes for redemption will be made by the Trustee in
compliance with any applicable requirements of the principal national securities
exchange, if any, on which the Notes are listed or, if the Notes are not then
listed on a national securities exchange (or if the Notes are so listed but the
exchange does not impose requirements with respect to the selection of debt
securities for redemption), by such method as the Trustee in its sole discretion
shall deem fair and appropriate; provided, however, that any redemption pursuant
to the provisions relating to redemptions from the proceeds of (a) one or more
Public Equity Offerings and/or (b) the sale of Capital Stock (other than
Disqualified Stock) to Strategic Equity Investors shall be made on a pro rata
basis or on as nearly a pro rata basis as practicable (subject to the
Depository's procedures). No Notes of a principal amount of $1,000 or less shall
be redeemed in part.
The Trustee shall promptly notify the Company and the Registrar and
each co-Registrar in writing of the Notes selected for redemption and, in the
case of any Notes selected for partial redemption, the principal amount thereof
to be redeemed.
For all purposes of this Indenture, unless the context otherwise
requires, all provisions relating to redemption of Notes shall relate, in the
case of any Note redeemed or to be redeemed only in part, to the portion of the
principal amount of such Note which has been or is to be redeemed.
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Section 12.03. Notice of Redemption.
Notice of redemption shall be given by first-class mail, postage
prepaid, mailed not less than 30 nor more than 60 days prior to the Redemption
Date, to each Holder of Notes to be redeemed, at the address of such Holder
appearing in the Note Register maintained by the Registrar or co-Registrar.
All notices of redemption shall identify the Notes to be redeemed
and shall state:
(a) the Redemption Date;
(b) the Redemption Price;
(c) that, unless the Company defaults in paying the Redemption
Price, any Note called for redemption shall cease to accrue interest on
and after the Redemption Date, and the only remaining right of the Holders
of such Notes is to receive payment of the Redemption Price upon surrender
to the Paying Agent of the Notes redeemed;
(d) if any Note is to be redeemed in part, the portion of the
principal amount (equal to $1,000 or any integral multiple thereof) of
such Note to be redeemed and that on and after the Redemption Date, upon
surrender for cancellation of such Note to the Paying Agent, a new Note or
Notes in the aggregate principal amount equal to the unredeemed portion
thereof will be issued without charge to the Holder;
(e) that Notes called for redemption must be surrendered to the
Paying Agent to collect the Redemption Price and the name and address of
the Paying Agent; and
(f) the CUSIP or CINS number, if any, relating to such Notes.
Notice of redemption of Notes to be redeemed at the election of the
Company shall be given by the Company or, at the Company's written request given
with sufficient advance notice to permit the Trustee to adequately respond, by
the Trustee in the name and at the expense of the Company.
Section 12.04. 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 to the Paying Agent, such Notes called for redemption shall be paid at
the Redemption Price (including accrued interest, if any, to the Redemption
Date), but interest installments whose Stated Maturity is on or prior to such
Redemption Date will be payable on the relevant Interest Payment Dates to the
Holders of record at the close of business on the relevant Regular Record Dates
referred to in the Notes.
Section 12.05. Deposit of Redemption Price.
On or prior to 11:00 a.m. New York City time on any Redemption Date,
the Company shall deposit with the Paying Agent an amount of money in same day
funds sufficient to pay the Redemption Price of all the Notes or portions
thereof which are to be redeemed on that date (including any accrued interest to
the Redemption Date), other than Notes or portions thereof called for redemption
on that date which have been delivered by the Company to the Trustee for
cancellation.
If the Company complies with the preceding paragraph, then, unless
the Company defaults in the payment of such Redemption Price, any Note called
for redemption shall cease to accrue interest on and after the applicable
Redemption Date, whether or not such notes are presented for payment, and the
only remaining right of
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the Holders of such Notes is to receive payment of the Redemption Price upon
surrender to the Paying Agent of the Notes. If any Note called for redemption
shall not be so paid upon surrender thereof for redemption, the principal,
premium, if any, and, to the extent lawful, accrued interest thereon shall,
until paid, bear interest from the Redemption Date at the rate provided in the
Notes.
Section 12.06. Notes Redeemed or Purchased in Part.
Upon surrender to the Paying Agent of a Note which is to be redeemed
in part, the Company shall execute and upon Company Order the Trustee shall
authenticate and deliver to the Holder of such Note, without service charge, a
new Note or Notes, of any authorized denomination as requested by such Holder in
aggregate principal amount equal to, and in exchange for, the unredeemed portion
of the principal amount of the Note so surrendered that is not redeemed.
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IN WITNESS WHEREOF, the parties hereto have caused this Indenture to
be duly executed as of the day and year first above written.
RHYTHMS NETCONNECTIONS INC., as Issuer
By: /s/ CATHERINE M. HAPKA
----------------------------------------
Name: Catherine M. Hapka
--------------------------------------
Title: President and Chief Executive Officer
-------------------------------------
STATE STREET BANK AND TRUST COMPANY
OF CALIFORNIA, N.A., as Trustee
By: /s/ SCOTT C. EMMONS
----------------------------------------
Name: Scott C. Emmons
--------------------------------------
Title: Assistant Vice President
-------------------------------------
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EXHIBIT A-1
[FORM OF NOTE]
[FACE OF NOTE]
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT") OR ANY STATE OR OTHER SECURITIES LAWS,
AND, ACCORDINGLY, MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED
WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS
EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE. BY ITS ACQUISITION HEREOF, THE
HOLDER (1) REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS
DEFINED IN RULE 144A UNDER THE SECURITIES ACT) OR (B) IT IS NOT A U.S. PERSON,
IS NOT ACQUIRING THESE SECURITIES FOR THE ACCOUNT OR BENEFIT OF A U.S. PERSON
AND IS ACQUIRING THIS SECURITY IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH
REGULATION S UNDER THE SECURITIES ACT, (2) AGREES THAT IT WILL NOT, WITHIN THE
TIME PERIOD REFERRED TO IN RULE 144(k) TAKING INTO ACCOUNT THE PROVISIONS OF
RULE 144(d), IF APPLICABLE, UNDER THE SECURITIES ACT (THE "RESALE RESTRICTION
TERMINATION DATE") RESELL OR OTHERWISE TRANSFER THIS NOTE EXCEPT (A) TO RHYTHMS
NETCONNECTIONS INC. (THE "COMPANY") OR ANY SUBSIDIARY THEREOF, (B) TO A
QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE 144A UNDER THE SECURITIES
ACT, (C) OUTSIDE THE UNITED STATES IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH
RULE 904 UNDER THE SECURITIES ACT, (D) PURSUANT TO ANOTHER AVAILABLE EXEMPTION
FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OR (E) PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, AND (3) AGREES THAT
IT WILL DELIVER TO EACH PERSON TO WHOM THIS NOTE IS TRANSFERRED A NOTICE
SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND; PROVIDED THAT THE COMPANY AND THE
TRUSTEE SHALL HAVE THE RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER (I)
PURSUANT TO CLAUSE (C) OR (D) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL,
CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM, AND (II) IN
EACH OF THE FOREGOING CASES, TO REQUIRE THAT A CERTIFICATION OF TRANSFER IN THE
FORM APPEARING ON THE OTHER SIDE OF THIS SECURITY IS COMPLETED AND DELIVERED BY
THE TRANSFEROR TO THE TRUSTEE. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF
THE HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE. AS USED HEREIN, THE
TERMS "OFFSHORE TRANSACTION", "UNITED STATES" AND "U.S. PERSON" HAVE THE
MEANINGS GIVEN TO THEM BY REGULATION S UNDER THE SECURITIES ACT.
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RHYTHMS NETCONNECTIONS INC.
GLOBAL NOTE
12 3/4% SENIOR NOTES DUE 2009, SERIES A
CUSIP No.___________ $ _________
REGISTERED No.
RHYTHMS NETCONNECTIONS INC., a corporation incorporated under the
laws of the State of Delaware (herein called the "Company," which term includes
any successor corporation under the Indenture hereinafter referred to), for
value received, hereby promises to pay to ___________, or registered assigns,
the principal sum of __________ Dollars ($__________) on April 15, 2009, at the
office or agency of the Company referred to below, and to pay interest thereon
on April 15 and October 15 (each an "Interest Payment Date"), of each year,
commencing on October 15, 1999, accruing from April 23, 1999 or from the most
recent Interest Payment Date to which interest has been paid or duly provided
for, at the rate of 12 3/4% per annum, until the principal hereof is paid or
duly provided for. Interest shall be computed on the basis of a 360-day year of
twelve 30-day months.
The interest so payable, and punctually paid or duly provided for,
on any Interest Payment Date will, as provided in the Indenture referred to on
the reverse hereof, be paid to the Person in whose name this Note (or one or
more Predecessor Notes) is registered at the close of business on the April 1 or
October 1 (each a "Regular Record Date"), whether or not a Business Day, as the
case may be, next preceding such Interest Payment Date. Any such interest not so
punctually paid, or duly provided for, and interest on such defaulted interest
at the then applicable interest rate borne by the Notes, to the extent lawful,
shall forthwith cease to be payable to the Holder on such Regular Record Date,
and may be paid to the Person in whose name this Note (or one or more
Predecessor Notes) is registered at the close of business on a Special Record
Date for the payment of such defaulted interest to be fixed by the Trustee,
notice of which shall be given to Holders of Notes not less than 10 days prior
to such Special Record Date, or may be paid at any time in any other lawful
manner not inconsistent with the requirements of any securities exchange or
market on which the Notes may be listed, and upon such notice as may be required
by such exchange or market, all as more fully provided in such Indenture.
Payment of the principal of, premium, if any, and interest on this
Note will be made at the office or agency of the Company maintained for that
purpose in the Borough of Manhattan in The City of New York, State of New York,
or at such other office or agency of the Company as may be maintained for such
purpose, in such coin or currency of the United States of America as at the time
of payment is legal tender for payment of public and private debts; provided,
however, that payment of interest may be made at the option of the Company by
check mailed to the address of the Person entitled thereto as such address shall
appear on the Note Register. However, payment by wire transfer of immediately
available funds to an account within the United States of America will be
required with respect to payments in respect of all Global Notes and to all
other holders which shall have provided written wire instructions to the Company
or Paying Agent by the record date preceding the payment date.
Reference is hereby made to the further provisions of this Note set
forth on the reverse hereof.
Unless the certificate of authentication hereon has been duly
executed by the Trustee referred to on the reverse hereof by manual signature,
this Note shall not be entitled to any benefit under this Indenture, or be valid
or obligatory for any purpose.
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IN WITNESS WHEREOF, the Company has caused this instrument to be
duly executed.
Dated: __________ __, 1999 RHYTHMS NETCONNECTIONS INC.
By: /s/ CATHERINE M. HAPKA
--------------------------------------
Name: Catherine M. Hapka
Title: President and Chief Executive Officer
By: /s/ SCOTT C. CHANDLER
--------------------------------------
Name: Scott C. Chandler
Title: Chief Financial Officer
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the 12 3/4% Senior Notes due 2009, Series A, referred
to in the within-mentioned Indenture.
STATE STREET BANK AND TRUST COMPANY
OF CALIFORNIA, N.A., as Trustee
By: /s/ SCOTT C. EMMONS
--------------------------------------
Authorized Signatory
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[REVERSE OF NOTE]
1. Indenture. This Note is one of a duly authorized issue of Notes of the
Company designated as its 12 3/4% Senior Notes due 2009, Series A (herein called
the "Initial Notes"). The Notes are limited (except as otherwise provided in the
Indenture referred to below) in aggregate principal amount to $325,000,000,
which may be issued under an indenture (herein called the "Indenture") dated as
of April 23, 1999, by and between the Company and State Street Bank and Trust
Company of California, N.A., as trustee (herein called the "Trustee," which term
includes any successor Trustee under the Indenture), to which Indenture and all
indentures supplemental thereto reference is hereby made for a statement of the
respective rights, limitations of rights, duties, obligations and immunities
thereunder of the Company, the Trustee and the Holders of the Notes, and of the
terms upon which the Notes are, and are to be, authenticated and delivered. The
Notes include the Initial Notes and the Unrestricted Notes (including the
Exchange Notes referred to below), issued in exchange for the Initial Notes
pursuant to the Registration Rights Agreement. The Initial Notes and the
Unrestricted Notes, including the Exchange Notes, are treated as a single class
of securities under the Indenture.
All capitalized terms used in this Note which are defined in the
Indenture and not otherwise defined herein shall have the meanings assigned to
them in the Indenture.
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
(15 U.S.C. ss.ss. 77aaa-77bbbb) (the "TIA"), as in effect on the date of the
Indenture. Notwithstanding anything to the contrary herein, the Notes are
subject to all such terms, and Holders of Notes are referred to the Indenture
and the TIA for a statement of such terms.
No reference herein to the Indenture and no provisions of this Note
or of the Indenture shall alter or impair the obligation of the Company, which
is absolute and unconditional, to pay the principal of, premium, if any, and
interest on this Note at the times, place, and rate, and in the coin or
currency, herein prescribed.
2. Registration Rights. The Holder of this Note is entitled to the
benefits of a Registration Rights Agreement, dated April 23, 1999, between the
Company and the Initial Purchasers (as amended from time to time, the
"Registration Rights Agreement"). Pursuant to the Registration Rights Agreement,
the Company is obligated to consummate an exchange offer pursuant to which the
Holders of Initial Notes shall have the right to exchange the Initial Notes for
12 3/4% Senior Notes due 2009, Series B, of the Company (herein called the
"Exchange Notes"), which will have been registered under the Securities Act, in
like principal amount and having identical terms as the Initial Notes (other
than as set forth in this paragraph). The Holders of Initial Notes shall be
entitled to receive, as liquidated damages, certain additional interest payments
in the event such exchange offer is not consummated within a specified period
and upon certain other conditions, all pursuant to and in accordance with the
terms of the Registration Rights Agreement and the Indenture.
3. Redemption. The Notes will be redeemable, at the option of the Company,
in whole or in part, on or after April 15, 2004 upon not less than 30 nor more
than 60 days' written notice at the redemption prices (expressed as percentages
of principal amount) set forth below, plus accrued and unpaid interest thereon,
if any, to the applicable redemption date, if redeemed during the twelve-month
period beginning on April 15 of each of the years indicated below:
Year Percentage
---- ----------
2004............................... 106.375%
2005............................... 104.250%
2006............................... 102.125%
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Year Percentage
---- ----------
2007 and thereafter................ 100.000%
In addition, at any time on or prior to April 15, 2002, the Company may,
other than in any circumstances resulting in a Change of Control, redeem, at its
option, up to a maximum of 35% of the originally-issued aggregate principal
amount of Notes at a redemption price (determined as of the applicable
redemption date) equal to 112.75% of the principal amount of the Notes so
redeemed plus accrued and unpaid interest, if any, and liquidated damages, if
any, with the net cash proceeds of (a) one or more Public Equity Offerings
and/or (b) the sale, subsequent to the Issue Date, of Capital Stock (other than
Disqualified Stock) in one or more transactions not constituting a Public Equity
Offering to Strategic Equity Investors, resulting in gross cash proceeds to the
Company of at least $25 million in the aggregate; provided that not less than
65% of the originally-issued aggregate principal amount of Notes is outstanding
immediately following such redemption. Any such redemption must be effected upon
not less than 30 nor more than 60 days' notice given within 30 days after the
consummation of a Public Equity Offering or sale to one or more Strategic Equity
Investors the net proceeds from which, together with any net proceeds from any
prior Public Equity Offerings or sales to Strategic Equity Investors, are to be
used to effect an optional redemption in accordance with this paragraph.
4. Offers to Purchase. Sections 10.10 and 10.15 of the Indenture provide
that upon the occurrence of a Change of Control and following certain Asset
Sales, and subject to certain conditions and limitations contained therein, the
Company shall make an offer to purchase all or a portion of the Notes at the
purchase prices and in accordance with the procedures set forth in the
Indenture.
5. Defaults and Remedies. If an Event of Default occurs and is continuing,
the Default Amount of all outstanding Notes may be declared due and payable in
the manner and with the effect provided in this Indenture.
6. Defeasance. The Indenture contains provisions (which provisions apply
to this Note) for defeasance at any time of (a) the entire indebtedness of the
Company on this Note and (b) certain restrictive covenants and related Defaults
and Events of Default, in each case upon compliance by the Company with certain
conditions set forth therein.
7. Amendments and Waivers. The Indenture permits, with certain exceptions
as provided therein, the amendment thereof and the modification of the rights
and obligations of the Company and the rights of the Holders under the Indenture
at any time by the Company and the Trustee with the consent of the Holders of
not less than a majority in aggregate principal amount of the Notes at the time
Outstanding. The Indenture also contains provisions permitting the Holders of
specified percentages in aggregate principal amount of the Notes at the time
Outstanding, on behalf of the Holders of all the Notes, to waive compliance by
the Company with certain provisions of the Indenture and certain past Defaults
under the Indenture and this Note and their consequences. Any such consent or
waiver by or on behalf of the Holder of this Note shall be conclusive and
binding upon such Holder and upon all future Holders of this Note and of any
Note issued upon the registration of transfer hereof or in exchange herefor or
in lieu hereof whether or not notation of such consent or waiver is made upon
this Note.
8. Denominations, Transfer and Exchange. The Notes are issuable only in
registered form without coupons in denominations of $1,000 and any integral
multiple thereof. As provided in the Indenture and subject to certain
limitations therein set forth, the Notes are exchangeable for a like aggregate
principal amount of Notes of a different authorized denomination, as requested
by the Holder surrendering the same.
As provided in the Indenture and subject to certain limitations
therein set forth, the transfer of this Note is registrable on the Note
Register, upon surrender of this Note for registration of transfer at the office
or agency of the Company maintained for such purpose in the Borough of Manhattan
in The City of New York, State of New York, or at such other office or agency of
the Company as may be maintained for such purpose, duly endorsed by, or
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<PAGE>
accompanied by a written instrument of transfer in form satisfactory to the
Company and the Registrar or co-Registrar duly executed by, the Holder hereof or
his attorney duly authorized in writing, and thereupon one or more new Notes, of
authorized denominations and for the same aggregate principal amount, will be
issued to the designated transferee or transferees.
No service charge shall be made for any registration of transfer or
exchange or redemption of Notes, but the Company may require payment of a sum
sufficient to cover any tax or other governmental charge payable in connection
therewith.
9. Persons Deemed Owners. Prior to and at the time of due presentment of
this Note for registration of transfer, the Company, the Trustee and any agent
of the Company or the Trustee may treat the Person in whose name this Note is
registered as the owner hereof for all purposes, whether or not this Note shall
be overdue, and neither the Company, the Trustee nor any agent shall be affected
by notice to the contrary.
10. GOVERNING LAW. THE INDENTURE, THIS NOTE AND EACH SUBSIDIARY GUARANTEE
SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF
NEW YORK WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW.
11. Collateral. The Company has purchased and deposited with the Trustee
Pledged Securities in an amount sufficient to fund the first six scheduled
interest payments on the Notes. The Pledged Securities are pledged for the
ratable benefit of the Holders of the Notes and the holders of the 1998 Notes.
Once the first six scheduled interest payments are made, the Notes and the 1998
Notes will be unsecured.
The Company will furnish to any Holder of a Note upon written
request and without charge a copy of the Indenture and the Registration Rights
Agreement unless the same is publicly available from the Commission. Requests
may be made to: Rhythms NetConnections Inc., 6933 South Revere Parkway,
Englewood, Colorado 80112; Attention: Secretary.
ASSIGNMENT FORM
If you the holder want to assign this Note, fill in the form below and have your
signature guaranteed:
I or we assign and transfer this Note to
(Print or type assignee's name and address (including zip code) and social
security or tax ID number)
and irrevocably appoint
agent to transfer this Note on the books of the Company. The agent may
substitute another to act for such agent.
In connection with any transfer of this Note occurring prior to the
date which is the earlier of (i) the date of the declaration by the Commission
of the effectiveness of a registration statement under the Securities Act of
1933, as amended (the "Securities Act"), covering resales of this Note (which
effectiveness shall not have been suspended or terminated at the date of the
transfer) and (ii) the date two years (or such shorter period of time as
permitted by Rule 144 under the Securities Act or any successor provision
thereunder) after the later of the original issuance date appearing on the face
of this Note (or any Predecessor Note) or the last date on which the Company or
any Affiliate of the Company was the owner of this Note (or any Predecessor
Note), the undersigned confirms that it has not utilized any general
solicitation or general advertising in connection with the transfer and that:
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[Check One]
|_| (a) this Note is being transferred in compliance with the
exemption from registration under the Securities Act
provided by Rule 144A thereunder.
or
|_| (b) this Note is being transferred other than in accordance
with (a) above and documents, including (i) a transferee
certificate substantially in the form of Exhibit D to
the Indenture in the case of a transfer to non-QIB
Accredited Investors or (ii) a transferor certificate
substantially in the form of Exhibit E to the Indenture
in the case of a transfer pursuant to Regulation S, are
being furnished which comply with the conditions of
transfer set forth in this Note and the Indenture.
If none of the foregoing boxes is checked and, in the case of (b) above, if the
appropriate document is not attached or otherwise furnished to the Trustee, the
Trustee or Registrar or co-Registrar shall not be obligated to register this
Note in the name of any Person other than the Holder hereof unless and until the
conditions to any such transfer of registration set forth herein and in Sections
3.16 and 3.17 of the Indenture shall have been satisfied.
- -------------------------------------------------------------------------------
Date: Your signature:
- -------------------------------------------------------------------------------
(Sign exactly as your name appears
on the other side of this Note)
- -------------------------------------------------------------------------------
By:
- -------------------------------------------------------------------------------
NOTICE: To be executed by an
executive officer
- -------------------------------------------------------------------------------
Signature Guarantee:
- -------------------------------------------------------------------------------
TO BE COMPLETED BY PURCHASER IF (a) ABOVE IS CHECKED
The undersigned represents and warrants that it is purchasing this
Note for its own account or an account with respect to which it exercises sole
investment discretion and that it and any such account is a "qualified
institutional buyer" within the meaning of Rule 144A under the Securities Act
and is aware that the sale to it is being made in reliance on Rule 144A and
acknowledges that it has received such information regarding the Company as the
undersigned has requested pursuant to Rule 144A (including the information
specified in Rule 144A(d)(4)) or has determined not to request such information
and that it is aware that the transferor is relying upon the undersigned's
foregoing representations in order to claim the exemption from registration
provided by Rule 144A.
Dated: Name of
--------------- Purchaser:
NOTICE: To be executed by an executive officer
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<PAGE>
OPTION OF HOLDER TO ELECT PURCHASE
If you wish to have this Note purchased by the Company pursuant to
Section 10.10 or 10.15 of the Indenture, check the appropriate box:
Section 10.10 |_| Section 10.15 |_|
If you wish to have a portion of this Note purchased by the Company
pursuant to Section 10.10 or 10.15 of the Indenture, state the percentage of
principal amount:
$_______ or ___%
- -------------------------------------------------------------------------------
Date: Your signature:
- -------------------------------------------------------------------------------
(Sign exactly as your name appears
on the other side of this Note)
- -------------------------------------------------------------------------------
By:
- -------------------------------------------------------------------------------
NOTICE: To be executed by an
executive officer
- -------------------------------------------------------------------------------
Signature Guarantee:
- -------------------------------------------------------------------------------
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EXHIBIT A-2
RHYTHMS NETCONNECTIONS INC.
GLOBAL NOTE
12 3/4% SENIOR NOTES DUE 2009, SERIES B
CUSIP No. $
REGISTERED No.
RHYTHMS NETCONNECTIONS INC., a corporation incorporated under the
laws of the State of Delaware (herein called the "Company," which term includes
any successor corporation under the Indenture hereinafter referred to), for
value received, hereby promises to pay to _______, or registered assigns, the
principal sum of ________________________ ($_____________) on April 15, 2009, at
the office or agency of the Company referred to below, and to pay interest
thereon on April 15 and October 15 (each an "Interest Payment Date"), of each
year, commencing on October 15, 1999, accruing from April 23, 1999 or from the
most recent Interest Payment Date to which interest has been paid or duly
provided for, at the rate of 12 3/4% per annum, until the principal hereof is
paid or duly provided for. Interest shall be computed on the basis of a 360-day
year of twelve 30-day months.
The interest so payable, and punctually paid or duly provided for,
on any Interest Payment Date will, as provided in the Indenture referred to on
the reverse hereof, be paid to the Person in whose name this Note (or one or
more Predecessor Notes) is registered at the close of business on the April 1 or
October 1 (each a "Regular Record Date"), whether or not a Business Day, as the
case may be, next preceding such Interest Payment Date. Any such interest not so
punctually paid, or duly provided for, and interest on such defaulted interest
at the then applicable interest rate borne by the Notes, to the extent lawful,
shall forthwith cease to be payable to the Holder on such Regular Record Date,
and may be paid to the Person in whose name this Note (or one or more
Predecessor Notes) is registered at the close of business on a Special Record
Date for the payment of such defaulted interest to be fixed by the Trustee,
notice of which shall be given to Holders of Notes not less than 10 days prior
to such Special Record Date, or may be paid at any time in any other lawful
manner not inconsistent with the requirements of any securities exchange or
market on which the Notes may be listed, and upon such notice as may be required
by such exchange or market, all as more fully provided in such Indenture.
Payment of the principal of, premium, if any, and interest on this
Note will be made at the office or agency of the Company maintained for that
purpose in the Borough of Manhattan in The City of New York, State of New York,
or at such other office or agency of the Company as may be maintained for such
purpose, in such coin or currency of the United States of America as at the time
of payment is legal tender for payment of public and private debts; provided,
however, that payment of interest may be made at the option of the Company by
check mailed to the address of the Person entitled thereto as such address shall
appear on the Note Register. However, payment by wire transfer of immediately
available funds to an account within the United States of America will be
required with respect to payments in respect of all Global Notes and to all
other holders which shall have provided written wire instructions to the Company
or Paying Agent by the record date preceding the payment date.
Reference is hereby made to the further provisions of this Note set
forth on the reverse hereof.
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Unless the certificate of authentication hereon has been duly
executed by the Trustee referred to on the reverse hereof by manual signature,
this Note shall not be entitled to any benefit under this Indenture, or be valid
or obligatory for any purpose.
IN WITNESS WHEREOF, the Company has caused this instrument to be
duly executed.
Dated: RHYTHMS NETCONNECTIONS INC.
By: /s/ CATHERINE M. HAPKA
--------------------------------------
Name: Catherine M. Hapka
Title: President and Chief Executive Officer
By: /s/ SCOTT C. CHANDLER
--------------------------------------
Name: Scott C. Chandler
Title: Chief Financial Officer
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the 12 3/4% Senior Notes due 2009, Series B, referred
to in the within-mentioned Indenture.
STATE STREET BANK AND TRUST COMPANY
OF CALIFORNIA, N.A., as Trustee
By: /s/ SCOTT C. EMMONS
----------------------------------------
Authorized Signatory
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[REVERSE OF NOTE]
1. Indenture. This Note is one of a duly authorized issue of Notes of the
Company designated as its 12 3/4% Senior Notes due 2009, Series B (herein called
the "Exchange Notes"). The Notes are limited (except as otherwise provided in
the Indenture referred to below) in aggregate principal amount to $325,000,000,
which may be issued under an indenture (herein called the "Indenture") dated as
of April 23, 1999, by and between the Company and State Street Bank and Trust
Company of California, N.A., as trustee (herein called the "Trustee," which term
includes any successor Trustee under the Indenture), to which Indenture and all
indentures supplemental thereto reference is hereby made for a statement of the
respective rights, limitations of rights, duties, obligations and immunities
thereunder of the Company, the Trustee and the Holders of the Notes, and of the
terms upon which the Notes are, and are to be, authenticated and delivered. The
Notes include the Initial Notes and the Unrestricted Notes (including the
Exchange Notes), issued in exchange for the Initial Notes pursuant to the
Registration Rights Agreement. The Initial Notes and the Unrestricted Notes,
including the Exchange Notes, are treated as a single class of securities under
the Indenture.
All capitalized terms used in this Note which are defined in the
Indenture and not otherwise defined herein shall have the meanings assigned to
them in the Indenture.
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
(15 U.S.C. ss.ss. 77aaa-77bbbb) (the "TIA"), as in effect on the date of the
Indenture. Notwithstanding anything to the contrary herein, the Notes are
subject to all such terms, and Holders of Notes are referred to the Indenture
and the TIA for a statement of such terms.
No reference herein to the Indenture and no provisions of this Note
or of the Indenture shall alter or impair the obligation of the Company, which
is absolute and unconditional, to pay the principal of, premium, if any, and
interest on this Note at the times, place, and rate, and in the coin or
currency, herein prescribed.
2. Redemption. The Notes will be redeemable, at the option of the Company,
in whole or in part, on or after April 15, 2004 upon not less than 30 nor more
than 60 days' written notice at the redemption prices (expressed as percentages
of principal amount) set forth below, plus accrued and unpaid interest thereon,
if any, to the applicable redemption date, if redeemed during the twelve-month
period beginning on April 15 of each of the years indicated below:
Year Percentage
---- ----------
2004............................... 106.375%
2005............................... 104.250%
2006............................... 102.125%
2007 and thereafter................ 100.000%
In addition, at any time on or prior to April 15, 2002, the Company may,
other than in any circumstances resulting in a Change of Control, redeem, at its
option, up to a maximum of 35% of the originally-issued aggregate principal
amount of Notes at a redemption price (determined as of the applicable
redemption date) equal to 112.75% of the principal amount of the Notes so
redeemed plus accrued and unpaid interest, if any, and liquidated damages, if
any, with the net cash proceeds of (a) one or more Public Equity Offerings
and/or (b) the sale, subsequent to the Issue Date, of Capital Stock (other than
Disqualified Stock) in one or more transactions not constituting a Public Equity
Offering
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to Strategic Equity Investors, resulting in gross cash proceeds to the Company
of at least $25 million in the aggregate; provided that not less than 65% of the
originally-issued aggregate principal amount of Notes is outstanding immediately
following such redemption. Any such redemption must be effected upon not less
than 30 nor more than 60 days' notice given within 30 days after the
consummation of a Public Equity Offering or sale to one or more Strategic Equity
Investors the net proceeds from which, together with any net proceeds from any
prior Public Equity Offerings or sales to Strategic Equity Investors, are to be
used to effect an optional redemption in accordance with this paragraph.
3. Offers to Purchase. Sections 10.10 and 10.15 of the Indenture provide
that upon the occurrence of a Change of Control and following certain Asset
Sales, and subject to certain conditions and limitations contained therein, the
Company shall make an offer to purchase all or a portion of the Notes at the
purchase prices and in accordance with the procedures set forth in the
Indenture.
4. Defaults and Remedies. If an Event of Default occurs and is continuing,
the Default Amount of all outstanding Notes may be declared due and payable in
the manner and with the effect provided in this Indenture.
5. Defeasance. The Indenture contains provisions (which provisions apply
to this Note) for defeasance at any time of (a) the entire indebtedness of the
Company on this Note and (b) certain restrictive covenants and related Defaults
and Events of Default, in each case upon compliance by the Company with certain
conditions set forth therein.
6. Amendments and Waivers. The Indenture permits, with certain exceptions
as provided therein, the amendment thereof and the modification of the rights
and obligations of the Company and the rights of the Holders under the Indenture
at any time by the Company and the Trustee with the consent of the Holders of
not less than a majority in aggregate principal amount of the Notes at the time
Outstanding. The Indenture also contains provisions permitting the Holders of
specified percentages in aggregate principal amount of the Notes at the time
Outstanding, on behalf of the Holders of all the Notes, to waive compliance by
the Company with certain provisions of the Indenture and certain past Defaults
under the Indenture and this Note and their consequences. Any such consent or
waiver by or on behalf of the Holder of this Note shall be conclusive and
binding upon such Holder and upon all future Holders of this Note and of any
Note issued upon the registration of transfer hereof or in exchange herefor or
in lieu hereof whether or not notation of such consent or waiver is made upon
this Note.
7. Denominations, Transfer and Exchange. The Notes are issuable only in
registered form without coupons in denominations of $1,000 and any integral
multiple thereof. As provided in the Indenture and subject to certain
limitations therein set forth, the Notes are exchangeable for a like aggregate
principal amount of Notes of a different authorized denomination, as requested
by the Holder surrendering the same.
As provided in the Indenture and subject to certain limitations
therein set forth, the transfer of this Note is registrable on the Note
Register, upon surrender of this Note for registration of transfer at the office
or agency of the Company maintained for such purpose in the Borough of Manhattan
in The City of New York, State of New York, or at such other office or agency of
the Company as may be maintained for such purpose, duly endorsed by, or
accompanied by a written instrument of transfer in form satisfactory to the
Company and the Registrar or co-Registrar duly executed by, the Holder hereof or
his attorney duly authorized in writing, and thereupon one or more new Notes, of
authorized denominations and for the same aggregate principal amount, will be
issued to the designated transferee or transferees.
No service charge shall be made for any registration of transfer or
exchange or redemption of Notes, but the Company may require payment of a sum
sufficient to cover any tax or other governmental charge payable in connection
therewith.
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8. Persons Deemed Owners. Prior to and at the time of due presentment of
this Note for registration of transfer, the Company, the Trustee and any agent
of the Company or the Trustee may treat the Person in whose name this Note is
registered as the owner hereof for all purposes, whether or not this Note shall
be overdue, and neither the Company, the Trustee nor any agent shall be affected
by notice to the contrary.
9. GOVERNING LAW. THE INDENTURE, THIS NOTE AND EACH SUBSIDIARY GUARANTEE
SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF
NEW YORK WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW.
10. Collateral. The Company has purchased and deposited with the Trustee
Pledged Securities in an amount sufficient to fund the first six scheduled
interest payments on the Notes. The Pledged Securities are pledged for the
ratable benefit of the Holders of the Notes and the holders of the 1998 Notes.
Once the first six scheduled interest payments are made, the Notes and the 1998
Notes will be unsecured.
The Company will furnish to any Holder of a Note upon written
request and without charge a copy of the Indenture unless the same is publicly
available from the Commission. Requests may be made to: Rhythms NetConnections
Inc., 6933 South Revere Parkway, Englewood, Colorado 80112; Attention:
Secretary.
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ASSIGNMENT FORM
If you the holder want to assign this Note, fill in the form below and have your
signature guaranteed:
I or we assign and transfer this Note to
(Print or type assignee's name and address (including zip code) and social
security or tax ID number)
and irrevocably appoint
agent to transfer this Note on the books of the Company. The agent may
substitute another to act for such agent.
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OPTION OF HOLDER TO ELECT PURCHASE
If you wish to have this Note purchased by the Company pursuant to
Section 10.10 or 10.15 of the Indenture, check the appropriate box:
Section 10.10 |_| Section 10.15 |_|
If you wish to have a portion of this Note purchased by the Company
pursuant to Section 10.10 or 10.15 of the Indenture, state the percentage of
principal amount:
$_______ or ___%
- -------------------------------------------------------------------------------
Date: Your signature:
- -------------------------------------------------------------------------------
(Sign exactly as your name appears
on the other side of this Note)
- -------------------------------------------------------------------------------
By:
- -------------------------------------------------------------------------------
NOTICE: To be executed by an
executive officer
- -------------------------------------------------------------------------------
Signature Guarantee:
- -------------------------------------------------------------------------------
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EXHIBIT B
FORM OF SUPPLEMENTAL INDENTURE TO BE DELIVERED
BY SUBSIDIARY GUARANTORS
SUPPLEMENTAL INDENTURE (this "Supplemental Indenture") dated as of
________ __, _____ between _____________________ (the "Subsidiary Guarantor"), a
subsidiary of Rhythms NetConnections Inc. (or its successor), a company
incorporated under the laws of the State of Delaware (the "Company"), and State
Street Bank and Trust Company of California, N.A.,as trustee under the indenture
referred to below (the "Trustee").
W I T N E S S E T H
WHEREAS, the Company has heretofore executed and delivered to the Trustee
an indenture (the "Indenture"), dated as of April 23, 1999, providing for the
issuance of an aggregate principal amount of $325,000,000 of 12 3/4% Senior
Notes due 2009 (the "Notes");
WHEREAS, Section 10.22 of the Indenture provides that, under certain
circumstances, the Company is required to cause the Subsidiary Guarantor to
execute and deliver to the Trustee a Subsidiary Guarantee on the terms and
conditions set forth herein; and
WHEREAS, pursuant to Section 9.01 of the Indenture, the Trustee is
authorized to execute and deliver this Supplemental Indenture;
NOW, THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt of which is hereby acknowledged, the
Subsidiary Guarantor and the Trustee mutually covenant and agree for the equal
and ratable benefit of the Holders of the Notes as follows:
1. Capitalized Terms. Capitalized terms used herein without definition
shall have the meanings assigned to them in the Indenture.
2. Indenture Provision Pursuant to Which Guarantee Is Given. This
Supplemental Indenture is being executed and delivered pursuant to Section 10.22
of the Indenture.
3. Agreements to Guarantee. The Subsidiary Guarantor hereby agrees as
follows:
(a) The Subsidiary Guarantor, jointly and severally with all other
Subsidiary Guarantors, if any, unconditionally guarantees to each Holder of a
Note authenticated and delivered by the Trustee and to the Trustee and its
successors and assigns, regardless of the validity and enforceability of the
Indenture, the Notes and the obligations of the Company under the Indenture and
the Notes, that:
(i) the principal of, premium, if any, on and interest on the Notes
shall be promptly paid in full when due, whether at maturity, by
acceleration, redemption or otherwise, and interest on the overdue
principal of, premium, if any, and interest on the Notes, to the extent
lawful, and all other obligations of the Company to the Holders or the
Trustee thereunder shall be promptly paid in full, all in accordance with
the terms thereof; and
(ii) in case of any extension of time for payment or renewal of any
Notes or any of such other obligations, that the same shall be promptly
paid in full when due in accordance with the terms of the extension or
renewal, whether at stated maturity, by acceleration or otherwise.
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(b) Notwithstanding the foregoing, in the event that this Subsidiary
Guarantee would constitute or result in a violation of any applicable fraudulent
conveyance or similar law of any relevant jurisdiction, the liability of the
Subsidiary Guarantor under this Supplemental Indenture and its Subsidiary
Guarantee shall be limited to such amount as will not, after giving effect
thereto, and to all other liabilities of the Subsidiary Guarantor, result in
such amount constituting a fraudulent transfer or conveyance.
4. Execution and Delivery of Subsidiary Guarantees.
(a) To evidence its Subsidiary Guarantee set forth in this Supplemental
Indenture, the Subsidiary Guarantor hereby agrees that a notation of such
Subsidiary Guarantee substantially in the form of Annex A hereto shall be
endorsed by an officer of such Subsidiary Guarantor on each Note authenticated
and delivered by the Trustee after the date hereof.
(b) Notwithstanding the foregoing, the Subsidiary Guarantor hereby agrees
that its Subsidiary Guarantee set forth herein shall remain in full force and
effect notwithstanding any failure to endorse on each Note a notation of such
Subsidiary Guarantee.
(c) If an officer whose signature is on this Supplemental Indenture or on
the Subsidiary Guarantee no longer holds that office at the time the Trustee
authenticates the Note on which a Subsidiary Guarantee is endorsed, the
Subsidiary Guarantee shall be valid nevertheless.
(d) The delivery of the Note by the Trustee, after the authentication
thereof under the Indenture, shall constitute due delivery of the Subsidiary
Guarantee set forth in this Supplemental Indenture on behalf of the Subsidiary
Guarantor.
(e) The Subsidiary Guarantor hereby agrees that its obligations hereof
shall be unconditional, regardless of the validity, regularity or enforceability
of the Notes or the Indenture, the absence of any action to enforce the same,
any waiver or consent by any Holder of the Notes with respect to any provisions
hereof or thereof, the recovery of any judgment against the Company, any action
to enforce the same or any other circumstance which might otherwise constitute a
legal or equitable discharge or defense of a guarantor.
(f) The Subsidiary Guarantor hereby waives diligence, presentment, demand
of payment, filing of claims with a court in the event of insolvency or
bankruptcy of the Company, any right to require a proceeding first against the
Company, protest, notice and all demands whatsoever and covenants that its
Subsidiary Guarantee made pursuant to this Supplemental Indenture will not be
discharged except by complete performance of the obligations contained in the
Notes and the Indenture or pursuant to Section 5(b) of this Supplemental
Indenture.
(g) If the Trustee or any Holder has instituted any proceeding to enforce
any right or remedy under this Supplemental 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 Subsidiary Guarantor, the Trustee and the
Holders shall be restored severally and respectively to their former positions
hereof and thereafter all rights and remedies of the Subsidiary Guarantor, the
Trustee and the Holders shall continue as though no such proceeding had been
instituted.
(h) The Subsidiary Guarantor hereby 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 Subsidiary Guarantor as a result of any payment by such Subsidiary
Guarantor under its Subsidiary Guarantee. The Subsidiary Guarantor further
agrees that, as between the Subsidiary Guarantors, on the one hand, and the
Holders and the Trustee, on the other hand:
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(i) the maturity of the obligations guaranteed hereby may be
accelerated as provided in Article Five of the Indenture for the purposes
of the Subsidiary Guarantee made pursuant to this Supplemental Indenture,
notwithstanding any stay, injunction or other prohibition preventing such
acceleration in respect of the obligations guaranteed hereby; and
(ii) in the event of any declaration of acceleration of such
obligations as provided in Article Five of the Indenture, such obligations
(whether or not due and payable) shall forthwith become due and payable by
the Subsidiary Guarantor for the purpose of the Subsidiary Guarantee made
pursuant to this Supplemental Indenture.
(i) The Subsidiary Guarantor shall have the right to seek contribution
from any other non-paying Subsidiary Guarantor, if any, so long as the exercise
of such right does not impair the rights of the Holders under the Subsidiary
Guarantee made pursuant to this Supplemental Indenture.
(j) The Subsidiary Guarantor 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, extension or
usury law wherever enacted, now or at any time hereafter in force, which may
affect the covenants or the performance of the Indenture or this Subsidiary
Guarantee; and the Subsidiary Guarantor (to the extent that it may lawfully do
so) 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.
5. Subsidiary Guarantor May Consolidate, Etc. on Certain Terms.
(a) Except as set forth in Articles Eight and Ten of the Indenture,
nothing contained in the Indenture, this Supplemental Indenture or in the Notes
shall prevent any consolidation or merger of the Subsidiary Guarantor with or
into the Company or any other Subsidiary Guarantor or shall prevent any
transfer, sale or conveyance of the property of the Subsidiary Guarantor as an
entirety or substantially as an entirety, to the Company or any other Subsidiary
Guarantor.
(b) Except as set forth in Articles Eight and Ten of the Indenture, upon
the sale, exchange or transfer, to any Person not an Affiliate of the Company,
of all of the Capital Stock of the Subsidiary Guarantor held by the Company and
its Subsidiaries, or of all or substantially all of the assets of the Subsidiary
Guarantor, whether by way of merger, consolidation or otherwise, which sale,
exchange or transfer is made in compliance with all applicable provisions of the
Indenture, then such Subsidiary Guarantor (in the event of a sale, exchange or
transfer of all the Capital Stock of such Subsidiary Guarantor) or the
corporation acquiring the property (in the event of a sale, exchange or transfer
of all or substantially all of the assets of such Subsidiary Guarantor) will be
released and relieved of any obligation under its Subsidiary Guarantee; provided
that the Net Cash Proceeds of such sale, exchange or transfer are applied in
accordance with Section 10.15 of the Indenture. Except with respect to
transactions set forth in the preceding sentence, the Company and the Subsidiary
Guarantor covenant and agree that upon any such merger, consolidation or sale,
the performance of all covenants and conditions of this Supplemental Indenture
to be performed by such Subsidiary Guarantor shall be expressly assumed by
supplemental indenture satisfactory in form to the Trustee, by the corporation
formed by such consolidation, or into which the Subsidiary Guarantor shall have
merged, or by the corporation which shall have acquired such property. Upon
receipt of an Officers' Certificate of the Company or the Subsidiary Guarantor,
as the case may be, to the effect that the Company or such Subsidiary Guarantor
has complied with the first sentence of this Section 5(b), the Trustee shall
execute any documents reasonably requested by the Company or the Subsidiary
Guarantor, at the cost of the Company or such Subsidiary Guarantor, as the case
may be, in order to evidence the release of such Subsidiary Guarantor from its
obligations under its Guarantee endorsed on the Notes and under the Indenture
and this Supplemental Indenture.
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6. Releases upon Release of Guarantee of Guaranteed Indebtedness.
Concurrently with the release or discharge of all of the Subsidiary Guarantor's
Guarantees of the payment of Indebtedness of the Company (other than a release
or discharge by or as a result of payment under such Guarantee of Indebtedness),
the Subsidiary Guarantor shall be automatically and unconditionally released and
relieved of its obligations under this Supplemental Indenture and its Subsidiary
Guarantee made pursuant to Section 4 of this Supplemental Indenture. Upon
delivery by the Company to the Trustee of an Officer's Certificate to the effect
that such release or discharge has occurred, the Trustee shall execute any
documents reasonably required in order to evidence the release of the Subsidiary
Guarantor from its obligations under this Supplemental Indenture and its
Subsidiary Guarantee made pursuant hereto; provided such documents shall not
affect or impair the rights of the Trustee and Paying Agent under Section 6.07
of the Indenture.
7. Releases upon Designation as an Unrestricted Subsidiary. Upon the
Designation of the Subsidiary Guarantor as an Unrestricted Subsidiary in
compliance with Section 10.20 of the Indenture, the Subsidiary Guarantor shall
be automatically and unconditionally released and relieved of its obligations
under this Supplemental Indenture and its Subsidiary Guarantee made pursuant to
Section 4 of this Supplemental Indenture. Upon delivery by the Company to the
Trustee of an Officer's Certificate to the effect that such Designation has
occurred in compliance with Section 10.20 of the Indenture, the Trustee shall
execute any documents reasonably required in order to evidence the release of
the Subsidiary Guarantor from its obligations under this Supplemental Indenture
and its Subsidiary Guarantee made pursuant hereto; provided such documents shall
not affect or impair the rights of the Trustee and Paying Agent under Section
6.07 of the Indenture.
8. NEW YORK LAW TO GOVERN. THIS SUPPLEMENTAL INDENTURE SHALL BE GOVERNED
BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT
GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW.
9. Counterparts. The parties may sign any number of copies of this
Supplemental Indenture. Each signed copy shall be an original, but all of them
together represent the same agreement.
10. Effect of Headings. The Section headings herein are for convenience
only and shall not effect the construction hereof.
11. Ranking. [Ranking terms to be provided as required by Section 10.22 of
the Indenture.]
[Signatures on following page]
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IN WITNESS WHEREOF, the parties hereto have caused this Supplemental Indenture
to be duly executed and attested, all as of the date first above written.
Dated: ___________ __, ____ [Subsidiary Guarantor]
By:
---------------------------------------
Name:
Title:
Dated: ___________ __, ____ State Street Bank and Trust Company of
California, N.A., as Trustee
By:
---------------------------------------
Name:
Title:
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ANNEX A TO SUPPLEMENTAL INDENTURE
FORM OF NOTATION OF SUBSIDIARY GUARANTEE ON NOTE
Each Subsidiary Guarantor (as defined in the Indenture) has jointly and
severally unconditionally guaranteed (a) the due and punctual payment of the
principal of, premium, if any, and interest on the Notes, whether at stated
maturity or an Interest Payment Date, by acceleration, call for redemption or
otherwise, (b) the due and punctual payment of interest on the overdue principal
and premium of, if any, and interest, to the extent lawful, on the Notes and (c)
that in case of any extension of time of payment or renewal of any Notes or any
of such other obligations, the same will be promptly paid in full when due in
accordance with the terms of the extension of renewal, whether at Stated
Maturity, by acceleration or otherwise. Notwithstanding the foregoing, in the
event that the Subsidiary Guarantee would constitute or result in a violation of
any applicable fraudulent conveyance or similar law of any relevant
jurisdiction, the liability of the Subsidiary Guarantor under its Subsidiary
Guarantee shall be limited to such amount as will not, after giving effect
thereto, and to all other liabilities of the Subsidiary Guarantor, result in
such amount constituting a fraudulent transfer or conveyance. The Subsidiary
Guarantee shall not be valid or obligatory for any purpose until the certificate
of authentication on the Note upon which the Subsidiary Guarantee is noted shall
have been executed by the Trustee under the Indenture by the manual or facsimile
signature of one of its authorized officers. [Ranking terms to be provided as
required by Section 10.22 of the Indenture.]
Dated: __________ __, ____ [Subsidiary Guarantor]
By:
---------------------------------------
Name:
Title:
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EXHIBIT C
FORM OF LEGEND FOR BOOK-ENTRY SECURITIES
Any Global Note authenticated and delivered hereunder shall bear a
legend (which would be in addition to any other legends required in the case of
a Restricted Note) in substantially the following form:
THIS NOTE IS A GLOBAL NOTE WITHIN THE MEANING OF THE INDENTURE
HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITORY OR A
NOMINEE OF A DEPOSITORY OR A SUCCESSOR DEPOSITORY. THIS NOTE IS NOT
EXCHANGEABLE FOR SECURITIES REGISTERED IN THE NAME OF A PERSON OTHER THAN
THE DEPOSITORY OR ITS NOMINEE EXCEPT IN THE LIMITED CIRCUMSTANCES
DESCRIBED IN THE INDENTURE, AND NO TRANSFER OF THIS NOTE (OTHER THAN A
TRANSFER OF THIS NOTE AS A WHOLE BY THE DEPOSITORY TO A NOMINEE OF THE
DEPOSITORY OR BY A NOMINEE OF THE DEPOSITORY TO THE DEPOSITORY OR ANOTHER
NOMINEE OF THE DEPOSITORY) MAY BE REGISTERED EXCEPT IN THE LIMITED
CIRCUMSTANCES DESCRIBED IN THE INDENTURE.
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE
OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), 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 IN
SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC
(AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR
OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL
INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST
HEREIN.
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EXHIBIT D
Form of Certificate To Be
Delivered in Connection with
Transfers to Institutional (non-QIB) Accredited Investors
__________, ____
State Street Bank and Trust Company
of California, N.A.
633 West 5th Street, 12th Floor
Los Angeles, California 90071
Attention: Corporate Trust Department
Re: Rhythms NetConnections Inc.(the "Company")
Indenture (the "Indenture") relating to
12 3/4% Senior Notes due 2009
Ladies and Gentlemen:
In connection with our proposed purchase of 12 3/4% Senior Notes due
2009 (the "Notes") of the Company we confirm that:
1. We have received such information as we deem necessary in order
to make our investment decision.
2. We understand that any subsequent transfer of the Notes is
subject to certain restrictions and conditions set forth in the Indenture
and the undersigned agrees to be bound by, and not to resell, pledge or
otherwise transfer the Notes except in compliance with, such restrictions
and conditions and the Securities Act of 1933, as amended (the "Securities
Act").
3. We understand that the offer and sale of the Notes have not been
registered under the Securities Act, and that the Notes may not be offered
or sold within the United States or to, or for the account or benefit of,
U.S. persons except as permitted in the following sentence. We agree, on
our own behalf and on behalf of any accounts for which we are acting as
hereinafter stated, that if we should sell any Notes, we will do so only
(A) to the Company, (B) inside the United States in accordance with Rule
144A under the Securities Act to a "qualified institutional buyer" (as
defined therein), (C) inside the United States to an institutional
"accredited investor" (as defined below) that, prior to such transfer,
furnishes (or has furnished on its behalf by a U.S. broker-dealer) to the
Trustee a signed letter substantially in the form hereof, (D) outside the
United States in accordance with Regulation S under the Securities Act,
(E) pursuant to the exemption from registration provided by Rule 144 under
the Securities Act (if available), or (F) pursuant to an effective
registration statement under the Securities Act, and we further agree to
provide to any person purchasing Notes from us a notice advising such
purchaser that resales of the Notes are restricted as stated herein.
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4. We understand that, on any proposed resale of Notes, we will be
required to furnish to the Trustee and the Company such certification,
legal opinion and other information as the Trustee and the Company may
reasonably require to confirm that the proposed sale complies with the
foregoing restrictions. We further understand that the Notes purchased by
us will bear a legend to the foregoing effect.
5. We are an institutional "accredited investor" (as defined in Rule
501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act) and
have such knowledge and experience in financial and business matters as to
be capable of evaluating the merits and risks of our investment in the
Notes, and we and any accounts for which we are acting are each able to
bear the economic risk of our or their investment, as the case may be.
6. We are acquiring the Notes purchased by us for our account or for
one or more accounts (each of which is an institutional "accredited
investor") as to each of which we exercise sole investment discretion.
You and the Company and your and their respective counsel are
entitled to rely upon this letter and are irrevocably authorized to produce this
letter or a copy hereof to any interested party in any administrative or legal
proceeding or official inquiry with respect to the matters covered hereby.
Very truly yours,
[Name of Proposed Transferee]
By:
--------------------------
[Authorized Signature]
Signature Guarantee: _____________________
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EXHIBIT E
Form of Certificate To Be Delivered
in Connection with Transfers
Pursuant to Regulation S
__________, ____
State Street Bank and Trust Company
of California, N.A.
633 West 5th Street, 12th Floor
Los Angeles, California 90071
Attention: Corporate Trust Department
Re: Rhythms NetConnections Inc. (the "Company")
12 3/4% Senior Notes due 2009
Ladies and Gentlemen:
In connection with our proposed sale of 12 3/4% Senior Notes due
2009 (the "Notes") of the Company, we confirm that such sale has been effected
pursuant to and in accordance with Regulation S under the U.S. Securities Act of
1933, as amended (the "Securities Act"), and, accordingly, we represent that:
(1) the offer of the Notes was not made to a person in the United
States;
(2) either (a) at the time the buy offer was originated, the
transferee was outside the United States or we and any person acting on
our behalf reasonably believed that the transferee was outside the United
States, or (b) the transaction was executed in, on or through the
facilities of a designated off-shore securities market and neither we nor
any person acting on our behalf knows that the transaction has been
pre-arranged with a buyer in the United States;
(3) no directed selling efforts have been made in the United States
in contravention of the requirements of Rule 903(a) or Rule 904(a) of
Regulation S, as applicable;
(4) the transaction is not part of a plan or scheme to evade the
registration requirements of the Securities Act;
(5) we have advised the transferee of the transfer restrictions
applicable to the Notes;
(6) if the circumstances set forth in Rule 904(b) under the
Securities Act are applicable, we have complied with the additional
conditions therein, including (if applicable) sending a confirmation or
other notice stating that the Notes may be offered and sold during the
distribution compliance period specified in Rule 903(b)(3), as applicable,
in accordance with the provisions of Regulation S; pursuant to
registration of the Securities under the Securities Act; or pursuant to an
available exemption from the registration requirements under the
Securities Act;
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(7) if the sale is made during a distribution compliance period and
the provisions of Rule 903(b)(3) are applicable thereto, we confirm that
such sale has been made in accordance with such provisions; and
(8) if the provisions of Rule 144 under the Securities Act are
applicable, we have complied with the terms and conditions thereof.
You and the Company and your and their respective counsel are
entitled to rely upon this letter and are irrevocably authorized to produce this
letter or a copy hereof to any interested party in any administrative or legal
proceedings or official inquiry with respect to the matters covered hereby.
Terms used in this certificate have the meanings set forth in Regulation S.
Very truly yours,
[Name of Transferor]
By:
-----------------------
Authorized Signature
Signature Guarantee:
---------------------
99
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SCHEDULE A
INDEBTEDNESS OF THE COMPANY OR RESTRICTED SUBSIDIARIES
THAT IS OUTSTANDING OR COMMITTED BUT UNDRAWN
100
<PAGE>
Exhibit 4.15
NOTES REGISTRATION RIGHTS AGREEMENT
Dated as of April 23, 1999
among
Rhythms NetConnections, Inc.,
Issuer
and
Merrill Lynch & Co.,
Merrill Lynch, Pierce, Fenner & Smith
Incorporated, and
Salomon Smith Barney Inc.
Chase Securities Inc.,
Initial Purchasers
<PAGE>
TABLE OF CONTENTS
Page
1. Definitions................................................................3
1933 Act...................................................................3
1934 Act...................................................................3
Depositary.................................................................3
Exchange Notes.............................................................3
Exchange Offer.............................................................3
Exchange Offer Registration................................................3
Exchange Offer Registration Statement......................................4
Holders....................................................................4
Indenture..................................................................4
Initial Purchasers.........................................................4
Majority Holders...........................................................4
Original Issue Date........................................................4
Person.....................................................................4
Prospectus.................................................................4
Purchase Agreement.........................................................4
Registration Expenses......................................................4
Registration Statement.....................................................5
SEC........................................................................5
Shelf Registration.........................................................5
Shelf Registration Statement...............................................5
Transfer Restricted Notes..................................................5
Trustee....................................................................6
2. Registration Under the 1933 Act............................................6
(a) Exchange Offer Registration...........................................6
(b) Shelf Registration....................................................7
(c) Expenses..............................................................9
(d) Effective Registration Statement......................................9
(e) Accrual and Payment of Additional Interest...........................10
(f) Specific Enforcement.................................................11
3. Registration Procedures..................................................11
4. Underwritten Registrations...............................................18
5. Indemnification and Contribution.........................................18
6. Miscellaneous............................................................21
(a) Rule 144 and Rule 144A...............................................21
(b) No Inconsistent Agreements...........................................22
(c) Amendments and Waivers...............................................22
(d) Notices..............................................................22
(e) Successors and Assigns...............................................22
(f) Third Party Beneficiary..............................................22
(g) Counterparts.........................................................23
(h) Headings.............................................................23
(i) GOVERNING LAW........................................................23
(j) Severability.........................................................23
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NOTES REGISTRATION RIGHTS AGREEMENT
THIS NOTES REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made
and entered into as of April 23, 1999, by and among RHYTHMS NETCONNECTIONS,
INC., a Delaware corporation (the "Company"), and MERRILL LYNCH & CO., MERRILL
LYNCH, PIERCE, FENNER & SMITH INCORPORATED ("Merrill Lynch") SALOMON SMITH
BARNEY INC. and CHASE SECURITIES INC. (collectively the "Initial Purchasers").
This Agreement is made pursuant to the Purchase Agreement dated
April 16, 1999 among the Company and the Initial Purchasers (the "Purchase
Agreement"), with respect to the issue and sale by the Company and the purchase
by the Initial Purchasers of the respective quantity of the Company's 12 3/4%
Senior Notes due 2009 (the "Notes"). In order to induce the Initial Purchasers
to enter into the Purchase Agreement, the Company has agreed to provide to the
Initial Purchasers and to other holders of Notes the registration rights set
forth in this Agreement. The execution and delivery of this Agreement is a
condition to the closing under the Purchase Agreement.
In consideration of the foregoing, the parties hereto agree as
follows:
1. Definitions.
As used in this Agreement, the following capitalized defined terms shall
have the following meanings:
"1933 Act" shall mean the Securities Act of 1933, as amended from time to
time, and the rules and regulations of the SEC promulgated thereunder.
"1934 Act" shall mean the Securities Exchange Act of 1934, as amended from
time to time, and the rules and regulations of the SEC promulgated thereunder.
"Depositary" shall mean The Depository Trust Company, or any other
depositary appointed by the Company; provided, however, that any such depositary
must have an address in the Borough of Manhattan, in the City of New York.
"Exchange Notes" shall mean 12 3/4% Senior Notes due 2009, Series B of the
Company, issued under the Indenture containing terms identical to the respective
Notes (except that (i) interest on the Exchange Notes shall accrue from the last
date on which interest was paid on the Notes, (ii) the transfer restrictions
thereon shall be eliminated and (iii) certain provisions relating to payment of
additional interest shall be eliminated) to be offered to Holders of Notes in
exchange for Notes pursuant to the Exchange Offer.
"Exchange Offer" shall mean the exchange offer by the Company of Exchange
Notes for Transfer Restricted Notes pursuant to Section 2(a) hereof.
"Exchange Offer Registration" shall mean a registration under the 1933 Act
effected pursuant to Section 2(a) hereof.
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<PAGE>
"Exchange Offer Registration Statement" shall mean an exchange offer
registration statement on Form S-4 (or, if applicable, on another appropriate
form), and all amendments and supplements to such registration statement, in
each case including the Prospectus contained therein, all exhibits thereto and
all material incorporated by reference therein.
"Holders" shall mean the Initial Purchasers, for so long as they own any
Transfer Restricted Notes, and each of their respective successors, assigns and
direct and indirect transferees who become registered owners of Transfer
Restricted Notes under the Indenture.
"Indenture" shall mean the Indenture relating to the Notes dated as of
April 23, 1999, between the Company and State Street Bank and Trust Company of
California, N.A., as trustee (the "Trustee"), and as the same may be amended
from time to time in accordance with the terms thereof.
"Initial Purchasers" shall have the meaning set forth in the preamble of
this Agreement.
"Majority Holders" shall mean the Holders of a majority of the aggregate
principal amount of Transfer Restricted Notes outstanding; provided that
whenever the consent or approval of Holders of a specified percentage of
Transfer Restricted Notes is required hereunder, Transfer Restricted Notes held
by the Company or any of its affiliates (as such term is defined in Rule 405
under the 1933 Act) shall be disregarded in determining whether such consent or
approval was given by the Holders of such required percentage or amount.
"Original Issue Date" shall mean the date of original issuance of the
Notes.
"Person" shall mean an individual, partnership, limited liability company,
corporation, trust or unincorporated organization, or a government or agency or
political subdivision thereof.
"Prospectus" shall mean the prospectus included in a Registration
Statement, including any preliminary prospectus, and any such prospectus as
amended or supplemented by any prospectus supplement, including a prospectus
supplement with respect to the terms of the offering of any portion of the
Transfer Restricted Notes covered by a Shelf Registration Statement, and by all
other amendments and supplements to a prospectus, including post-effective
amendments, and in each case including all material incorporated by reference
therein.
"Purchase Agreement" shall have the meaning set forth in the preamble of
this Agreement.
"Registration Expenses" shall mean any and all expenses incident to
performance of or compliance by the Company with this Agreement, including
without limitation: (i) all SEC, stock exchange or National Association of
Securities Dealers, Inc. ("NASD") registration and filing fees, (ii) all fees
and expenses incurred in connection with compliance with state or other
securities or blue sky laws and compliance with the rules of the NASD (including
reasonable fees and disbursements of United States and local counsel for any
underwriters and Holders in connection with state or other securities or blue
sky qualification of any of the Exchange Notes or Transfer Restricted Notes),
(iii) all expenses of any Persons in preparing, printing and
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distributing any Registration Statement, any Prospectus, any amendments or
supplements thereto, any underwriting agreements, securities sales agreements,
certificates representing the Exchange Notes and other documents relating to the
performance of and compliance with this Agreement, (iv) all rating agency fees,
(v) all fees and disbursements relating to the qualification of the Indenture
under applicable securities laws, (vi) the reasonable fees and disbursements of
counsel for the Company and of the independent public accountants of the
Company, including the expenses of any special audits or "cold comfort" letters
required by or incident to such performance and compliance, (vii) the fees and
expenses of a "qualified independent underwriter" as defined by Conduct Rule
2720 of the NASD, if required by the NASD rules, in connection with the offering
of the Transfer Restricted Notes, and (viii) the reasonable fees and expenses of
the Trustee, including its counsel, and any escrow agent or custodian.
Notwithstanding the foregoing, "Registration Expenses" shall exclude, and the
Holders of the Transfer Restricted Notes being registered shall pay, any amounts
required by Section 2(c) to be paid by the Holders.
"Registration Statement" shall mean any registration statement of the
Company which covers any of the Exchange Notes or Transfer Restricted Notes
pursuant to the provisions of this Agreement, and all amendments and supplements
to any such Registration Statement, including post-effective amendments, in each
case including the Prospectus contained therein, all exhibits thereto and all
material incorporated by reference therein.
"SEC" shall mean the Securities and Exchange Commission.
"Shelf Registration" shall mean a registration effected pursuant to
Section 2(b) hereof.
"Shelf Registration Statement" shall mean a "shelf" registration statement
of the Company pursuant to the provisions of Section 2(b) of this Agreement
which covers all of the Transfer Restricted Notes on an appropriate form under
Rule 415 under the 1933 Act, or any similar rule that may be adopted by the SEC,
and all amendments and supplements to such registration statement, including
post-effective amendments, in each case including the Prospectus contained
therein, all exhibits thereto and all material incorporated by reference
therein.
"Transfer Restricted Notes" shall mean the Notes; provided, however, that
any Note shall cease to be a Transfer Restricted Note when (i) such Note has
been exchanged by a person other than a broker-dealer for an Exchange Note in
the Exchange Offer, (ii) following the exchange by a broker-dealer in the
Exchange Offer of a Note for an Exchange Note, such Exchange Note is sold to a
purchaser who receives from such broker-dealer on or prior to the date of such
sale a copy of the prospectus contained in the Exchange Offer Registration
Statement, (iii) such Note has been effectively registered under the 1933 Act
and disposed of in accordance with the Shelf Registration Statement, (iv) such
Note is distributed to the public pursuant to Rule 144(k) under the 1933 Act (or
any similar provision then in force, but not Rule 144A under the 1933 Act), (v)
such Note shall have been otherwise transferred by the Holder thereof and a new
Note not bearing a legend restricting further transfer shall have been delivered
by the Company and subsequent disposition of such Note shall not require
registration or qualification under the 1933 Act or any similar state law then
in force or (vi) such Note ceases to be outstanding.
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<PAGE>
"Trustee" shall mean the Trustee under the Indenture.
2. Registration Under the 1933 Act.
(a) Exchange Offer Registration. To the extent not prohibited by any
applicable law or applicable interpretation of the staff of the SEC, the Company
shall (A) cause to be filed an Exchange Offer Registration Statement with the
SEC within 90 days after the Original Issue Date covering the offer by the
Company to the Holders of Exchange Notes for all of their Transfer Restricted
Notes, (B) use its best efforts to cause such Exchange Offer Registration
Statement to be declared effective under the 1933 Act as promptly as possible
but in any event within 150 days after the Original Issue Date and (C) use its
best efforts to consummate the Exchange Offer within 30 days after the date on
which such Exchange Offer Registration Statement is declared effective under the
1933 Act. Upon the effectiveness of the Exchange Offer Registration Statement,
the Company shall promptly commence the Exchange Offer, it being the objective
of such Exchange Offer to enable each Holder (other than Participating
Broker-Dealers (as defined in Section 3(f))) eligible and electing to exchange
Transfer Restricted Notes for Exchange Notes (assuming that such Holder is not
an affiliate of the Company within the meaning of Rule 405 under the 1933 Act,
acquires the Exchange Notes in the ordinary course of such Holder's business and
has no arrangements or understandings with any person to participate in the
Exchange Offer for the purpose of distributing the Exchange Notes) to trade such
Exchange Notes from and after their receipt without any limitations or
restrictions under the 1933 Act and without material restrictions under the
securities laws of a substantial proportion of the several states of the United
States.
In connection with the Exchange Offer, the Company shall:
(i) mail to each Holder a copy of the Prospectus forming part of the
Exchange Offer Registration Statement, together with an appropriate letter
of transmittal and related documents;
(ii) keep the Exchange Offer open for not less than 20 business days
after the date notice thereof is mailed to the Holders (or longer if
required by applicable law);
(iii) use the services of the Depositary for the Exchange Offer with
respect to Notes evidenced by global certificates;
(iv) permit Holders to withdraw tendered Transfer Restricted Notes
at any time prior to the close of business, New York City time, on the
last business day on which the Exchange Offer shall remain open, by
sending to the institution specified in the notice, a telegram, telex,
facsimile transmission or letter setting forth the name of such Holder,
the principal amount of Transfer Restricted Notes delivered for exchange,
and a statement that such Holder is withdrawing its election to have such
Notes exchanged; and
(v) otherwise comply with all applicable laws relating to the
Exchange Offer.
As soon as practicable after the close of the Exchange Offer, the Company
shall:
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<PAGE>
(i) accept for exchange Transfer Restricted Notes duly tendered and
not validly withdrawn pursuant to the Exchange Offer in accordance with
the terms of the Exchange Offer Registration Statement and the letter of
transmittal which is an exhibit thereto;
(ii) deliver, or cause to be delivered, to the Trustee for
cancellation all Transfer Restricted Notes so accepted for exchange by the
Company; and
(iii) cause the Trustee promptly to authenticate and deliver
Exchange Notes to each Holder of Transfer Restricted Notes equal in
principal amount to the principal amount of the Transfer Restricted Notes
of such Holder so accepted for exchange.
Interest will accrue on each Exchange Note exchanged for a Note, in either
case from the last date on which interest was paid on the Notes surrendered in
exchange therefor. If no interest has been paid on the Notes, such interest will
be payable from April 23, 1999. The Exchange Offer shall not be subject to any
conditions, other than (i) that the Exchange Offer, or the making of any
exchange by a Holder, does not violate applicable law or any applicable
interpretation of the staff of the SEC and (ii) the proper tendering of Transfer
Restricted Notes in accordance with the Exchange Offer. Each Holder of Transfer
Restricted Notes (other than Participating Broker-Dealers) who wishes to
exchange such Transfer Restricted Notes for Exchange Notes in the Exchange Offer
shall have represented that (i) it is not an affiliate (as defined in Rule 405
under the 1933 Act) of the Company, or, if it is such an affiliate, it will
comply with the registration and prospectus delivery requirements of the 1933
Act to the extent applicable, (ii) any Exchange Notes to be received by it will
be acquired in the ordinary course of its business, (iii) at the time of the
commencement of the Exchange Offer it has no arrangement with any person to
participate in the distribution (within the meaning of the 1933 Act) of the
Exchange Notes and (iv) it shall have made such other representations as may be
reasonably necessary under applicable SEC rules, regulations or interpretations
to render the use of Form S-4 or another appropriate form under the 1933 Act
available. To the extent permitted by law and ascertainable by the Company, the
Company shall inform the Initial Purchasers of the names and addresses of the
Holders to whom the Exchange Offer is made, and the Initial Purchasers shall
have the right to contact such Holders and otherwise facilitate the tender of
Transfer Restricted Notes in the Exchange Offer.
(b) Shelf Registration. If (i) because of any change in law or applicable
interpretations thereof by the staff of the SEC, the Company is not permitted to
effect the Exchange Offer as contemplated by Section 2(a) hereof, (ii) for any
other reason the Exchange Offer is not consummated within 180 days following the
Original Issue Date, (iii) any Holder notifies the Company prior to one year
after the Original Issue Date that (x) due to a change in law or policy it is
not entitled to participate in the Exchange Offer, (y) due to a change in law or
policy it may not resell the Exchange Notes acquired by it in the Exchange Offer
to the public without delivering a prospectus, and the prospectus contained in
the Exchange Offer Registration Statement is not appropriate or available for
such resales by such Holder, and such prospectus is not promptly amended or
modified in order to be suitable for use in connection with such resales for
such Holder and all similarly situated Holders or (z) it is a broker-dealer and
owns Notes acquired directly from the Company or an affiliate of the Company or
(iv) a majority of the
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<PAGE>
Holders may not resell the Exchange Notes acquired by them in the Exchange Offer
to the public without restriction under the Securities Act and without
restriction under applicable blue sky or state securities laws, then the Company
shall, at its cost:
(A) use its best efforts to, prior to the later of (I) the date that
is 90 days after the Original Issue Date and (II) the date that is 30 days
after the filing obligation arises, file with the SEC a Shelf Registration
Statement relating to the offer and sale of the Transfer Restricted Notes
by the Holders from time to time in accordance with the methods of
distribution elected by the Majority Holders of such Transfer Restricted
Notes and set forth in such Shelf Registration Statement, and use their
best efforts to cause such Shelf Registration Statement to be declared
effective under the Securities Act as promptly as possible, but in any
event within 60 days after the filing obligation arises; provided that, if
the filing obligation arises pursuant to clause (ii) above, then the
Company shall file the Shelf Registration Statement on or prior to 210
days after the Original Issue Date; and provided further that, with
respect to Exchange Notes received by a broker-dealer in exchange for any
securities that were acquired by such broker-dealer as a result of market
making or other trading activities, the Company may, if permitted by
current interpretations by the Commission's staff, file a post-effective
amendment to the Exchange Offer Registration Statement containing the
information required by Regulation S-K Items 507 and/or 508, as
applicable, in satisfaction of its obligations under this paragraph (A)
solely with respect to broker-dealers who acquired their Notes as a result
of market making or other trading activities, and any such Exchange Offer
Registration Statement, as so amended, shall be referred to herein as, and
governed by the provisions herein applicable to, a Shelf Registration
Statement. If the Company is required to file a Shelf Registration
Statement pursuant to clause (iii) above or pursuant to clause (iv) above,
then the Company shall file and use its best efforts to have declared
effective by the SEC both an Exchange Offer Registration Statement
pursuant to Section 2(a) with respect to all Transfer Restricted Notes and
a Shelf Registration Statement (which may be a combined Registration
Statement with the Exchange Offer Registration Statement) with respect to
offers and sales of Transfer Restricted Notes held by such Holder or such
Initial Purchaser entitled to the rights under Section 2(b)(iii), as
applicable, after completion of the Exchange Offer;
(B) use its best efforts to keep the Shelf Registration Statement
continuously effective in order to permit the Prospectus forming part
thereof to be usable by Holders for a period of two years after its
effective date or such shorter period which will terminate when all of the
Transfer Restricted Notes covered by the Shelf Registration Statement
either have been sold pursuant to the Shelf Registration Statement or have
ceased to be Transfer Restricted Notes; and
(C) notwithstanding any other provisions hereof, ensure that (i) any
Shelf Registration Statement and any amendment thereto and any Prospectus
forming a part thereof and any supplement thereto complies in all material
respects with the 1933 Act and the rules and regulations thereunder, (ii)
any Shelf Registration Statement and any amendment thereto does not, when
it becomes effective, contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary
to
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<PAGE>
make the statements therein not misleading, and (iii) any Prospectus
forming part of any Shelf Registration Statement, and any supplement to
such Prospectus (as amended or supplemented from time to time), does not
include an untrue statement of a material fact or omit 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.
The Company further agrees, if necessary, to supplement or amend the Shelf
Registration Statement if reasonably requested by the Majority Holders with
respect to information relating to the Holders and otherwise as required by
Section 3(b) below, to use all reasonable efforts to cause any such amendment to
become effective and such Shelf Registration to become usable as soon as
practicable thereafter and to furnish to the Holders of Transfer Restricted
Notes copies of any such supplement or amendment promptly after its being used
or filed with the SEC.
(c) Expenses. The Company shall pay all Registration Expenses in
connection with the registration pursuant to Section 2(a) and 2(b) and, in the
case of any Shelf Registration Statement, will reimburse the Holders entitled to
the rights under Section 2(b) for the reasonable fees and disbursements of one
counsel designated in writing by the Majority Holders to act as counsel for the
Holders of the Transfer Restricted Notes in connection therewith. Each Holder
shall pay all expenses of its counsel other than as set forth in the preceding
sentence, underwriting discounts and commissions (and any other fees or costs of
the underwriter) and transfer taxes, if any, relating to the sale or disposition
of such Holder's Transfer Restricted Notes pursuant to the Shelf Registration
Statement.
(d) Effective Registration Statement.
(i) The Company will be deemed not to have used its best efforts to
cause a Registration Statement to become, or to remain, effective during
the requisite periods set forth herein if the Company voluntarily takes
any action that could reasonably be expected to result in any such
Registration Statement not being declared effective or in the Holders of
Transfer Restricted Notes covered thereby not being able to exchange or
offer and sell such Transfer Restricted Notes during that period unless
(A) such action is required by applicable law or (B) such action is taken
by the Company in good faith and for valid business reasons (but not
including avoidance of the Company's obligations hereunder), including a
material corporate transaction, so long as the Company promptly complies
with the requirements of Section 3(k) hereof, if applicable.
(ii) An Exchange Offer Registration Statement pursuant to Section
2(a) hereof or a Shelf Registration Statement pursuant to Section 2(b)
hereof will not be deemed to have become effective unless it has been
declared effective by the SEC; provided, however, that if, after it has
been declared effective, the offering of Transfer Restricted Notes
pursuant to a Registration Statement is interfered with by any stop order,
injunction or other order or requirement of the SEC or any other
governmental agency or court, such Registration Statement will be deemed
not to have been effective during the period of such interference, until
the offering of Transfer Restricted Notes pursuant to such Registration
Statement may legally resume.
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<PAGE>
(iii) During any 365-day period, the Company may suspend the
availability of a Shelf Registration Statement and the use of the related
Prospectus, as provided in Section 3(e)(vi) and the last paragraph of
Section 3 hereof, for a period of up to 60 consecutive days (except for
the consecutive 60-day period immediately prior to maturity of the Notes),
if any event shall occur as a result of which it shall be necessary, in
the good faith determination of the board of directors of the Company, to
amend the Shelf Registration Statement or amend or supplement any
prospectus or prospectus supplement thereunder in order that each such
document not include any untrue statement of fact or omit to state a
material fact necessary to make the statements therein not misleading in
light of the circumstances under which they were made.
(e) Accrual and Payment of Additional Interest. In the event that (i) the
Exchange Offer Registration Statement is not filed with the SEC on or prior to
the 90th calendar day following the Original Issue Date, (ii) the Exchange Offer
Registration Statement is not declared effective on or prior to the 150th
calendar day following the Original Issue Date, (iii) the Exchange Offer is not
consummated on or prior to the 30th calendar day after the date on which the
Exchange Offer Registration Statement is declared effective, (iv) if required, a
Shelf Registration Statement with respect to the Notes is not declared effective
on or prior to the 60th calendar day following the date on which the obligation
to file such registration statement arises or (v) the Exchange Offer
Registration Statement or the Shelf Registration Statement is declared effective
but thereafter ceases to be effective or usable except in accordance with
Section 2(d)(iii) hereof (each event referred to in clauses (i) through (v)
above, a "Registration Default"), the Notes shall, with respect to each
Registration Default, accrue interest, as liquidated damages ("Additional
Interest"), at a rate of one-half of one percent per annum of the principal
amount of the Notes commencing upon the occurrence of such Registration Default,
which rate will increase by one-half of one percent at the end of each 90-day
period in which such Registration Default is not cured, provided that the
maximum aggregate Additional Interest that accrues on the principal amount of
the Restricted Notes as a result of all Registration Defaults will in no event
exceed one and one-half percent (1.5%) per annum. Additional Interest shall be
computed based on the actual number of days elapsed in each 90-day period in
which Additional Interest accrues on the Notes.
The Company shall notify the Trustee within three Business Days
after the occurrence of each Registration Default. Additional Interest payable
with respect to any Note shall be due and payable on each April 15 and October
15 (each an "Additional Interest Payment Date") if Additional Interest has
accrued on such Note during the semi-annual period immediately preceding such
Additional Interest Payment Date, to the Person in whose name such Note (or one
or more Predecessor Notes) is registered at the close of business on the April 1
or October 1, whether or not a Business Day, next preceding such Additional
Interest Payment Date. Each obligation to pay Additional Interest shall be
deemed to accrue from and including the day following the occurrence of the
applicable Registration Default.
Upon (v) the filing of the Exchange Offer Registration Statement after the
90-day period described in clause (i) above, (w) the effectiveness of the
Exchange Offer Registration Statement after the 150-day period described in
clause (ii) above, (x) the consummation of the Exchange Offer after the 30-day
period described in clause (iii) above, (y) the effectiveness of a Shelf
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Registration Statement after the 60-day period described in clause (iv) above,
or (z) the cure of any Registration Default described in clause (v) above, such
Additional Interest shall cease to accrue on the Notes from the date of such
filing, effectiveness, consummation or cure, as the case may be, if the Company
is otherwise in compliance with this paragraph; provided, however, that if,
after any such Additional Interest ceases to accrue, a different event specified
in clause (i), (ii), (iii), (iv) or (v) above occurs, such Additional Interest
shall begin to accrue again pursuant to the foregoing provisions.
(f) Specific Enforcement. Without limiting the remedies available to the
Initial Purchasers and the Holders, the Company acknowledges (i) that any
failure by it to comply with its obligations under Sections 2(a) and 2(b) hereof
may result in material irreparable injury to the Initial Purchasers or the
Holders for which there is no adequate remedy at law, (ii) that it will not be
possible to measure damages for such injuries precisely and (iii) that, in the
event of any such failure, the Initial Purchasers or any Holder may obtain such
relief as may be required to specifically enforce the Company's obligations
under Sections 2(a) and 2(b).
3. Registration Procedures.
In connection with the obligations of the Company with respect to the
Registration Statements pursuant to Sections 2(a) and 2(b) hereof, the Company
shall:
(a) prepare and file with the SEC a Registration Statement, within the
time period specified in Section 2, on the appropriate form under the 1933 Act,
which form (i) shall be selected by the Company, (ii) shall, in the case of a
Shelf Registration, be available for the sale of the Transfer Restricted Notes
by the selling Holders thereof entitled to the rights under Section 2(b) and
(iii) shall comply as to form in all material respects with the requirements of
the applicable form and include or incorporate by reference all financial
statements required by the SEC to be filed therewith, and use its best efforts
to cause such Registration Statement to become effective and remain effective in
accordance with Section 2 hereof;
(b) prepare and file with the SEC such amendments and post-effective
amendments to each Registration Statement as may be necessary under applicable
law to keep such Registration Statement effective for the applicable period;
cause each Prospectus to be supplemented by any required prospectus supplement,
and as so supplemented to be filed pursuant to Rule 424 under the 1933 Act; and
comply with the provisions of the 1933 Act with respect to the disposition of
all securities covered by each Registration Statement during the applicable
period in accordance with the intended method or methods of distribution by the
selling Holders thereof;
(c) in the case of a Shelf Registration, (i) notify each Holder of
Transfer Restricted Notes, at least ten days prior to filing, that a Shelf
Registration Statement with respect to the Transfer Restricted Notes is being
filed and advising such Holders that the distribution of Transfer Restricted
Notes will be made in accordance with the method elected by the Majority
Holders; and (ii) furnish to each Holder of Transfer Restricted Notes, to
counsel for the Initial Purchasers, to counsel for the Holders and to each
underwriter of an underwritten offering of Transfer Restricted Notes, if any,
without charge, as many copies of each Prospectus, including
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each preliminary Prospectus, and any amendment or supplement thereto and such
other documents as such Holder or underwriter may reasonably request, including
financial statements and schedules and, if the Holder so requests, all exhibits
(including those incorporated by reference) in order to facilitate the public
sale or other disposition of the Transfer Restricted Notes; and (iii) subject to
Section 2(d)(iii) and the last paragraph of this Section 3, hereby consent to
the use of the Prospectus, including each preliminary Prospectus, or any
amendment or supplement thereto by each of the selling Holders of Transfer
Restricted Notes in connection with the offering and sale of the Transfer
Restricted Notes covered by the Prospectus or any amendment or supplement
thereto;
(d) use its reasonable best efforts to register or qualify the Transfer
Restricted Notes under all applicable state securities or "blue sky" laws of
such jurisdictions as any Holder of Transfer Restricted Notes covered by a
Registration Statement and each underwriter of an underwritten offering of
Transfer Restricted Notes shall reasonably request by the time the Registration
Statement is declared effective by the SEC, to cooperate with the Holders in
connection with any filings required to be made with the NASD and do any and all
other acts and things which may be reasonably necessary or reasonably advisable
to enable such Holder to consummate the disposition in each such jurisdiction of
such Transfer Restricted Notes owned by such Holder; 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 3(d) or (ii) take any action which
would subject it to general service of process or taxation in any such
jurisdiction if it is not then so subject;
(e) in the case of a Shelf Registration, notify each Holder of Transfer
Restricted Notes entitled to the rights under Section 2(b) and counsel for such
Holders promptly and, if requested by such Holder or counsel, confirm such
advice in writing promptly (i) when a Registration Statement has become
effective and when any post-effective amendments and supplements thereto become
effective, (ii) of any request by the SEC or any state securities authority for
post-effective amendments and supplements to a Registration Statement and
Prospectus or for additional information after the Registration Statement has
become effective, (iii) of the issuance by the SEC or any state securities
authority of any stop order suspending the effectiveness of a Registration
Statement or the initiation of any proceedings for that purpose, (iv) if, during
the period a Registration Statement is effective, the representations and
warranties of the Company contained in any underwriting agreement, securities
sales agreement or other similar agreement, if any, relating to such offering
cease to be true and correct in all material respects, (v) of the receipt by the
Company of any notification with respect to the suspension of the qualification
of the Transfer Restricted Notes for sale in any jurisdiction or the initiation
or threatening of any proceeding for such purpose, (vi) of the happening of any
event or the discovery of any facts during the period a Shelf Registration
Statement is effective (including as contemplated in Section 2(d)(iii) hereof)
which makes any statement made in such Registration Statement or the related
Prospectus untrue in any material respect or which requires the making of any
changes in such Registration Statement or Prospectus in order to make the
statements therein not misleading and (vii) of any determination by the Company
that a post-effective amendment to a Registration Statement would be
appropriate;
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(f) (A) in the case of the Exchange Offer, (i) include in the Exchange
Offer Registration Statement a "Plan of Distribution" section covering the
use of the Prospectus included in the Exchange Offer Registration
Statement by broker-dealers who have exchanged their Transfer Restricted
Notes for Exchange Notes for the resale of such Exchange Notes, (ii)
furnish to each broker-dealer who desires to participate in the Exchange
Offer, without charge, as many copies of each Prospectus included in the
Exchange Offer Registration Statement, including any preliminary
prospectus, and any amendment or supplement thereto, as such broker-dealer
may reasonably request within 180 days following the date of effectiveness
of the Exchange Offer Registration Statement, (iii) include in the
Exchange Offer Registration Statement a statement that any broker-dealer
who holds Transfer Restricted Notes acquired for its own account as a
result of market-making activities or other trading activities (a
"Participating Broker-Dealer"), and who receives Exchange Notes for
Transfer Restricted Notes pursuant to the Exchange Offer, may be a
statutory underwriter and must deliver a prospectus meeting the
requirements of the 1933 Act in connection with any resale of such
Exchange Notes, (iv) subject to the last paragraph of Section 3, hereby
consent to the use of the Prospectus forming part of the Exchange Offer
Registration Statement or any amendment or supplement thereto, by any
broker-dealer in connection with the sale or transfer of the Exchange
Notes covered by the Prospectus or any amendment or supplement thereto,
and (v) include in the transmittal letter or similar documentation to be
executed by an exchange offeree in order to participate in the Exchange
Offer the following provision:
"If the undersigned is not a broker-dealer, the undersigned represents
that it is not engaged in, and does not intend to engage in, a
distribution of Exchange Notes. If the undersigned is a broker-dealer that
will receive Exchange Notes for its own account in exchange for Transfer
Restricted Notes, it represents that the Transfer Restricted Notes to be
exchanged for Exchange Notes were acquired by it as a result of
market-making activities or other trading activities and acknowledges that
it will deliver a prospectus meeting the requirements of the 1933 Act in
connection with any resale of such Exchange Notes pursuant to the Exchange
Offer; however, by so acknowledging and by delivering a prospectus, the
undersigned will not be deemed to admit that it is an "underwriter" within
the meaning of the 1933 Act;"
(B) to the extent any Participating Broker-Dealer participates in
the Exchange Offer, the Company shall use its best efforts to cause to be
delivered at the request of an entity representing the Participating
Broker-Dealers (which entity shall be one of the Initial Purchasers,
unless it elects not to act as such representative) only one, if any,
"cold comfort" letter with respect to the Prospectus in the form existing
on the last date for which exchanges are accepted pursuant to the Exchange
Offer and with respect to each subsequent amendment or supplement, if any,
effected during the period specified in clause (C) below;
(C) to the extent any Participating Broker-Dealer participates in
the Exchange Offer, the Company shall use its best efforts to maintain the
effectiveness of the
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Exchange Offer Registration Statement for a period of 180 days following
the closing of the Exchange Offer; and
(D) the Company shall not be required to amend or supplement the
Prospectus contained in the Exchange Offer Registration Statement as would
otherwise be contemplated by Section 3(b) hereof, or take any other action
as a result of this Section 3(f), for a period exceeding 180 days after
the last date for which exchanges are accepted pursuant to the Exchange
Offer (as such period may be extended by the Company) and Participating
Broker-Dealers shall not be authorized by the Company to, and shall not,
deliver such Prospectus after such period in connection with resales
contemplated by this Section 3.
(g) (A) in the case of an Exchange Offer, furnish counsel for the Initial
Purchasers and (B) in the case of a Shelf Registration, furnish counsel for the
Holders of Transfer Restricted Notes copies of any request by the SEC or any
state securities authority for amendments or supplements to a Registration
Statement and Prospectus or for additional information;
(h) make every reasonable effort to obtain the withdrawal of any order
suspending the effectiveness of a Registration Statement as soon as practicable
and provide immediate notice to each Holder of the withdrawal of any such order;
(i) in the case of a Shelf Registration, furnish to each Holder entitled
to the rights under Section 2(b), without charge, at least one conformed copy of
each Registration Statement and any post-effective amendment thereto (without
documents incorporated therein by reference or exhibits thereto, unless
requested);
(j) in the case of a Shelf Registration, cooperate with the selling
Holders entitled to the rights under Section 2(b) to facilitate the timely
preparation and delivery of any certificates representing Transfer Restricted
Notes to be sold and not bearing any restrictive legends; and cause such
Transfer Restricted Notes to be in such denominations (consistent with the
provisions of the Indenture) in a form eligible for deposit with the Depositary
and registered in such names as the selling Holders or the underwriters, if any,
may reasonably request in writing at least one business day prior to the closing
of any sale of Transfer Restricted Notes;
(k) in the case of a Shelf Registration, upon the occurrence of any event
or the discovery of any facts, each as contemplated by Section 3(e)(vi) hereof,
use their best efforts to prepare a supplement or post-effective amendment to a
Registration Statement or the related Prospectus or any document incorporated
therein by reference or file any other required document so that, as thereafter
delivered to the purchasers of the Transfer Restricted Notes, such Prospectus
will not contain at the time of such delivery any untrue statement of a material
fact or omit to state a material fact necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading. The
Company agrees to notify each Holder to suspend use of the Prospectus as
promptly as practicable after the occurrence of such an event, and each Holder
hereby agrees to suspend use of the Prospectus until the Company has amended or
supplemented the Prospectus to correct such misstatement or omission. At such
time as such public disclosure
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is otherwise made or the Company determines that such disclosure is not
necessary, in each case to correct any misstatement of a material fact or to
include any omitted material fact, the Company agrees promptly to notify each
Holder of such determination and to furnish each Holder such numbers of copies
of the Prospectus, as amended or supplemented, as such Holder may reasonably
request;
(l) obtain CUSIP numbers for all Exchange Notes, or Transfer Restricted
Notes, as the case may be, not later than the effective date of a Registration
Statement, and provide the Trustee with any necessary printed certificates for
the Exchange Notes in a form eligible for deposit with the Depositary;
(m) (i) cause the Indenture to be qualified under the Trust Indenture Act
of 1939, as amended (the "TIA"), in connection with the registration of the
Exchange Notes, or Transfer Restricted Notes, as the case may be, (ii) cooperate
with the Trustee and the Holders to effect such changes to the Indenture as may
be required for the Indenture to be so qualified in accordance with the terms of
the TIA and (iii) execute, and use its best efforts to cause the Trustee to
execute, all documents as may be required to effect such changes, and all other
forms and documents required to be filed with the SEC to enable the Indenture to
be so qualified in a timely manner;
(n) in the case of a Shelf Registration, enter into agreements (including
underwriting agreements) and take all other customary and appropriate actions
(including those reasonably requested by the Holders of a majority in principal
amount of the Transfer Restricted Notes being sold under Section 2(b)) in order
to expedite or facilitate the disposition of such Transfer Restricted Notes and
in such connection, whether or not an underwriting agreement is entered into and
whether or not the registration is an underwritten registration:
(i) make such representations and warranties to the Holders of such
Transfer Restricted Notes and the underwriters, if any, in form, substance
and scope as are customarily made by issuers to underwriters in similar
underwritten offerings as may be reasonably requested by them;
(ii) obtain opinions of counsel to the Company and updates thereof
(which counsel and opinions (in form, scope and substance) shall be
reasonably satisfactory to the managing underwriters, if any, and the
Holders of a majority in principal amount of the Transfer Restricted Notes
being sold) addressed to each selling Holder and the underwriters, if any,
covering the matters customarily covered in opinions requested in sales of
securities or underwritten offerings and such other matters as may be
reasonably requested by such Holders and underwriters;
(iii) obtain "cold comfort" letters and updates thereof from the
Company's independent certified public accountants addressed to the
underwriters, if any, and to the selling Holders of Transfer Restricted
Notes, such letters to be in customary form and covering matters of the
type customarily covered in "cold comfort" letters to underwriters in
connection with similar underwritten offerings;
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<PAGE>
(iv) enter into a securities sales agreement with the Holders and an
agent of the Holders providing for, among other things, the appointment of
such agent for the selling Holders for the purpose of soliciting purchases
of Transfer Restricted Notes, which agreement shall be in form, substance
and scope customary for similar offerings;
(v) if an underwriting agreement is entered into in the case of an
underwritten offering, cause the same to set forth indemnification
provisions and procedures substantially equivalent to the indemnification
provisions and procedures set forth in Section 5 hereof with respect to
the underwriters and all other parties to be indemnified pursuant to
Section 5 hereof; and
(vi) deliver such documents and certificates as may be reasonably
requested and as are customarily delivered in similar offerings.
The above shall be done at (i) the effectiveness of such Registration
Statement (and, if appropriate, each post-effective amendment thereto) and (ii)
each closing under any underwriting or similar agreement as and to the extent
required thereunder. In the case of any underwritten offering, the Company shall
provide written notice to the Holders of all Transfer Restricted Notes not then
exchanged for Exchange Notes of such underwritten offering at least 30 days
prior to the filing of a prospectus supplement for such underwritten offering.
Such notice shall (x) offer each such Holder the right to participate in such
underwritten offering, (y) specify a date, which shall be no earlier than 10
days following the date of such notice, by which such Holder must inform the
Company of its intent to participate in such underwritten offering and (z)
include the instructions such Holder must follow in order to participate in such
underwritten offering;
(o) in the case of a Shelf Registration, make available for inspection by
representatives of the Holders entitled to rights under Section 2(b) and any
underwriters participating in any disposition pursuant to a Shelf Registration
Statement and any U.S. counsel or accountant retained by such Holders or
underwriters, all financial and other records, pertinent corporate documents and
properties of the Company reasonably requested by any such Persons, and cause
the respective officers, directors, employees, and any other agents of the
Company to supply all information reasonably requested by any such
representative, underwriter, special counsel or accountant in connection with a
Registration Statement; provided that any such records, documents, properties
and such information that is designated in writing by the Company, in good
faith, as confidential at the time of delivery of such records, documents,
properties or information shall be kept confidential by any such representative,
underwriter, special counsel or accountant and shall be used only in connection
with such Registration Statement, unless disclosure thereof is made in
connection with a court proceeding or required by law, or such information has
become available (not in violation of this agreement) to the public generally or
through a third party without an accompanying obligation of confidentiality, and
the Company shall be entitled to request that such representative, underwriter,
special counsel or accountant sign a confidentiality agreement to the foregoing
effect;
(p) (i) in the case of an Exchange Offer, a reasonable time prior to the
filing of any Exchange Offer Registration Statement, any Prospectus forming a
part thereof, any amendment
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to an Exchange Offer Registration Statement or amendment or supplement to a
Prospectus, provide copies of such document to the Initial Purchasers, and make
such changes in any such document prior to the filing thereof as the Initial
Purchasers or their counsel may reasonably request; (ii) in the case of a Shelf
Registration, a reasonable time prior to filing any Shelf Registration
Statement, any Prospectus forming a part thereof, any amendment to such Shelf
Registration Statement or amendment or supplement to such Prospectus, provide
copies of such document to the Holders entitled to rights under Section 2(b), to
the Initial Purchasers, to counsel on behalf of such Holders and to the
underwriter or underwriters of an underwritten offering of Transfer Restricted
Notes, if any, and make such changes in any such document prior to the filing
thereof as counsel to the Initial Purchasers or any underwriter may reasonably
request; and (iii) cause the representatives of the Company to be available for
discussion of such document as shall be reasonably requested by the Holders of
Transfer Restricted Notes, the Initial Purchasers on behalf of such Holders or
any underwriter, and shall not at any time make any filing of any such document
of which such Holders, the Initial Purchasers on behalf of such Holders, their
counsel or any underwriter shall not have previously been advised and furnished
a copy or to which such Holders, the Initial Purchasers on behalf of such
Holders, their counsel or any underwriter shall reasonably object within a
reasonable time period;
(q) otherwise use its best efforts to comply with all applicable rules and
regulations of the SEC and make available to their security holders, as soon as
reasonably practicable (but not until the end of the first full fiscal quarter
following effectiveness), an earnings statement covering at least 12 months
which shall satisfy the provisions of Section 11(a) of the 1933 Act and Rule 158
thereunder; and
(r) cooperate and assist in any filings required to be made with the NASD
and in the performance of any due diligence investigation by any underwriter and
its counsel.
In the case of a Shelf Registration Statement, the Company may (as a
condition to such Holder's participation in the Shelf Registration) require each
Holder of Transfer Restricted Notes to furnish to the Company such information
regarding such Holder and the proposed distribution by such Holder of such
Transfer Restricted Notes as the Company may from time to time reasonably
request in writing.
In the case of (1) a Shelf Registration Statement or (2) Participating
Broker-Dealers utilizing the Prospectus contained in the Exchange Offer
Registration Statement as provided in Section 3(f) hereof, that are seeking to
sell Exchange Notes and are required to deliver Prospectuses, each Holder agrees
that, upon receipt of any notice from the Company of the happening of any event
or the discovery of any facts, each of the kind described in Section
3(e)(ii)-(vii) hereof, such Holder will forthwith discontinue disposition of
Transfer Restricted Notes pursuant to a Registration Statement until such
Holder's receipt of the copies of the supplemented or amended Prospectus
contemplated by Section 3(k) hereof or until it is advised in writing by the
Company that the use of the applicable Prospectus may be resumed, and, if so
directed by the Company, such Holder will deliver to the Company (at their
expense) all copies in its possession, other than permanent file copies then in
such Holder's possession, of the Prospectus covering such Transfer Restricted
Notes or Exchange Notes, as the case may be, current at the time of receipt of
such notice. Each Holder agrees to keep confidential the cause
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of any such notice of suspension or other information provided to them by the
Company with respect thereto or any other event which would materially adversely
affect the Company. If the Company shall give any such notice to suspend the
disposition of Transfer Restricted Notes or Exchange Notes, as the case may be,
pursuant to a Registration Statement as a result of the happening of any event
or the discovery of any facts, each of the kind described in Section 3(e)(vi)
hereof, the Company shall be deemed to have used its best efforts to keep the
Shelf Registration Statement effective during such period of suspension;
provided that (i) such period of suspension shall not exceed the time periods
provided in Section 2(d)(iii) hereof and (ii) the Company shall use its
reasonable best efforts to file and have declared effective (if an amendment) as
soon as practicable an amendment or supplement to the Shelf Registration
Statement and shall extend the period during which the Registration Statement
shall be maintained effective pursuant to this Agreement by the number of days
during the period from and including the date of the giving of such notice to
and including the date when the Holders shall have received copies of the
supplemented or amended Prospectus necessary to resume such dispositions.
4. Underwritten Registrations.
If any of the Transfer Restricted Notes covered by any Shelf Registration
are to be sold in an underwritten offering, the investment banker or investment
bankers and manager or managers that will manage the offering will be selected
by the Majority Holders of such Transfer Restricted Notes included in such
offering, provided such banker or manager is acceptable to the Company, acting
reasonably.
No Holder of Transfer Restricted Notes may participate in any underwritten
registration hereunder unless such Holder (a) agrees to sell such Holder's
Transfer Restricted Notes on the basis provided in any underwriting arrangements
approved by the Persons entitled hereunder to approve such arrangements and (b)
completes and executes all questionnaires, powers of attorney, indemnities,
underwriting agreements and other documents required under the terms of such
underwriting arrangements.
5. Indemnification and Contribution.
(a) The Company agrees to indemnify and hold harmless each Initial
Purchaser, each Holder, including Participating Broker-Dealers, each underwriter
who participates in an offering of Transfer Restricted Notes, their respective
affiliates, and their respective directors, officers, employees, agents and each
Person, if any, who controls any of such parties within the meaning of Section
15 of the 1933 Act or Section 20 of the 1934 Act as follows:
(i) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, arising out of any untrue statement or alleged
untrue statement of a material fact contained in any Registration
Statement (or any amendment thereto) pursuant to which Exchange Notes or
Transfer Restricted Notes were registered under the 1933 Act, including
all documents incorporated therein by reference, or the omission or
alleged omission therefrom of a material fact required to be stated
therein or necessary to make the statements therein not misleading or
arising out of any untrue statement or alleged
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untrue statement of a material fact contained in any Prospectus (or any
amendment or supplement thereto) or the omission or alleged omission
therefrom of a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading;
(ii) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, to the extent of the aggregate amount paid in
settlement of any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or of any claim
whatsoever, in each case, based upon any such untrue statement or
omission, or any such alleged untrue statement or omission; provided that
(subject to Section 5(d) below) any such settlement is effected with the
written consent of the Company; and
(iii) against any and all expenses whatsoever, as incurred
(including the reasonable fees and disbursements of one counsel chosen by
any indemnified party), reasonably incurred in investigating, preparing or
defending against any litigation, or any investigation or proceeding by
any court or governmental agency or body, commenced or threatened, or any
claim whatsoever based upon any such untrue statement or omission, or any
such alleged untrue statement or omission, to the extent that any such
expense is not paid under subparagraph (i) or (ii) of this Section 5(a);
provided, however, that this indemnity agreement does not apply to any loss,
liability, claim, damage or expense to the extent (i) arising out of an untrue
statement or omission or alleged untrue statement or omission (A) made in or
omitted from a Preliminary Prospectus or registration statement and corrected or
included in a subsequent Prospectus or registration statement or any amendment
or supplement thereto made in reliance upon and in conformity with written
information furnished to the Company by the Initial Purchasers, any Holder,
including Participating Broker-Dealers, or any underwriter expressly for use in
the Registration Statement (or any amendment thereto) or the Prospectus (or any
amendment or supplement thereto) or (B) resulting from the use of the Prospectus
during a period when the use of the Prospectus has been suspended in accordance
with Section 2(d)(iii), Section 3(e)(vi) and the last paragraph of Section 3
hereof, provided, in each case, that Holders received prior notice of such
suspension.
(b) In the case of an Exchange Offer Registration or a Shelf Registration,
each Holder agrees, severally and not jointly, to indemnify and hold harmless
the Company, each Initial Purchaser, each underwriter who participates in an
offering of Transfer Restricted Notes and the other selling Holders and each of
their respective directors and officers (including each officer of the Company
who signed the Registration Statement) and each Person, if any, who controls the
Company, any Initial Purchaser, any underwriter or any other selling Holder
within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act,
against any and all loss, liability, claim, damage and expense described in the
indemnity contained in Section 5(a) hereof, as incurred, but only with respect
to untrue statements or omissions, or alleged untrue statements or omissions,
made in the Registration Statement (or any amendment thereto) or the Prospectus
(or any amendment or supplement thereto) in reliance upon and in conformity with
written information furnished to the Company by such Holder expressly for use in
the Registration
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Statement (or any amendment thereto), or the Prospectus (or any amendment or
supplement thereto); provided, however, that no such Holder shall be liable for
any claims hereunder in excess of the amount of net proceeds received by such
Holder from the sale of Transfer Restricted Notes pursuant to such Registration
Statement.
(c) In case any action shall be commenced involving any Person in respect
of which indemnity may be sought pursuant to either paragraph (a) or (b) above,
such Person (the "indemnified party") shall give notice as promptly as
reasonably practicable to each Person against whom such indemnity may be sought
(the "indemnifying party"), but failure to so notify an indemnifying party shall
not relieve such indemnifying party from any liability hereunder to the extent
it is not materially prejudiced as a result thereof and in any event shall not
relieve it from any liability which it may have otherwise than on account of
this indemnity agreement. An indemnifying party may participate at its own
expense in the defense of such action; provided, however, that counsel to the
indemnifying party shall not (except with the consent of the indemnified party)
also be counsel to the indemnified party. In no event shall the indemnifying
party or parties be liable for the fees and expenses of more than one counsel
(in addition to any local counsel) separate from their own counsel for all
indemnified parties in connection with any one action or separate but similar or
related actions in the same jurisdiction arising out of the same general
allegations or circumstances. No indemnifying party shall, without the prior
written consent of the indemnified parties, settle or compromise or consent to
the entry of any judgment with respect to any litigation, or any investigation
or proceeding by any governmental agency or body, commenced or threatened, or
any claim whatsoever in respect of which indemnification or contribution could
be sought under this Section 5 (whether or not the indemnified parties are
actual or potential parties thereof), unless such settlement, compromise or
consent (i) includes an unconditional release of each indemnified party from all
liability arising out of such litigation, investigation, proceeding or claim and
(ii) does not include a statement as to or an admission of fault, culpability or
a failure to act by or on behalf of any indemnified party.
(d) If at any time an indemnified party shall have requested an
indemnifying party to reimburse the indemnified party for fees and expenses of
counsel, such indemnifying party agrees that it shall be liable for any
settlement of the nature contemplated by Section 5(a)(ii) hereof effected
without its written consent if (i) such settlement is entered into more than 45
days after receipt by such indemnifying party of the aforesaid request, (ii)
such indemnifying party shall have received notice of the terms of such
settlement at least 30 days prior to such settlement being entered into and
(iii) such indemnifying party shall not have reimbursed such indemnified party
in accordance with such request prior to the date of such settlement.
(e) If the indemnification provided for in any of the indemnity provisions
set forth in this Section 5 is for any reason unavailable to or insufficient to
hold harmless an indemnified party in respect of any losses, liabilities,
claims, damages or expenses referred to therein, then each indemnifying party
shall contribute to the aggregate amount of such losses, liabilities, claims,
damages and expenses incurred by such indemnified party, as incurred, in such
proportion as is appropriate to reflect the relative fault of such indemnifying
party or parties on the one hand, and such indemnified party or parties on the
other hand, in connection with the statements or omissions which resulted in
such losses, liabilities, claims, damages or expenses,
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as well as any other relevant equitable considerations, The relative fault of
such indemnifying party or parties on the one hand, and such indemnified party
or parties on the other hand shall be determined by reference to, among other
things, whether any such untrue or alleged untrue statement of a material fact
or omission or alleged omission to state a material fact relates to information
supplied by such indemnifying party or parties or such indemnified party or
parties and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission. The Company, the
Initial Purchasers and the Holders of the Transfer Restricted Notes agree that
it would not be just and equitable if contribution pursuant to this Section 5
were determined by pro rata allocation (even if the Initial Purchasers were
treated as one entity, and the Holders were treated as one entity, for such
purpose) or by another method of allocation which does not take account of the
equitable considerations referred to above in Section 5. The aggregate amount of
losses, liabilities, claims, damages and expenses incurred by an indemnified
party and referred to above in this Section 5 shall be deemed to include any
legal or other expenses reasonably incurred by such indemnified party in
investigating, preparing or defending against any litigation, or any
investigation or proceeding by an governmental agency or body, commenced or
threatened, or any claim whatsoever based upon any 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 1993 Act) shall
be entitled to contribution from any Person who was not guilty of such
fraudulent misrepresentation. For purposes of this Section 5, each Person, if
any, who controls an Initial Purchaser or Holder within the meaning of Section
15 of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to
contribution as such Initial Purchaser or Holder, and each director of the
Company, each officer of the Company who signed the Registration Statement, and
each Person, if any, who controls the Company within the meaning of Section 15
of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to
contribution as the Company.
6. Miscellaneous.
(a) Rule 144 and Rule 144A. For so long as the Company is subject to the
reporting requirements of Section 13 or 15(d) of the 1934 Act, the Company
covenants that it will file the reports required to be filed by it under Section
13(a) or 15(d) of the 1934 Act and the rules and regulations adopted by the SEC
thereunder, and that if it ceases to be so required to file such reports, it
will upon the request of any Holder of Transfer Restricted Notes (i) make
publicly available such information as is necessary to permit sales pursuant to
Rule 144 under the 1933 Act, (ii) deliver such information to a prospective
purchaser as is necessary to permit sales pursuant to Rule 144A under the 1933
Act and it will take such further action as any Holder of Transfer Restricted
Notes may reasonably request, and (iii) take such further action that is
reasonable in the circumstances, in each case, to the extent required from time
to time to enable such Holder to sell its Transfer Restricted Notes without
registration under the 1933 Act within the limitation of the exemptions provided
by (x) Rule 144 under the 1933 Act, as such Rule may be amended from time to
time, (y) Rule 144A under the 1933 Act, as such Rule may be amended from time to
time, or (z) any similar rules or regulations hereafter adopted by the SEC. Upon
the written request of any Holder of Transfer Restricted Notes, the Company will
deliver to such Holder a written statement as to whether it has complied with
such requirements.
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<PAGE>
(b) No Inconsistent Agreements. The Company has not entered into, nor will
it on or after the date of this Agreement enter into, any agreement that is
inconsistent with the rights granted to the Holders of Transfer Restricted Notes
in this Agreement or that otherwise conflicts with the provisions hereof. The
rights granted to the Holders hereunder do not in any way conflict with, and are
not inconsistent with, the rights granted to the holders of the Company's other
issued and outstanding securities under any agreements or instruments relating
to such securities. Except as set forth in this Agreement, no Person has any
rights to include any securities of the Company in any Registration Statement
required to be filed pursuant to this Agreement.
(c) Amendments and Waivers. The provisions of this Agreement, including
the provisions of this sentence, may not be amended, modified or supplemented,
and waivers or consents to departures from the provisions hereof may not be
given unless the Company has obtained the written consent of Holders of at least
a majority in aggregate principal amount of the outstanding Transfer Restricted
Notes affected by such amendment, modification, supplement, waiver or departure;
provided, however, that no amendment, modification, supplement or waiver or
consent to any departure from the provisions of Section 5 hereof shall be
effective as against any Holder of Transfer Restricted Notes unless consented to
in writing by such Holder.
(d) Notices. All notices and other communications provided for or
permitted hereunder shall be made in writing by hand-delivery, registered
first-class mail, telecopier, or any courier guaranteeing overnight delivery (i)
if to a Holder (other than an Initial Purchaser), at the most current address
set forth on the records of the Registrar under the Indenture, (ii) if to an
Initial Purchaser, at the most current address given by such Initial Purchaser
to the Company by means of a notice given in accordance with the provisions of
this Section 6(d), which address initially is the address set forth in the
Purchase Agreement; and (iii) if to the Company, initially at the address set
forth in the Purchase Agreement and thereafter at such other address, notice of
which is given in accordance with the provisions of this Section 6(d).
All such notices and communications shall be deemed to have been duly
given: at the time delivered by hand, if personally delivered; five business
days after being deposited in the mail, postage prepaid, if mailed; when receipt
is acknowledged, if telecopied; and on the next business day if timely delivered
to an air courier guaranteeing overnight delivery.
Copies of all such notices, demands, or other communications shall be
concurrently delivered by the Person giving the same to the Trustee, at the
address specified in the Indenture.
(e) Successors and Assigns. This Agreement shall inure to the benefit of
and be binding upon the successors, assigns and transferees of each of the
parties, including, without limitation and without the need for an express
assignment, subsequent Holders; provided that nothing herein shall be deemed to
permit any assignment, transfer or other disposition of Transfer Restricted
Notes in violation of the terms hereof or of the Purchase Agreement or the
Indenture. If any transferee of any Holder shall acquire Transfer Restricted
Notes, in any manner, whether by operation of law or otherwise, such Transfer
Restricted Notes shall be held subject to all of the terms of this Agreement,
and by taking and holding such Transfer Restricted
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<PAGE>
Notes, such Person shall be conclusively deemed to have agreed to be bound by
and to perform all of the terms and provisions of this Agreement, including the
restrictions on resale set forth in this Agreement and, if applicable, the
Purchase Agreement, and such Person shall be entitled to receive the benefits
hereof.
(f) Third Party Beneficiary. The Holders shall be third party
beneficiaries to the agreements made hereunder between the Company on the one
hand, and the Initial Purchasers, on the other hand, and shall have the right to
enforce such agreements directly to the extent it deems such enforcement
necessary or advisable to protect its rights or the rights of Holders hereunder.
(g) Counterparts. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
(h) Headings. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
(i) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
(j) Severability. In the event that any one or more of the provisions
contained herein, or the application thereof in any circumstance, is held
invalid, illegal or unenforceable, the validity, legality and enforceability of
any such provision in every other respect and of the remaining provisions
contained herein shall not be affected or impaired thereby.
[signature page follows]
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the date first written above.
RHYTHMS NETCONNECTIONS, INC.
By /s/ SCOTT C. CHANDLER
-----------------------
Scott C. Chandler
Chief Financial Officer
Confirmed and accepted as of
the date first above written:
MERRILL LYNCH & CO.,
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
SALOMON SMITH BARNEY INC.
CHASE SECURITIES INC.
By: MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By: /s/ MARCY BECKER
----------------------------------------
Authorized Signatory
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<PAGE>
Exhibit 4.16
PLEDGE AND ESCROW AGREEMENT
Dated as of April 23, 1999 from
RHYTHMS NETCONNECTIONS INC.
as Pledgor to
STATE STREET BANK AND TRUST COMPANY OF CALIFORNIA, N.A.
as Trustee
<PAGE>
PLEDGE AND ESCROW AGREEMENT
This PLEDGE AND ESCROW AGREEMENT (the "Pledge Agreement") is made and
entered into as of April 23, 1999 by and among Rhythms NetConnections Inc., a
Delaware corporation, having its principal office at 6933 South Revere Parkway,
Englewood, Colorado 80112 (the "Pledgor"), and State Street Bank and Trust
Company of California, N.A., a national banking association, having its
principal corporate trust office at Library Tower, 633 West 5th Street, 12th
Floor, Los Angeles, California 90071, as trustee (the "Trustee"), for the
holders of the Senior Notes (as defined herein) issued by the Pledgor under the
Indenture referred to below and for the holders of the Discount Notes (as
defined herein) (collectively, the "Holders").
W I T N E S S E T H:
WHEREAS, the Pledgor and the Initial Purchasers (as defined herein) are
parties to a Purchase Agreement dated April 16, 1999 (the "Purchase Agreement"),
pursuant to which the Pledgor will issue and sell to the Initial Purchasers
$325,000,000 in aggregate principal amount of 12 3/4% Senior Notes due 2009 (the
"Series A Notes") which will be exchangeable into 12 3/4% Senior Notes due 2009,
Series B (the "Series B Notes"), containing terms identical to the Series A
Notes in all material respects (except for references to certain restrictions on
transfers, registration rights and restrictive legends) (the Series A Notes and
the Series B Notes being collectively referred to as the "Senior Notes");
WHEREAS, the Pledgor has outstanding $290,000,000 in aggregate principal
amount at maturity of 13 1/2% Senior Discount Notes due 2008 (the "Discount
Notes");
WHEREAS, the Pledgor and the 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 the Senior Notes on the date hereof;
WHEREAS, pursuant to the Indenture, on the Issue Date (as defined herein),
the Pledgor is required to pledge for the benefit of the Holders of the Senior
Notes and the Discount Notes on an equal and ratable basis a portfolio of
securities initially consisting of Government Securities (as defined herein) in
an amount and with such maturity as will be sufficient upon receipt of scheduled
interest and principal payments of such securities, based upon the report of an
internationally recognized firm of independent public accountants or a
nationally recognized investment banking firm, in either case selected by the
Pledgor, to provide for payment in full of the first six scheduled interest
payments due on the Senior Notes (unless and to the extent already paid) at the
stated rate of 12 3/4% (excluding liquidated damages, if any) (the "First Six
Scheduled Interest Payments");
WHEREAS, the Pledgor will also open an account (the "Cash Collateral
Account") with the Trustee at its office in Los Angeles, California, which will
be in the name of the Trustee for the benefit of the Pledgor but under the sole
dominion and control of the Trustee and subject to the terms of this Pledge
Agreement;
WHEREAS, this Pledge Agreement and the Collateral (as defined herein)
secure the Secured Obligations (as defined herein); and
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WHEREAS, the parties hereto desire to set forth their agreement with
regard to the administration of the Collateral Investments Account and the Cash
Collateral Account, the creation and perfection of a Security Interest in the
Collateral, the termination of this Pledge Agreement and other matters.
Capitalized terms used but not defined herein shall have the meanings assigned
to them in the Indenture.
AGREEMENT NOW, THEREFORE, in consideration of the premises herein
contained, and in order to induce the Holders of the Senior Notes to purchase
the Senior Notes, the Pledgor and the Trustee hereby agree, for the benefit of
the Trustee and for the equal and ratable benefit of the Holders of the Senior
Notes and the Discount Notes, as follows:
SECTION 1. Definitions
"Cash Collateral Account" shall have the meaning specified in the
Recitals.
"Collateral" shall have the meaning specified in Section 2.1 hereof.
"Collateral Investments" shall have the meaning specified in Section 3.4
hereof.
"Collateral Investments Account" shall have the meaning specified in
Section 3.5 hereof.
"Event of Default" shall have the meaning specified in Section 12 hereof.
"First Six Scheduled Interest Payments" shall have the meaning specified
in the Recitals.
"FRBNY" shall have the meaning specified in Section 3.5 hereof.
"Holders" shall have the meaning specified in the Recitals.
"Indenture" shall have the meaning specified in the Recitals.
"Initial Portfolio" shall have the meaning specified in Section 3.1
hereof.
"Initial Purchasers" means Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Salomon Smith Barney Inc. and Chase Securities Inc.
"Issue Date" means the time and date of the first issuance of the Senior
Notes under the Indenture.
"Issuer Order" shall have the meaning specified in Section 4 hereof.
"Pledge Agreement" shall have the meaning specified in the Recitals.
"Pledgor Funds" shall have the meaning specified in Section 4 hereof.
"Pledgor's Designee" shall have the meaning specified in Section 4 hereof.
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<PAGE>
"Secured Obligations" means the Pledgor's obligations to (i) pay in full
the First Six Scheduled Interest Payments and (ii) repay the principal, premium
and interest (whether accrued before or after the commencement of a bankruptcy,
insolvency or other similar proceeding regardless of whether or not a claim
therefore is allowed or allowable in any such proceeding) on the Senior Notes
and the Discount Notes, as the case may be, in the event that the Senior Notes
or the Discount Notes become due and payable prior to such time as the First Six
Scheduled Interest Payments shall have been paid in full (at which time the
payment of such principal, premium and interest shall no longer be Secured
Obligations except to the extent such principal, premium or interest is then due
and payable).
"UCC" means the Uniform Commercial Code as in effect on the date hereof in
New York State. Unless otherwise defined herein or in the Indenture, terms used
herein which are defined in the UCC are used herein as therein defined.
SECTION 2. Security Interest
2.1 Pledge and Grant of Security Interest. The Pledgor hereby irrevocably
pledges, assigns and sets over to the Trustee, and grants to the Trustee, for
the equal and ratable benefit of the Holders of the Senior Notes and the
Discount Notes, a first priority continuing security interest in all of the
Pledgor's right, title and interest to all of the Collateral, whether now owned
or existing or hereafter acquired or created.
"Collateral" means and includes (whether characterized as investment
property, deposit accounts, cash or otherwise):
(a) the Collateral Investments Account and the Cash Collateral
Account, all funds from time to time deposited or held therein and all
certificates and instruments, if any, from time to time representing or
evidencing the Collateral Investments Account and the Cash Collateral Account;
(b) all Collateral Investments and all certificates and instruments,
if any, representing or evidencing the Collateral Investments, and any and all
security entitlement to the Collateral Investments, and any and all related
securities accounts in which any security entitlement to the Collateral
Investments is carried, including, without limitation, the Collateral
Investments Account;
(c) all notes, certificates of deposit, deposit accounts, checks and
other instruments, if any, from time to time hereafter delivered to or otherwise
possessed by the Trustee or its nominees for or on behalf of the Pledgor in
substitution for or in addition to any or all of the then existing Collateral;
(d) all interest, dividends (if any), 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
(e) all proceeds of the foregoing, including, without limitation,
cash proceeds.
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<PAGE>
2.2 Secured Obligations. This Pledge Agreement, in accordance with its
terms and the terms of the Indenture, secures the due and punctual payment and
performance of the Secured Obligations.
SECTION 3. Deposit of Initial Portfolio; Collateral Investments
Account and Cash Collateral Account; Collateral Investments
3.1 Deposit of Initial Portfolio. On the Issue Date, the Pledgor shall
deposit, or shall cause to be deposited, into the Collateral Investments Account
for the equal and ratable benefit of the Holders of the Senior Notes and the
Discount Notes, a portfolio of securities initially consisting of Government
Securities in an amount and with such maturity 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 (as
such amount is verified by the report of an internationally recognized firm of
independent public accountants or a nationally recognized investment banking
firm, in either case selected by the Pledgor, in the form of Exhibit A delivered
to the Trustee) (the "Initial Portfolio").
3.2 Maintaining the Collateral Investments Account and the Cash Collateral
Account. So long as any Secured Obligations shall remain unpaid:
(a) The Pledgor will maintain the Collateral Investments Account and
the Cash Collateral Account with State Street Bank and Trust Company of
California, N.A. in Los Angeles, California; and
(b) It shall be a term and condition of the Collateral Investments
Account and the Cash Collateral Account, notwithstanding any term or condition
to the contrary in any other agreement relating to either such account, and
except as otherwise provided by the provisions of Section 3.4, Section 4 and
Section 12 hereof, that no amount (including interest on or other proceeds on
the Collateral Investments Account or the Cash Collateral Account) 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 other than the Trustee or its designated agent from
the Collateral Investments Account or the Cash Collateral Account (other than
customary brokerage or similar fees, expenses, discounts or commissions payable
in connection with investments of funds pursuant to Section 3.4 hereof);
provided that, notwithstanding the foregoing, no withdrawals may be made by the
Pledgor under Section 3.4, Section 4 or Section 12 hereof.
The Collateral Investments Account and the Cash Collateral 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.
3.3 Investing of Amounts in the Collateral Investments Account. All
amounts invested in the Collateral Investments Account shall initially be
invested in the Initial Portfolio. At any time while this Pledge Agreement is in
force, the Pledgor may substitute either:
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<PAGE>
(a) Marketable U.S. Securities for the Government Securities pledged as
Collateral hereunder; provided, however, that the Marketable U.S. Securities so
substituted must have a fair market value (measured at the date of substitution)
as certified to the Trustee, in the opinion of a nationally recognized firm of
independent public accountants or a nationally recognized investment banking
firm, in either case selected by the Pledgor, at least equal to 125.0% of the
amount of any of the First Six Scheduled Interest Payments that are unpaid (or
the pro rata portion of such interest payments equal to the percentage of such
interest payments to be secured by such Marketable U.S. Securities) as of the
date such Marketable U.S. Securities are proposed to be substituted as
Collateral hereunder. Concurrently with such substitution, the Pledgor shall (i)
deliver a certificate in the form of Exhibit B hereto reaffirming the
representations and warranties set forth in Section 5 hereof, (ii) deliver an
Opinion of Counsel stating that the Trustee has a perfected lien in such
Marketable U.S. Securities and (iii) deliver the accountants' or investment
bankers' opinion described above. The Pledgor hereby pledges and the Trustee
shall hold a security interest in, for the benefit of the Holders of the Senior
Notes and the Discount Notes, on an equal and ratable basis, any Marketable U.S.
Securities received by the Trustee in accordance with this Section 3.3(a); or
(b) Government Securities with different maturities than the Government
Securities pledged as Collateral hereunder; provided, however, that the
Government Securities so substituted must be in such amount and with such
maturity as will be sufficient upon receipt of scheduled interest and principal
of such securities, in the opinion of a nationally recognized firm of
independent public accountants or a nationally recognized investment banking
firm, in either case selected by the Pledgor, to provide for payment in full of
the First Six Scheduled Interest Payments that are unpaid (or the pro rata
portion of such interest payments equal to the percentage of such interest
payments to be secured by such Government Securities) as of the date such
Government Securities are proposed to be substituted as Collateral hereunder.
Concurrently with such substitution, the Pledgor shall (i) deliver a certificate
in the form of Exhibit B hereto reaffirming the representations and warranties
set forth in Section 5 hereof, (ii) deliver an Opinion of Counsel stating that
the Trustee has a perfected lien in such Government Securities and (iii) deliver
the accountants' or investment bankers' opinion described above. The Pledgor
hereby pledges and the Trustee shall hold a security interest in, for the
benefit of the Holders of the Senior Notes and the Discount Notes, on an equal
and ratable basis, any Government Securities received by the Trustee in
accordance with this Section 3.3(b).
3.4 Investing of Amounts in the Cash Collateral Account. If requested in
writing by the Pledgor, the Trustee will, subject to the provisions of Section 4
and Section 12 hereof, from time to time (i) invest amounts on deposit in the
Cash Collateral Account in such Cash Equivalents in the name of the Trustee as
the Pledgor may select and (ii) invest interest paid on the Cash Equivalents
referred to in clause (i) above, and reinvest other proceeds of any such Cash
Equivalents that may mature or be sold, in each case in such Cash Equivalents in
the name of the Trustee, as the Pledgor may select (the Cash Equivalents
referred to in clauses (i) and (ii) above being collectively "Collateral
Investments"); provided, however, in providing directions hereunder the Pledgor
shall use reasonable and good faith efforts to assure that the amount on deposit
in the Collateral Investments Account and the Cash Collateral Account,
collectively, at any time during the term of this Pledge Agreement, are
sufficient to provide for the payment in full of the First Six Scheduled
Interest Payments remaining unpaid at such time. Interest and
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<PAGE>
proceeds that are not invested or reinvested in Collateral Investments as
provided above shall be deposited and held in the Cash Collateral Account.
3.5 Delivery of Collateral.
(a) If and to the extent the Collateral is represented or evidenced
by certificates or instruments, all such certificates or instruments
representing or evidencing the Collateral, including, without limitation,
amounts invested or reinvested in Collateral Investments as provided in Section
3.4 hereof, shall be delivered to and held by or on behalf of the Trustee
pursuant hereto and shall be in suitable form for transfer by delivery, or shall
be accompanied by duly executed instruments of transfer or assignment in blank,
all in form and substance sufficient to convey a valid security interest in such
Collateral to the Trustee for the benefit of the Holders of the Senior Notes and
the Discount Notes on an equal and ratable basis or shall be credited to a
securities account (the "Collateral Investments Account") designated by the
Trustee. For the better perfection of the Trustee's rights in and to the
Collateral, the Pledgor shall forthwith, upon the pledge of any Collateral
hereunder, cause all such Collateral, including the Collateral Investments
Account and all other accounts representing a security entitlement to or
containing any Collateral (including, without limitation, any Collateral
Investments) to be registered in the name of the Trustee or such of its nominees
as the Trustee shall direct and the Pledgor shall approve (which approval shall
not be unreasonably withheld), and to be under the sole dominion and control of
the Trustee, which dominion and control shall be agreed to and acknowledged by
any securities intermediary holding any such account in an acknowledgment in the
form of Exhibit C hereto, subject only to the revocable rights specified in
Section 4 hereof. In addition, the Trustee shall have the right at any time to
exchange certificates or instruments representing or evidencing the Collateral
for certificates or instruments of smaller or larger denominations.
(b) The Trustee shall become the holder or entitlement holder, as
the case may be, of the Collateral Investments and of any and all security
entitlements to the Collateral Investments, through action by the Federal
Reserve Bank of New York ("FRBNY") or another securities intermediary, as
confirmed (in writing or electronically or otherwise in accordance with standard
industry practice) to the Trustee by FRBNY or such other securities intermediary
(i) indicating by book-entry that the Collateral Investments or a security
entitlement thereto has been credited to the Collateral Investments Account, or
(ii) acquiring the Collateral Investments or a security entitlement thereto for
the Trustee and accepting the same for credit to the Collateral Investments
Account.
(c) Prior to the acquisition by the Trustee of Collateral
Investments (or acquisition by the Trustee of any security entitlement thereto),
as provided in subsection (a) or (b) of this Section 3.5, the Trustee shall
establish the Collateral Investments Account on its books as an account
segregated from all other custodial or collateral accounts at its office at 633
West 5th Street, 12th Floor, Los Angeles, California 90071. Upon acquisition of
any Collateral Investments by the Trustee (or the Trustee's acquisition of a
security entitlement thereto), as confirmed to the Trustee by FRBNY or another
securities intermediary, the Trustee shall make appropriate book entries
indicating that the Collateral Investments and/or such security entitlement have
been credited to and are held in the Collateral Investments Account. Subject to
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<PAGE>
the other terms and conditions of this Pledge Agreement, all Collateral
Investments held by the Trustee pursuant to this Pledge Agreement shall be held
in the Collateral Investments Account subject (except as expressly provided in
Section 4 hereof) to the exclusive dominion and control of the Trustee and
exclusively for the benefit of the Trustee and for the equal and ratable benefit
of the Holders of the Senior Notes and the Discount Notes and segregated from
all other funds or other property otherwise held by the Trustee.
(d) All Collateral shall be retained in the Cash Collateral Account
and the Collateral Investments Account pending disbursement pursuant to the
terms hereof.
(e) On the date hereof, the Trustee shall deliver to the Pledgor and
the Initial Purchasers a duly executed certificate, in the form of Exhibit D
hereto, of an officer of the Trustee, confirming the Trustee's establishment and
maintenance of the Collateral Investments Account and the Cash Collateral
Account and its receipt and holding of the Initial Portfolio and any other
Collateral or a security entitlement thereto and the crediting of the Initial
Portfolio and any other Collateral or such security entitlement to the
Collateral Investments Account, all in accordance with this Pledge Agreement.
(f) On the date hereof, the Pledgor shall deliver to the Trustee the
report of an internationally recognized firm of independent public accountants
or a nationally recognized investment banking firm, in either case selected by
the Pledgor, substantially in the form of Exhibit A hereto.
SECTION 4. Disbursements of Collateral
The Trustee shall hold the Collateral in the Collateral Investments
Account and the Cash Collateral Account and release the same, or a portion
thereof, only as follows:
(a) At least one Business Day prior to the due date of any of the
First Six Scheduled Interest Payments, the Trustee shall release from the Cash
Collateral Account and/or liquidate Collateral in the Collateral Investments
Account, and transfer to the Trustee, as Paying Agent (or any other entity then
acting as Paying Agent under the Indenture) in order to pay to the Holders of
the Senior Notes proceeds sufficient to provide for payment in full of such
interest then due on the Senior Notes; provided that, in the event Collateral is
not required to be liquidated, the Pledgor will give the Trustee at least three
Business Days' notice pursuant to written instructions executed by the Pledgor
(an "Issuer Order"). The Trustee will take any action necessary to provide for
the payment of such interest then due on the Senior Notes to the Holders of the
Senior Notes in accordance with the payment provisions of the Indenture and the
Senior Notes from (and to the extent of) proceeds of the funds in the Cash
Collateral Account or the Collateral Investments Account, as the case may be.
Nothing in this Section 4 shall affect the Trustee's rights to apply the
Collateral to the payments of amounts due on the Senior Notes or Discount Notes
upon acceleration thereof prior to such time as the First Six Scheduled Interest
Payments shall have been paid in full.
(b) If the Pledgor makes any payment or portion of any payment of
the First Six Scheduled Interest Payments from a source of funds other than the
Cash Collateral Account or the Collateral Investments Account ("Pledgor Funds"),
the Pledgor may, after payment in full
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<PAGE>
of such interest payment or portion thereof from such Pledgor Funds, direct the
Trustee in writing to release to the Pledgor or to another party at the
direction of the Pledgor (the "Pledgor's Designee") proceeds from the Cash
Collateral Account or the Collateral Investments Account in an amount less than
or equal to the amount of Pledgor Funds applied to such interest payment. Upon
receipt of an Issuer Order by the Trustee, 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 Cash Collateral Account or the Collateral Investments Account,
as the case may be. Concurrently with any release of funds requested by the
Pledgor pursuant to this Section 4(b), the Pledgor shall deliver to the Trustee
a certificate signed by an officer of the Pledgor stating that such release has
been authorized by the Pledgor and will not contravene any provision of
applicable law or its certificate of incorporation or its by-laws or any
material agreement or other material instrument binding upon the Pledgor or any
of its subsidiaries 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 interest granted under the Pledge Agreement.
(c) At least one Business Day prior to the due date of any of the
First Six Scheduled Interest Payments, the Pledgor covenants to give the Trustee
(by Issuer Order) notice as to whether such payment of interest will be made
pursuant to Section 4(a) or 4(b) hereof and as to the respective amounts of
interest that will be paid pursuant to Section 4(a) or 4(b) hereof; provided
that, in the event Collateral is not required to be liquidated, the Pledgor will
give the Trustee at least three Business Days' notice pursuant to an Issuer
Order. If no such notice is given, the Trustee shall act pursuant to Section
4(a) as if it had received an Issuer Order pursuant to this paragraph for the
payment in full of the interest then due.
(d) The Trustee shall liquidate Collateral Investments pursuant to
Section 4(a) hereof in order to make any scheduled payment of interest or any
release hereunder unless instructed to not do so by Issuer Order.
(e) In the event that the Collateral held in the Cash Collateral
Account and the Collateral Investments Account exceeds the amount sufficient, in
the opinion of an internationally recognized firm of independent public
accountants or a nationally recognized investment banking firm, in either case
selected by the Pledgor, to provide for payment in full of the First Six
Scheduled Interest Payments (or, in the event an interest payment or payments
have been made, an amount sufficient to provide for payment in full of the First
Six Scheduled Interest Payments remaining unpaid at such time), the Trustee
shall release to the Pledgor at the Pledgor's request and upon receipt of such
opinion any such excess Collateral.
(f) Upon the release of any Collateral from the Cash Collateral
Account or the Collateral Investments Account in accordance with the terms of
this Pledge Agreement, the security interest evidenced by this Pledge Agreement
in such released Collateral will automatically terminate and be of no further
force and effect.
(g) Nothing contained in Section 3 hereof, this Section 4 or any
other provision of this Pledge Agreement shall (i) afford the Pledgor any right
to issue entitlement orders with respect to any security entitlement to the
Collateral Investments or any securities account in which any such security
entitlement may be carried, or otherwise afford the Pledgor
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control of any such security entitlement or (ii) otherwise give rise to any
rights of the Pledgor with respect to the Collateral Investments, 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 this Section 4)
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
entitlement to the Collateral Investments solely as trustee for the Holders of
the Senior Notes and the Discount Notes and not as a securities intermediary.
SECTION 5. Representations and Warranties
The Pledgor hereby represents and warrants on its own behalf, as of the
date hereof, that:
(a) The execution and delivery by the Pledgor of, and the
performance by the Pledgor of its obligations under, this Pledge Agreement have
been duly authorized by all necessary corporate action and will not contravene
or constitute a default under any provision of applicable law or its certificate
of incorporation or its by-laws or any material agreement or other material
instrument binding upon the Pledgor or any of its subsidiaries 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; no consent, approval,
authorization or order of, or qualification with, any governmental body or
agency is required (i) for the performance by the Pledgor of its obligations
under this Pledge Agreement, (ii) 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.
(b) The Pledgor is the beneficial owner of the Initial Portfolio,
free and clear of any Lien or claims of any person or entity (except for the
security interests granted under this Pledge Agreement). No financing statement
covering Pledgor's interest in the Collateral is on file in any public office
other than any financing statements filed pursuant to this Pledge Agreement.
(c) This Pledge Agreement has been duly authorized, validly executed
and delivered by the Pledgor and (assuming the due authorization and valid
execution and delivery of this Pledge Agreement by the Trustee and
enforceability of the Pledge Agreement against the Trustee in accordance with
its terms) 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 and the discretion of the court
before which any proceeding therefor may be brought, (iii) the exculpation
provisions and rights to
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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(b), Section 15.11 and Section 15.15 hereof may be
limited by applicable law.
(d) Upon the delivery to the Trustee of the certificates or
instruments, if any, representing or evidencing the Collateral, and the transfer
and pledge to the Trustee of the Collateral or the acquisition by the Trustee of
a security entitlement thereto, in accordance with the terms hereof, the pledge
of and grant of a security interest in the Collateral securing the payment of
the Secured Obligations for the benefit of the Trustee and the Holders of the
Senior Notes and the Discount Notes will constitute a first priority perfected
security interest in such Collateral (except, with respect to proceeds, only to
the extent permitted by Section 9-306 of the UCC), enforceable as such against
all creditors of the Pledgor and any persons purporting to purchase any of the
Collateral from the Pledgor, except in each case as enforcement may be affected
by general equitable principles (whether considered in a proceeding in equity or
at law) and other than as permitted by the Indenture.
(e) 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 of its subsidiaries 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.
(f) The pledge of the Collateral pursuant to this Pledge Agreement
is not prohibited by law or governmental regulation (including, without
limitation, Regulations T, U and X of the Board of Governors of the Federal
Reserve System) applicable to the Pledgor.
(g) No Event of Default exists.
SECTION 6. Further Assurances
The Pledgor will, promptly upon request by the Trustee (which request the
Trustee may submit in its discretion or at the direction of the Holders of a
majority in principal amount of the Senior Notes or of the Discount Notes then
outstanding), execute and deliver or cause to be executed and delivered, or use
its reasonable best efforts to procure, all assignments, instruments and other
documents, deliver any instruments to the Trustee and take any other actions
that are reasonably necessary or 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 enable the Trustee to exercise
and enforce its rights and remedies hereunder with respect to any Collateral or
to otherwise effect the purposes of this Pledge Agreement. The Pledgor also
agrees, whether or not requested by the Trustee, to take all actions (including
the filing of UCC-1 financing statements in the appropriate jurisdictions) 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, 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). The Pledgor will furnish to the Trustee all
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opinions, certificates and other documents required to be furnished pursuant to
Section 10.24 of the Indenture in the manner set forth therein.
SECTION 7. Covenants
The Pledgor covenants and agrees on its behalf with the Trustee and the
Holders of the Senior Notes and the Discount Notes that from and after the date
of this Pledge Agreement until the payment in full in cash of the Secured
Obligations:
(a) it will not (and will not purport to) sell, assign or otherwise
dispose of, or grant any option or warrant with respect to, any of the
Collateral;
(b) it will not create or permit to exist any Lien upon or with
respect to 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 at all times will be the sole beneficial owner of the Collateral;
and
(c) 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 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 the Collateral.
SECTION 8. Power of Attorney
The Pledgor hereby irrevocably appoints the Trustee as the Pledgor's
attorney-in-fact, coupled with an interest, 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 reasonable discretion to take any action and to execute
any instrument which the Trustee may reasonably deem necessary or advisable to
accomplish the purposes of this Pledge Agreement, including, without limitation,
to receive, endorse and collect all instruments made payable to the Pledgor
representing any interest payment, dividend or other distribution in respect of
the Collateral or any part thereof and to give full discharge for the same, and
the reasonable expenses of the Trustee incurred in connection therewith shall be
payable by the Pledgor. This power of attorney is coupled with an interest and
is irrevocable by the Pledgor. In addition to all of the powers granted to the
Trustee pursuant to the Indenture, the Pledgor hereby appoints and constitutes
the Trustee to exercise to the fullest extent permitted by law all of the
following powers upon and at any time after the occurrence and during the
continuance of an Event of Default:
(a) collection of proceeds of any Collateral;
(b) conveyance of any item of Collateral to any purchaser thereof;
(c) giving of any notices or recording of any Liens under Section 6
hereof; and
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(d) paying or discharging 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 Secured
Obligations of the Pledgor to the Trustee, due and payable immediately upon
demand. The Trustee's authority under this Section 8 shall include, without
limitation, the authority to endorse and negotiate any checks or instruments
representing proceeds of the 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 actions arising from or incident to the powers granted to the Trustee in
this Pledge Agreement.
SECTION 9. Trustee May Perform
Without limiting the authority granted under Section 8 and except with
respect to the failure of the Pledgor to deliver investment instructions (which
shall be governed by the other terms of this Pledge Agreement), if the Pledgor
fails to perform any agreement contained herein, the Trustee may, but shall not
be obligated to, itself perform, or cause performance of, such agreement, and
the reasonable expenses of the Trustee incurred in connection therewith shall be
payable by the Pledgor.
SECTION 10. No Assumption of Duties; Reasonable Care
The rights and powers granted to the Trustee hereunder are being granted
in order to preserve and protect the security interest of the Trustee and the
Holders of the Senior Notes and the Discount 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 similar accounts, 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, maturity 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,
(c) investing or reinvesting any of the Collateral other than as
directed by the Pledgor in accordance with Section 3 hereof, or
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(d) the validity, sufficiency or priority of the Collateral or the
perfection or the maintenance of the perfection of any security interest granted
hereby, provided, however, that nothing contained in this Pledge Agreement shall
relieve the Trustee of any responsibilities as a securities intermediary under
applicable law.
SECTION 11. Indemnity
The Pledgor shall indemnify, hold harmless and defend the Trustee and its
directors, officers, agents and employees, from and against any and all claims,
actions, obligations, liabilities and expenses, including reasonable defense
costs, reasonable investigative fees and costs, and reasonable legal fees and
damages arising from the Trustee's performance as Trustee under this Pledge
Agreement, except to the extent that such claim, action, obligation, liability
or expense is directly attributable to the bad faith, gross negligence or
willful misconduct of such indemnified person. The provisions of this Section 11
shall survive termination of this Pledge Agreement and the registration and
removal of the Trustee.
SECTION 12. Remedies upon Event of Default
If any Event of Default under the Indenture or a material 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 Senior Notes and the Discount
Notes shall have, on an equal and ratable basis, 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
addition, with respect to any Collateral that shall then be in or shall
thereafter come into the possession or custody of the Trustee, the Trustee may
and, at the direction of the Holders of a majority in principal amount of the
Senior Notes and of the Discount Notes then outstanding shall, appoint a broker
or other expert to sell or cause the same to be sold at any broker's board or at
public or private sale, in one or more sales or lots, at such price or prices
such broker or other expert may deem best, for cash or on credit or for future
delivery, without assumption of any credit risk. The purchaser of any or all of
the 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. The Trustee will give the Pledgor reasonable notice of the time and
place of any public sale thereof, or of the time after which any private sale or
other intended disposition is to be made. 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. Any requirements of reasonable notice shall be met if
such notice is mailed to the Pledgor as provided in Section 15.1 hereof at least
ten (10) days before the time of the sale or disposition. The Trustee or any
Holder of Senior Notes or Discount 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 expenses (including court
costs and reasonable attorneys' fees, expenses and disbursements) of, or
incident to, the
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enforcement of any of the provisions hereof shall be recoverable from the
proceeds of the sale or other disposition of the Collateral.
(b) The Pledgor further agrees to use its reasonable best efforts to
do or cause to be done all such other acts as may be 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 Senior Notes and the Discount Notes, that the
Trustee and the Holders of the Senior Notes and the Discount 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 Senior Notes and the Discount 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 Senior Notes and the
Discount Notes and security interests hereunder, and all obligations of the
Pledgor hereunder, shall be absolute and unconditional irrespective of:
(a) any lack of validity or enforceability of the Indenture or the
indenture governing the Discount 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 Secured Obligations, or any other amendment or
waiver of or any consent to any departure from the Indenture or the indenture
governing the Discount Notes;
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(c) any exchange, surrender, release or non-perfection of any Liens
on any other collateral for all or any of the Secured Obligations; or
(d) 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 Secured Obligations or of this
Pledge Agreement.
SECTION 15. Miscellaneous Provisions
15.1 Notices. Any notice or communication 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: Rhythms NetConnections Inc.
6933 South Revere Parkway
Englewood, Colorado 80112
Attention: Scott Chandler
with a copy to: Brobeck Phleger & Harrison LLP
550 West "C" Street - Suite 1300
San Diego, California 92101
Telephone: (619) 234-1966
Telecopier: (619) 234-3848
Attention: John Denniston
if to the Trustee: State Street Bank and Trust Company of
California, N.A.
Library Tower
633 West 5th Street, 12th Floor
Los Angeles, California 90071
Telephone: (213) 362-7369
Telecopier: (213) 362-7357
Attention: Corporate Trust Department (Rhythms
NetConnections Inc. 12 3/4% Senior
Notes due 2009)
with a copy to: Shipman & Goodwin LLP
One American Row
Hartford, Connecticut 06103-2819
Telephone: (860) 251-5919
Telecopier: (860) 251-5999
Attention: Daniel P. Brown, Jr.
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.
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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
provisions, 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.
15.4 Headings. The headings in this Pledge Agreement have been inserted
for convenience of reference only, are not to be considered a part thereof and
shall in no way modify or restrict any of the terms or provisions hereof.
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.
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 Senior Notes and the Discount
Notes, any benefit or any legal or equitable right, remedy or claim under this
Pledge Agreement.
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 neither the Trustee nor any Holder of Senior Notes or Discount
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 Event of
Default or in any breach of any of the terms and conditions hereof. Failure of
the Trustee or any Holder of Senior Notes or Discount Notes to exercise, or
delay in exercising, any right, power or privilege hereunder shall not preclude
any other or further exercise thereof or the exercise of any other right, power
or privilege. A waiver by the Trustee or any Holder of the Senior Notes or the
Discount 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
Senior Notes or Discount 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.
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.
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 the
Indenture or in this Pledge Agreement,
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remain in full force and effect until the payment in full in cash of the Secured
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 Senior Notes and the Discount Notes and their respective
successors, transferees and assigns.
(b) This Pledge Agreement shall terminate upon the payment in full
in cash of the Secured 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.
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 Pledgors.
15.10 Survival Provisions. 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. The obligations of the Pledgor under Sections 11 and 13 hereof shall
survive the termination of this Pledge Agreement.
15.11 Waivers. The Pledgor waives presentment and demand for payment of
any of the Secured Obligations, protest and notice of dishonor or default with
respect to any of the Secured Obligations, and all other notices to which the
Pledgor might otherwise be entitled, except as otherwise expressly provided
herein or in the Indenture.
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
though agents or employees and shall be entitled to retain counsel and to act in
good faith in reliance upon the advice of counsel concerning all such matters.
Except as otherwise expressly provided in this Pledge Agreement, the Indenture
or the indenture governing the Discount Notes, 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, gross negligence
or willful misconduct, and the Trustee shall not be responsible for the
validity, effectiveness, sufficiency or priority 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. The Trustee shall have
no duty to cause any financing statement or continuation statement to be filed
in respect of the Collateral.
(b) The Pledgor acknowledges that the rights 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
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the Trustee and the Holders of the Senior Notes and the Discount Notes, be
governed by the Indenture and the indenture governing the Discount Notes 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 Senior Notes
and the Discount 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.
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.
15.14 Rights of Holders of the Notes. No Holder of Senior Notes or
Discount Notes shall have any independent rights hereunder other than those
rights granted to individual Holders of the Senior Notes or Discount Notes
pursuant to Section 5.08 of the Indenture and Section 5.08 of the indenture
governing the Discount Notes, respectively; provided that nothing in this
subsection shall limit any rights granted to the Trustee under the Senior Notes,
the Discount Notes, the Indenture or the indenture governing the Discount Notes.
15.15 Governing Law; Submission to Jurisdiction; Waiver of Jury Trial;
Waiver of Damages.
(a) THIS PLEDGE AGREEMENT SHALL BE GOVERNED BY AND INTERPRETED UNDER
THE LAWS OF THE STATE OF NEW YORK, AND ANY DISPUTE ARISING OUT OF, CONNECTED
WITH, RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED AMONG THE
PLEDGOR, THE TRUSTEE AND THE HOLDERS OF THE SENIOR NOTES AND THE DISCOUNT 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 WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. NOTWITHSTANDING
THE FOREGOING: THE MATTERS IDENTIFIED IN 31 C.F.R. SECTIONS 357.10 AND 357.11
(AS IN EFFECT ON THE DATE OF THIS AGREEMENT) SHALL BE GOVERNED SOLELY BY THE
LAWS SPECIFIED THEREIN.
(b) THE PLEDGOR AGREES THAT NEITHER ANY HOLDER OF SENIOR NOTES OR
DISCOUNT NOTES NOR (EXCEPT AS OTHERWISE PROVIDED IN THIS PLEDGE AGREEMENT, THE
INDENTURE OR THE INDENTURE GOVERNING THE DISCOUNT NOTES) THE TRUSTEE IN ITS
CAPACITY AS TRUSTEE SHALL HAVE ANY LIABILITY TO THE PLEDGOR (WHETHER ARISING IN
TORT, CONTRACT OR OTHERWISE) FOR LOSSES SUFFERED BY THE PLEDGOR IN CONNECTION
WITH, ARISING OUT OF, OR IN ANY WAY RELATED TO, THE TRANSACTIONS CONTEMPLATED
AND THE RELATIONSHIP ESTABLISHED BY THIS PLEDGE AGREEMENT, OR ANY ACT, OMISSION
OR EVENT OCCURRING IN CONNECTION THEREWITH, UNLESS IT IS DETERMINED BY A FINAL
AND NONAPPEALABLE JUDGMENT OF A COURT THAT IS BINDING ON THE TRUSTEE OR SUCH
HOLDER OF SENIOR NOTES OR DISCOUNT NOTES, AS THE CASE MAY BE, THAT SUCH LOSSES
18
<PAGE>
WERE THE RESULT OF ACTS OR OMISSIONS ON THE PART OF THE TRUSTEE OR SUCH HOLDERS
OF SENIOR NOTES OR DISCOUNT NOTES, AS THE CASE MAY BE, CONSTITUTING BAD FAITH,
GROSS NEGLIGENCE OR WILLFUL MISCONDUCT.
(c) TO THE EXTENT PERMITTED BY APPLICABLE LAW, THE PLEDGOR WAIVES
THE POSTING OF ANY BOND OTHERWISE REQUIRED OF THE TRUSTEE OR ANY HOLDER OF
SENIOR NOTES OR DISCOUNT 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 SENIOR NOTES OR DISCOUNT 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 SENIOR
NOTES OR DISCOUNT NOTES ON THE OTHER HAND.
15.16 Wire Transfers.
(a) The Trustee is authorized to seek confirmation of fund transfer
instructions by telephone call-back to the person or persons designated on
Exhibit E hereto, and the Trustee may rely upon the confirmations of anyone
purporting to be the person or persons so designated. The persons and telephone
numbers for call-backs may be changed only in a writing actually received and
acknowledged by the Trustee. The parties to this Pledge Agreement acknowledge
that such security procedure is commercially reasonable.
(b) It is understood that the Trustee and the beneficiary's bank in
any funds transfer may rely solely upon any account numbers or similar
identifying number provided by either of the other parties hereto to identify
(i) the beneficiary, (ii) the beneficiary's bank, or (iii) an order it executes
using any such identifying number, even where its use may result in a person
other than the beneficiary being paid, or the transfer of funds to a bank other
than the beneficiary's bank or an intermediary bank designated.
19
<PAGE>
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:
RHYTHMS NETCONNECTIONS INC.
By: /s/ CATHERINE HAPKA
-------------------------------------------
Name: Catherine Hapka
Title: Chief Executive Officer & President
Trustee:
STATE STREET BANK OF TRUST COMPANY OF
CALIFORNIA, N.A.
By: /s/ SCOTT C. EMMONS
-------------------------------------------
Name: Scott C. Emmons
Title: Assistant Vice President
20
<PAGE>
EXHIBIT A
[Letterhead]
April 23, 1999
Independent Public Accountants' or Investment Banking Firms' Report
on Sufficiency of Marketable U.S. Securities
[to be supplied separately by Pricewaterhouse Coopers LLP]
A-1
<PAGE>
EXHIBIT B
RHYTHMS NETCONNECTIONS INC.
The undersigned officers of Rhythms NetConnections Inc. a Delaware
corporation (the "Pledgor"), hereby certify to the Trustee, pursuant to Section
3.3 of the Pledge and Escrow Agreement dated as of April 23, 1999 (the "Pledge
Agreement") between the Pledgor and State Street Bank and Trust Company of
California, N.A., as trustee (the "Trustee") under the Indenture dated as of
April 23, 1999 (the "Indenture") between the Pledgor and the Trustee, as
follows:
The representations and warranties of the Pledgor set forth in Section 5
of the Pledge Agreement are true and correct as of the day hereof.
RHYTHMS NETCONNECTIONS INC.
By:_______________________________________
Name:
Title:
Dated:___________________________
B-1
<PAGE>
EXHIBIT C
April 23, 1999
State Street Bank and Trust Company of California, N.A.
Library Tower
633 West 5th Street, 12th Floor
Los Angeles, California 90071
Re: Rhythms NetConnections Inc.
Dear Sir or Madam:
Reference is made to Collateral Investments Account No. 122038-0110 into
which certain securities, instruments and other properties are deposited from
time to time (the "Collateral Investments Account") maintained by you (the
"Trustee"). Pursuant to the Pledge and Escrow Agreement dated April 23, 1999
(the "Pledge Agreement"), Rhythms NetConnections Inc. (the "Pledgor"), has
granted to the Trustee for the holders of 12 3/4% Senior Notes due 2009 referred
to in the Indenture dated as of April 23, 1999 (the "Indenture") and the
Pledgor's 13 1/2% Senior Discount Notes due 2008 (the "Discount Notes"), between
the Trustee and the Pledgor, a security interest in certain property of the
Pledgor, including, among other things, the following (the "Collateral
Investments"): (a) the Collateral Investments Account and the Cash Collateral
Account, (b) all certificates and instruments, if any, representing or
evidencing the Collateral and the Collateral Investments, (c) any and all
securities entitlements to the Collateral and the Collateral Investments, (d)
any and all related securities accounts in which security entitlements to the
Collateral and the Collateral Investments 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 or Collateral Investments, (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 or Collateral Investments, 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
paragraph) and, to the extent not otherwise included, all cash. It is a
condition to the continued maintenance of the Collateral Investments Account
with you that you agree to this letter agreement.
By signing this letter agreement, you acknowledge notice of, and consent
to the terms and provisions of, the Pledge Agreement, a copy of which is
attached hereto, and confirm to the Trustee that the description of the
Collateral Investments Account set forth on Schedule 1 hereof is correct and
that you have received no notice of any other pledge or assignment of the
Collateral Investments Account. Further, you hereby agree with the Trustee that:
(a) Notwithstanding anything to the contrary in any other agreement
relating to the Collateral Investments Account, the Collateral Investments
Account is and will be subject to the
C-1
<PAGE>
terms and conditions of the Pledge Agreement, will be maintained solely for the
benefit of the Trustee, will be entitled "Rhythms Collateral Investments
Account" and will be subject to written instructions only from an officer of the
Trustee. You hereby agree to comply with all instructions (including, without
limitation, any instructions to liquidate all or less than all the Collateral
Investments and transfer the proceeds thereof to the Trustee), originated by the
Trustee relating to the Collateral Investments Account without further consent
from any other person (including, without limitation, the Pledgor), and not to
comply with any instructions originated by any person other than the Trustee.
(b) You will maintain a record of all securities, instruments, checks and
other remittance items received in the Collateral Investments Account and, in
addition to providing the Trustee and the Pledgor with a report describing the
contents on the Collateral Investments Account on a regular basis (or upon
Trustee's or Pledgor's request), furnish to the Trustee a monthly statement of
the Collateral Investments Account to be transmitted electronically to the
Trustee at Library Tower, 633 West 5th Street, 12th Floor, Los Angeles,
California 90071, Attention: Corporate Trust Department (Rhythms NetConnections
Inc. 12 3/4% Senior Notes due 2009).
(c) You will transfer, in same day funds, as soon as practicable upon
receipt, all amounts collected from the Collateral Investments Account on such
day to Cash Collateral Account No. 122038-020 (the "Cash Collateral Account").
(d) All transfers referred to in paragraph (c) above shall be made by you
irrespective of, and without deduction for, any counterclaim, defense,
recoupment or set-off and shall be final, and you will not seek to recover from
the Trustee for any reason any such payment once made.
(e) All service charges and fees with respect to the Collateral
Investments Account shall be payable by the Pledgor.
(f) The Trustee shall be entitled to exercise any and all rights of the
Pledgor in respect of the Collateral Investments Account in accordance with the
terms of the pledge Agreement, and the undersigned shall comply in all respects
with such exercise.
This letter agreement shall be binding upon you and your successors and
assigns and shall inure to the benefit of the Trustee, the holders of the Notes
and the Discount Notes and their successors, transferees and assigns. You may
terminate this letter agreement only upon thirty days' prior written notice to
the Pledgor and the Trustee. Upon such termination you shall close the
Collateral Investments Account and transfer all funds in the Collateral
Investments Account to the Cash Collateral Account. After any such termination,
you shall nonetheless remain obligated promptly to transfer to the Cash
Collateral Account all securities, instruments, funds and other property
received in respect of the Collateral Investments Account.
This letter agreement shall be governed by and construed in accordance
with the laws of the State of New York without regard to choice-of-law
principles.
C-2
<PAGE>
Very truly yours,
RHYTHMS NETCONNECTIONS INC.
By:_______________________________________
Name:
Title:
Acknowledged and agreed to
as of the date first above written:
STATE STREET BANK AND TRUST COMPANY
OF CALIFORNIA, N.A.
By:___________________________________
Name:
Title:
C-3
<PAGE>
EXHIBIT D
STATE STREET BANK AND TRUST COMPANY OF CALIFORNIA, N.A.
OFFICER'S CERTIFICATE
Pursuant to the Pledge and Escrow Agreement (the "Pledge Agreement") dated
as of April 23, 1999 by and among Rhythms NetConnections Inc. (the "Pledgor")
and State Street Bank and Trust Company of California, N.A., as trustee (the
"Trustee") for the holders of the Pledgor's 12 3/4% Senior Notes due 2009 and 13
1/2% Senior Discount Notes due 2008, the undersigned officer of the Trustee, on
behalf of the Trustee, makes the following certifications to the Pledgor and the
Initial Purchasers. Capitalized terms used and not defined in this Officer's
Certificate have the meanings set forth or referred to in the Pledge Agreement.
1. Substantially contemporaneously with the execution and delivery of this
Officer's Certificate, the Trustee has established with State Street Bank and
Trust Company of California, N.A. a cash collateral account (the "Cash
Collateral Account") and, as securities intermediary, a securities account in
the name of "Rhythms Collateral Investments Account" (the "Collateral
Investments Account") with respect to which the Trustee is the entitlement
holder, and has made appropriate book entries in its records establishing that
the Initial Portfolio and the Collateral Investments and the Trustee's
securities entitlement thereto have been credited to and are held in the Cash
Collateral Account or the Collateral Investments Account, as the case may be,
all in accordance with the Pledge Agreement.
2. The Trustee has established and maintained and will maintain the Cash
Collateral Account and the Collateral Investments Account and all securities
entitlements and other positions carried in the Cash Collateral Account or the
Collateral Investments Account solely in its capacity as Trustee and has not
asserted and will not assert any claim to or interest in the Cash Collateral
Account or the Collateral Investments Account or any such securities
entitlements or other positions except in such capacity.
3. The Trustee has acquired its security entitlement to the Collateral
Investments directly through a "securities account" (as defined in Section
8-501(a) of the UCC) maintained by State Street Bank and Trust Company for the
benefit of State Street Bank and Trust Company of California, N.A. at the
Federal Reserve Bank of Boston, as securities intermediary, for value and
without notice of any adverse claim thereto. Without limiting the generality of
the foregoing, the Cash Collateral Account and the Collateral Investments are
not and the Trustee's security entitlement to the Collateral Investments is not,
to the Trustee's knowledge, subject to any Lien granted by or to arising through
or in favor of any securities intermediary (including, without limitation, State
Street Bank and Trust Company or the Federal Reserve Bank of Boston) through
which the Trustee derives its security entitlement to the Collateral
Investments.
4. The Trustee has not caused or permitted the Cash Collateral Account or
the Collateral Investments or its security entitlement hereto to become subject
to any Lien created by or arising through the Trustee.
D-1
<PAGE>
IN WITNESS WHEREOF, the undersigned officer has executed this Officer's
Certificate on behalf of State Street Bank and Trust Company of California, N.A.
as Trustee this 23rd day of April, 1999.
STATE STREET BANK AND TRUST COMPANY OF
CALIFORNIA, N.A.
By:_______________________________________
Name:
Title:
D-2
<PAGE>
EXHIBIT E
Telephone Numbers for Call-Backs and
Persons Designated to Confirm Funds Transfer Instructions
If to Pledgor:
- --------------------------------------------------------------------------------
Name Telephone Number
- --------------------------------------------------------------------------------
Scott Chandler (303) 476-4238
- --------------------------------------------------------------------------------
Katrina Thompson (303) 476-2220
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
E-1
<PAGE>
[LETTERHEAD]
June __, 1999
Rhythms NetConnections Inc.
6933 South Revere Parkway
Englewood, CO 80112
Ladies and Gentlemen:
We have acted as counsel for Rhythms NetConnections Inc., a Delaware
corporation (the "Company") in connection with the proposed offering and
issuance of $325.0 million of 12 3/4% Senior Notes due 2009 (the "Exchange
Notes") of the Company in exchange for a like amount of 12 3/4% Senior Notes due
2009 (the "Outstanding Notes") of the Company, as contemplated by the
Registration Statement on Form S-4 with respect to the Exchange Notes filed with
the Securities and Exchange Commission (the "Commission") on June __, 1999 under
the Securities Act of 1933 (the "Securities Act") (such Registration Statement,
as amended is hereinafter referred to as the "Registration Statement").
In our capacity as counsel to the Company, we have examined, among other
things, the following:
(i) The Registration Statement;
(ii) The Indenture, dated April 23, 1999, by and between the
Company and State Street Bank and Trust Company of California, N.A. (the
"Trustee") (the "Indenture");
(iii) The Certificate of Incorporation of the Company,
including all amendments thereto, as in effect at the date hereof;
(iv) The Bylaws of the Company, including all amendments
thereto, as in effect on the date hereof;
(v) Resolutions of the Board of Directors of the Company
adopted by unanimous written consent dated as of April 16, 1999, authorizing the
issuance of the Exchange Notes and certain other actions with regard thereto;
and
(vi) Resolutions of the Board of Directors of the Company
adopted by unanimous written consent dated as of April 16, 1999, authorizing the
pricing of the Outstanding Notes and other final terms with regard thereto.
<PAGE>
Rhythms NetConnections Inc. [LOGO] June __, 1999
Page 2
In addition, we have obtained from public officials and from officers
and other representatives of the Company and the Trustee such certificates,
documents and assurances as we considered necessary or appropriate for purposes
of rendering this opinion letter. In our examination of the documents listed in
(i) through (vi) above and the other certificates, documents and assurances
referred to herein, we have assumed the legal capacity of all natural persons,
the genuineness of all signatures, the authenticity of all documents submitted
to us as originals, the conformity to original documents of all documents
submitted to us as copies and the authenticity of the originals of such
documents. Regarding documents executed by parties other than the Company, we
have assumed (i) that each such other party had the power to enter into and
perform all its obligations thereunder, (ii) the due authorization, execution
and delivery of such documents by each such party, and (iii) that such documents
constitute the legal, valid, binding and enforceable obligations of each such
party.
This opinion letter relates solely to the laws of the State of New York
and the General Corporation Law of the State of Delaware and we express no
opinion as to the effect or applicability of the laws of any other
jurisdictions.
Based upon and subject to the foregoing and on our consideration of such
other matters of fact and questions of law as we considered relevant in the
circumstances, we are of the opinion that:
1. When (i) authenticated by the Trustee in accordance with the
provisions of the Indenture, (ii) duly executed by the Company and (iii) issued
and delivered in exchange for the Outstanding Notes in accordance with the terms
of the Exchange Offer (as defined in the Registration Statement), the Exchange
Notes will be legal, valid and binding obligations of the Company enforceable
against the Company in accordance with their terms.
The opinions set forth above are subject to the following
qualifications, assumptions, limitations and exceptions:
(a) The binding nature of the obligations of the Company
under the Exchange Notes may be subject to or limited by (i) bankruptcy,
insolvency, reorganization, arrangement, moratorium, fraudulent transfer and
other similar laws affecting the rights of creditors generally; and (ii) general
equitable principles (whether relief is sought in a proceeding at law or in
equity), including, without limitation, concepts of materiality, reasonableness,
good faith, and fair dealing.
(b) We express no opinion as to provisions of the Exchange
Notes, purporting to establish an evidentiary standard or to authorize
conclusive determinations by any party thereto or any other person or allowing
any party thereto or any other person to make determinations in its sole
discretion.
<PAGE>
Rhythms NetConnections Inc. [LOGO] June __,1999
Page 3
(c) We also express no opinion as to:
(i) the enforceability of any provisions pursuant to
which the Company agrees to make payments without set-off, defense or
counterclaim;
(ii) remedial provisions of the Exchange Notes
including, without limitation, certain of the waivers therein, which purport to
permit any person to exercise remedies with respect to the Company other than in
compliance with applicable laws;
(iii) the enforceability of provisions relating to
indemnification, contribution or exculpation, to the extent any such provision
is contrary to public policy or prohibited by law (including, without
limitation, federal and state securities laws);
(iv) any provisions of the Exchange Notes purporting to
waive either illegality as a defense to the performance of contract obligations
or any other defense to such performance which cannot, as a matter of law, be
effectively waived;
(v) any provisions of the Exchange Notes, permitting
modification thereof only by means of an agreement in writing signed by the
parties thereto;
(vi) any provision of the Exchange Notes requiring
payment of attorneys' fees, except to the extent a court determines such fees to
be reasonable;
(vii) the effect of the law of any jurisdiction other
than the State of New York which limits the rates of interest legally chargeable
or collectible; and
(viii) provisions of the Exchange Notes to the extent
that they purport to exclude conflict of law principles under New York law.
We hereby consent to the filing of this opinion 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 thereby admit that we are in the category of persons whose consent is
required under Section 7 of the Securities Act or the rules and regulations of
the Commission thereunder.
<PAGE>
Rhythms NetConnections Inc. [LOGO] June __,1999
Page 4
This opinion letter is expressly limited to the matters set forth above
and we render no other opinion and express no other belief, whether by
implication or otherwise, as to any other matters. This opinion letter is
rendered as of the date hereof, and we assume no obligation to advise you of any
facts, circumstances, events or developments that may be brought to our
attention in the future, which facts, circumstances, events or developments may
alter, affect or modify the opinions or beliefs expressed herein.
Very truly yours,
BROBECK, PHLEGER & HARRISON LLP
<PAGE>
Rhythms NetConnections Inc. [LOGO] June __,1999
Page 5
<PAGE>
EXHIBIT 10.31
AMENDMENT NO. 2 TO FRAMEWORK AGREEMENT
This Amendment No. 2 (this "Amendment") to the Framework Agreement
originally dated as of March 3, 1999 and as amended on April 6, 1999 (the
"Agreement") is made as of this 10th day of May 1999 by and between RHYTHMS
NETCONNECTIONS, INC., a Delaware corporation, and MCI WORLDCOM, INC., a Georgia
corporation. Capitalized terms used herein which are not defined herein shall
have the definitions ascribed to them in the Agreement.
WHEREAS, the parties desire to amend the Agreement as set forth herein.
In consideration of the promises and covenants contained herein and other
good and valuable consideration the receipt of which is hereby acknowledged, the
parties hereto agree as follows:
1. AMENDMENT TO THE AGREEMENT. The references to "sixty (60) days" in
each of Sections 2.1, 3.1, 4.1, 4.2 and 8.2(d) are hereby amended to refer to
"seventy-five (75) days".
2. EFFECT OF AMENDMENT. Except as amended and set forth above, the
Agreement shall continue in full force and effect.
3. COUNTERPARTS. This Amendment may be executed in any number of
counterparts, each of which will be deemed an original and all of which together
shall constitute one and the same instrument.
4. SEVERABILITY. If one or more provisions of this Amendment are held to
be unenforceable under applicable law, such provision shall be excluded from
this Amendment and the balance of the Amendment shall be interpreted as if such
provision were so excluded and shall be enforceable in accordance with its
terms.
5. ENTIRE AGREEMENT. This Amendment, together with the Agreement,
constitutes the full and entire understanding and agreement between the parties
with regard to the subjects hereof and thereof.
6. GOVERNING LAW. This Amendment shall be governed by and construed in
accordance with the laws of the State of New York, without giving effect to its
principles of conflicts of law.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
IN WITNESS WHEREOF, this Amendment is hereby executed as of the date first
above written.
MCI WORLDCOM, INC.
By: /s/ Stephen Mooney
-----------------------------------------------
Name
Director
---------------------------------------------
Title
RHYTHMS NETCONNECTIONS INC.
By: /s/ Scott C. Chandler
-----------------------------------------------
Name
Chief Financial Officer
---------------------------------------------
Title
[SIGNATURE PAGE TO AMENDMENT NO. 2 TO
FRAMEWORK AGREEMENT]
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-4 (File
No. 333-_____) of our report dated March 4, 1999, except for the last
paragraph of Note 11 as to which the date is March 19, 1999, on our audits of
the consolidated financial statements of Rhythms NetConnections Inc. We also
consent to the reference to our firm under the caption "Experts."
PricewaterhouseCoopers LLP
Denver, Colorado
July 9, 1999
<PAGE>
EXHIBIT 25.1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM T-1
--------
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) /X/
STATE STREET BANK AND TRUST COMPANY OF CALIFORNIA, NATIONAL ASSOCIATION
(EXACT NAME OF TRUSTEE AS SPECIFIED IN ITS CHARTER)
United States 06-1143380
(JURISDICTION OF INCORPORATION OR (I.R.S. EMPLOYER
ORGANIZATION IF NOT A U.S. NATIONAL BANK) IDENTIFICATION NO.)
633 West 5th Street, 12th Floor, Los Angeles, California 90071
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Lynda A. Vogel, Senior Vice President and Managing Director
633 West 5th Street, 12th Floor, Los Angeles, California 90071
(213) 362-7399
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
RHYTHMS NETCONNECTIONS INC.
(EXACT NAME OF OBLIGOR AS SPECIFIED IN ITS CHARTER)
DELAWARE 33-0747515
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
7337 SOUTH REVERE PARKWAY
ENGLEWOOD, COLORADO
80112-3931
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
$325,000,000 12 3/4% SENIOR NOTES DUE 2009
(TYPE OF SECURITIES)
<PAGE>
GENERAL
ITEM 1. GENERAL INFORMATION.
FURNISH THE FOLLOWING INFORMATION AS TO THE TRUSTEE:
(a) NAME AND ADDRESS OF EACH EXAMINING OR SUPERVISORY AUTHORITY TO
WHICH IT IS SUBJECT.
Comptroller of the Currency, Western District Office, 50
Fremont Street, Suite 3900, San Francisco, California, 94105-2292
(b) WHETHER IT IS AUTHORIZED TO EXERCISE CORPORATE TRUST POWERS.
Trustee is authorized to exercise corporate trust powers.
ITEM 2. AFFILIATIONS WITH OBLIGOR.
IF THE OBLIGOR IS AN AFFILIATE OF THE TRUSTEE, DESCRIBE EACH SUCH
AFFILIATION.
The obligor is not an affiliate of the trustee or of its
parent, State Street Bank and Trust Company.
(See note on page 2.)
ITEM 3. THROUGH ITEM 15. NOT APPLICABLE.
ITEM 16. LIST OF EXHIBITS.
LIST BELOW ALL EXHIBITS FILED AS PART OF THIS STATEMENT OF ELIGIBILITY.
1. A COPY OF THE ARTICLES OF ASSOCIATION OF THE TRUSTEE AS NOW IN
EFFECT.
A copy of the Articles of Association of the trustee, as now
in effect, is on file with the Securities and Exchange Commission as
Exhibits with corresponding exhibit numbers to the Form T-1 of Western
Digital Corporation, filed pursuant to Section 305(b)(2) of the Act, on
May 12, 1998 (Registration No. 333-52463), and are incorporated herein
by reference.
2. A COPY OF THE CERTIFICATE OF AUTHORITY OF THE TRUSTEE TO COMMENCE
BUSINESS, IF NOT CONTAINED IN THE ARTICLES OF ASSOCIATION.
A Certificate of Corporate Existence (with fiduciary powers)
from the Comptroller of the Currency, Administrator of National Banks
is on file with the Securities and Exchange Commission as Exhibits with
corresponding exhibit numbers to the Form T-1 of Western Digital
Corporation, filed pursuant to Section 305(b)(2) of the Act, on May 12,
1998 (Registration No. 333-52463), and are incorporated herein by
reference.
3. A COPY OF THE AUTHORIZATION OF THE TRUSTEE TO EXERCISE CORPORATE
TRUST POWERS, IF SUCH AUTHORIZATION IS NOT CONTAINED IN THE DOCUMENTS
SPECIFIED IN PARAGRAPH (1) OR (2), ABOVE.
Authorization of the Trustee to exercise fiduciary powers
(included in Exhibits 1 and 2; no separate instrument).
4. A COPY OF THE EXISTING BY-LAWS OF THE TRUSTEE, OR INSTRUMENTS
CORRESPONDING THERETO.
A copy of the by-laws of the trustee, as now in effect, is on
file with the Securities and Exchange Commission as Exhibits with
corresponding exhibit numbers to the Form T-1 of Western Digital
Corporation, filed pursuant to Section 305(b)(2) of the Act, on May 12,
1998 (Registration No. 333-52463), and are incorporated herein by
reference.
1
<PAGE>
5. A COPY OF EACH INDENTURE REFERRED TO IN ITEM 4. IF THE OBLIGOR IS IN
DEFAULT.
Not applicable.
6. THE CONSENTS OF UNITED STATES INSTITUTIONAL TRUSTEES REQUIRED BY
SECTION 321(b) OF THE ACT.
The consent of the trustee required by Section 321(b) of the
Act is annexed hereto as Exhibit 6 and made a part hereof.
7. A COPY OF THE LATEST REPORT OF CONDITION OF THE TRUSTEE PUBLISHED
PURSUANT TO LAW OR THE REQUIREMENTS OF ITS SUPERVISING OR EXAMINING
AUTHORITY.
A copy of the latest report of condition of the trustee
published pursuant to law or the requirements of its
supervising or examining authority is annexed hereto as
Exhibit 7 and made a part hereof.
NOTES
In answering any item of this Statement of Eligibility which relates to
matters peculiarly within the knowledge of the obligor or any underwriter for
the obligor, the trustee has relied upon information furnished to it by the
obligor and the underwriters, and the trustee disclaims responsibility for the
accuracy or completeness of such information.
The answer furnished to Item 2. of this statement will be amended, if
necessary, to reflect any facts which differ from those stated and which would
have been required to be stated if known at the date hereof.
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, as
amended, the trustee, State Street Bank and Trust Company of California,
National Association, organized and existing under the laws of the United States
of America, has duly caused this statement of eligibility to be signed on its
behalf by the undersigned, thereunto duly authorized, all in the City of Los
Angeles, and State of California, on the 1st of June, 1999.
STATE STREET BANK AND TRUST COMPANY
OF CALIFORNIA, NATIONAL ASSOCIATION
By: /s/ Scott C. Emmons
------------------------
SCOTT C. EMMONS
ASSISTANT VICE PRESIDENT
2
<PAGE>
EXHIBIT 6
CONSENT OF THE TRUSTEE
Pursuant to the requirements of Section 321(b) of the Trust Indenture
Act of 1939, as amended, in connection with the proposed issuance by RHYTHMS
NETCONNECTIONS INC. of its $325,000,000 12 3/4% SENIOR NOTES DUE 2009, we hereby
consent that reports of examination by Federal, State, Territorial or District
authorities may be furnished by such authorities to the Securities and Exchange
Commission upon request therefor.
STATE STREET BANK AND TRUST COMPANY
OF CALIFORNIA, NATIONAL ASSOCIATION
By: /s/ Scott C. Emmons
------------------------
SCOTT C. EMMONS
ASSISTANT VICE PRESIDENT
DATED: JUNE 1, 1999
3
<PAGE>
EXHIBIT 7
Consolidated Report of Condition and Income for A Bank With Domestic Offices
Only and Total Assets of Less Than $100 Million of State Street Bank and Trust
Company of California, a national banking association duly organized and
existing under and by virtue of the laws of the United States of America, at the
close of business MARCH 31, 1999, published in accordance with a call made by
the Federal Deposit Insurance Corporation pursuant to the required law: 12
U.S.C. Section 324 (State member banks); 12 U.S.C. Section 1817 (State nonmember
banks); and 12 U.S.C. Section 161 (National banks).
<TABLE>
<CAPTION>
Thousands
ASSETS of Dollars
<S> <C>
Cash and balances due from depository institutions:
Noninterest-bearing balances and currency and coin ................................ 6,881
Interest-bearing balances ......................................................... 0
Securities . ............................................................................... 38
Federal funds sold and securities purchased
under agreements to resell in domestic offices
of the bank and its Edge subsidiary ............................................... 0
Loans and lease financing receivables:
Loans and leases, net of unearned income ................................. 0
Allowance for loan and lease losses ...................................... 0
Allocated transfer risk reserve .......................................... 0
Loans and leases, net of unearned income and allowances ........................... 0
Assets held in trading accounts ............................................................ 0
Premises and fixed assets .................................................................. 41
Other real estate owned .................................................................... 0
Investments in unconsolidated subsidiaries ................................................. 0
Customers' liability to this bank on acceptances outstanding ............................... 0
Intangible assets .......................................................................... 0
Other assets ............................................................................... 718
-----
Total assets ............................................................................... 7,678
-----
-----
LIABILITIES
Deposits:
In domestic offices ............................................................... 0
Noninterest-bearing ............................................. 0
Interest-bearing ................................................ 0
In foreign offices and Edge subsidiary ............................................ 0
Noninterest-bearing ............................................. 0
Interest-bearing ................................................ 0
Federal funds purchased and securities sold under
agreements to repurchase in domestic offices of
the bank and of its Edge subsidiary ............................................... 0
Demand notes issued to the U.S. Treasury and Trading Liabilities ........................... 0
Other borrowed money ....................................................................... 0
Subordinated notes and debentures .......................................................... 0
Bank's liability on acceptances executed and outstanding ................................... 0
Other liabilities .......................................................................... 3,370
Total liabilities .......................................................................... 3,370
--------
EQUITY CAPITAL
Perpetual preferred stock and related surplus .............................................. 0
Common stock ............................................................................... 500
Surplus .................................................................................... 750
Undivided profits and capital reserves/Net unrealized holding gains (losses) ............... 3,058
Cumulative foreign currency translation adjustments ........................................ 0
Total equity capital ....................................................................... 4,308
--------
Total liabilities and equity capital ....................................................... 7,678
--------
--------
</TABLE>
4
<PAGE>
I, Kevin R. Wallace, Vice President and Comptroller of the above named bank do
hereby declare that this Report of Condition and Income for this report date
have been prepared in conformance with the instructions issued by the
appropriate Federal regulatory authority and is true to the best of my knowledge
and belief.
Kevin R. Wallace
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 appropriate Federal regulatory authority and is true and correct.
Lynda A. Vogel
James A. Quale
Stephen Rivero
5
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 33,752
<SECURITIES> 115,556
<RECEIVABLES> 800
<ALLOWANCES> 165
<INVENTORY> 1,020
<CURRENT-ASSETS> 152,945
<PP&E> 49,822
<DEPRECIATION> 910
<TOTAL-ASSETS> 245,547
<CURRENT-LIABILITIES> 33,801
<BONDS> 162,990
0
24
<COMMON> 10
<OTHER-SE> 41,577
<TOTAL-LIABILITY-AND-EQUITY> 245,547
<SALES> 660
<TOTAL-REVENUES> 660
<CGS> 6,138
<TOTAL-COSTS> 6,138
<OTHER-EXPENSES> 14,578
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,627
<INCOME-PRETAX> (23,899)
<INCOME-TAX> 0
<INCOME-CONTINUING> (23,899)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (23,899)
<EPS-BASIC> (5.38)
<EPS-DILUTED> (5.38)
</TABLE>
<PAGE>
Exhibit 99.1
LETTER OF TRANSMITTAL
FOR
12 3/4% SENIOR NOTES DUE 2009
OF
RHYTHMS NETCONNECTIONS INC.
PURSUANT TO THE EXCHANGE OFFER IN RESPECT OF
ALL OF ITS OUTSTANDING 12 3/4% SENIOR NOTES DUE 2009, SERIES A
FOR
12 3/4% SENIOR NOTES DUE 2009, SERIES B
___________________________
PURSUANT TO THE PROSPECTUS DATED ___________________, 1999
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
______ __, 1999 UNLESS THE OFFER IS EXTENDED (THE "EXPIRATION DATE").
TENDERS OF NOTES MAY BE WITHDRAWN AT ANY TIME PRIOR TO 5:00 P.M.
ON THE EXPIRATION DATE.
TO: STATE STREET BANK AND TRUST COMPANY OF CALIFORNIA, N.A., EXCHANGE AGENT
<TABLE>
<S> <C>
BY REGISTERED OR CERTIFIED MAIL: THE EXCHANGE AGENT
State Street Bank and Trust Company of State Street Bank and Trust Company of
California, N.A California, N.A
c/o State Street Bank and Trust Company
P.O. Box 778 BY FACSIMILE:
Boston, MA 02102-0778 (For Eligible Institutions Only)
Attn: Kellie Mullen (617) 664-5290
BY HAND OR OVERNIGHT CARRIER:
State Street Bank and Trust Company of
California, N.A
c/o State Street Bank and Trust Company CONFIRM BY TELEPHONE: (617) 664-5587
2 Avenue de Lafayette Attn: Kellie Mullen
Boston, MA 02111-1724
Attn: Kellie Mullen
</TABLE>
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS, OR TRANSMISSION VIA
FACSIMILE, OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID
DELIVERY. THE INSTRUCTIONS CONTAINED HEREIN SHOULD BE READ
CAREFULLY BEFORE THIS LETTER OF TRANSMITTAL IS COMPLETED.
HOLDERS WHO WISH TO BE ELIGIBLE TO RECEIVE NEW NOTES FOR THEIR OLD NOTES
PURSUANT TO THE EXCHANGE OFFER MUST VALIDLY TENDER (AND NOT WITHDRAW) THEIR
OLD NOTES TO THE EXCHANGE AGENT PRIOR TO THE EXPIRATION DATE.
By execution hereof, the undersigned acknowledges receipt of the
Prospectus dated _______ ___, 1999 (the "Prospectus") of Rhythms
NetConnections Inc., a Delaware corporation (the "Company"), which, together
with this Letter of Transmittal and the instructions hereto (the "Letter of
Transmittal"), constitutes the Company's offer (the "Exchange Offer") to
exchange $1,000 principal amount of its new 12 3/4% Senior Notes Due 2009,
Series B (the "New Notes"), which have been registered under the Securities
Act of 1933, as amended (the "Securities Act"), pursuant to a Registration
Statement of which the Prospectus constitutes a part, for each $1,000
principal amount of its outstanding 12 3/4% Senior Notes Due 2009, Series A
(the "Old Notes"), upon the terms and subject to the conditions set forth in
the Prospectus. Capitalized terms used but not defined herein have the
meaning given to them in the Prospectus.
<PAGE>
This Letter of Transmittal is to be used if certificates for the
Old Notes are to be forwarded herewith. If delivery of the Old Notes is to
be made through book-entry transfer into the Exchange Agent's account at The
Depository Trust Company ("DTC"), this Letter of Transmittal need not be
delivered; provided, however, that tenders of the Old Notes must be effected
in accordance with DTC's Automated Tender Offer Program procedures and the
procedures set forth in the Prospectus under the caption "The Exchange
Offer--Procedures for Tendering" and "--Book-Entry Transfer; Delivery and
Form."
For each Old Note accepted for exchange, the holder of such Old
Note will receive a New Note having a principal amount equal to that of the
surrendered Old Note. If (a) the Company fails to file any of the
Registration Statements required by the Registration Rights Agreement on or
before the date specified for such filing, (b) any of such Registration
Statements is not declared effective by the Commission on or prior to the
date specified for such effectiveness (the "Effectiveness Target Date"), (c)
the Company fails to consummate the Exchange Offer within 30 business days of
the Effectiveness Target Date with respect to the Exchange Offer Registration
Statement, or (d) the Shelf Registration Statement or the Exchange Offer
Registration Statement is declared effective but thereafter ceases to be
effective or usable in connection with resales of Old Notes during the
periods specified in the Registration Rights Agreement (each such event
referred to in clauses (a) through (d) above a "Registration Default"), then
interest ("Additional Interest") will accrue on the Old Notes and the New
Notes (in addition to the stated interest on the Old Notes and the New Notes)
at a rate of 0.50% per annum commencing upon the occurrence of such
Registration Default, which rate will increase by 0.50% at the end of each
90-day period in which such Registration Default is not cured, provided that
the maximum aggregate Additional Interest that so accrues as a result of all
Registration Defaults will in no event exceed 1.5% per annum. Additional
Interest shall be computed based on the actual number of days elapsed in each
90-day period in which Additional Interest accrues on the Old Notes and the
New Notes, as applicable. Holders of Old Notes accepted for exchange will be
deemed to have waived the right to receive any other payments or accrued
interest on the Old Notes. The Company reserves the right, at any time or
from time to time, to extend the Exchange Offer at its discretion, in which
event the term "Expiration Date" shall mean the latest time and date to which
the Exchange Offer is extended. The Company shall notify the holders of the
Old Notes of any extension by means of a press release or other public
announcement prior to 9:00 A.M., New York City time, on the next business day
after the previously scheduled Expiration Date.
This Letter of Transmittal is to be completed by a holder of Old Notes
if certificates are to be forwarded herewith. Holders of Old Notes whose
certificates are not immediately available, or who are unable to deliver their
certificates and all other documents required by this Letter of Transmittal or
confirmation of the book-entry tender of their Old Notes into the Exchange
Agent's account at DTC (a "Book-Entry Confirmation") to the Exchange Agent on or
prior to the Expiration Date, must tender their Old Notes according to the
guaranteed delivery procedures set forth in "The Exchange Offer--Guaranteed
Delivery Procedures" section of the Prospectus. See Instruction 2. Delivery of
documents to DTC does not constitute delivery to the Exchange Agent.
The undersigned has completed the appropriate boxes below and
signed this Letter of Transmittal to indicate the action the undersigned
desires to take with respect to the Exchange Offer.
<PAGE>
List below the Old Notes to which this Letter of Transmittal
relates. If the space provided below is inadequate, the certificate numbers
and principal amount of Old Notes should be listed on a separate signed
schedule affixed hereto.
- -------------------------------------------------------------------------------
DESCRIPTION OF OLD NOTES TENDERED HEREBY
- -------------------------------------------------------------------------------
(1) (2) (3) (4)
AGGREGATE
NAME(s) AND ADDRESS(s) CERTIFICATE PRINCIPAL PRINCIPAL
OF REGISTERED OWNER(s) OR REGISTRATION AMOUNT AMOUNT
(PLEASE FILL IN) NUMBERS* REPRESENTED TENDERED**
BY OLD NOTES
- -------------------------------------------------------------------------------
--------------------------------------------------
--------------------------------------------------
--------------------------------------------------
--------------------------------------------------
--------------------------------------------------
--------------------------------------------------
--------------------------------------------------
Total
- -------------------------------------------------------------------------------
* Need not be completed by Book-entry Holders.
** Unless otherwise indicated, the Holder will be deemed to have tendered the
full aggregate principal amount represented by such Old Notes. All tenders
must be in integral multiples of $1,000. See Instruction 1.
/ / CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER
MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH THE BOOK-ENTRY
TRANSFER FACILITY AND COMPLETE THE FOLLOWING:
Name of Tendering Institution_____________________________________________
Account Number____________________________________________________________
Transaction Code Number___________________________________________________
/ / CHECK HERE IF OLD NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE OF
GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND COMPLETE THE
FOLLOWING:
Name of Registered Holder(s)______________________________________________
Window Ticket (if any)____________________________________________________
Date of Execution of Notice of Guaranteed Delivery________________________
Name of Institution which guaranteed delivery_____________________________
IF DELIVERED BY BOOK-ENTRY TRANSFER, COMPLETE THE FOLLOWING:
Account Number____________________________________________________________
Transaction Code Number___________________________________________________
/ / CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL
COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS
THERETO.
Name:_____________________________________________________________________
Address:__________________________________________________________________
Telephone Number:_________________________________________________________
<PAGE>
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
Upon the terms and subject to the conditions of the Exchange Offer,
the undersigned hereby tenders to the Company the principal amount of the Old
Notes indicated above. Subject to, and effective upon, the acceptance for
exchange of such Old Notes tendered hereby, the undersigned hereby exchanges,
assigns and transfers to, or upon the order of, the Company all right, title
in and interest in and to such Old Notes as are being tendered hereby,
including all rights to accrued and unpaid interest thereon as of the
Expiration Date. The undersigned hereby irrevocably constitutes and appoints
the Exchange Agent the true and lawful agent and attorney-in-fact of the
undersigned (with full knowledge that said Exchange Agent acts as the agent
of the Company in connection with the Exchange Offer) to cause the Old Notes
to be assigned, transferred and exchanged. The undersigned represents and
warrants that it has full power and authority to tender, exchange, assign and
transfer the Old Notes and to acquire New Notes issuable upon the exchange of
such tendered Old Notes, and that when the same are accepted for exchange,
the Company will acquire good and unencumbered title to the tendered Old
Notes, free and clear of all liens, restrictions, charges and encumbrances
and not subject to any adverse claim.
The undersigned represents to the Company that (i) the New Notes
acquired pursuant to the Exchange Offer are being obtained in the ordinary
course of business of the person receiving such New Notes, whether or not
such person is the undersigned, and (ii) neither the undersigned nor any such
other person has an arrangement or understanding with any person to
participate in a distribution of such New Notes. If the undersigned is not a
broker-dealer, the undersigned represents that it is not engaged in, and does
not intend to engage in, a distribution of New Notes. If the undersigned is
a broker-dealer that will receive New Notes for its own account in exchange
for Old Notes, it represents that the Old Notes to be exchanged for New Notes
were acquired by it as a result of market-making activities or other trading
activities and acknowledges that it will deliver a prospectus meeting the
requirements of the Securities Act in connection with any resale of such New
Notes pursuant to the Exchange Offer; however, by so acknowledging and by
delivering a prospectus, the undersigned will not be deemed to admit that it
is an "underwriter" within the meaning of the Securities Act. The
undersigned and any such other person acknowledge that, if they are
participating in the Exchange Offer for the purpose of distributing the New
Notes, (i) they cannot rely on the position of the staff of the Securities
and Exchange Commission enunciated in Exxon Capital Holdings Corporation
(available April 13, 1989), Morgan Stanley & Co., Inc. (available June 5,
1991) Sherman & Sterling (available July 2, 1993) or similar no-action
letters and, in the absence of an exemption therefrom, must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction and (ii) failure to comply with such
requirements in such instance could result in the undersigned or any such
other person incurring liability under the Securities Act for which such
persons are not indemnified by the Company. If the undersigned or the person
receiving the New Notes covered by this letter is an "affiliate" (as defined
under Rule 405 of the Securities Act) of the Company, the undersigned
represents to the Company that the undersigned understands and acknowledges
that such New Notes may not be offered for resale, resold or otherwise
transferred by the undersigned or such other person without registration
under the Securities Act or an exemption therefrom.
The undersigned also warrants that it will, upon request, execute
and deliver any additional documents deemed by the Exchange Agent or the
Company to be necessary or desirable to complete the exchange, assignment and
transfer of the Old Notes tendered hereby or transfer ownership of such Old
Notes on the account books maintained by a book-entry transfer facility. The
undersigned further agrees that acceptance of any tendered Old Notes by the
Company and the issuance of New Notes in exchange therefor shall constitute
performance in full by the Company of its obligations under the Registration
Rights Agreement and that the Company shall have no further obligations or
liabilities thereunder for the registration of the Old Notes or the New Notes.
The Exchange Offer is subject to certain conditions set forth in
the Prospectus under the caption "The Exchange Offer--Conditions." The
undersigned recognizes that as a result of these conditions (which may be
waived, in whole or in part, by the Company), as more particularly set forth
in the Prospectus, the Company may not be required to exchange any of the Old
Notes tendered hereby and, in such event, the Old Notes not exchanged will be
returned to the undersigned at the address shown above in the box entitled
"Description of Old Notes Tendered Hereby."
All authority herein conferred or agreed to be conferred shall
survive the death or incapacity of the undersigned and every obligation of
the undersigned hereunder shall be binding upon the heirs, personal
representatives,
<PAGE>
successors and assigns of the undersigned. This tender may be withdrawn only
in accordance with the procedures set forth in "The Exchange
Offer--Withdrawal of Tenders" section of the Prospectus.
Unless otherwise indicated in the box entitled "Special Issuance
Instructions" or the box entitled "Special Delivery Instructions" in this
Letter of Transmittal, certificates for all New Notes delivered in exchange
for tendered Old Notes, and any Old Notes delivered herewith but not
exchanged, will be registered in the name of the undersigned and shall be
delivered to the undersigned at the address shown above in the box entitled
"Description of Old Notes Tendered Hereby." If a New Note is to be issued to
a person other than the person(s) signing this Letter of Transmittal, or if
the New Note is to be mailed to someone other than the person(s) signing this
Letter of Transmittal or to the person(s) signing this Letter of Transmittal
at an address different than the address shown on this Letter of Transmittal,
the appropriate boxes of this Letter of Transmittal should be completed. If
Old Notes are surrendered by Holder(s) that have completed either the box
entitled "Special Issuance Instructions" or the box entitled "Special
Delivery Instructions" in this Letter of Transmittal, signature(s) on this
Letter of Transmittal must be guaranteed by an Eligible Institution (defined
in Instruction 4).
THE UNDERSIGNED, BY COMPLETING THE BOX ENTITLED "DESCRIPTION OF OLD
NOTES TENDERED HEREBY" ABOVE AND SIGNING THIS LETTER OF TRANSMITTAL, WILL BE
DEEMED TO HAVE TENDERED THE OLD NOTES AS SET FORTH IN SUCH BOX ABOVE.
<PAGE>
SPECIAL ISSUANCE INSTRUCTIONS
(SEE INSTRUCTIONS 4 AND 5)
To be completed ONLY if certificates for Old Notes not exchanged and/or
New Notes are to be issued in the name of and sent to someone other than the
person(s) whose signature(s) appear(s) on this Letter above, or if Old Notes
delivered by book-entry transfer which are not accepted for exchange are to
be returned by credit to an account maintained at the Book-Entry Transfer
Facility other than the account indicated above.
Issue New Notes and/or Old Notes to:
Name(s):______________________________________________________________________
(PLEASE TYPE OR PRINT)
______________________________________________________________________________
(PLEASE TYPE OR PRINT)
Address:______________________________________________________________________
______________________________________________________________________________
(INCLUDING ZIP CODE)
(Complete accompanying Substitute Form W-9) Credit unexchanged Old Notes
delivered by book-entry transfer to the Book-Entry Transfer Facility account
set forth below.
______________________________________________________________________________
(BOOK-ENTRY TRANSFER FACILITY
ACCOUNT NUMBER, IF APPLICABLE)
SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 4 AND 5)
To be completed ONLY if certificates for Old Notes not exchanged and/or
New Notes are to be sent to someone other than the person(s) whose
signature(s) appear(s) on this Letter above or to such person(s) at an
address other than shown in the box entitled "Description of Old Notes
Tendered Hereby" on this Letter above.
Mail New Notes and/or Old Notes to:
Name(s):______________________________________________________________________
(PLEASE TYPE OR PRINT)
______________________________________________________________________________
(PLEASE TYPE OR PRINT)
Address:______________________________________________________________________
______________________________________________________________________________
(INCLUDING ZIP CODE)
<PAGE>
REGISTERED HOLDER(S) OF NOTES SIGN HERE
(IN ADDITION, COMPLETE SUBSTITUTE FORM W-9 BELOW)
Dated: ______________________________ ___________________________, 1999
X_____________________________ ___________________________, 1999
X_____________________________ ___________________________, 1999
SIGNATURE(s) OF OWNER(s) DATE
Area Code and Telephone Number: _______________________________________
SIGNATURE(s) OF REGISTERED HOLDER(s):
Must be signed by registered holder(s) exactly as name(s) appear(s) on the
Old Notes or on a security position listing as the owner of the Old Notes or
by person(s) authorized to become registered holder(s) by properly completed
bond powers transmitted herewith. If signature is by attorney-in-fact,
trustee, executor, administrator, guardian, officer of a corporation or other
person acting in a fiduciary capacity, please provide the following
information.
(PLEASE PRINT OR TYPE)
Name(s): _____________________________________________________________________
______________________________________________________________________________
Capacity (full title): _______________________________________________________
Address (including zip code): ________________________________________________
______________________________________________________________________________
______________________________________________________________________________
Area Code and Telephone Number: ______________________________________________
Tax Identification or Social Security No.: ___________________________________
Dated: _______________________________________________________________________
SIGNATURE GUARANTEE
(IF REQUIRED - SEE INSTRUCTION 4)
Authorized Signature: ________________________________________________________
(SIGNATURE OF REPRESENTATIVE OF SIGNATURE GUARANTOR)
Name and Title: ______________________________________________________________
Name of Plan: ________________________________________________________________
Area Code and Telephone Number: ______________________________________________
Dated: _______________________________________________________________________
IMPORTANT: THIS LETTER OF TRANSMITTAL OR A FACSIMILE HEREOF (TOGETHER WITH
THE CERTIFICATES FOR OLD NOTES OR A BOOK-ENTRY CONFIRMATION AND ALL
OTHER REQUIRED DOCUMENTS OR THE NOTICE OF GUARANTEED DELIVERY) MUST
BE RECEIVED BY THE EXCHANGE AGENT PRIOR TO 5:00 P.M., NEW YORK CITY
TIME, ON THE EXPIRATION DATE.
PLEASE READ THIS LETTER OF TRANSMITTAL
CAREFULLY BEFORE COMPLETING ANY BOX ABOVE
<PAGE>
PAYOR'S NAME: RHYTHMS NETCONNECTIONS INC.
THIS SUBSTITUTE FORM W-9 MUST BE COMPLETED AND SIGNED
Please provide your social security number or other taxpayer
identification number on the following Substitute Form W-9 and certify
therein that you are subject to backup withholding.
______________________________________________________________________________
NAME
______________________________________________________________________________
BUSINESS NAME, IF DIFFERENT FROM ABOVE
CHECK APPROPRIATE BOX: INDIVIDUAL/SOLE PROPRIETOR CORPORATION
PARTNERSHIP OTHER _______________________________________________________
______________________________________________________________________________
ADDRESS (NUMBER, STREET, AND APT. OR SUITE NO.)
______________________________________________________________________________
CITY, STATE, AND ZIP CODE
SUBSTITUTE Part 1 -- PLEASE PROVIDE Social security number
FORM W-9 YOUR TIN IN THE BOX AT ______________________
RIGHT AND CERTIFY BY OR
SIGNING AND DATING BELOW Employer identification
number_________________
----------------------------------------------------------
Part 2 -- Check the box if you are NOT subject to backup
Department of withholding under the provisions of Section 3406 of the
the Treasury Internal Revenue Code because (1) you are exempt from
Internal Revenue backup withholding, (2) you have not been notified that
Service you are subject to backup withholding as a result of
failure to report all interest or dividends or (3) the
Internal Revenue Service has notified you that you are no
longer subject to backup withholding.
----------------------------------------------------------
PAYER'S REQUEST Part 3 -- CERTIFICATION -- UNDER THE PENALTIES OF PERJURY,
FOR TAXPAYER I CERTIFY THAT THE INFORMATION PROVIDED ON THIS FORM IS
IDENTIFICATION TRUE, CORRECT AND COMPLETE.
NUMBER (TIN)
Awaiting TIN
SIGNATURE:__________________________ DATE:________________
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP
WITHHOLDING OF 31% OF PAYMENTS MADE TO YOU.
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX
IN PART 3 OF SUBSTITUTE FORM W-9.
CERTIFICATE OF AWAITING TAX IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number
has not been issued to me, and either (a) I have mailed or delivered an
application to receive a taxpayer identification number to the appropriate
Internal Revenue Service Center or Social Security Administration Office, or
(b) I intend to mail or deliver an application in the near future. I
understand that if I do not provide a taxpayer identification number within
60 days, 31% of all reportable payments made to me thereafter will be
withheld, until I provide a number.
Signature ________________________________________________ Date________________
<PAGE>
INSTRUCTIONS
FORMING PART OF THE TERMS AND
CONDITIONS OF THE EXCHANGE OFFER
1. DELIVERY OF THIS LETTER OF TRANSMITTAL AND CERTIFICATES
All physically delivered Old Notes or confirmation of any book-entry
transfer to the Exchange Agent's account at a book-entry transfer facility of
Old Notes tendered by book-entry transfer, as well as a properly completed
and duly executed copy of this Letter of Transmittal or facsimile thereof,
and any other documents required by this Letter of Transmittal, must be
received by the Exchange Agent at its address set forth herein on or prior to
the Expiration Date. The method of delivery of this Letter of Transmittal,
the Old Notes and any other required documents is at the election and risk of
the Holder, and except as otherwise provided below, the delivery will be
deemed made only when actually received by the Exchange Agent. If such
delivery is by mail, it is suggested that registered mail with return receipt
requested, properly insured, be used. Old Notes tendered hereby must be in
denominations of principal amount of $1,000 and any integral multiple thereof.
No alternative, conditional, irregular or contingent tenders will be
accepted. All tendering Holders, by execution of this Letter of Transmittal
(or facsimile thereof), shall waive any right to receive notice of the
acceptance of the Old Notes for exchange.
Delivery to an address of the Trustee other than as set forth herein, or
instructions via a facsimile number other than the ones set forth herein,
will not constitute a valid delivery.
2. GUARANTEED DELIVERY PROCEDURES.
Holders who wish to tender their Old Notes and (i) whose Old Notes are
not immediately available, or (ii) who cannot deliver their Old Notes, the
Letter of Transmittal or any other required documents to the Exchange Agent
prior to the Expiration Date, may effect a tender if:
(a) The tender is made through an Eligible Institution;
(b) Prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the Holder of the Old Notes, the
certificate number or numbers of such Old Notes and the principal amount of
Old Notes tendered, stating that the tender is being made thereby and
guaranteeing that, within three New York Stock Exchange trading days after
the Expiration Date, the Letter of Transmittal (or facsimile thereof)
together with the certificate(s) representing the Old Notes to be tendered in
proper form for transfer and any other documents required by the Letter of
Transmittal, or a Book-Entry Confirmation, as the case may be, will be
delivered by the Eligible Institution to the Exchange Agent; and
(c) Such properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as the certificate(s) representing all tendered
Old Notes in proper form for transfer and all other documents required by the
Letter of Transmittal, or a Book-Entry Confirmation, as the case may be, are
received by the Exchange Agent within three New York Stock Exchange trading
days after the Expiration Date.
Upon request of the Exchange Agent, a Notice of Guaranteed Delivery will
be sent to Holders who wish to tender their Old Notes according to the
guaranteed delivery procedures set forth above. Any Holder who wishes to
tender Old Notes pursuant to the guaranteed delivery procedures described
above must ensure that the Exchange Agent receives the Notice of Guaranteed
Delivery relating to such Old Notes prior to the Expiration Date. Failure to
complete the guaranteed delivery procedures outlined above will not, of
itself, affect the validity or effect a revocation of any Letter of
Transmittal form properly completed and executed by a Holder who attempted to
use the guaranteed delivery procedures.
3. PARTIAL TENDERS (NOT APPLICABLE TO HOLDERS WHO TENDER BY BOOK-ENTRY
TRANSFER); WITHDRAWALS.
If less than all of the Old Notes evidenced by a submitted certificate
are to be tendered, the tendering holder(s) should fill in the aggregate
principal amount at maturity of Old Notes to be tendered in the column
entitled "Principal Amount Tendered" of the box above entitled "Description
of Old Notes Tendered Hereby." A reissued certificate representing the
balance of untendered Old Notes will be sent to such tendering holder, unless
otherwise provided in the appropriate box on this Letter of Transmittal,
promptly after the Expiration Date. All of the Old Notes delivered to the
Exchange Agent will be deemed to have been tendered unless otherwise
indicated.
<PAGE>
Old Notes tendered pursuant to the Exchange Offer may be withdrawn at
any time prior to the Expiration Date as described in the Prospectus, after
which tenders of Old Notes are irrevocable.
4. SIGNATURE ON THIS LETTER OF TRANSMITTAL, WRITTEN INSTRUMENTS AND
ENDORSEMENTS; GUARANTEE OF SIGNATURES.
If this Letter of Transmittal is signed by the registered Holder(s) of
the Old Notes tendered hereby, the signature must correspond exactly with the
name(s) as written on the face of the certificates without alternation or
enlargement or any change whatsoever. If this Letter of Transmittal is
signed by a participant in the Depository, the signature must correspond with
the name as it appears on the security position listing as the owner of the
Old Notes.
If any of the Old Notes tendered hereby are owned of record by two or
more joint owners, all such owners must sign this Letter of Transmittal.
If a number of Old Notes registered in different names are tendered, it
will be necessary to complete, sign and submit as many separate copies of
this Letter of Transmittal as there are different registrations of Old Notes.
Signatures on this Letter of Transmittal or a notice of withdrawal, as
the case may be, must be guaranteed by an Eligible Institution unless the Old
Notes tendered hereby are tendered (i) by a registered Holder (which term,
for the purposes described herein, shall include a participant in the
Depository whose name appears on a security listing as the owner of the Old
Notes) who has not completed the box entitled "Special Issuance Instructions"
or "Special Delivery Instructions" on this Letter of Transmittal or (ii) for
the account of an Eligible Institution.
When this Letter of Transmittal is signed by the registered holder or
holders of the Old Notes specified herein and tendered hereby, no
endorsements of certificates or separate bond powers are required. If,
however, the New Notes are to be issued, or any untendered Old Notes are to
be reissued, to a person other than the registered holder, then endorsements
of any certificates transmitted hereby or separate bond powers are required.
Signatures on such certificate(s) must be guaranteed by an Eligible
Institution.
If this Letter of Transmittal is signed by a person other than the
registered holder or holders of any certificate(s) specified herein, such
certificate(s) must be endorsed or accompanied by appropriate bond powers, in
either case signed exactly as the name or names of the registered holder or
holders appear(s) on the certificate(s) and signatures on such certificate(s)
must be guaranteed by an Eligible Institution.
If this Letter of Transmittal, any certificates or separate written
instruments of transfer or exchange are signed by trustees, executors,
administrators, guardians, attorneys-in-fact, officers of corporations or
others acting in a fiduciary or representative capacity, such persons should
so indicate when signing, and, unless waived by the Company, proper evidence
satisfactory to the Company of their authority so to act must be submitted.
Please contact the Company if there are any questions regarding what
constitutes proper evidence.
Endorsements on certificates for Old Notes or signatures on bond powers
required by this Instruction 4 must be guaranteed by a firm which is a member
of a registered national securities exchange or a member of the National
Association of Securities Dealers, Inc. or by a commercial bank or trust
company having an office or correspondent in the United States or by such
other Eligible Institution within the meaning of Rule 17(A)(d)-15 under the
Securities Exchange Act of 1934, as amended (each an "Eligible Institution").
5. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS.
Tendering Holders should indicate, in the applicable box, the name and
address (or account at the Depository) in which the New Notes issued pursuant
to the Exchange Offer and/or substitute certificates evidencing Old Notes not
exchanged are to be issued (or deposited), if different from the names and
addresses or accounts of the person signing this Letter of Transmittal. In
the case of issuance in a different name, the employer identification number
or social security number of the person named must also be indicated and the
tendering Holder should complete the applicable box. Holders tendering Old
Notes by book-entry transfer may request that Old Notes not exchanged be
credited to such account maintained at DTC as such holder may designate
hereon. If no such instructions are given, such Old Notes not exchanged will
be returned to the name and address of the person signing this Letter of
transmittal.
6. TRANSFER TAXES.
The Company shall pay all transfer taxes, if any, applicable to the
transfer and exchange of Old Notes to it or its order pursuant to the
Exchange Offer. If, however, New Notes and/or substitute Old Notes not
exchanged are to be delivered to, or are to be registered or issued in the
name of, any person other than the registered holder of the Old
<PAGE>
Notes tendered hereby, or if tendered Old Notes are registered in the name of
any person other than the person signing this Letter of Transmittal, or if a
transfer tax is imposed for any reason other than the transfer of Old Notes
to the Company or its order pursuant to the Exchange Offer, the amount of any
such transfer taxes (whether imposed on the registered holder or any other
persons) will be payable by the tendering holder. If satisfactory evidence
of payment of such taxes or exemption therefrom is not submitted herewith,
the amount of such transfer taxes will be collected from the tendering Holder
by the Exchange Agent.
Except as provided in this Instruction 6, it will not be necessary for
transfer stamps to be affixed to the Old Notes listed in this Letter of
Transmittal.
7. WAIVER OF CONDITIONS.
The Company reserves the right, in its reasonable judgment, to waive, in
whole or in part, any of the conditions to the Exchange Offer set forth in
the Prospectus.
8. NO CONDITIONAL TENDERS.
No alternative, conditional, irregular or contingent tenders will be
accepted. All tendering holders of Old Notes, by execution of this Letter of
Transmittal, shall waive any right to reserve notice of the acceptance of
their Old Notes for exchange.
Neither the Company, the Exchange Agent nor any other person is
obligated to give notice of any defect or irregularity with respect to any
tender of Old Notes nor shall any of them incur any liability for failure to
give any such notice.
9. MUTILATED, LOST, STOLEN OR DESTROYED OLD NOTES.
Any Holder whose Old Notes have been mutilated, lost, stolen or
destroyed should contact the Exchange Agent at the address indicated above
for further instructions.
10. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES.
Questions relating to the procedure for tendering as well as requests
for additional copies of the Prospectus and this Letter of Transmittal, may
be directed to the Exchange Agent at the address and telephone number(s) set
forth above.
11. VALIDITY AND FORM.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Old Notes and withdrawal of tendered Old
Notes will be determined by the Company in its sole discretion, which
determination will be final and binding. The Company reserves the absolute
right to reject any and all Old Notes not properly tendered or any Old Notes
the Company's acceptance of which would, in the opinion of counsel for the
Company, be unlawful. The Company also reserves the right, in its reasonable
judgment, to waive any defects, irregularities or conditions of tender as to
particular Old Notes. The Company's interpretation of the terms and
conditions of the Exchange Offer (including the instructions in this Letter
of Transmittal) will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of Old Notes must be
cured within such time as the Company shall determine. Although the Company
intends to notify Holders of defects or irregularities with respect to
tenders of Old Notes, neither the Company, the Exchange Agent nor any other
person shall incur any liability for failure to give such notification.
Tenders of Old Notes will not be deemed to have been made until such defects
or irregularities have been cured or waived. Any Old Notes received by the
Exchange Agent that are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned by the Exchange
Agent to the tendering Holder as soon as practicable following the Expiration
Date.
<PAGE>
IMPORTANT TAX INFORMATION
Under federal income tax law, a Holder tendering Old Notes is required
to provide the Exchange Agent with such Holder's correct Taxpayer
Identification Number ("TIN") on Substitute Form W-9 above. If such Holder
is an individual, the TIN is the Holder's social security number. The
Certificate of Awaiting Taxpayer Identification Number should be completed if
the tendering Holder has not been issued a TIN and has applied for a number
or intends to apply for a number in the near future. If the Exchange Agent
is not provided with the correct TIN, the Holder may be subject to a $50
penalty imposed by the Internal Revenue Service. In addition, payments that
are made to such Holder with respect to tendered Old Notes may be subject to
backup withholding.
Certain Holders (including, among others, all domestic corporations and
certain foreign individuals and foreign entities) are not subject to these
backup withholding and reporting requirements. Such a Holder, who satisfies
one or more of the conditions set forth in Part 2 of the Substitute Form W-9
should execute the certification following such Part 2. In order for a
foreign Holder to qualify as an exempt recipient, that Holder must submit to
the Exchange Agent a properly completed Internal Revenue Service Form W-9,
signed under penalties of perjury, attesting to that Holder's exempt status.
Such forms can be obtained from the Exchange Agent.
If backup withholding applies, the Exchange Agent is required to
withhold 31% of any amounts otherwise payable to the Holder. Backup
withholding is not an additional tax. Rather, the tax liability of persons
subject to backup withholding will be reduced by the amount of tax withheld.
If withholding results in an overpayment of taxes, a refund may be obtained
from the Internal Revenue Service.
PURPOSE OF SUBSTITUTE FORM W-9
To prevent backup withholding on payments that are made to a Holder with
respect to Old Notes tendered for exchange, the Holder is required to notify
the Exchange Agent of his or her correct TIN by completing the form herein
certifying that the TIN provided on Substitute Form W-9 is correct (or that
such Holder is awaiting a TIN) and that (i) each Holder is exempt, (ii) such
Holder has not been notified by the Internal Revenue Service that he or she
is subject to backup withholding as a result of failure to report all
interest or dividends or (iii) the Internal Revenue Service has notified such
Holder that he or she is no longer subject to backup withholding.
WHAT NUMBER TO GIVE THE EXCHANGE AGENT
Each Holder is required to give the Exchange Agent the social security
number or employer identification number of the record Holder(s) of the Old
Notes. If Old Notes are in more than one name or are not in the name of the
actual Holder, consult the instructions on Internal Revenue Service Form W-9,
which may be obtained from the Exchange Agent, for additional guidance on
which number to report.
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
If the tendering Holder has not been issued a TIN and has applied for a
number or intends to apply for a number in the near future, write "Applied
For" in the space for the TIN or Substitute Form W-9, sign and date the form
and the Certificate of Awaiting Taxpayer Identification Number and return
them to the Exchange Agent. If such certificate is completed and the
Exchange Agent is not provided with the TIN within 60 days, the Exchange
Agent will withhold 31% of all payments made thereafter until a TIN is
provided to the Exchange Agent.
IMPORTANT: THIS LETTER OF TRANSMITTAL OR A FACSIMILE THEREOF (TOGETHER
WITH OLD NOTES OR CONFIRMATION OF BOOK-ENTRY TRANSFER AND ALL OTHER REQUIRED
DOCUMENTS) OR A NOTICE OF GUARANTEED DELIVERY MUST BE RECEIVED BY THE
EXCHANGE AGENT PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE.
<PAGE>
Exhibit 99.2
NOTICE OF GUARANTEED DELIVERY
FOR
12 3/4% SENIOR NOTES DUE 2009
OF
RHYTHMS NETCONNECTIONS INC.
As set forth in the Prospectus dated June __, 1999 (the
"Prospectus") of Rhythms NetConnections Inc. (the "Company") and in the
accompanying Letter of Transmittal and instructions thereto (the "Letter of
Transmittal"), this form or one substantially equivalent hereto must be used
to accept the Company's exchange offer (the "Exchange Offer") to purchase all
of its outstanding 12 3/4% Senior Notes due 2009, Series A (the "Old Notes")
in exchange for the Company's 12 3/4% Senior Notes due 2009, Series B, if (i)
certificates representing the Old Notes to be tendered for purchase and
payment are not lost but are not immediately available, (ii) time will not
permit the Letter of Transmittal, certificates representing such Old Notes or
other required documents to reach State Street Bank and Trust Company of
California, N.A. (the "Exchange Agent") on or prior to 5:00 p.m., New York
City time, on the Expiration Date or (iii) the procedures for delivery of the
Old Notes through book-entry transfer into the Exchange Agent's account at
The Depository Trust Company ("DTC") in accordance with DTC's Automated
Tender Offer Program cannot be completed on a timely basis. This form may be
delivered by an Eligible Institution by mail or hand delivery or transmitted,
via facsimile (receipt confirmed by telephone) to the Exchange Agent as set
forth below. All capitalized terms used herein but not defined herein shall
have the meanings ascribed to them in the Prospectus.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
___________ __, 1999 UNLESS THE OFFER IS EXTENDED (THE "EXPIRATION DATE").
TENDERS OF OLD NOTES MAY BE WITHDRAWN UNDER THE PROCEDURES DESCRIBED IN THE
PROSPECTUS AT ANY TIME PRIOR TO 5:00 P.M. ON THE EXPIRATION DATE.
BY MAIL, HAND OR OVERNIGHT CARRIER: THE EXCHANGE AGENT
State Street Bank and Trust Company of State Street Bank and Trust Company
California, N.A of California, N.A
c/o State Street Bank and Trust Company
2 International Place BY FACSIMILE:
Boston, MA 02110 (For Eligible Institutions Only)
Attn: Kellie Mullen (617) 664-5290
CONFIRM BY TELEPHONE:
(617) 664-5587
Attn: Kellie Mullen
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS, OR TRANSMISSION VIA
FACSIMILE, OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
This form is not to be used to guarantee signatures. If a
signature on the Letter of Transmittal is required to be guaranteed by an
"Eligible Institution" under the instructions thereto, such signature
guarantee must appear in the applicable space provided in the signature box
on the Letter of Transmittal.
<PAGE>
Ladies and Gentlemen:
The undersigned hereby tender(s) to the Company, upon the terms and
subject to the conditions set forth in the Exchange Offer (as described in
the Prospectus) and the Letter of Transmittal, receipt of which is hereby
acknowledged, the aggregate principal amount of Old Notes set forth below
pursuant to the guaranteed delivery procedures set forth in the Prospectus
under the caption "The Exchange Offer -- Guaranteed Delivery Procedures."
The undersigned understands that tenders of Old Notes will be
accepted only in principal amounts equal to $1,000 or integral multiples
thereof. The undersigned understands that tenders of Old Notes pursuant to
the Exchange Offer may not be withdrawn after 5:00 p.m., New York City time,
on the Expiration Date. Tenders of Old Notes may also be withdrawn if the
Exchange Offer is terminated without any such Old Notes being purchased
thereunder or as otherwise provided in the Prospectus under the caption "The
Exchange Offer -- Withdrawal of Tenders."
All authority herein conferred or agreed to be conferred by this
Notice of Guaranteed Delivery shall survive the death or incapacity of the
undersigned, and every obligation of the undersigned under this Notice of
Guaranteed Delivery shall be binding upon the heirs, personal
representatives, executors, administrators, successors, assigns, trustees in
bankruptcy and other legal representatives of the undersigned.
PLEASE COMPLETE AND SIGN
Signature(s) of Registered Holder(s) Name(s) of Registered Holder(s):
or Authorized Signatory: ________________________________
___________________________________ ________________________________
___________________________________
___________________________________ Address:
___________________________________ ________________________________
________________________________
Principal Amount of Old Notes
Tendered:
___________________________________ Area Code and Telephone No.:
___________________________________ ________________________________
If Old Notes will be delivered by
Certificate No(s). of Old Notes book-entry transfer at The
(if available): Depository Trust Company,
___________________________________ insert Depository Account No.:
___________________________________ ________________________________
________________________________
Date:
___________________________________
<PAGE>
This Notice of Guaranteed Delivery must be signed by the registered
holder(s) of Old Notes exactly as its (their) name(s) appear on certificates
for Old Notes or on a security position listing as the owner of Old Notes, or
by person(s) authorized to become registered holder(s) by endorsements and
documents transmitted with this Notice of Guaranteed Delivery. If signature
is by a trustee, executor, administrator, guardian, attorney-in-fact, officer
or other person acting in a fiduciary or representative capacity, such person
must provide the following information.
Please print name(s) and address(es)
Name(s):______________________________________________________________________
Capacity:_____________________________________________________________________
Address(es):__________________________________________________________________
__________________________________________________________________
__________________________________________________________________
Do not send Old Notes with this form. Old Notes should be sent to
the Exchange Agent together with a properly completed and duly executed
Letter of Transmittal.
The undersigned, a member firm of a registered national securities
exchange or of the National Association of Securities Dealers, Inc. or a
commercial bank or trust company having an office or a correspondent in the
United States, hereby (a) represents that each holder of Old Notes on whose
behalf this tender is being made "own(s)" the Old Notes covered hereby within
the meaning of Rule 14e-4 under the Securities Exchange Act of 1934, as
amended, (b) represents that such tender of Old Notes complies with such Rule
14e-4, and (c) guarantees that, within three New York Stock Exchange trading
days from the date of this Notice of Guaranteed Delivery, a properly
completed and duly executed Letter of Transmittal (or a facsimile thereof),
together with certificates representing the Old Notes covered hereby in
proper form for transfer (or confirmation of the book-entry transfer of such
Old Notes into the Exchange Agent's account at The Depository Trust Company,
pursuant to the procedure for book-entry transfer set forth in the
Prospectus) and required documents will be deposited by the undersigned with
the Exchange Agent.
The undersigned acknowledges that it must deliver the Letter of
Transmittal and Old Notes tendered hereby to the Exchange Agent within the
time period set forth above and that failure to do so could result in
financial loss to the undersigned.
Name of Firm:_________________________________________________________________
Authorized Signature:_________________________________________________________
Address:______________________________________________________________________
Area Code and Telephone No.:__________________________________________________
Authorized Signature:_________________________________________________________
Name:_________________________________________________________________________
(Please Type or Print)
Title:________________________________________________________________________
Date:_________________________________________________________________________
<PAGE>
Exhibit 99-3
-----------------------------------------------
ACI PLUS
SERVICE AGREEMENT
-----------------------------------------------
-----------------
X
-----------------
APRIL 6, 1999
ACI Corp. Feb. 1999
All Rights Reserved
DSLAgreement_0404_1
<PAGE>
THIS DOCUMENT IS CONFIDENTIAL AND PROPRIETARY AND IS INTENDED SOLELY FOR USE BY
CUSTOMERS OF ACI. CUSTOMERS SHOULD NOT DISCUSS, SHOW OR REFER TO THIS
DOCUMENT WITH OR TO ANY PERSON WHO IS NOT AN EMPLOYEE OR OFFICIAL OF CUSTOMER
WITHOUT PRIOR WRITTEN APPROVAL FROM ACI.
PROVISIONING AGREEMENT, dated as of April 6, 1999, ("Effective Date") by
and between ACI Corp., a Delaware corporation ("ACI") and Qwest
Communications Corporation, a Delaware corporation (the "COMPANY").
ACI and COMPANY have reached agreement upon the terms and conditions
upon which COMPANY will purchase ACI's advanced DSL telecommunications
services and "Equipment" (as defined in Section 4) (the "Products"), which
Products are more fully defined in Attachment 2, for use and/or resale in
*** geographical markets where ACI offers services in the United States (a
single geographical market shall be referred to herein as "Single Market" and
all Single Markets shall be collectively referred to herein as "the Markets")
(the Single Markets and the schedule of availability are set forth in
Attachment 5, attached hereto). COMPANY may, in its sole discretion, sell
the Products purchased from ACI to customers of the COMPANY (the "Customers")
in all Markets *** in accordance with the *** terms
set forth in this Agreement.
This Agreement between ACI and COMPANY shall consist of the specific
terms set forth herein as well as the terms and conditions contained in
following Attachments:
Attachment 1: General Terms and Conditions
Attachment 2: ACI Plus Products and Pricing
Attachment 3: Schedule of Cancellation Fees and Costs
Attachment 4: Service Level Agreement
The specific terms and conditions of each of these Attachments are
incorporated into this Agreement in their entirety by this reference, and
constitute an integral part of this Agreement.
Words or terms not defined herein having well-known technical or trade
meanings shall be so construed.
The Company's billing and contact information is as follows:
COMPANY BILLING INFORMATION:
Company Name: Qwest Communications Corporation
Company Mailing Address: 700 Qwest Tower, 555 Seventeenth Street
City: Denver State: Colorado Zip: 80202
Telephone: (303) *** Fax: (303) ***
COMPANY PRIMARY CONTACT:
*** Portions of this page have been omitted pursuant to a request for
Confidential Treatment and filed separately with the Commission.
ACI Corp. Feb. 1999
All Rights Reserved
DSLAgreement_0404_1 2
<PAGE>
Name: ***
Title: Primary Contact Title
Street Address: 700 Qwest Tower, 555 Seventeenth Street
City/State/Zip: Denver, Colorado 80202
E-mail Address: E-mail Address: ***
COMPANY hereby acknowledges that it has reviewed the terms and conditions
in this Agreement and each of the Attachments referred to herein, and ACI and
COMPANY have caused their duly authorized representatives to execute this
Agreement on and as of the date first set forth above.
QWEST COMMUNICATIONS CORPORATION ACI CORP.
By: By:
-------------------------------- ---------------------------------
Title: Title:
----------------------------- ------------------------------
AUTHORIZED ACI OFFICER
By:
---------------------------------
Title:
------------------------------
*** Portions of this page have been omitted pursuant to a request for
Confidential Treatment and filed separately with the Commission.
ACI Corp. Feb. 1999
All Rights Reserved
DSLAgreement_0404_1 3
<PAGE>
ATTACHMENT 1: GENERAL TERMS AND CONDITIONS
1. GENERAL
1.1. RELATIONSHIP. Neither this Agreement nor the provision of the
Products referred to herein to COMPANY creates a joint venture, partnership
or agency relationship between ACI and COMPANY; COMPANY is a service
provider with respect to its Customers, and ACI is only a supplier to COMPANY
with no relationship, financial or otherwise, to those Customers as a result
of this Agreement.
1.2. EGRESS CONNECTION. The types of Egress Connection available from
COMPANY's Points of Presence ("POPs") to ACI's POPs (collectively, an "Egress
Connection") are set forth in Attachment 2. Concurrently with the execution
of this Agreement, COMPANY shall deliver to ACI a fully completed and signed
Egress Connection Order Form to establish the Egress Connection that COMPANY
has selected. Depending upon the type of Egress Connection selected by
COMPANY and the Market where such Egress Connection is to be installed, ACI
shall use best efforts to install the Egress Connection within ***
days after delivery of the Egress Connection Order Form to ACI. COMPANY shall
be responsible for all installation and monthly recurring charges, as set
forth in Attachment 2, for the term of the Egress Connection specified in the
Egress Connection Order Form as of the "Acceptance Date" (as hereinafter
defined) of such Egress Connection. As used herein, "Acceptance Date" is the
date in which COMPANY accepts delivery of the installed Egress Connection.
If COMPANY fails to provide ACI notice that the Egress Connection fails to
support high speed digital throughput at the specified bandwidth in
accordance with the terms of this Agreement ("Connection Deficiency"), within
*** days after notification by ACI of
the installation of such Egress Connection, COMPANY shall be deemed to have
accepted the Egress Connection as of the date of delivery of such installed
connection. Each term for an Egress Connection ordered pursuant to this
Agreement shall be for a minimum duration of at least ***
period, commencing upon the date that charges for such Egress Connection
commences hereunder. COMPANY will be responsible for the Early Termination
Fees set forth in Attachment 3 if an Egress Connection is terminated by
COMPANY without cause prior to the completion of the term for which that
Egress Connection was ordered. COMPANY shall give notice to ACI at least
*** days prior to the date that an Egress Connection is disconnected by
COMPANY, and an Egress Connection may not be disconnected until
*** have been ***
Notwithstanding anything to the contrary in this Section 1.2, ACI shall
bill COMPANY upon installation of the Egress Connection; provided that in the
event COMPANY does not accept such Egress Connection due to a Connection
Deficiency, COMPANY shall ***
*** by COMPANY up to and including the date of installation and
until such time the Egress Connection is accepted by COMPANY.
1.3. NETWORKNOW ACCESS. A) After processing COMPANY's Egress Connection
Order Form, ACI will issue to COMPANY the number of usernames (the
"Username") and passwords (the "Password"), as reasonably determined by
COMPANY, with different security access levels to enable COMPANY to access
the NetworkNow website maintained by an affiliate of ACI, which will allow
COMPANY to perform certain functions
*** Portions of this page have been omitted pursuant to a request for
Confidential Treatment and filed separately with the Commission.
ACI Corp. Feb. 1999
All Rights Reserved
DSLAgreement_0404_1 4
<PAGE>
with ACI over the Internet. COMPANY and ACI understand and agree that the
information contained in and made available through NetworkNow (as well as
the Username and Password therefor) is "Confidential Information" (as defined
in Section 6.5.3) and should only be used for the purposes for which it is
intended and should not be disclosed to unauthorized persons. COMPANY and ACI
shall ensure that each of its employees is aware of the confidential and
proprietary nature of the Username and the Password and the proper use of the
information obtained from the NetworkNow website. Any unauthorized use or
disclosure of the Username or Password or any information derived from
NetworkNow is subject to Section 6.4.3 herein. Each party shall immediately
notify the other party of any unauthorized use or disclosure of such
Username, Password or information. COMPANY shall promptly contact ACI to
obtain a different Username and Password, or change the Password associated
with the compromised Username when (a) COMPANY becomes aware that the
security of the Username or the Password has been compromised in any manner,
and/or (b) the employment of one or more of the representatives of COMPANY
who has used or had access to COMPANY's Username or the Password is
terminated by COMPANY. ACI shall immediately notify COMPANY in the event
that the Username or the Password is disclosed to a third party.
B) ACI and COMPANY shall cooperate to develop additional procedures
with respect to NetworkNow to coordinate their respective activities,
maintain and share updated information and facilitate interaction between
their respective systems (including, without limitation, multiple security
access levels to deal with network engineering and billing or account
information).
1.4. *** DISTRIBUTOR. COMPANY shall be a ***
distributor of Products in any Market in which COMPANY is authorized to
provide Products to Customers under this Agreement. ACI reserves the
*** in any Market, including,
without limitation, one or more affiliates of ACI. Similarly, COMPANY shall
have the *** services or Products ***
in any Market.
(A) PROVISION OF PRODUCTS
2.1. AVAILABLE PRODUCTS. The Products that are available for purchase by
COMPANY under this Agreement are described in Part 1(A) of Attachment 2, as
well as the prices for those services and features that will apply during the
"Term" (as defined in Section 7) of this Agreement. Each of the Products
described in Attachment 2 will receive the benefits of the Service Level
Agreement set forth in Attachment 4 to this Agreement.
2.2. ADDITIONAL PRODUCTS. From time to time ACI shall offer COMPANY new
Products or services developed by ACI or obtained by ACI from others for use
with the Products. Any new Products or services which COMPANY elects to
order from ACI shall be considered to form part of the Products and shall be
provided upon the terms and conditions of this Agreement, together with such
additional terms and conditions which are generally applicable to the
provision of those new Products and services. This Agreement shall be
amended in a writing executed by both parties to include Additional Products.
(Except as the context may otherwise require, Available Products and
Additional Products will be collectively referred to herein as "Products").
2.3. *** A) Products shall be ordered by
COMPANY using the ACI Products Order Form, and COMPANY shall be responsible
for the *** and ***
applicable for each Product, as set forth in Attachment 2 for the duration
of the term specified for that Product in the ACI Product Order Form. The
minimum term for any Product ordered shall be *** from the date
that the Product is installed. Subject to paragraph 2.3(B) below, ACI
*** and *** that the *** and ***, as set forth
in Attachments 2 and 3, with the exception of ***
, for the Products and Egress Connections
available in the Market shall *** (without the
*** may be withheld by ***
throughout the *** of this *** , and reserves the
right to *** such *** for one or more of the Products or Egress
Connections for all or any portion of the *** or
thereafter.
*** Portions of this page have been omitted pursuant to a request for
Confidential Treatment and filed separately with the Commission.
ACI Corp. Feb. 1999
All Rights Reserved
DSLAgreement_0404_1 5
<PAGE>
B) ACI *** as of the date of execution of
this Agreement, the *** (as defined in Section ***
COMPANY in this Agreement are
*** ***
(collectively, a *** ) for ***
and ***; provided however, that if any
*** via a written *** to its ***, such that the ***
is substantially ***
the *** of *** herein, ACI may *** such ***
, for as long as ***
*** than that of COMPANY, *** If during the term of this
Agreement ACI shall *** to
any other *** who obtains from ACI *** the *** products in *** the
*** as the COMPANY has agreed to in ***
, ACI shall *** COMPANY, and
*** , shall ***
such ***
and ACI shall provide *** COMPANY
*** to the *** such *** were *** by ACI to such
*** .
C) Commencing on the ***
Date, COMPANY shall have ***
from time to time (but no more than *** in any ***
period) during the Term of this Agreement or any renewal thereof and for a
period of *** following the expiration of the Term or any renewal
thereof, to ***
chosen by COMPANY,- and reasonably acceptable to ACI, to
*** (taken as a
whole), and *** (collectively, "Major Terms") of ACI's ***
with *** for the sole purpose of ***
*** Section *** herein ( *** ). The following procedures
shall be followed by COMPANY, the *** and ACI with
respect to the *** set forth in this Section 2.3(C):
a) When *** ACI information and documentation ("ACI Documents"), the
*** shall have *** to all documentation such ***
considers relevant to *** and may only take notes or make redacted
copies thereof;
b) The *** shall be *** after a
*** advance written notice from Company to ACI ***
at ACI's principal executive offices on a mutually convenient date and at
a mutually convenient time within the *** following
such *** ;
c) All documents *** by the *** (together with all ***
of ACI Documents obtained by the *** ) shall be subject to ACI's
standard and customary confidentiality agreement in favor of ACI;
d) The *** shall not disclose *** or any information
contained therein without the prior, written consent of ACI'; and
e) The * will produce a *** (as defined herein) which shall
be delivered to COMPANY and ACI simultaneously. A *** shall be in
writing and shall (1) state the fact of whether any ***
*** COMPANY's Major Terms and *** Major Terms *** (a
*** ) and, if any *** exists, the aggregate *** ACI ***
COMPANY as a result of such *** and (2) list the *** if any, to
COMPANY's Major Terms that are necessary to *** into *** with the
provisions of Section *** of this Agreement. If ACI shall dispute or
challenge any *** contained in the *** either party may refer any
such challenge by ACI to the *** of the *** to an arbitration
proceeding pursuant to Section 6.4.2 of this Agreement without ***
with the *** hereof, and COMPANY and ACI shall each participate in any
such arbitration.
f) COMPANY shall pay the *** of *** ; provided however that,
if the *** of the *** a *** in the amounts *** to
COMPANY and such *** exceeds *** and *** or more of the
aggregate amount *** ACI to COMPANY during the period *** ,
ACI shall, within *** of the date when the *** becomes ***
(including the conclusion of any arbitration proceedings undertaken with
respect to such *** COMPANY for: (i) the *** and *** of
the *** and (ii)
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ACI Corp. Feb. 1999
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DSLAgreement_0404_1 6
<PAGE>
the *** COMPANY with respect to any such
*** ; and *** COMPANY's *** to reflect the *** Terms.
D) The procedures set forth in Section *** hereof shall constitute
the COMPANY's sole and exclusive remedy for any violation by ACI of the terms
of Section *** of this Agreement. In the event that ACI fails to pay
the amounts owed *** period and/or *** to *** the ***
Major Terms as a consequence of a final determination of a violation of
Section *** hereof, COMPANY shall be entitled to seek any remedies
available under law and in equity to recover such amounts due from ACI or to
obtain *** following the *** after the date when ***
becomes *** as provided herein.
E) ACI and COMPANY *** representatives shall meet at least ***
each *** by way of example and not limitation, the terms and
conditions of this Agreement and other agreements of the parties.
F) ACI shall endeavor to allow COMPANY to *** when using any
Product without *** if, and to the extent, that *** transmissions
do not require ACI to make any material changes or modifications to its
*** , equipment or infrastructure facilities attributable to, among other
things, hardware configuration, *** or *** utilization. If ACI
shall determine that any material changes or modifications are required or
appropriate to accommodate COMPANY's *** transmissions, ACI ***
an adjustment in the prices charged under this Agreement to compensate ACI
for the additional costs incurred by ACI to accommodate COMPANY's ***
transmissions. Nothing herein shall require (i) ACI to undertake any
material changes or modifications to its network, equipment or facilities
which ACI considers, in its sole discretion, to be commercially,
administratively or technically inappropriate or imprudent under the facts
and circumstances existing at the time of any such determination, or (ii)
COMPANY to utilize *** transmissions at such *** .
2.4. OTHER CHARGES. All prices set forth in the Attachments are
exclusive of applicable federal, state and local taxes, surcharges,
assessments and other governmental charges and fees (collectively, "Taxes"),
which shall be invoiced to and due from COMPANY unless COMPANY provides to
ACI a valid and effective certificate from the appropriate taxing authorities
exempting COMPANY from the Taxes that would otherwise be invoiced hereunder.
2.5. SPECIAL PROGRAMS. From time to time, ACI may offer *** and
*** relating to the Products or Egress Connections, each of which shall
*** , and *** to, the *** of this *** and shall be
administered upon such *** terms and conditions as ACI may announce or
provide with respect to each such program. *** to *** in any
one or more of those *** upon the *** applicable to each such
program offered by ACI and this *** shall be *** such *** .
2.6 VOLUME COMMITMENT. COMPANY shall order, and ACI shall provide, a
minimum of *** DSL lines (the "Purchase Commitment"). The Purchase
Commitment, which is more fully described in Attachment II, attached hereto,
shall terminate on the *** of the *** Date (as defined herein) or
the date on which COMPANY orders the *** DSL line.
3. ORDER, INSTALLATION AND BILLING ARRANGEMENTS
3.1 SERVICE DETERMINATION. Prior to submission of an "Order" (as
defined in Section 3.2 below) COMPANY shall provide to ACI lists of, or
individual, addresses of potential Customers in the Market to determine the
availability of Products and estimated transmission speeds ("Service
Determination") for those Customers. Using the qualification database of ACI
or its affiliates, ACI will pre-qualify those potential customers and deliver
the results thereof to COMPANY within *** after delivery of the
potential Customer's address to ACI. The speeds at which ACI can reliably
deliver Products are referred to herein as the "Minimum Expected Service
Availability". COMPANY understands and acknowledges that the actual
transmission speeds delivered by ACI may vary from the transmission speeds
indicated in such Service Determination or otherwise expected by
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DSLAgreement_0404_1 7
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COMPANY or its Customers based upon, among other things, factors such as the
length and gauge of the line serving the Customer, and other operational
characteristics of the facilities and equipment used by ACI.
3.2 ORDER AND INSTALLATION
3.2.1 ORDERING PROCESS. A) COMPANY shall place orders for
Products with ACI by submission of an approved ACI Products Order Form (an
"Order"). Orders may be submitted by COMPANY prior to completion of the
Egress Connection necessary to accommodate those Orders, but installation
appointments will not be scheduled to occur for those Orders prior to
completion of the Egress Connection needed to accommodate those Orders. ACI
will provide COMPANY with a confirmation of the Order promptly after its
submission, which confirmation shall include *** . COMPANY shall have
the right to submit an Order for any Product for a particular Customer but
ACI shall only be obligated to provide the *** included in the Minimum
Expected Service Availability with respect to such Customer.
B) For purposes of the Purchase Commitment, Orders shall *** of
the Purchase Commitment *** such Orders have been *** ACI.
*** Market moves, Customer renewals, and Customer *** Market
transfers *** shall *** be considered Orders *** shall such
Orders *** of the Purchase Commitment.
3.2.2 EVALUATION OF PRODUCT AVAILABILITY. During the period
between the submission of the Order and no later than *** prior to the
scheduled installation date, ACI or an authorized representative of ACI will
preliminarily evaluate the parameters of the requested loop obtained from the
ILEC to determine the speeds that can be provided over that loop and will
inform COMPANY of the results of its evaluation if there is a problem with
the Product designated in the Order. Further, a portion of this evaluation
may be performed by ACI at the premises of the potential Customer. If ACI
determines during the evaluation that reliable service is not reasonably
achievable over the requested loop, ACI may propose and *** to achieve
reliable connectivity for such loop, each of which shall be *** prior
to implementation. If any additional or unusual *** charges are
reasonably anticipated with implementation of the alternative access
strategies, ACI will inform COMPANY of an estimate of those costs prior to
installation. If ACI is unable to provide transmission speeds at least
equivalent to the speeds included in the *** and *** does not
*** for such *** at the *** and *** strategies that
*** provided by ACI, COMPANY shall *** and *** shall ***
in connection with such *** . If COMPANY is satisfied with the ***
and access strategy, the Order shall be accepted by COMPANY and ACI at
the available speeds and applicable charges for such *** and
alternative access strategy.
3.2.3. INSTALLATION. ACI shall use best efforts to install
Products within *** after the submission of the Order. COMPANY
acknowledges that problems beyond the control of ACI (including, without
limitation, facility problems, incorrect or incomplete Customer information
supplied by COMPANY or Customer unavailability) may delay installation dates.
For Products, ACI shall schedule all installations by appointments with
Customers based upon the information supplied by COMPANY to ACI, and Product
installation appointments may be scheduled *** the *** and ***
. Once an installation appointment is scheduled by ACI, a technical
representative (the "Technical Representative") should arrive within ***
. Egress Connections shall be scheduled by appointment with the COMPANY at a
mutually convenient date and time, and installation shall be arranged by ACI
based upon the time parameters set forth in ACI's agreements with the
applicable Local Exchange Carrier in the Market where the Egress Connection
will occur.
3.2.4. PRODUCT ACCEPTANCE. Promptly after installation of a
Product at the Customer's premises, the installation will be confirmed to
COMPANY in writing.
(a) If the installed transmission speeds are not at least
equivalent to those included in the ***
with respect to the Customer or such other Products as
subsequently agreed to by ACI and COMPANY following the Order,
the Customer shall have *** (the "Acceptance Period") to
use the installed Product and cancel the installed Product if
Customer is not satisfied. If the Customer decides to cancel,
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DSLAgreement_0404_1 8
<PAGE>
COMPANY will *** , the Equipment
associated with such installation shall be immediately
returned to ACI, and *** shall be
*** ACI in connection with such
cancelled installation as a result of ***
ACI to provide the *** or the Products subsequently
agreed to by ACI and COMPANY; provided that such cancelled
Product shall *** of the *** . If, however, the
Customer is satisfied with the speeds available to the
requested loop; Customer has ordered the exact speed of the
Product delivered by ACI to Customer; or Customer fails to
cancel the installed Product prior to the expiration of such
Acceptance Period, then the installation shall not be
cancelled or cancelable and the *** ACI in accordance
with the *** for the Product actually installed and the
access strategies employed with respect to that installation.
(b) If the installed transmission speeds are not at least
equivalent to the Product set forth in the Order but are at
least equivalent to those included in the *** , the
Customer may decline service at the completion of the
installation process or elect to use the installed Product
for the Acceptance Period. If Customer decides to cancel
within the Acceptance Period, COMPANY shall *** ACI
the *** set forth in Attachment 3 to this Agreement
but *** shall be *** . If, however, the Customer
is satisfied with the installed Product or shall fail to cancel
the installed Product prior to the expiration of the Acceptance
Period, then the installation shall not be canceled or
cancelable and the *** ACI in accordance with the ***
for the Product actually installed.
3.2.5. DEACTIVATION. In certain circumstances, it may be
necessary for a Technical Representative to assist the Customer in completing
a deactivation of the Product at the end of the service period. The COMPANY
shall notify ACI of each deactivation as soon as practicable to ascertain if
a visit by the Technical Representative to the Customer's premises will be
necessary, so that an appointment can be arranged on a timely basis. With
respect to any Customer using a Product during an Acceptance Period, COMPANY
shall notify ACI no later than *** immediately following the end of the
Acceptance Period if that Customer has timely cancelled the installed Product.
3.3 BILLING AND PROMPT PAYMENT.
3.3.1 BILLING PROCEDURE. At the end of each ACI billing cycle
(currently at the *** , ACI will provide to COMPANY a ***
(electronically or via CD-ROM) of account for all *** charges relating to
the Products and Egress Connections for the applicable billing period. All
charges and fees for Products and Egress Connections provided to COMPANY
shall be billed by ACI directly to COMPANY, and COMPANY shall be solely
responsible for making prompt and complete payment to satisfy all such
billings in accordance with this Agreement. Standard *** charges
*** for Products shall be billed to COMPANY *** , and *** and
*** charges for Products and Egress Connections shall be billed *** .
Any and all statements of account sent by ACI to COMPANY reflecting
*** charges for Products or Egress Connections or other costs and
assessments shall be payable to ACI within *** of the receipt of such
statement of account. If undisputed amounts are not paid by COMPANY on or
prior to the due date, late fees shall accrue and become immediately due and
payable on the outstanding unpaid balance of undisputed amounts at the rate
of *** per *** or the highest rate
permitted by applicable law, *** .
3.3.2. BILLING RESOLUTION. If COMPANY in good faith disputes
any invoiced amount, it shall submit to ACI, within *** following the
date of the invoice, full payment of the undisputed portion of the invoice
and written documentation identifying and substantiating the disputed amount.
If COMPANY and ACI cannot, in good faith, promptly resolve any questions or
disagreements regarding a disputed billing, then the dispute will be settled
by escalation and arbitration pursuant to Section 6.4 of this Attachment 1.
If COMPANY shall fail to
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ACI Corp. Feb. 1999
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DSLAgreement_0404_1 9
<PAGE>
pay any undisputed portion of any ACI billing invoice or any disputed
portions as a result of any arbitration proceeding within *** after
the date of such statement or the notification of any such arbitration award,
whichever is later, ACI shall have the right to issue to COMPANY a written
notice of suspension of services to COMPANY, whereupon ACI shall have the
right to *** the *** of any and all *** and *** or
*** from the *** of such written notice.
3.4. *** AND OTHER FEES. All applicable *** charges and other fees
are set forth and more fully defined in Attachment 3.
1. The *** of any Product or Egress Connection *** to the
*** of its applicable *** will result in *** .
2. A *** will apply if COMPANY or any Customer *** to ***
any *** unless ACI has been notified of a change in the *** on
or prior to *** , the *** the *** and *** of the
*** .
3. An *** will apply for re-installation of a connection for ***
of a *** . No *** will apply..
4. A *** Change *** will apply when the COMPANY or COMPANY's
Customers elect to *** any Product
COMPANY shall be liable for all costs incurred by ACI arising from
COMPANY's or any Customer's *** of any *** .
3.5. COMPANY RESPONSIBILITY. COMPANY shall not be relieved of any
obligation hereunder by virtue of the fact that its Customers ultimately use
the Products. COMPANY shall be financially responsible for all matters
relating to its Customers (including, without limitation, solicitation,
service requests, creditworthiness, customer service, billing and collection,
and marketing communication), and for all charges generated by its Customers.
ACI acknowledges and agrees that ACI shall not have any contractual or
financial interest in COMPANY's Customer relationships under this Agreement
and, subject to the terms hereof, *** shall be *** the ***
and *** of its *** ; provided, however, that COMPANY shall not
obligate ACI to provide services to COMPANY for provision to Customers except
as specifically set forth in this Agreement, and shall not misrepresent or
misstate any of the qualities or capabilities of any of the Products.
COMPANY shall also be solely liable for amounts it cannot collect from its
Customers and billing adjustments it grants to its Customers (including
adjustments for erroneous charges or any other form of credit provided by
COMPANY to its Customers).
3.6. PROGRAM MANAGEMENT. ACI shall designate *** ACI *** as
the *** for the business relationship between ACI and COMPANY hereunder
and *** shall be dedicated to and responsible for coordinating all
matters between ACI and COMPANY in connection with the transactions
contemplated in this Agreement (the *** ). All complaints that COMPANY
may have with respect to the Products or the services provided by ACI
hereunder shall be reported to the *** in the first instance and the
*** will coordinate the review of, and the implementation of necessary
steps to address any such complaints within ACI promptly after they are
reported by COMPANY.
3.7 MAJOR SERVICE PROBLEMS.
(A) Nothing set forth in this Paragraph A shall affect the rights of COMPANY
under the Service Level Agreement set forth in Attachment 4 hereto with respect
to the subject matter of this Paragraph A. If at least *** Customers of
COMPANY shall concurrently experience in a *** Market any service
affecting problems (including, without limitation, *** ) which are
attributable to ACI's network or operations that persist for more than ***
for each such Customer and that occur within multiple Central Offices in such
*** Market ("Major Service Problem"); the *** of ACI shall meet ***
with COMPANY to discuss the persisting Major Service Problem
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DSLAgreement_0404_1 10
<PAGE>
and explore the development and implementation of appropriate remedial
actions to correct the Major Service Problem. At any such meeting, COMPANY
shall present the evidence that it has to describe and substantiate the Major
Service Problem and the *** shall present the solutions that have been
attempted by ACI to address those problems. Regardless of such meeting, if
the Major Service Problem persists for *** or more after such ***
period (or within the time period specified by a *** whose service or
equipment is responsible, in whole or in part, for the Major Service Problem
but in no event greater than *** ("Critical Service Problem"), the
affected Customer(s), by notice to ACI, shall have the right in its sole
discretion to terminate the affected lines *** (including *** ) and
*** any *** which COMPANY *** ACI for the *** of such
Customer's affected line and *** for the affected ***
(collectively, the "Major Service Problem *** ).
(B) If COMPANY has *** working lines and thereafter COMPANY has
experienced over *** Critical Service Problems, Company shall have the
right, in its sole discretion, to receive the Major Service Problem ***
and immediately *** without *** for *** or *** . In
addition, *** of affected line(s), Product(s) or the Agreement shall
not limit ACI's *** pursuant to Section ***.
(C) Notwithstanding anything to the contrary set forth in this Section 3.7,
any Major Service Problem (and any resulting Critical Service Problem) caused
by COMPANY's collocated equipment installed in, or COMPANY's personnel or
authorized representatives operating in, a Central Office pursuant to or as
permitted by a Collocation Agreement, dated the date hereof, between ACI and
COMPANY (the "Collocation Agreement") shall *** or *** to ***
a *** or a *** for *** of this Section 3.7.
4. TECHNICAL SERVICE ARRANGEMENTS
Equipment consists of a high-speed "modem", associated wiring, cabling
and any other equipment required to provide a Customer with use of the
Products (collectively, the "Equipment"). ACI shall supply the Equipment
required to provide a Customer's premises with normal use of the Products.
Installation shall consist of a service call by a Technical Representative to
configure, enable, and test the Equipment installed at the Customer's
premises for access to the "ACI Network" (as hereinafter defined).
Verification by the Technical Representative that the Customer's premises can
properly access the ACI Network at the parameters required for use of the
Products included in the *** , or other mutually agreed upon Products
and Customers acceptance of the Equipment, shall constitute final
installation. COMPANY will be required to pay the *** as set forth in
Attachment 2 to the Agreement associated with the Products *** by ACI
and *** by Customer ( *** any such charges are *** , in whole
or in part, by ACI during any *** or *** ). As used herein, "ACI
Network" shall consist of the DSL Line from the customer premise to the local
central office ("Connection Point") connected to the DSLAM and onto the local
ATM backbone through to the local market hub location (ACI Metro Service
Center) and terminated on the local ATM switch.
5. PROPRIETARY ARRANGEMENTS
5.1. USE OF NAME AND MARKS. This Agreement confers no right upon either
party to use the name, service marks, trademarks, copyrights or patents of
ACI or any of its affiliates, or COMPANY or any of its affiliates, except as
expressly provided herein. Neither ACI nor COMPANY shall take any action
which would compromise the registered copyrights or service marks of COMPANY
or any of its affiliates or ACI or any of its affiliates, respectively. In
no event may either party or its affiliates use the other party's or the
other party's affiliates' names, trademarks, service marks, trade names,
logos, designations, copyrights or other proprietary rights (collectively,
the "Marks") without the prior written consent of the other party or the
other party's affiliates, as the case may be, *** be *** in the
*** or its *** . Each party acknowledges that the other party and
its affiliates own and shall retain ownership of its respective Marks and
agrees that it will not at any time during or after the term of this
Agreement assert or claim any interest in, or do anything that may adversely
affect the validity of such other party's or its affiliates' Marks
(including, without limitation, any act or failure to act which may infringe
or lead to the infringement of any of the other party's or its affiliates'
proprietary rights).
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DSLAgreement_0404_1 11
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Each party will provide the other party with written notice of any
breach of this Section 5.1. Such other party shall immediately use its best
efforts to eliminate and cure such breach, and shall advise the complaining
party of each of its actions to effect such cure. If, in the
*** , the other party *** to effect a ***
of the date of the complaining party's notice, then the complaining
party may, *** *** and in
***
the other party or any other person, except for such
party's *** .
5.2. USE OF PRODUCTS. A) COMPANY will be solely responsible for the
content of any transmissions over the ACI Network from COMPANY's Points of
Presence (POPs) to the ACI Network. COMPANY agrees to provide Products to
its Customers in a manner that conforms with the non-price terms of this
Agreement and that is in compliance with all laws, rules and regulations
applicable to the provision of such Products by COMPANY. In the event the
Product purchased will provide Customer with access to the public Internet,
COMPANY shall comply, and shall procure from each Customer which is provided
Products a written agreement to comply, at all times with the requirements of
the COMPANY's Acceptable Use Policy (as amended from time to time at
COMPANY's sole discretion).
B) To maintain or improve ACI service or the ACI Network, to prevent
fraud or for other business reasons, ACI can restrict, interrupt or modify
the services provided hereunder upon commercially reasonable notice to
COMPANY but, with respect to each interruption, restriction or modification,
ACI will promptly seek to resolve any situation or condition that has caused
an interruption in service to the extent that the fault involves the ACI
Network or its equipment. ACI shall not be liable for any claim by or
against COMPANY arising out of or related to the actions of any person
***
resulting in: (i) alteration, theft or
destruction of COMPANY's or any Customer's computer programs, information,
data files, procedures or other property, (ii) any losses or damages COMPANY
or its Customers may suffer in connection with COMPANY's or its Customers'
use or inability to use the Products, or (iii) any data, materials or other
information transmitted or received by or to COMPANY or its Customers or its
intended recipient that are lost or improperly intercepted via the Internet.
5.3. CHANGES TO PRODUCTS OR AGREEMENT. A) Although any Product provided
by ACI is subject to its business policies, practices, and procedures (which
ACI reserves the right to change at any time and from time to time in its
sole discretion upon advance notice to COMPANY), ACI will not materially
adversely change the Products provided to COMPANY hereunder except upon
*** notice to COMPANY (a "Notice of Change"). Upon delivery of notice of
a material adverse change to any Product, COMPANY shall promptly notify ACI
of the Customers that will be affected by such change (the "Affected
Customers") and the then existing remaining duration of each such Affected
Customer's contract with COMPANY (excluding elective extensions) relating to
the Product(s) subject to such changes (the "Affected Duration"). ACI shall
have the option to either continue to provide the existing Product to the
Affected Customers during the Affected Duration or to upgrade or enhance the
service to an Affected Customer for the Affected Duration of such Affected
Customer's existing contract with COMPANY *** . Upon receipt of any
Notice of Change, COMPANY shall not thereafter market or submit Orders for
any Products that are materially adversely changed by ACI except as specified
in the Notice of Change. Except as set forth herein, if COMPANY otherwise
elects to continue to use Products or services after receiving a Notice of
Change, those changes will apply to COMPANY commencing on *** after the
date *** the Notice of Change. ACI shall exercise commercially
reasonable efforts to avoid service degradation, interruption or material
cost to any Customers as a result of such material adverse changes in
Products for a period of *** after notice to COMPANY of such Product
changes.
B) Notwithstanding any other provision set forth in this Agreement, ACI
shall not be liable for any failure or delay in its performance under this
Agreement (including any changes to or failure to continue to provide the
Products or services contemplated herein) due to any cause beyond ACI's
reasonable control, including, without limitation, any act of war or civil
insurrection, acts of God, earthquake, flood, embargo, riot, Year 2000
outages, sabotage, labor dispute, governmental act or change in regulatory
requirements affecting telecommunications companies similarly situated with
ACI generally, or failure of the Internet; provided, however, that COMPANY
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DSLAgreement_0404_1 12
<PAGE>
shall *** of any *** pursuant to *** such failure or delay
in performance with respect to such affected Customers and ACI shall (a) give
the COMPANY prompt notice of such cause, and (b) use its *** efforts to
correct promptly such failure or delay in performance to the extent
consistent with then applicable law and regulatory requirements. COMPANY's
Customers shall be entitled to *** the affected lines or Products
*** for *** or any *** if such failure or delay in performance
continues for *** or more *** efforts by both parties to mitigate
such failure or delay. Such terminated lines or Products shall *** the
COMPANY's *** of the affected lines or Products pursuant to ***
shall be governed by Section *** .
C) Subject to *** commitment to maintain the *** for
Products and Egress Connections set forth in Attachment 2 to the Agreement
during the *** of this Agreement, ACI reserves the right to introduce
new Products or marketing or promotional programs or change the terms of any
existing promotional or discount program, or in response to business,
operational or competitive developments *** and supplemental
*** are *** or *** and will be applicable on a *** .
5.4. CUSTOMER SUPPORT; RESTORATION OF SERVICE. COMPANY's Customers
using Available Products will be entitled to avail themselves of the ACI
customer services described in the Service Level Agreement. In the event
that a COMPANY's Customer experiences a noticeable reduction in transmission
speed or a noticeable interruption of DSL service attributable to the
Products, ACI shall, *** the *** or the *** , restore
the Customer's service with respect to the Products to its condition prior to
such reduction or interruption in accordance with the "Mean Time to Restore
Service" set forth in the Service Level Agreement or *** COMPANY the
*** set forth therein in accordance with the terms of the Service Level
Agreement; provided, however, that ACI shall not be responsible for any such
reduction or interruption arising from or caused by any equipment or services
which are beyond ACI's control (including without limitation a Customer's
computer or software).
6. LEGAL CONSIDERATIONS.
6.1. LIMITATION OF LIABILITY. Notwithstanding anything to the contrary
contained in this Agreement and except as set forth in Sections 5.2, 6.3 and
Attachment 4, IN NO EVENT SHALL EITHER PARTY TO THIS AGREEMENT BE LIABLE FOR
SPECIAL, INDIRECT, INCIDENTAL, CONSEQUENTIAL OR EXEMPLARY DAMAGES (INCLUDING,
WITHOUT LIMITATION, LOSS OF PROFITS, CUSTOMERS OR GOODWILL ARISING FROM THE
RELATIONSHIP OR CONDUCT OF BUSINESS HEREUNDER).
6.2. WARRANTIES.
Subject to the limitations set forth below, in the event that the
Equipment installed by ACI at a Customer's premises is determined to be
defective or otherwise becomes non-operational during the term of this
Agreement, ACI will ***
to the Customer upon receipt of notice of a malfunction of the Equipment,
and COMPANY agrees to cause the defective or non-operational Equipment to be
returned to ACI.
WARRANTIES AND REMEDIES SET FORTH IN THIS AGREEMENT AND THE SERVICE LEVEL
AGREEMENT ARE THE ONLY WARRANTIES AND REMEDIES WITH RESPECT TO THE
PRODUCTS, AND ARE IN LIEU OF ANY OTHER WARRANTY, WRITTEN OR ORAL,
STATUTORY, EXPRESS OR IMPLIED, INCLUDING WARRANTIES OF MERCHANTABILITY AND
FITNESS FOR A PARTICULAR PURPOSE.
Any warranties provided by ACI under this Agreement shall not apply to any
situation where (a) any Product, Equipment or other service has been
installed or serviced by anyone other than ACI or its authorized Technical
Representatives, (b) the Equipment has experienced misuse or unusual damage,
and/or (c) any Product, Equipment or other service is not used in compliance
with the available operating instructions established by ACI or the original
manufacturer. Except as expressly provided in this Agreement, this Agreement
shall not provide third parties (including Customers) with any rights,
privileges, causes of action or claims against ACI or COMPANY.
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DSLAgreement_0404_1 13
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6.3. PATENT INFRINGEMENT. *** will indemnify, defend and hold
*** harmless from and against any and all costs, liabilities, losses and
expenses (including, without limitation, reasonable attorney's fees)
resulting from any claim, suit, action or proceeding (collectively, an
"Action") brought against *** alleging that customary use of the
*** infringes
or contributes to the infringement of any issued United States patent or
letters patent (but excluding any infringement contributorily caused by
COMPANY's business or COMPANY's equipment). *** shall promptly notify
*** of any Action, and ACI shall have the right to control any such
Action and shall have the right to conclude a settlement of any such Action
which shall be binding upon COMPANY. ACI shall have the right, in order to
avoid or settle any Action, to substitute *** non-infringing
equipment, material, processes or Products, or to modify its Products or the
Equipment to become non-infringing, or to obtain necessary licenses to use
the infringing equipment, material, processes or Products, in each case
consistent with *** .
6.4. DISPUTE RESOLUTION; ENFORCEMENT OF CONFIDENTIALITY OBLIGATIONS
6.4.1. ESCALATION. Except as otherwise specifically provided in
Section 2.3 of this Agreement, any controversy or claim arising out of,
relating to or in connection with this Agreement shall, in the first
instance, be resolved by a panel of two (2) executives from each party. In
the event such panel is unable to resolve the dispute within *** , the
issue shall be escalated to an *** from each party. In the event the
*** are unable to resolve the dispute within *** , the issue shall
be escalated to the respective *** of the parties. If the ***
are unable to resolve the dispute within *** , either party may then
refer such dispute to arbitration in accordance with Subsection 6.4.2 hereof.
6.4.2. ARBITRATION. Any controversy or claim arising out of,
relating to or in connection with this Agreement that has not been resolved
pursuant to Subsection 6.4.1 hereof shall be resolved through arbitration
pursuant to and in accordance with the Commercial Arbitration Rules of the
American Arbitration Association then in effect, as modified by the terms of
this Subsection 6.4.2 set forth below:
(a) Arbitration shall be conducted at a location in Denver, Colorado to be
agreed upon by the parties.
(b) Arbitration shall be conducted by three (3) arbitrators, with each party
to this Agreement selecting one (1) arbitrator each and the two selected
arbitrators then selecting the third arbitrator.
(c) Prior to the commencement of the arbitration, each party shall *** ,
including the *** to *** than *** and to *** . This
*** shall be conducted in accordance with *** , which shall be
interpreted and enforced by the arbitrators.
(d) The arbitrators shall, as soon as practicable and upon *** notice to
each party, conduct an arbitration hearing and proceeding on the merits of
the dispute and thereafter shall issue a written decision explaining the
basis for the decision, including findings of fact and conclusions of law.
The decision of the arbitrators shall be based upon a *** .
(e) Each party shall bear its own costs and expenses arising out of any
arbitration (including the costs of the arbitrator selected by it), and
shall bear equally the costs, expenses and fees of the third party
arbitrator.
(f) Any arbitration arising out of or relating to this Agreement or any
alleged breach or non-performance thereof may include by consolidation,
joinder or other manner any other person or persons which or whom a party
to the arbitration reasonably believes to be substantially involved in a
common question of fact or law.
(g) The agreement to arbitrate shall be specifically enforceable under
prevailing law. Except for misapplication of law, any award rendered by
the arbitrators shall be final, binding and enforceable by any
*** Portions of this page have been omitted pursuant to a request for
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ACI Corp. Feb. 1999
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DSLAgreement_0404_1 14
<PAGE>
party to the arbitration, and judgment may be rendered upon it in
accordance with applicable law in a court of competent jurisdiction.
(h) The parties acknowledge that this Agreement evidences a transaction
involving interstate commerce. The United States Arbitration Act shall
govern the interpretation, enforcement, and proceedings pursuant to the
arbitration clause in this Agreement.
6.4.3. CONFIDENTIALITY OBLIGATIONS. A) Neither party shall disclose
to any third party during the Term of this Agreement and during the ***
period immediately following the termination or expiration of this
Agreement, any of the terms, conditions, or information of a confidential
nature exchanged between the parties, including information regarding the
Products, services and related programs as well as information about
Customers, unless disclosure is required by any state or federal governmental
agency, otherwise required to be disclosed by law or is necessary in any
proceeding establishing rights or obligations under this Agreement.
B) Any information, including trade secrets, reports, documents and/or data
or data collection of one party (the "Disclosing Party") that are furnished
or made available or otherwise disclosed to the other party or any of its
employees, contractors, agents, or subsidiaries (the "Receiving Party")
pursuant to the terms and conditions of this Agreement shall be deemed as
confidential information ("Confidential Information"). Confidential
Information shall be: (i) deemed the property of the Disclosing Party; (ii)
be held strictly in confidence by the Receiving Party with the same degree of
care that the Receiving Party treats its own proprietary business
information; and (iii) be used by the Receiving Party only for those purposes
required to perform its obligations under this Agreement. Information
previously known to the Receiving Party free of any confidentiality
obligation and the Receiving Party can demonstrate its prior actual
knowledge, or subsequently made public by a third party shall not be deemed
Confidential Information. In the event of any unpermitted disclosure by a
Receiving Party, the Disclosing Party shall be entitled to seek such relief
as may be available to it at law or in equity, including, without limiting
the generality of the foregoing, any proceedings to: (i) obtain damages for
any breach of this Agreement; (ii) seek any preliminary injunction or
restraining order for specific performance; or (iii) enjoin the breach of
such provision..
C) This Section supercedes any pre-existing agreement or understanding
between the parties with respect to confidentiality.
6.5. INDEMNIFICATION. Each party hereto (as "Indemnitor") shall
indemnify, defend and hold harmless the other party hereto (as "Indemnitee")
and its affiliates from and against any and all liabilities, costs, damages,
fines, assessments, penalties and expenses (including reasonable attorney's
fees and expenses) resulting from any breach of, or failure to comply with,
any provision of this Agreement *** .
7. TERM OF AGREEMENT; TERMINATION PROVISIONS
7.1. RENEWAL. Unless otherwise set forth herein, this Agreement shall
commence on the Effective Date and shall continue until the *** of the
" *** Date" (as defined in Attachment 2) ("Term"); provided however, the
Purchase Commitment obligations of COMPANY shall terminate on the ***
of the *** Date (as defined herein) and the date on which COMPANY
*** . This Agreement shall only renew upon mutual agreement of the parties
7.2. TERMINATION. In addition to COMPANY's right of termination set
forth in Section 3.7, either party may terminate this Agreement upon written
notice to the other party in the event that such party (i) is in material
breach of a material provision hereof and such breach is *** after
written notice of such breach, or (ii) becomes bankrupt or insolvent, or
makes an assignment for the benefit of creditors, if such proceedings are not
dismissed *** after commencement.
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ACI Corp. Feb. 1999
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DSLAgreement_0404_1 15
<PAGE>
In addition, COMPANY may elect to terminate this Agreement upon ***
notice to ACI and *** for any *** or *** in the event that
(a) ACI terminates the Collocation Agreement without any right by ACI to
terminate the Collocation Agreement pursuant to the terms thereof, or (b)
COMPANY terminates the Collocation Agreement pursuant to any right COMPANY
has under the Collocation Agreement and ACI shall have repeatedly failed to
perform its material obligations under the Collocation Agreement and such
repeated failures shall have resulted in costs or other liabilities to
COMPANY not cured or satisfied by ACI in excess of ***
during the *** .
7.3. EFFECT OF TERMINATION. In the event of any termination pursuant
to Section 7.2 hereof as a result of ACI's breach of its obligations under
this Agreement, ACI agrees to cooperate with COMPANY, on a commercially
reasonable efforts basis, to transition existing Customer contracts of
COMPANY to another network operator; provided, however, that ACI shall be
obligated to assist such transition if, and only during the period that,
COMPANY is in full compliance with its payment obligations as of the date of
termination by COMPANY and COMPANY continues to perform its other obligations
to ACI under this Agreement. The termination of this Agreement under any
provision of this Article 7 shall not affect the terms of any of the
provisions of Article 6, this Section 7.3, and/or Article 8 of this
Agreement, each of which shall continue in full force and effect following
such termination.
7.4 CHANGE IN CONTROL. This Agreement shall continue in force
regardless of any acquisitions or changes of control of either party and
shall be binding upon the successors and permitted assigns of each.
8. MISCELLANEOUS PROVISIONS
8.1. NOTICES. Any notices or other communication under this Agreement
must be in writing and will be deemed to have been duly given when (a)
delivered by hand (with written confirmation of receipt); (b) sent by
facsimile (with written confirmation of receipt) or (c) *** after being
deposited for delivery with a nationally recognized overnight delivery
service, and addressed or sent, as the case may be, to the appropriate
addresses or facsimile numbers set forth below (or to such other addresses or
facsimile numbers as a party may designate by notice to the other party):
(a) if to COMPANY, to the address, numbers and person designated on page
2 of this Agreement with a copy to General Counsel;
(b) if to ACI, to:
ACI Corp.
6933 South Revere Parkway
Englewood, Colorado 80112-3931
Tel. No.: (303) 476-4200
Fax No.: (303) 476-4201
Attn: ***
with a copy to:
Jeffrey Blumenfeld, Esq.
Blumenfeld & Cohen
1615 M Street, N.W., Suite 700
Washington, D.C. 20036
Tel No.: 202-955-6300
Fax No.: 202-955-6460
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DSLAgreement_0404_1 16
<PAGE>
8.2. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each
of the parties and delivered to the other party, it being understood that all
parties do not need to sign the same counterpart.
8.3. ENTIRE AGREEMENT; ASSIGNMENT. This Agreement (together with the
Attachments referred to herein) constitutes the entire agreement between the
parties and supersedes all prior agreements and understandings (both oral and
written), and is not intended to, and does not, confer upon any other person
any rights or remedies with respect to the subject matter of this Agreement.
Except as otherwise expressly provided herein, the provisions of this
Agreement shall inure to the benefit of, and be binding upon, the successors
and permitted assigns of the parties hereto. Neither party may assign or
transfer its rights or obligations under this Agreement to any third party
without the prior written consent of the other party, which consent shall not
be unreasonably withheld; provided, however, that either party may assign its
rights and obligations under this Agreement (a) in whole or in part to any
subsidiary or parent of such party as long as such party remains primarily
obligated under this Agreement, and/or (b) in whole as part of a corporate
reorganization, consolidation, merger, or sale of all or substantially all of
its assets.
8.4. GOVERNING LAW; VENUE. This Agreement shall be governed by and
construed in accordance with the laws of the State of Colorado, regardless of
the laws that might otherwise govern the applicable principles of conflicts
of laws thereof, and any dispute or controversy arising out of the Agreement
shall have its venue in the state or federal courts and arbitration panels
located in metropolitan Denver, Colorado, and each of the parties hereby
consents to that venue and the jurisdiction of any such court or arbitration
panel. Any and all remedies conferred upon any party by this Agreement shall
be deemed cumulative and not exclusive of any other remedy conferred hereby,
or by law or at equity upon a party, and the exercise by a party of one
remedy will not preclude the exercise of any other remedy.
8.5. AMENDMENT; WAIVER; SEVERABILITY. Except as otherwise
specifically provided in this Agreement, no alteration, modification,
amendment or addition shall be valid and enforceable unless in each instance
such alteration, modification, amendment or addition is expressed in writing
and signed by or on behalf of the party against which such alteration,
modification, amendment or addition is to be enforced. No waiver of any
nature, whether by conduct or otherwise, shall be deemed to be or construed
as a continuing waiver of any breach of or non-compliance with any other term
or provision of this Agreement or any other agreement to which such party is
subject. If any term or provision of this Agreement is illegal or invalid
for any reason whatsoever, such illegality or invalidity shall not affect the
validity of the remainder of this Agreement.
8.6. CUSTOMER COMPLAINTS. COMPANY shall immediately notify ACI of
(a) any action, complaint or other filing by any Customer involving or
regarding any aspect of ACI's Products contemplated herein (including,
without limitation, ACI's installation, repair service or Equipment
replacement practices or programs) (collectively, the "ACI Services"); (b)
any complaint proceeding, investigation, subpoena or other action (formal or
informal) instituted by, or filed with, any federal, state or municipal
government agency, body, commission or official involving or regarding the
ACI Services; and (c) any pending or threatened action, suit or proceeding
before or by any court or arbitrator involving or regarding the ACI Services
(collectively, a "Complaint Proceeding"). COMPANY shall promptly provide to
ACI any and all information in COMPANY's possession, and true and complete
copies of any and all documentation that COMPANY has, relating to the factual
basis underlying any such Complaint Proceeding. Each of ACI and COMPANY
shall cooperate in all reasonable respects and otherwise assist each other
and their respective legal advisors in preparing any appropriate defense,
settlement or compromise of any such Complaint Proceeding.
8.7 PUBLICITY. Except as required by law
*** to such party, COMPANY and ACI shall not
publicize nor disclose any aspect or contents of this Agreement or its
relationship with each other in any way.
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ACI Corp. Feb. 1999
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DSLAgreement_0404_1 17
<PAGE>
ATTACHMENT 2: ACI PLUS PRODUCTS AND PRICING
I. QWEST PRICING PLAN
The Pricing set forth herein is based on the significant equity investment of
COMPANY in the parent company of ACI and the *** Purchase
Commitment of COMPANY set forth in Section 2.6 of the Agreement and this
Attachment 2.
A. *** RECURRING CHARGES *** FOR PRODUCTS
-------------------------------------------------------
<TABLE>
<CAPTION>
----------------------------------- Special Conditions or
Purchase *** Considerations
Commitment Commitment
Level -------------------
Bandwidth Suggested *** TO
List Price COMPANY
>
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------
*** *** *** Only offered ***
- ----------------------------------------------------------------------
*** *** ***
- ----------------------------------------------------------------------
*** *** ***
- ----------------------------------------------------------------------
*** *** ***
- ----------------------------------------------------------------------
*** *** ***
- ----------------------------------------------------------------------
*** *** ***
- ----------------------------------------------------------------------
*** *** ***
*** *** ***
- ----------------------------------------------------------------------
*** *** ***
- ----------------------------------------------------------------------
*** *** ***
- ----------------------------------------------------------------------
*** *** ***
- ----------------------------------------------------------------------
</TABLE>
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DSLAgreement_0404_1 18
<PAGE>
B. NON-RECURRING CHARGES FOR PRODUCTS ***
<TABLE>
<CAPTION>
Installation
Charges
*** *** *** *** or CPE
*** term term greater term ONLY
- ---------------------------------------
Bandwidth
- ---------------------------------------
<S> <C> <C> <C> <C> <C>
*** *** *** *** *** ***
*** *** *** *** *** ***
*** *** *** *** *** ***
*** *** *** *** *** ***
*** *** *** *** *** ***
*** *** *** *** *** ***
*** *** *** *** *** ***
*** *** *** *** *** ***
*** *** *** *** *** ***
*** *** *** *** *** ***
*** *** *** *** *** ***
- ---------------------------------------
</TABLE>
** Includes *** and ***
** Charges, as set forth in Attachment 3, will apply to *** of minimum
*** .
COMPANY Egress Circuit Pricing***
This is the *** .
<TABLE>
<CAPTION>
*** Only Service ****
--------------------- --------------------------------
*** Non- *** Non-
Recurring Recurring Recurring Recurring
Charges Charges Charges
--------------------- --------------------------------
<S> <C> <C> <C> <C>
------------------------------- --------------------------------
*** *** *** *** ***
------------------------------- --------------------------------
*** *** *** *** ***
------------------------------- --------------------------------
</TABLE>
***Includes ***
****COMPANY shall *** for its *** and *** for ***
Service for *** to the *** .
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DSLAgreement_0404_1 19
<PAGE>
II. QWEST VOLUME COMMITMENT PROVISION
COMPANY shall place Orders, as defined in Section 3.2.1, and ACI shall
provide a minimum of *** DSL lines (the "Purchase Commitment")
for providing ACI DSL services during the "Line Commitment Period" (defined
below). The Line Commitment Period shall begin on the first day of the month
in which the parties have mutually certified, by completing and signing the
Commencement Date Certificate set forth in Schedule 2A, that ACI has ***
in *** in a *** CMSAs and/or MSAs *** Date"), and shall
end on the *** date or the date on which COMPANY satisfies the Purchase
Commitment, *** .
Targeted Milestone *** * Milestone Line Target
*** ***
*** ***
*** ***
*** ***
*** ***
*** ***
*** ***
*"TARGETED MILESTONE *** SHALL REFER TO THE LAST *** OF
THE *** PERIOD COMMENCING ON THE LINE COMMITMENT COMMENCEMENT DATE AND
EACH *** THEREOF.
ACI acknowledges and agrees that COMPANY may satisfy the Milestone Line
Target(s) at any time prior to the applicable Milestone *** . Further,
COMPANY may satisfy its Purchase Commitment at any time prior to the expiration
of the Line Commitment Period, and thereafter *** under this Agreement.
In addition, any Orders placed by COMPANY prior to the *** Date ***
of the Purchase Commitment.
In the event COMPANY has not satisfied the Milestone Line Target on or
prior to the applicable Targeted Milestone *** COMPANY shall ***
to the *** the *** and the *** during the period
commencing on the date hereof and ending on the applicable Milestone ***
the *** by *** ; provided, however, that COMPANY shall be
entitled to obtain *** time during the *** Milestone ***
through the *** Milestone *** of this Agreement in its
*** discretion ( *** ). In the event COMPANY does not satisfy the
Milestone Line Target in the year immediately following such *** in
*** the *** applicable to the Milestone *** , COMPANY
shall *** that would have been *** COMPANY had COMPANY not
elected *** . The following examples are illustrative of certain
results under these principles:
EXAMPLE (1) - At the end of *** COMPANY has *** which is
*** . ACI would invoice the COMPANY per the following calculation -
*** (assumed *** ) equals *** to be *** COMPANY and
*** ACI.
EXAMPLE(2) - At the end of *** , COMPANY has *** which is
*** . ACI would invoice the COMPANY per the following calculation -
*** (assumed *** ) equals *** to be *** to COMPANY
and *** ACI.
COMPANY shall use commercially reasonable efforts to deter Customer's from
terminating installed Orders prior to expiration of their term agreements.
"MSA" shall mean Metropolitan Statistical Area as such term is defined in
"OMB Bulletin 98-06: Revised Statistical Definitions of Metropolitan Areas
(MAs) and Guidance on Uses of MA Definitions" which is available from the
National Technical Information Service (Accession Number PB98-146160).
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ACI Corp. Feb. 1999
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DSLAgreement_0404_1 20
<PAGE>
"CMSA" shall mean Consolidated Metropolitan Statistical Area as such term is
defined in "OMB Bulletin 98-06: Revised Statistical Definitions of
Metropolitan Areas (MAs) and Guidance on Uses of MA Definitions" which is
available from the National Technical Information Service (Accession Number
PB98-146160).
*** shall mean ACI's *** within an *** , or adjacent
to an *** , or adjacent to the *** , which enables ACI to
*** from the *** in support of *** .
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ACI Corp. Feb. 1999
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DSLAgreement_0404_1 21
<PAGE>
SCHEDULE 2A
COMMENCEMENT DATE CERTIFICATE
THIS COMMENCEMENT DATE CERTIFICATE is made as of ________________ by ACI
Corp. ("ACI").
WHEREAS, ACI and Qwest Communications Corporation ("COMPANY") entered into
an Agreement dated as of April 4, 1999, whereby, among other things, ACI agreed
to provide and COMPANY agreed to order certain DSL services.
NOW, THEREFORE, pursuant to Attachment 2 of the Agreement, ACI hereby
certifies as follows:
1. The date on which ACI has *** in a *** CMSAs and/or MSAs
in each such CMSA or MSA and has *** in *** in such locations
is _______________________
IN WITNESS WHEREOF, the parties have caused this Commencement Date
Certificate to be signed and delivered as of the date first above written.
ACI Corp.
By: ________________________________
Title: _____________________________
Qwest Communications Corporation
By: ________________________________
Title: _____________________________
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ACI Corp. Feb. 1999
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DSLAgreement_0404_1 22
<PAGE>
ATTACHMENT 3: SCHEDULE OF *** OTHER FEES
COMPANY shall be responsible for the following fees and charges in
accordance with the terms of the Agreement:
I. ***
(A) ACI PLUS PRODUCTS:
If COMPANY cancels an Order for a Product *** for *** a
*** by ACI to provide a Product *** Customer or
because *** the Products, a *** to the ***
actually *** by ACI as a direct result of such ***
will be *** the COMPANY and *** ACI; provided that
ACI shall use its best efforts to *** such *** .
ACI agrees that such *** shall be a *** of any
*** .
***. If a Product is disconnected *** of the *** for
that Product *** (as hereinafter defined) shall be ***
COMPANY and *** ACI. As used herein, the *** shall be
*** to the *** would have been *** on the ***
(as hereinafter defined); *** the *** actually paid by
*** a *** dollar ($ *** ) *** fee, if
applicable, if such *** is returned and is reusable. As used
herein, *** shall be defined as the *** accrued from the
*** to the *** . For example, if a Customer disconnects
a *** Product in *** of a *** term and returns
the *** in good condition, COMPANY shall *** with
respect to *** calculated as follows: $ *** .
(B) EGRESS CONNECTIONS:
If COMPANY cancels an Order for an Egress Connection *** of the
ordered Egress Connection, any and all *** actually ***
ACI up to the *** and/or as a *** of such *** will
be *** COMPANY and *** ACI; provided that ACI shall use
its best efforts to *** . ACI agrees that such *** shall
be a *** of any *** .
***. If COMPANY cancels an Egress Connection *** of the Egress
Connection and *** of the applicable *** , a *** of
*** for a *** and *** for a *** , as the case may
be, will be *** COMPANY and *** ACI.
II. ***
(A) *** OR *** :
1. If an *** is *** after the *** , a *** to
the third party *** or *** actually *** ACI as a
*** of such *** will be *** the COMPANY and ***
ACI; provided that ACI shall use its best efforts to *** such
*** and *** . ACI agrees that such *** shall be a
*** of any third party *** .
2. If the Customer is not available at the scheduled time and date
to permit installation to proceed as scheduled, *** will be
*** COMPANY and *** ACI.
(B) EGRESS ***
*** will be supplied *** . (Allow *** for *** )
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ACI Corp. Feb. 1999
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DSLAgreement_0404_1 23
<PAGE>
(C) *** CUSTOMER ***
No cancellation charge will apply to a Customer's *** .
However, *** charge for *** (notwithstanding the ***
will be *** COMPANY and *** ACI with respect to *** .
The *** of the Product at the *** will be for ***
from the date that *** at the *** .
(D) ***
This is included in the charges for a normal installation. Normal or
*** shall include up to *** of *** and *** of
one customary *** or *** (according to the Customer's
preference) in an *** situated in a standard, *** .
(E) ***
COMPANY must notify ACI in the original Order if additional ***
at the Customer's premises will be *** or greater. ACI reserves
the right to require such *** to be completed by others and/or
to schedule extensive *** at a different time than the ***
, but will make every effort to coordinate this *** with the
*** . If ACI is not notified of *** , ACI reserves the right
to *** the *** at *** COMPANY (and such ***
shall supercede and nullify ACI's *** .
Time and Materials at the following rates: *** /Minimum Charge
*** additional ***
(F) *** FEE:
An *** charge equal to *** of the *** fee.
(G) *** FEE:
A *** charge will be assessed against the Company whenever a
*** is made for *** . No additional charge will be assessed
for *** ; provided that COMPANY does not *** .
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ACI Corp. Feb. 1999
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DSLAgreement_0404_1 24
<PAGE>
ATTACHMENT 4: ACI SERVICE LEVEL AGREEMENT
NETWORK AVAILABILITY
ACI is committed to providing a reliable network for COMPANY and its Customers.
With that goal, ACI's
*** for Network Availability is *** . ACI's Regional Network
Availability is defined as:
1 - ***
The availability *** does not account for *** Egress Connections,
natural disasters, *** (as hereinafter defined) on ACI's Network,
scheduled or unscheduled *** on the customer *** , or end user
equipment outages. *** is calculated commencing with the date and time
on which the *** the trouble *** and ending upon confirmation
from ACI that the Network Availability has been restored. As used herein
*** shall be defined as *** to the *** or *** in the
*** for replacement or *** to *** and is customarily performed
during *** . Such *** is not usually *** .
If ACI does not meet *** Regional Network Availability per the above
definition, ACI will *** for *** or *** of the *** .
NETWORK DELAY
ACI is committed to providing a fast network for COMPANY and its Customers.
ACI supports *** for the time to transmit a *** message from the
DSL Access Multiplexer interface up to, *** , the COMPANY's egress and
back. This measurement
*** .
ACI defines round trip message delay as the *** the following:
time from when the *** of the outgoing message *** until when the
*** of the message *** ;
time from when the *** of the incoming message *** until when the
*** of the message *** .
If ACI does not meet the delay *** for the *** , ACI will ***
of the *** attributable to *** .
THROUGHPUT
ACI is committed to minimizing network congestion for COMPANY and its
Customers. ACI's *** for the Customer to achieve the speed of their
contracted access through the ACI's Regional Network is *** over ***
. Throughput is defined as the ability of the network to transmit traffic
at the contracted access speed.
If ACI does not meet the throughput *** , ACI will *** of the ***
attributable to *** .
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DSLAgreement_0404_1 25
<PAGE>
MEAN RESPONSE TIME
ACI commits itself to providing the best customer care experience in the
telecommunications industry. To that end, ACI promises to answer the phone
within *** of the *** , and a Customer is *** no ***
than *** .
MEAN TIME TO RESTORE SERVICE
ACI commits itself to restoring service within certain periods of time based
on severity of the problem, and whether single or multiple Customers are
affected. ACI guarantees restoration of services within the following time
frames:
CUSTOMER CONNECTIONS:
mean time to repair within *** ( *** ) - *** of ***
if not repaired *** .
mean time to repair within *** ( *** ) - *** of ***
if not repaired *** .
ACI will manage the local loop vendor (or Incumbent Local Exchange Carrier)
on behalf of COMPANY for any repairs or problems related to ACI-provided
Customer connections.
GENERAL TERMS
All Network Performance Parameters are based on the assumption that COMPANY
and its Customer networks are appropriately engineered (i.e., Egress
Connections are within reasonable over-subscription limits). If ACI
determines that the COMPANY or Customer network is inappropriately
configured, *** .
*** will be *** for Availability, Throughput, or Network Latency
*** of installation. COMPANY must *** to ACI for *** .
*** provided by ACI hereunder shall not be *** for any *** or
greater than *** for the *** within any given *** and
*** for the installation charge.
*** will be *** to COMPANY for any *** or other *** or
*** (including, without limitation, any *** to *** service
under its Network Availability, Network Delay, and Throughput commitments
contained herein) which are caused by or contributed to (a) *** , (b) by
any third party (including the COMPANY or Customer), (c) by atmospheric or
environmental conditions, (d) by any Act of God or natural disaster, or (e)
by any person who is not controlled by, or under common control with, ACI.
ACI will nevertheless use its reasonable efforts to seek a prompt resumption
of service, resolution of transmission problems and/or rescheduled
installation in circumstances where such efforts have a reasonable likelihood
of achieving those results promptly.
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DSLAgreement_0404_1 26
<PAGE>
OTHER
COMPANY and ACI shall *** Service Level Agreement *** designed
for COMPANY.
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ACI Corp. Feb. 1999
All Rights Reserved
DSLAgreement_0404_1 27
<PAGE>
ATTACHMENT 5. MARKETS
ACI MARKETS
Size
# MSA
*** San Diego *** ***
*** San Francisco *** ***
*** Oakland *** ***
*** San Jose *** ***
*** Los Angeles *** ***
*** Orange County *** ***
*** Chicago *** ***
*** NYC *** ***
*** Sacramento *** ***
*** Philadelphia *** ***
*** Boston *** ***
*** Wash, DC *** ***
*** Seattle *** ***
*** Portland *** ***
*** Denver *** ***
*** Minneapolis *** ***
*** Detroit *** ***
*** Milwaukee *** ***
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*** Portions of this page have been omitted pursuant to a request for
Confidential Treatment and filed separately with the Commission.
ACI Corp. Feb. 1999
All Rights Reserved
DSLAgreement_0404_1 28
